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Stock Data:

Sector Textiles-Denim

BSE 532631

NSE NDL

Face Value Rs 10

52 week H/L 36-99.45

6 Month Average Volume 367808

Company Profile:

Nandan Denim Ltd (Earlier incorporated as Nandan Exim Ltd) headquartered in Ahmadabad is

part of Chirpal Group a leading Business conglomerate. The company commenced its

operations initially with textile trading but later forayed into textile manufacturing in

2004.The company manufactures denim, cotton fabrics and Khaki cloth.

In 2004 the company set up a denim manufacturing capacity but commenced its operations

only from 2006 onwards. During the same year the company came out with its initial public

offer of 120 MN INR and got listed on BSE and NSE.

In FY 2014 the company changed its name to Nandan Denim Ltd. Over the years the company

has expanded its denim fabric manufacturing capacity and has established itself as one of the

leading players in Indian Denim fabric Industry.

Key Highlights:

NDL’s(Nandan Denim Limited)

denim fabric manufacturing

capacity has increased from 71

MMPA to 110 (MN metric per

annum) the highest in India

NDL was set up with a focus on

domestic market with products

launched being priced in the

mid segment ,unlike Arvind who

on the other hand caters mostly

to the export markets

Currently Domestic market

contributes 85-90% of Sales for NDL while 10-15% of sales comes from exports

Recognizing the potential in exports, NDL is aiming to strengthen its distribution network in

markets such as Bangladesh, South Korea, Hong Kong, Latin Americas, South Africa, Turkey

and Mexico

The company has been witnessing significant traction from US Markets and going forward has

plans to establish relationship with the European Apparel Manufacturers

The company is aiming to double its exports revenue in the next 2 years (The company

recorded 14.4 % sales from exports in the first 9 months of FY 2015)

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NDL has diversified its product offerings with shirting fabric and yarn dying which is expected

to lower its dependence on denim segment and broaden its revenue base

NDL is in the process of backward integrating its weaving and processing; where in the

company is expanding its weaving facility to ensure that the majority of its yarn requirement

is met internally leading to lower raw material costs which in turn will boost operating

margins in future

NDL is going forward with aggressive expansion of its existing facilities so as to avail the

benefits laid out by the Gujarat government. The Benefits include Gujarat textile Policy: 5%

interest subsidy and power subsidy @ 1 per unit for 5 years.

As per the rules framed under the Gujarat government textile policy ,NDL is entitled for VAT

refund on the machinery excluding land

and other costs

The per capita consumption of denims in

India is far below as compared to other

developed and developing countries

which will add to the growth prospects of

the company

Nandan denim’s clientele list includes

some of the world renowned brands

Around 70% of the orders are confirmed

through long term agreements involving minimum yearly quantity commitments.

Management Overview:

NDL is promoted by Mr Vedprakash D. Chiripal and Mr Brijmohan D. Chiripal, who have over

three decades and two decades of experience, respectively, in textile products and related

domain. The promoters have also founded Chiripal Industries Ltd, which is also in the textile

business. Although the promoters are still associated with the company, the next generation

has also joined and has participated actively in driving the growth of the company in recent

years.

NDL is part of the Chiripal group-which ranks among the established integrated textile houses

in India

Nandan denim Ltd has a legacy of fair ,transparent and ethical governance Practices

Superior Marketing & Distribution:

Domestic markets Export markets

Leveraging the strong agent based network of

Chiripal group

Leveraging the strong agent based global

network of Chiripal group

Strong Pan Indian Network of distributors

associated with the company for close to a

decade

Export of denim fabrics to over 22 countries

across the globe & a strong global network of

distributors in 15 countries

Strategic Tie ups with more than a dozen firms to

exclusively sell Nandan Denim products

Merchant exports through various star export

houses to give an additional Boost to exports

Demand for denim Jeans

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Financials:

NDL’s financial performance- Sales, EBITDA & PAT growth over the years

All Values in Cr 2011 2012 2013 2014 2015

Sales 507 573.84 703.12 893.75 1096.53

Sales Growth 13% 23% 27% 23%

EBITDA 67.15 82.59 106.92 132.67 165.44

EBITDA Growth 23% 29% 24% 24.70%

EBITDA Margins 13% 14% 15% 15% 15%

Net Profit 17.35 18.79 31.05 39.31 51.42

Net Profit Growth 8% 65% 27% 31%

Net Profit Margins 3% 3% 4% 4% 5%

Sales have grown by a CAGR of 17% over the

period of 5 years

Operating Profits have grown by a CAGR of

19.75% and operating margin has been in line

with previous years

Net Profits have grown by a CAGR of 24% over

the period of 5 years and there has been a

decent growth in Net Profit margins

This is a low margin business but having said

that Nandan denim has increased its

manufacturing capacity anticipating the

growing demand for denim products and huge

potential for exports which in turn will lead to

high product turnover.(Volumes)

Going forward with 100% capacity utilization

(Current Capacity utilization is 80%) Nandan

denim will be able to reap the benefits of economies of scale and thereby control production

costs thus improving margins

Over the period of 5 years from 2010-2014 Nandan denim’s revenue growth has been the

highest in its peer group

Over the period from 2011-2014 Average EBITDA margins has also been better than its peers

and as per management guidance the margins

will only get better in future.

In 2015 exports have contributed 15% to its

revenues (This number will only get better as

time passes by as NDL is increasing their focus

on the export business)

Export sales are expected to grow faster than

domestic sales over the next 2 years

17%

13%

12.7%

0% 10% 20%

Nandan…

Arvind

Aarvee

Revenue CAGR (2010-14)

Revenue CAGR(2011-14)

14.42%

12.17%

13.70%

10.00% 12.00% 14.00% 16.00%

Nandan…

Arvind

Aarvee

Avg EBITDA Margins

Avg EbitdaMargins

0%

50%

100%

2013 2014 2015

10% 11.50% 15%

Domestic Sales

Export Sales

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Key Ratios:

2010 2011 2012 2013 2014 As of now

Price/CFO 30.2521 11.11798 1.205116 2.090716 1.893464 4.2

Price/Earnings 84 51.84211 5.230024 3.812317 4.223638 7.6

P/B 7.594035 6.184835 0.618336 0.644765 0.766852 1.5

Performance Ratios:

2010 2011 2012 2013 2014

ROA 2.93% 4.25% 4.55% 5.66% 6.50%

ROE 9.06% 11.97% 11.89% 16.91% 18.15%

ROCE 10.80% 11.01% 13.38% 13.84% 14.79%

The increasing ROE YoY implies that the company has been efficient in generation profits in

relationship to its assets

The company has been successful in steadily increasing its ROE which indicates that the

company is giving its shareholders more value for their money

The ROCE of Nandan Denims is increasing YoY and is higher than its cost of capital (10%-

10.5%) this means that the company is putting its capital to the best use to generate higher

revenues

Solvency Ratios:

FY 2010 FY 2011 FY 2012 FY 2013 FY 2014

Debt-Equity 2.1 1.6 1.6 2 1.8

Debt/EBITDA 2.1 2.5 1.8 2.1 2.6

Interest Coverage 2.1 2.5 1.8 2.1 2.6

Working Capital Turnover Ratios:

FY11 FY12 FY13 FY14

Inventory Turns 4.179031 5.821987 5.870073 4.179031

Debtors Turns 5.53 9.22 8.75 8.41

Number of days in Working Capital 102.16 77.85 87.16 64.64

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Valuation Methodologies:

EPS-PE Growth Method

Intrinsic Value Method

EV/EBITDA Method

Bankruptcy Test (Z Score)

EPS - PE growth method This is an important stock valuation method which takes into account the EPS projected growth and

historical P/E ratio to calculate the intrinsic value of the stock

2010 2011 2012 2013 2014 2015

EPS -0.03 0.25 0.38 4.13 8.63 11.28

-933% 52% 987% 109% 31%

PE 51.84211 5.230024 3.812317 4.223638 5.604545

Nandan Denim’s average EPS growth rate for 5 years has been around 49% but considering

the outliers we would take a conservative growth rate of 12% for 5 years

So the Projected EPS 5 years from now for Nandan Denim is 19.87

Now to calculate the future share price for Nandan denim 5 years from now we would

calculate the average PE (In case of Nandan Denim it is a growth company which is still

trading at considerable lower PE ,so we would go with the Industry average which is around

14)

The projected share price for Nandan Denim 5 years from now is around 256

Finally, if we discount the future price by 10%, the cost of capital (The minimum required

return we need on our investment) we get 161 as the intrinsic value of the share.

Current EPS 11.28

Estimated Growth Rate 12%

Estimated Future PE 14

EPS in 5 Years 19.87

Value per share in 5 Years 256

Current stock Valuation 161

The intrinsic value as per PE EPS growth method is 161

Intrinsic Value Method This is the method Benjamin Graham “The Father of Value Investing” used to value growth stocks in

his famous book Intelligent Investor. The original formula from security analysis is:

V = EPS * (8.5+2G)

where V=Intrinsic value ,EPS is the trailing 12 months EPS, 8.5 is the P/E for a no growth company and

g being the growth rate for the next 5 years

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But later Benjamin graham included another variable to the formula the minimum required rate of

return (Risk free interest rate).When graham was publicizing his work the risk free interest rate was

4.4 which he included in the formula.

So the new revised formula is: V=EPS*(8.5+2G)*4.4/Y

Where Y =Current prevailing AAA grade bond rate

My approach:

Instead of taking trailing EPS for the last 12 months I have taken a normalized EPS ignoring the

depressed earnings for Nandan Denim from 2011-2014 which comes close to 8 (EPS)

Normalized growth rate for Nandan denim (Conservative Figure) 12%

I have taken 7 as PE for a no growth company (Conservative figure)

The 2*G is quite aggressive so I have reduced the multiplier to 1.5

The risk free interest rate on 10 Year G Bond in India is around 7.8%

Average Yield on High grade corporate bonds on an average is 10%

Normalized EPS 8

Growth Rate(Conservative Figure) 12%

PE of a No Growth company 7

Growth Multiplier(Conservative) 1.5

Risk free Interest rate 10 Yr. G Bond 7.8%

Average Yield on 10 yr. High grade AAA Corporate

Bond

10%

Putting this into formula: 8*(7+ (1.5*12)*7.8/10)

The intrinsic value of the stock by using this method comes to 168.32 which is way more than

the current trading price of the stock

EV/EBITDA Multiple:

(As of March 2014) Nandan Denim Aarvee Denim

Market Cap (Cr) 166.03 83.82

Total Debt (Long Term + Short term) (Cr) 388.5 359.50

Cash (Cr) 26.07 7.20

EV (Cr) 528.46 436.12

EBITDA (Cr) 132.67 76.01

EV/EBITDA 3.98 5.74

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The EV/EBITDA multiple of Nandan Denim is lower than Aarvee which is its closest

competitor and also less than the Industry average which is around 5.7

Altman Z score:

Altman Z score is a combination of 5 different useful ratios that is used to estimate the

probability of financial distress

Before entering into an equity position it is very important to understand the credit risk

associated with the stock

It is very crucial to evaluate a company’s Balance sheet before taking a position as a company

with a weak balance sheet is always exposed to a significant amount of risk

So now we are going to assess the Bankruptcy risk of Nandan denim to understand whether company

is exposed to any Kind of Bankruptcy risk.

Parameters:

Altman Z score Formulae =1.2*A1+1.4*A2+3.3*A3+0.6*A4+1*A5

The Altman Z score of Nandan Denims is 2.93 and lies close to the safe zone.

Z Score>2.99 Safe Zone

Z Score>1.88>2.99 Grey Zone

Z Score<1.8 Distress Zone

All Values in Crore FY 2014

Total Current Assets 335.19

Total Current Liabilities 186.66

Working Capital 148.53

Total Assets 605.04

Liabilities 388.53

Retained Earnings 170.96

EBIT 86.93

Market Cap 191.5068

Sales 893.75

FY 2014

A1 Working Capital/Total Assets 0.245488

A2 Retained Earnings/Total Assets 0.28256

A3 EBIT/Total Assets 0.143676

A4 Market Cap/Liabilities 0.492901

A5 Sales Turnover/Total Assets 1.477175

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“In the case of Nandan denim this score does not have to bring much of worry as Nandan

denim is a growing company and has taken debt to finance its capacity expansion plan

which in fact would prove to be fruitful in the long run”

Key Risks:

Under utilization of Capacity :NDL has taken up a very aggressive and ambitious capacity

expansion plan under which it has expanded its denim fabric manufacturing capacity from 71

mmpa to 110 mmpa in Q4 2014 keeping the potential for growth in mind but if the company

is unable to use its expanded capacity optimally the operating margins will be negatively

impacted

Volatility in Raw Material Prices: Given that cotton is the key raw material used for

manufacturing denim, a sharp surge in cotton prices may dent NDL’s operating margins

Currency Risk: Volatility in foreign currency could impact the export earnings of the company

Outlook:

I am very positive on the outlook of Nandan Denim on the basis of the factors below: Strong Sales growth that the company is experiencing due to opportunities in the

global denim Industry

The company’s exports still do not fully tap the major destinations such as USA and

Europe, so there is still tremendous potential for the company to grow internationally

The new installed capacity of 110 mmpa is expected to provide requisite trigger for

future growth

On basis of the valuations the stock is still trading at a discounted price.

“Considering all the above factors Nandan denim Ltd is a good buy at the current price level

and someone with a tolerance for risk and a time frame of 1-2 years should consider taking a

good look at this stock”

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Appendix:

Overview of Indian Denim Industry: The Indian denim apparel market has grown from Rs.72 billion in FY2011 to Rs.108 billion in FY2013

and is expected to expand to Rs.132 billion in FY2017. The Indian denim apparel market has been

growing at a CAGR of 14%-15% which has fast outpaced the global denim apparel market growing at a

CAGR of 3%-5%. The domestic denim apparel market has witnessed faster growth vis-a-vis export in

terms of volume over a period of five years FY2009-FY2013.

In addition, India is the fourth largest exporter of denim fabrics in the world after China, Pakistan and

Turkey. World trade in denim fabric averaged 670,000 tonnes over the past one decade, while in

value terms, it fluctuated between $3 bn and $3.5 bn. India accounts for 5% of this trade. Of the total

denim fabric produced in India, about 25%-30% (~200 MMPA) is exported. In recent times, fabrics

exported from China have become costlier than those from India owing to multiple reasons including

the Cotton Policy and Yuan disparity apart from the ever rising cost of power and manpower.

Owing to these factors, denim fabric manufactured in China costs $2.6-$2.65/metre compared with

~$2.5/metre in India, making India a more lucrative destination for international buyers. Geopolitical

instability of Pakistan, another major denim fabric exporter, has also worked in India’s favour.

Additionally, the emergence of Bangladesh, which imports bulk of its denim fabric from India, as a

favoured destination for RMG manufacturing has boosted India’s exports. Owing to these factors,

India’s share in the world trade of denim fabric is expected to improve, benefitting domestic players.