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    Vardhman Textile

    VTLMixed
    Textiles·22 Jan 2025
    Management Summary

    Vardhman Textiles faced a challenging Q3 FY25 as the spinning business struggled with a significant disparity between high domestic cotton prices and lower international yarn benchmarks. While the fabric division remains a bright spot with full utilization, overall margins are compressed by structural issues including the 11% cotton import duty and Minimum Support Price (MSP) dynamics. The company is doubling down on a massive ₹3,400 crore CAPEX program focused on modernization, green energy, and synthetic fabrics to drive a 2-3% margin recovery by FY27.

    Highlights

    8

    • Standalone EBITDA margin reported at approximately 13%, down from historical pre-COVID levels of 18-20%.

    • Total CAPEX plan of ₹3,400 crores announced, with ₹2,800 crores currently under execution.

    • Fabric business operating at nearly 100% capacity utilization, contrasting with a struggling spinning segment.

    • Cotton procurement cost for the quarter averaged ₹53,000 to ₹54,000 per candy.

    • Yarn realization declined to approximately $3.00 per kg from $3.25 per kg six months prior.

    • Cotton yarn spread in Q3 stood at approximately 70 US cents per kg, below the $1.00 benchmark.

    • Indian cotton prices are currently 12 cents higher than New York Futures due to MSP and 11% import duty.

    • Management targets a 200-300 bps margin improvement by FY27 through modernization and green energy initiatives.

    Concerns

    2

    • Raw Material Price Disparity

    • Import Duty on Cotton

    What Changed1

    vs Q1 FY26

    Risks discussed3 → 4 (+1)

    Key financials

    Single quarter

    04 metrics
    1. 01EBITDA Margin13%
    2. 02Cotton Cost₹54,0000%YoY
    3. 03Yarn Realization3 USD-7.7%QoQ
    4. 04Cotton Yarn Spread0.7 USD0%QoQ

    Segment breakdown

    Fabric
    100% Capacity Utilization46 Mn Expansion Target
    Spinning
    15% Industry Capacity Shutdown100 Mn Export Volume (India)
    List

    Guidance & targets

    4
    CategoryTargetPriority
    Capex
    Total Capital Expenditure
    3400
    		High
    Margin
    EBITDA Margin Improvement
    2-3%
    		Medium
    Capacity
    Fabric Weaving Capacity Addition
    30-31
    		High
    Capacity
    Synthetic Fabric Capacity
    15
    		High

    Risks & concerns

    5
    RiskSeverity

    Raw Material Price Disparity

    Indian cotton is 12 cents/lb more expensive than global benchmarks, making Indian yarn uncompetitive. — Management acknowledged

    high

    Import Duty on Cotton

    The 11% import duty prevents Indian spinners from sourcing cheaper global cotton to neutralize domestic MSP impacts. — Management acknowledged

    high

    BIS Regulations on Synthetic Fibers

    Bureau of Indian Standards (BIS) certification requirements are blocking cheaper imports of polyester and viscose. — Both acknowledged

    medium

    Industry Capacity Overhang

    While 15% of Indian spindle capacity has permanently stopped, the remaining sector is still not making money. — Management acknowledged

    medium

    Areas of Evasion(1)

    • Vague on the specific profitability of the new synthetic segment, citing it as a 'learning' phase.

    Q&A highlights

    3

    “We had bought the cotton last year... our average cost was in the same range of Rs.53,000, 54,000 only. So, though the market price of cotton was higher... we were not losing money, but at the same time the margins improvement did not happen for us because our actual cost was almost same.”

    Explains why the company isn't seeing immediate margin expansion despite a drop in spot cotton prices, due to their specific inventory cycle.

    asked by Avanish Chandra

    2 min read5 chapters

    Detailed Narrative

    01

    Spinning Segment Structural Headwinds

    The spinning business is currently caught in a pincer movement between high domestic cotton prices and falling global yarn realizations. Management noted that Indian cotton is trading at 80 US cents, a 12-cent premium over New York Futures, primarily due to the Minimum Support Price (MSP) and an 11% import duty. This has compressed yarn spreads to 70 US cents per kg, well below the historical $1.00 benchmark required for healthy reinvestment. Consequently, nearly 15% of India's spindle capacity has permanently shut down, and the industry is seeing minimal new expansion.

    02

    Aggressive Modernization and Green CAPEX

    Vardhman is executing a massive ₹3,400 crore CAPEX program, with ₹2,800 crores already in motion and expected to conclude by December 2025. A significant portion is dedicated to modernization (₹400 crores) and green power (₹600 crores) to reduce utility costs and improve operational flexibility. Management expects these initiatives to drive a 200-300 basis point improvement in EBITDA margins by FY27, potentially bringing them back to the 15-16% range from the current 13%.

    03

    Fabric Division Outperformance

    In contrast to spinning, the fabric division is performing exceptionally well, operating at nearly 100% capacity utilization. The company is adding a new production line to expand weaving capacity by 30-31 million meters per annum, expected to come online around September 2025. This shift toward more value-added fabric processing is a key pillar of the company's strategy to mitigate the volatility and low margins of the commodity yarn business.

    04

    Strategic Foray into Synthetic Fabrics

    Vardhman is diversifying into 100% synthetic filament-based products with a ₹350 crore investment for a 15 million meter per annum line. While this targets high-margin outerwear and technical textiles (with potential margins of 25-35%), the project faces immediate raw material challenges. Domestic polyester and viscose prices are 10-15% higher than global prices due to BIS certification requirements that effectively block imports, potentially impacting the segment's initial competitiveness.

    05

    Inventory Strategy and Margin Lag

    The company's decision to carry 6-7 months of cotton inventory (procured at ₹53,000-54,000 per candy) protected it when market prices spiked to ₹60,000. However, this same strategy is now delaying margin improvement as spot prices fall toward ₹54,000. Management indicated that margins are unlikely to see a major sequential jump in Q4 FY25 unless international yarn prices recover or the rupee depreciates significantly.

    This is an AI-generated summary of a publicly available earnings call transcript. It is for informational purposes only and does not constitute investment advice, a recommendation, or an endorsement. inve.money is not a SEBI-registered investment advisor. Please consult a qualified financial advisor before making any investment decisions.