Dolly Khanna Buys Trident
By Now you might know Dolly Khanna, She is famously called the lady with a midas touch. Her latest stock pick is Trident Limited (1.03% Stake), a leading manufacturer and exporter of Home Textiles & Paper products. She is very bullish on Textile, as she already owns Nitin Spinners and Nandan Denims. Even in our last blog the ‘Magic multibagger’, using Joel Greenblatt’s Magic Formula, 2 out of the 10 stocks were textiles (KG Denims and Pasupati Acrylon).
Let Understand Trident in 5 mins (Everything you need to know about it)
About the Company – Trident Group and a leading manufacturer and exporter of Home Textiles & Paper products. Co has its manufacturing facilities set up in Barnala in Punjab & Budni in the state of Madhya Pradesh in India. Company’s domestic sales contribute 39% whereas 61% is export sales. Textile business contributes 78% to the revenue whereas the paper business contributes 22%.
The company has been in Investing mode for last 2 years and has lately and has invested 1,667 crores in home textile division via a combination of debt and Equity.The company has guided for a revenue of 1200 crores during optimal use of capacity in the new plant which commenced commercial production in febuary 2016. The company expect 40-50% capacity utilization in FY 2017, a contribution about 500-600Crs to topline and 80% utilization in FY18.
Financials at a Glance –
The company’s business model over the last few years have moved from a commodity type Yarn producer to value added home textile market. The company has been focused on high margin, high value product not only in the textile division but also in the paper division where they have guided to increase share of high margin copier business to 60-70% from 50% of current sales.
Understanding Companies Business Model – The main 2 segments of Business are Textile Business (78%) and Paper Business (22%)
Trident’s paper business has been doing better compared to the textile business. The company has been in transition mode from a commodity player to Value added paper.
The company boost of a great client portfolio in its textile division like Target, Wal-Mart, Macy’s, IKEA, Ralph Lauren in International market and Domestic Giants like ITC Hotels, Page Industries etc.
Case for Operating Leverage – The Company has had 18% margins on average when it was in commodity business of yarn. With new capacity coming in and utilization improving till FY 2018, there is a strong case for margin improvement to 20-23% by 2018.
Case for Financial Leverage – 70% of long term debt falls under the purview of lower interest rates since its under the TUFS scheme(Interest Subsidy given by government) . Trident has repaid outstanding term loans of Rs. 366 crore in H1 of FY17, which included prepayment of Rs. 151 crore of high cost debt .The co has targeted to keep net debt to equity ratio of 1.25x by FY18E Vs 1.4x in H1FY17. The decline in the current interest rates of the co will also be beneficial. It must be noted that cost of capital is low for trident due to TUFs scheme and paying off long term debt will decrease return ratios.
Comparison with Peers and Valuation- We value the Paper business at 800 Crores assuming a PE multiple of 10 times. The two main competitors of Trident in home textile division are welspun (23% CAGR in last 5 years) and Indocount (25% CAGR in last 5 years). Both have grown fairly well in the last few years compared to Trident which has grown at 15% CAGR in last 5 years. Trident has been a late entrant in bed linen business but it has fresh capacity to increase revenues from 3700 crores to about 5000 in next 2 years. The Operating Margin of Welspun in FY 2016 stood at 26.38%, whereas it stood at 20% for Indo Count. Since trident is fully backward intergrated (Inhouse yarn business) we believe that it can increase margins by 300 bps to 23% from current 20% in next 2 years.
Trident will reap benefits of increasing scale of operations, highly integrated manufacturing process in both home textiles and paper, and continued access to low-cost raw material for paper division will ensure healthy and sustained operating profitability in the medium term. We believe trident will do an EPS of 8-9 in FY 2018. We value Trident at 10-11x FY 2018 and give it a fair value of 95 by march 2018. We also believe that the downside risk in this stock is limited to 50 and any dip remains a buying opportunity.
Risk – The company has been frequently diluting equity, which has resulted in low growth in EPS. We don’t expect any further dilution of Equity as debt capital is very cheap for the company and debt/equity is well under control.
Conclusion – Ramping of utilization both in the towels and bed-linen facilities in Budhni (Madhya Pradesh) and sound export prospects for home furnishing will be key trigger for the stock prices in the medium to long term. We believe that trident is a stable business and since it is fully backward integrated in the next few years it can have strong margin expansion.
Disclosure – Stallion Asset is a SEBI Registered Company and this is not a Recommendation. Use this for Educational Purpose only. Amit Jeswani and His Family have no positions in Trident.
