Vardhman Textile Limited share price is currently trading at discount to its intrinsic value. This is a reasonably good company to watch out for investing.
How this company came to my notice?
I was recently preparing a report for my blog post on the topic of PEG ratio on India stocks. In this list I noticed Vardhman Textile Limited.
The PEG ratio of Vardhman Textile Limited w.r.t to past years EPS growth rates was like this: PEG (1 year)-0.14, PEG (3Y)-0.63, and PEG (5Y)-0.21.
A stock which has PEG of 1 and below is very interesting. Vardhman Textile Limited is showing low PEG for all three time horizons (1 year, 3 year & 5 year).
Hence, I thought to do a slightly more detailed analysis of Vardhman Textile Limited share price.
Vardhman is like a household name in India. I still remember watching ads of “Vardhman Knitting Yarns” being displayed on TV. But I was not expecting that the same old company is now a Rs.7,000 Crore worth company (Market cap).
After looking into the Annual Report of the company, it was clear that the core business of Vardhman is “Yarn and Fabric”.
In the past Vardhman has diversified its business in Threads, Fibres, Garments and Steel. But now the company is focusing more on Yarn and Fabric which has been its core since last 50 years.
It was also very interesting to see the competition posed to Vardhman Textile Limited (VTXL) by its rival companies. Basically I was surprised to see the competitive edge that is enjoyed by VTXL.
Have a look yourself:
The nearest rival of Vardhman is Trident. But note the difference between Trident and Vardhman:
- Market Cap – Vardhman is 67% bigger than Trident.
- Sales Turnover – Vardhman is 22% bigger than Trident.
- Net Profit – Vardhman is 197% bigger than Trident.
So it will not be wrong to state that Vardhman Textile Limited is enjoying a great competitive advantage over its nearest rivals.
Vardhman Group (textile spinning mill and general mill) started production in year 1965 in Ludhiyana, Punjab. The founders of Vardhman was Mr. V.S Oswal & Mr. Ratan Chand Oswal.
Presently Mr. Paul Oswal is the Chairman of Vardhman Textile Limited. Sachit Jain, Suchita Jain, and Neeraj Jain is the Joint managing Directors of the company.
Adishwar Enterprises LLP (19.89%), Vardhman Holdings Limited (24.51%), and Devakar Investment & Trading Company Private Limited (10.79%) are the main promoters of VTXL.
Total shareholding of the Promoters in VTXL is 61.84% as declared in their FY16-17 annual report.
Mutual Funds have 11.48% holding, and Foreign Portfolio Investors have 11.02% holding in VTXL.
How do they make money? They generate income mainly from sale of products (97%).
Their line of business is as below:
Out of this, they are now considering sale of yarn and fabric as their core business.
Vardhman Textile Limited has its corporate headquarters in Ludhiana, Punjab.
Vardhman Textile Limited Share Price & other details..
The price history of VTXL is decent. Apart from the general price volatility, the growth trend shown by its market price is robust and consistent.
This type of price trend generally favours the long term investors.
But what makes Vardhman Textile Limited share price special is, it has always been backed by its business fundamentals.
It was hard to find a period where Vardhman Textile Limited share price has become unreasonable.
This is probably because VTXL is still a mid cap stocks.
But there is something in this mid cap stock that I found very interesting in its annual report. It was related to its percentage sales it generates from export market.
The Chairman of VTXL says in his annual report that, in the global textile sector, USA and European Nations are the major buyers of textile. The countries who supply textile to USA and Europe is China, India, Bangladesh and Vietnam.
But China may loose its preference soon because of the increasing labour and production cost in China. If China loses its edge, India will surely benefit.
So, a mid cap stock, who is generating 38.5% of its sales revenue from export must be given due diligence by long term investors. Moreover, if the export component of VTXL is going to go further up, this is a company which automatically becomes a MUST WATCH.
Lets see how its stock price has behaved in last 5 years:
In Dec’2013, Vardhman Textile limited share price was at Rs.385 levels.
By the Mar’17, Vardhman Textile limited share price jumped to Rs.1350 levels (CAGR : 32%, in just 4.5 years).
Today in Dec’2017,Vardhman Textile limited share price is trading at Rs.1294 levels.
In a span of last 8/9 months (Mar’17 to Dec’17) there is a price dip of -1.0%.
Though it is not a big fall, but considering that its fundamentals are outstanding, it prompted me to dig deeper into its financial reports.
The result of my analysis is presented here for my readers knowledge…
Vardhman Textile Limited share price vs business fundamentals (5Y Data)
To have a good comparative between a shares market price and its business fundamentals, following trend will give a good idea:
- Reserves and Surplus Growth in last 5 years.
- Sales growth in last 5 years.
- Net Profit growth in last 5 years.
- Dividend payment growth in last 5 years and,
- EPS growth in last 5 years.
Comparing these growth rates with the last 5 years price trend will give a good idea of whether price is keeping up pace with its fundamentals.
There are stocks whose market price reacts too violently to even small changes in its business fundamentals.
Such unjustified reactions pushes the market price of stocks to either become undervalued or overvalued.
Lets have a look at price vs business fundamentals comparison of Vardhman Textile Share Price.
Share Price: Consistently growing from 270 levels to 1295 levels in 5 years. Growth rate has been good at 36.83% per annum.
Reserves & Surplus: Continuously increasing since past 5 years (Mar’13). Growth rate has been decent at 12.17% per annum.
Income (Turnover): Steadily increasing since past 5 years (Mar’13). Growth rate has been decent at 8.36% per annum.
Net Profit (PAT): Steadily increasing since past 5 years (Mar’13). Growth rate has been good at 25.34% per annum.
Equity dividend payout: The company paid dividend only in 4 out of 5 years. In year ending Mar’17, company has not paid any dividends. This may be due to the Rs.2000 Capex plan they have been executing till this year.
EPS: Overall increasing in EPS in past 5 years (Mar’13) has been great @ 28.63. Thanks to the share buyback that took place in FY16-17.
Quoting from the companies Annual report for year 2016-17, Chairman has declared that in next 4 years, further Capex plan of Rs.2,500 crore is also envisaged.
This is a very positive declarations and its execution will lead to further sales, profit and EPS gains for the company.
Having said that, what I saw in moneycontrol surprised me.
A company which is showing this kind of robust business fundamentals has a P/E ratio of just 11.77.
This is a big hint that the current price level of the company is trading at unjustifiably low levels. Such price levels often brings market price close to its intrinsic values.
But before making any conclusion, lets look at quarterly numbers published by the company till Sep’17.
Vardhman Textile Limited share price vs business fundamentals (after Mar’17)
The results of last five quarters has not been as good. As a result the share price rose by 2.66% from Oct’16 to Dec’17.
Hence the price appreciation has been too much in last 5 quarters.
But in a similar period (5 quarters), Sensex rose from 27,900 levels to 32,900 levels (CAGR: 14.1% p.a.).
So is this a good sign or a bad sign?
We have already seen that the business fundamentals of the company is good. But the last 5 quarter performance has not been as great. This may be the cause why share price is not matching with the Sensex growth.
Income (Turnover): Decreased since past 5 quarters (Sep’16). Growth rate has been negative at -0.05% per annum.
Net Profit (PAT): Decreased since past 5 quarters (Sep’16). Growth rate has been negative at -22.85% per annum.
EPS: Decreased since past 5 quarters (Sep’16). Growth rate has been negative at -3.40% per annum.
Considering that the growth rates of 5 quarters are negative, recent price stagnation is only justified.
But has the price stagnation made the market price of Vardhman Textile touch intrinsic value?
Lets do the fundamental analysis to get a more concrete answer.
Stock Analysis of Vardhman Textile Limited
My readers are aware that on getmoneyrich, a stock analysis worksheet is also offered for the readers helping them to learn the process of fundamental analysis of Indian stocks.
I have used this worksheet to do some number crunching for Vardhman Textile Ltd.
Allow me to share some of my observations here.
#1. Price Earning (P/E) & Price Book value (P/B) Ratio:
P/E & P/B ratio is one excellent stock metric which gives us a quick idea of stocks current price valuation.
As a thumb rule, a stock whose P/E ratio is above 15 is considered expensive. A stock whose P/B is above 1.5 is also considered expensive.
But this thumb rule has now become obsolete.
Hence it is essential to use other, more relevant, comparator.
The stock analysis worksheet compared Vardhman’s P/E with its industries (Miscellaneous) P/E ratio to get an idea about its price valuation.
The stock analysis worksheet also compared the companies P/E and P/B with its Sensex’s overall P/E & P/B ratio to get an idea about its price valuation.
The result was like this:
Compared to Industry P/E ratio, Vardhman’s share price looks at par. But compared to Sensex P/E ratio, it looks very undervalued.
Compared to Sensex P/B ratio,Vardhman’s share price looks very undervalued.
#2. Simple Moving Average (SMA):
Analyzing stock price based on SMA is part of technical analysis.
I personally feel comfortable in including a tinge of technical analysis in my stock research.
It gives me a better feel of how the stock price has been moving in the past as compared to today’s price.
When we look at SMA (200, 150, 50 & 30 day) and compare it with current price, the trend is very clear. The price has been gradually but very slowly increasing.
Interesting here is to check that if the current price levels is still exciting (even after the recent upward movement of price).
SMA works like a fire alarm for analysts.
If SMA is showing a growing trend, analysts become cautious about the stock price tending to become overvalued.
If SMA is showing a falling trend, analysts become cautious and dig deeper into the cause of such price fall.
To know this we will have to estimate the intrinsic value of Vardhman.
#3. Intrinsic Value:
This is the heart of my stock analysis worksheet.
Though I am no expert of estimating intrinsic value of companies, but still this worksheet works for me.
It gives me a rough idea of where the current price of stock is trending (undervalued or overvalued).
Lets see how the intrinsic value of Vardhman looks like:
Current market price is Rs.1,295.
Calculated intrinsic value by this worksheet is Rs.5,100.
I must say that I was expecting this. The kind of growth rates this company has been showing in last 5 years, Intrinsic value of this stock was bound to be higher.
But this is also a fact that I was not expecting it to be as high as Rs.5100. Even if these calculations are 50% right, still intrinsic value of Vardhman will be double its current price.
We shall also not forget that the Chairman has stated in the annual report that in next 4 years, further investment of Rs.2500 is envisaged.
This makes the current price levels of Vardhman even more attractive.
One must also not forget that in FY16-17, the company has also bought-back some of its share from public.
When this type of buyback happens? When company is thinks that the current price levels of the stock is very attractive.
So all conditions are pointing clearly at the fact that Vardhman Textile Limited share price is trading at undervalued price levels.
#4. Overall Rating of Vardhman Textile Limited
This is the best part of my stock analysis worksheet. It consolidates the results and gives a one line, clear answer.
The worksheet has analyzed Vardhman Textile Limited based on the following parameters.
* Price Valuation
* Business Fundamentals
* Profitability &
* Price history
Though this worksheet gives more weightage on Price valuation and Business fundamentals, but it also considers companies profitability and price history.
For Vardhman Textile Limited, the overall grading is excellent. The main reason being, its current market price is very much below its intrinsic value.
Only those stocks which is both fundamentally strong, and also displays undervalued market price, this worksheet will give it high grades.
The overall results looks like this:
According to the rule of my stock analysis worksheet, any stock which obtains an overall grades of 85% or more, is a good stock.
Here Vardhman Textile Limited has scored only 88.9%.
In term of price valuation, Vardhman Textile Limited has score 96.7%.
In term of business fundamenatls, Vardhman Textile Limited has score 82.7%.
Though the profitability of Vardhman is not as great, but sill it is a very interesting stock to watch out for people.
I personally consider this company as a good long term asset.
Disclaimer: All blog posts of getmoneyrich.com are for information only. No blog posts should be considered as an investment advice or as a recommendation. The user must self-analyze all securities before investing in one.