This Multibagger Textile Stock Reported Rs 722 Cr Revenue In Q1, Brokerage Suggests Buy For 51% Gain

A leading brokerage firm Edelweiss Wealth Research has recently published a report on Indo Count Industries Limited, suggesting buying the stock of the company. The company's volume increased 5% YoY to 19.1 mn metres, led by the integration of GHCL home textiles unit. Barring GHCL integration, Indo Count Industries' volume declined by ~20% YoY in this quarter. Indo Count is a small cap textile sector company having a market capitalization of Rs 2,809 crore.

The brokerage recommends buying the stock of the company for a target price of Rs 210 apiece. Further, the stocks of the company have the potential to surge around 51% upside in the next 12 months, if we consider the stock's Current Market Price and the brokerage's estimated target price.

Stock Outlook & Returns

The current market price of the stock is Rs 139.05 apiece, trading 0.61% below the previous close. The stock yesterday closed at Rs 139.90 apiece. Currently, it is trading Rs 19.50 apiece above the 52-week low. 

The stock hit the 52-week low recently on 20 June 2022 at Rs 119.55 apiece. The 52 week high of the stock is Rs 315 apiece, recorded on 11 October 2021. The PE ratio is 8.64, and the P/B ratio is 1.73. The TTM EPS is Rs 16.12, and ROE is 22.58%. The debt to equity ratio is 0.82. The dividend yield is 1.44% and the face value is Rs 2.

The stock has done well in terms of returns on investment over the past 3 years, given multibagger returns of 312.5%. However, it has not performed well in the last 1 year, declining 48.57%. In the last 1 week, it has a positive return of 1.96%, and 1 month gave a positive return of 3.3%, respectively. In 5 years, it has declined marginally at around 0.81%. 

Integration of GHCL unit drives overall volume growth

Though Indo Count Industries' standalone volume declined by ~20% YoY, overall volumes grew 5% YoY to 19.1mn metres at the consolidated level, on account of integration of GHCL's home textiles unit (GHCL volume is 5mn metres, based on our calculation) during the quarter.

Indo Count Industries has been reporting decline in volumes over the last three quarters on account of slowdown in home textiles demand coupled with inflationary environment in its key export markets (US, EU and EK). Usually, volumes in H1 are low for home textile players and demand picks up over H2 due to the holiday season in the US. Hence, we expect Indo Count Industries to post a soft quarter in Q2FY23 as well, affected by a retail slowdown in its key markets (resulting in inventory pile-up at the retailer).

"However, we expect this demand to revive in H2FY23 with the onset of the US holiday season and projection of further correction in commodity inflation (domestic cotton prices expected to decline ~25% and supply chain constraints to further ease). We expect Indo Count Industries to attain volume of ~92mn metres in FY23E," the brokerage estimated.

Margins inch up on low-cost inventory boost

Indo Count Industries posted unusually high gross margins of 63% in Q1FY23 (usual GP of 53-54%), assisted by full utilisation of low-cost cotton inventory. This helped the company negate the impact of negative operating leverage due to integration of the GHCL unit (employee expenses and operating overheads increased 50% and 16% YoY). As a result, contraction in EBITDA margins was limited to 236bps YoY. Although cotton prices and freight costs declined by ~15% and ~30%, respectively from the peak levels, we expect the company's gross margins to normalise in Q2FY23 and revert back to historical levels of 51-54% as the benefit of low-cost inventory wears out.

Valuations and outlook; Maintain BUY

The home textile export market, especially bed linen segment, has been facing headwinds over the last year on account of supply chain issues, commodity inflation and demand slowdown post-COVID-19, which resulted in India's bed linen export market share to the US declining by ~800bps to 53%.

Although home textile players may continue to face headwinds on account in the near term, we continue to remain positive on the textile export theme from the medium- to long-term perspective on account of (a) the US banning Xinjiang cotton, which fortifies the China+1 strategy; (b) signing of FTA agreements with Australia and the UAE and high probability of FTA signing with the EU and the UK over the next year; and (c) various government initiatives to aid textile exports.

"We expect Indo Count Industries to post revenue, EBITDA and PAT CAGR of 15%, 12% and 10% over FY22-24E. We maintain our target price of Rs 210/share at P/E of 10x on FY24E earnings estimates," the brokerage has said.

About - Indo Count Industries Limited

Indo Count Industries Limited is a specialized end-to-end bedding provider that is solely focused on creating all-encompassing sleep experiences. Incorporated in November 1988 as Vishnu Aluminium a public limited company Indo Count Industries acquired its present name in April 1990. The company mainly produces 60's and 2/60's combed cotton yarn. In 1994-95 the installed capacity was increased to 32256 spindles with the commissioning of 6048 spindles. Indo Count Industries has been accredited with the ISO 9002 certification. The company has a presence in 49 markets. It is also the preferred partner for some of the best-known retail, hospitality and fashion brands in the world. 

Disclaimer

The stock has been picked from the brokerage report of Edelweiss Wealth Research. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.