© Sumpoorna 2012

1

Rising Star– Nahar Spinning Ltd. June 25, 2012

Recommendation Buy

Transaction Price Range Rs.49 - Rs.55

Target Rs.68

Time horizon 6 months

1-yr stock price movement (NSE)

Snapshot

CMP 52.45

Date 25-Jun-12

Beta 0.87

52-week High (Rs.) 92.90

52-week Low (Rs.) 45.00

Industry Textiles

FYE March

Adj. EPS (Rs.) -32.5

P/EPS ratio (x) -1.61

Cash EPS (Rs.) -9.1

P/ Cash EPS (x) -5.78

P/ BV ratio (x) 0.34

BV/ Share (Rs.) 152.15

M. Cap/ Sales (x) 0.11

Market Cap (Rs. Cr) 189.16

Dividend yield (%) 0

FV/ share (Rs.) 5

F&O Presence NO

Avg. Daily Trades (Rs. Cr.) 0.14

Bloomberg Ticker NSM IN

NSE Ticker NAHARSPING

BSE Ticker 500296

Return Comparison vis-à-vis Nifty

Particulars (%) 1m 3m 1yr

Nahar Spinning Ltd.

9.6% 4.7% -33.5%

Nifty 5.9% -0.7% -5.7%

Particulars (Rs. Cr.)

FY12 FY12

Q4 9m 12m

Net Sales 470.8 1,308.0 1,691.4

Net Profit 4.7 -27.2 -117.2

Cash Profit 26.2 37.2 -32.8

Profit (%) 1.0% -2.1% -6.9%

Adj. EPS (Rs.) 1.3 -7.5 -32.5

Share Holding Pattern

No. of shares: 36,065,303

Promoter holding (%): 64.02

Institutions (%): 1.86

Non-Institutions (%): 34.12

Free Float (%): 35.98

Business: Nahar Spinning Mills Limited (“Nahar Spinning” or “The Company”), with a capacity of

3,83,296 spindles and 1080 rotors, is the second largest player in domestic cotton yarn

industry and is the largest exporter of cotton yarn. It manufactures cotton, synthetic and

blended yarn. Nahar Spinning is also present in the readymade garments (“RMG”) space,

manufacture knitted and woolen garments. The company has eight weaving units with

seven locations in Punjab and one unit at Mandideep in Madhya Pradesh.

Investment Rationale:

Nahar Spinning along with its group company Nahar Industrial Ltd. is the largest buyer of

raw cotton which helps the company with greater bargaining power and hence, lower raw

material costs. Integrated operations, large scale of procurement, and an efficient

procurement strategy provide the company with greater degree of operational efficiencies.

The company’s revenue have been increasing at a CAGR of over 23 percent; further, we

expect the revenues to increase Rs.2,000 crore by March 31, 2013 (‘FY2012-13’ or ‘FY13’),

in line with previous trends; incremental revenues from the capacity expansion are also

expected to aid revenue growth in FY13. During FY12 the company reported a growth in

top-line of over Rs.300 crore as rupee depreciation has helped in increasing textile

exports. However, the company reported a net loss of Rs.117.20 crore on account of huge

inventories which were procured at previously prevailing higher cotton prices; further, the

company has reduced its inventory cycles to safeguard from fluctuations in raw material

prices.

The company’s share is quoting at a “Price/ Book value” (P/BV) of about 0.34 times and

“Market Cap/ Sales” of 0.11 times; these valuations seem quite attractive considering

Nahar Spinning’s integrated business model. Thus, aided by robust capacity expansions and healthy domestic & global consumption demand going forward. Further, in our view the down-side is captured in the current share price, without accounting for growth expectations from new capacity additions; hence, we strongly recommend a ‘BUY’ for the company’s stock. Business Outlook

Strength: o Secular growth in topline; the trend is likely to continue aided by increased

demand and capacity expansions o Supporting industry trends – growth in domestic demand and increased

export realizations due to weakening of the Indian Rupee. o Operational efficiencies aided by scale of operations and expertise in raw

material procurement. o The company’s reducing inventory cycles to help the company partially

offset raw material price volatility.

Risks: o Industry risks – high competition aided by low entry barriers o Limited ability to absorb price declines in cotton prices due to high

inventories o Concentration in product mix and clients to affect negatively in case of

reversal in the positive demand trend

*Annualized Investment rating scale: Buy (>15% returns); Add (5% <15% returns); Sell (<-5% returns)

45

55

65

75

85

95

© Sumpoorna 2012

2

Rising Star– Nahar Spinning Ltd. June 25, 2012

Legal History & Structure:

Nahar Incorporated in 1980, Ludhiana-based Nahar Spinning is the flagship of the Nahar group of companies. Promoted by

Mr. Jawahar Lal Oswal, Nahar Spinning manufactures cotton, synthetic and blended yarn and cotton and woolen knitted

garments. The company went public in 1985, with a public issue of equity shares at par.

Group Companies: Nahar Industrial Enterprises Limited, Oswal Woolen Mills Limited (OWM), Nahar Investments and Holding

Limited

Management’s Growth Path:

Expansion Plans:

o With the opening of Global Trade company has taken effective steps to increase its exports Markets. Company continues to

make efforts to provide quality products at very competitive rates so that it can compete with International suppliers and

maintain a steady growth of exports. o The company additionally installed 37,200 spindles and 360 rotors in FY11. o On account of heavy losses incurred by the company in Q1FY12, the company is planning further efficiency and cost-

reduction measures.

Manufacturing capacities:

Installed Capacity Unit FY 09 FY 10 FY 11 Cotton/Synthetic Yarn Spindles 3,44,952 3,46,096 3,83,296

Rotors 720 720 1,080

Gas-Mercerizing MT 2,040 2,040 2,040

Actual Production Unit FY 09 FY 10 FY 11

Textile & Hosiery Garments Pcs 55,83,808 7,079,154 7,788,731 Cotton/Synthetic Yarn Kgs 6,25,56,321 6,1,855,507 60,235,337

Gas-Mercerizing Kgs 1,2,341,117 1,681,865 1,976,407 Dyeing & Processing Kgs 8,96,088 4,87,014 1,21,588

Markets:

o The company has an established position in the export markets, particularly in US, Brazil, China, Bangladesh, Egypt, and Korea

and has a status of “Star Trading House” for its cotton yarn exports. Its garments such as T-shirts are exported to reputed

international brands such as GAP, Arrow, Old Navy and Philips Van Heusen, amongst others.

o During FY12, the cotton yarn segment constituted 89 percent of total revenues in, of which maximum was earned through

exports to Brazil, China/Hong Kong, Bangladesh, Egypt and Korea. Majority of garment revenues is earned through exports to

GAP, Philippe Van-Heusen and CHAPS, in the US; which has resulted in high business concentration risk. Its dependence on few

clients reduces its bargaining power and limits its ability to pass on hikes in input prices.

Operations

o Nahar Industrial Enterprises and Nahar Spinning purchase their cotton on a combined basis, resulting in a higher bargaining

power and cost savings for the company. Majority of its cotton procurement takes place from October to April, which is the

cotton season in India. Nahar Spinning maintains an average cotton inventory of seven to eight months.

o The company has also forward integrated into the manufacturing of garments; thereby increasing the realization through value

additions.

o Nahar Spinning follows the strategy of exporting coarser counts (30s to 40s) to Bangladesh, Brazil and Korea, and selling finer

counts (60s to 80s) in the domestic market. Hence, Nahar Spinning’s domestic realizations are higher than that from the export

markets. The type of counts sold depends on the customer’s requirements.

© Sumpoorna 2012

3

Rising Star– Nahar Spinning Ltd. June 25, 2012

Segmental Performance:

Segmental Revenue (Rs.crore)

Quarter ended Year ended

Mar'12 Dec'11 Sept'11 Mar'11 Mar'12 Mar'11

Yarn 448.52 390.42 374.30 331.95 1,583.11 1,273.20

Garments 45.70 56.77 52.02 44.86 191.28 209.77

Total 494.22 447.19 426.33 376.82 1,774.39 1,482.97

Less: Inter segment sales 2.34 1.80 1.88 20.93 82.97 94.22

Total 470.79 429.14 407.47 355.88 1,691.42 1,388.75

Segment PBIT

Yarn 25.67 -3.55 -4.36 49.38 -86.25 222.05

Garments 4.35 6.38 4.65 1.85 16.95 14.81

Total 30.03 33.32 0.28 51.23 -69.30 236.87

Less

Foreign exchange hedging 0.00 0.00 0.00 0.00 0.00 10.58

Finance Cost 27.19 25.52 26.16 16.62 110.12 48.62

Unallocable Expenses -4.11 -0.84 -0.40 -0.93 -5.97 -0.27

PBT 6.95 -21.34 -25.48 35.54 -173.44 177.93

Notes:

The majority of the loss earned by the company during FY12 is attributable to the quarter ended June 30, 2011; due to inventories which

were procured at previously prevailing higher cotton prices; further, the company has reduced its inventory cycles to safeguard from

fluctuations in raw material prices.

Contribution to Top line (FY 12):

Geographical Revenue Breakup:

Notes:

For FY13, we do not see any major shift in contribution of export and domestic business. Further, portion of sales from the RMG segment

is likely to be in line with FY12.

Where a rupee is spent (Standalone data; FY 12):

Yarn89%

Garments11%

Domestic70%

Exports30%

Raw Materials69%

Power11%Employee Cost

7%

Other13%

© Sumpoorna 2012

4

Rising Star– Nahar Spinning Ltd. June 25, 2012

Financial Performance (Standalone Basis):

Income Statement (Rs. Cr.)

FY 12 FY 11 FY 10 FY 09 Growth Mar'12 Dec '11 Sep '11 June '11 Mar '11

Annual Annual Annual Annual 08 - '11 3 months 3 months 3 months 3 months 3 months

Net Sales 1691.42 1391.52 1110.47 1000.38 16.89% 470.80 429.76 407.47 385.43 355.89

Growth 21.55% 25.31% 11.00% 9.71% 9.55% 5.47% 5.72% 8.30% -9.54%

Total Income 1705.85 1406.22 1120.82 1007.10 16.87% 477.55 431.95 408.91 387.44 360.19

Growth 21.31% 25.46% 11.29% 9.41% 10.56% 5.63% 5.54% 7.57% -9.41%

Expenses 1684.73 1106.29 925.32 914.67 24.41% 421.91 405.48 387.66 470.15 289.67

Growth 52.29% 19.56% 1.16% 24.61% 4.05% 4.60% -17.55% 62.31% -1.96%

EBITDA 11.80 299.92 195.51 92.43 4.61% 55.64 26.47 21.24 -82.70 70.52

Growth -96.07% 53.41% 111.52% -50.43% 110.20% 24.62% -125.68% -217.27% -30.96%

Int. & Fin. Charges 110.12 52.21 45.04 41.39 57.24% 27.20 25.49 26.17 30.81 16.62

Growth 110.92% 15.92% 8.81% 93.33% 6.71% -2.60% -15.06% 85.38% 64.39%

Depreciation 84.85 69.78 69.86 76.11 4.76% 21.49 22.33 20.56 20.07 18.35

Growth 21.60% -0.12% -8.21% 5.75% -3.76% 8.61% 2.44% 9.37% 2.23%

PBT -173.44 177.93 80.61 -25.08 -156.28% 6.96 -21.35 -25.48 -133.58 35.55

Growth -197.48% 120.74% -421.44% -126.95% -132.60% -16.21% -80.93% -475.75% -52.02%

PAT -117.20 119.73 53.49 -16.63 -155.40% 4.67 -14.60 -17.23 -90.05 24.91

Growth -197.89% 123.82% -421.65% -125.87% -131.99% -15.26% -80.87% -461.50% -52.59%

Cash Profit -32.76 189.51 123.35 59.48 -3.16% 26.16 7.73 3.33 -69.98 43.26

Growth -117.29% 53.63% 107.38% -56.35% 238.42% 132.13% -104.76% -261.77% -38.63%

Common-Size Statement

(% of Net Sales)

FY 12 FY 11 FY 10 FY 09

Cash Flow Statement (Rs. Cr.)

FY 11 FY 10 FY 09 FY 08

Annual Annual Annual Annual

Annual Annual Annual Annual

Expenses 99.6% 79.5% 83.3% 91.4%

PBT 188.52 80.61 -25.08 19.84

Int. & Fin. Charges 6.51% 3.75% 4.06% 4.14%

Adjustments -30.04 36.99 136.69 52.94

Depreciation 5.02% 5.01% 6.29% 7.61%

Operating Cash Flow 158.48 117.60 111.61 72.78

Cash Profit -1.94% 13.62% 11.11% 5.95%

Financing Cash Flow 47.72 -35.28 -73.42 80.13

EBITDA 0.70% 21.55% 17.61% 9.24%

Investing Cash Flow -213.35 -73.42 -39.21 -148.07

Capital Employed 99.59% 143.83% 127.02% 114.78%

Free Cash Flow 57.35 80.04 -64.76 -47.86

Enterprise Value 10.00% 120.50% 100.20% 71.52%

Net Cash Flow -7.15 8.90 -1.02 4.85

Market Capitalization 10% 25.32% 24.76% 8.40%

Closing Balance 11.12 18.26 9.36 10.38

Key Ratios

Mar '12 Dec '11 Sep '11 June'11

Balance Sheet (Rs. Cr.)

FY 12 FY 11 FY 10 FY 09

3 months 3 months 3 months 3 months

Annual Annual Annual Annual

Interest Coverage (x) 2.05 1.04 0.81 -2.68

Equity Capital 18.05 18.05 18.05 18.05

PBT Margin (%) 1.47% -4.94% -6.24% -34.48%

Reserves 530.71 647.91 536.57 489.39

PAT Margin (%) 0.99% -3.38% -4.22% -23.24%

Net worth 548.76 665.97 554.62 507.44

ROE (%) 20.28% -63.40% -74.82% -391.01%

Market Capitalization 176.36 352.36 275.00 84.03

ROCE (%) 3.01% 0.31% 0.08% -16.04%

Debt 1135.69 1335.50 855.92 640.76

EPS (Rs.) 1.30 -4.05 -4.78 -24.97

Payable within 1 yr. N/A 62.83 67.89 0.00

Capital Employed 1684.45 2001.46 1410.54 1148.20

Highlights FY 12 FY 11 FY 10 FY 09

Annual Annual Annual Annual

Gross Block N/A 1536.79 1376.49 1324.80

Interest Coverage (x) -1.06 4.41 2.79 0.39

Less: Depreciation N/A 785.50 729.37 676.06

PBT Margin (%) -10.25% 12.79% 7.26% -2.51%

Net Block N/A 751.29 647.12 648.75

PAT Margin (%) -6.87% 8.51% 4.77% -1.65%

Capital WIP N/A 86.50 41.18 23.90

ROE (%) -21.36% 17.98% 9.64% -3.28%

ROCE (%) -3.75% 13.49% 9.82% 1.30%

Investments 8.25 14.09 10.95 17.02

EPS (Rs.) -32.50 33.20 14.83 -4.61

Debtors 381.78 372.30 245.41 237.16

Price/ EPS (x) -1.49 2.94 5.14 0.00

Cash & Bank balance 11.77 11.12 18.26 9.36

CEPS -9.08 52.55 34.20 16.49

Loans & Advances 116.59 206.88 134.02 114.27

Price/ CEPS (x) -5.34 1.86 2.23 1.41

Other Current Assets 0.00 0.00 0.00 0.00

BV/ Share 152.15 184.65 153.78 140.69

Total Current Assets 955.29 1395.56 886.17 562.52

Price/ BV (x) 0.32 0.53 0.50 0.17

Total Current Liabilities 917.23 189.29 119.42 58.58

M. Cap/ Sales (x) 0.10 0.25 0.25 0.08

Net Current Assets 38.06 1206.27 766.75 503.94

Debt/ Equity (x) 2.06 2.01 1.54 1.26

Dividend Yield (%) 0.00% 2.05% 1.97% 2.15%

Contingent Liabilities N/A 297.15 153.25 214.97

© Sumpoorna 2012

5

Rising Star– Nahar Spinning Ltd. June 25, 2012

Financial Notes:

o Estimated amount of Contracts remaining to be executed on capital account, net of advances Rs.16034.73 Lacs in FY 11.

o Foreign exchange hedging contracts which were under dispute with ICICI Bank Ltd. have been settled during the year.

Accordingly hedging loss of Rs.1058.46 Lacs has been paid during the year. As reserve created to meet out such liability is no

more required, hence the same has been written back.

o Assets below Rs. 5000 are depreciated at rate of 100 percent.

o In the opinion of the board, the value of Current Assets, Loans and Advances have a value in the ordinary course of business at

least equal to that stated in the balance sheet except in case of those shown as doubtful. No provision has been made for

doubtful debts.

Investment rating scale: Buy (>15% returns);

Add (5% <15% returns); Sell (<-5% returns)

Source:

Sumpoorna Research, Company website and other publicly available data

Document prepared by:

Ishu Mann Nitesh Aggarwala

For further information, please contact

Sumpoorna Global Markets & Economics Research

Phone:

+91 120 4505200

Email: knowledgecentre@sumpoorna.com

url:

www.sumpoornaonline.com

Note: The information and opinions in this report have been prepared by Sumpoorna and are

subject to change without any notice. Please contact Sumpoorna for more

information on investment decisions. Sumpoorna, its affiliates and clients may have

investment positions in the investment vehicles recommended in this report.

Disclosure Sumpoorna Portfolio Limited and its affiliates (collectively referred to as ‘Sumpoorna’) are a full-service, integrated investment banking, investment management and brokerage and financing group. We along with affiliates are underwriter of securities and participate in virtually all securities trading markets in India. Our research professionals provide important input into our investment banking and other business selection processes. Sumpoorna generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Disclaimer This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the security/ instrument referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Sumpoorna and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Sumpoorna Portfolio Limited, its affiliates, directors, its proprietary trading and investment businesses (collectively referred to as ‘Sumpoorna’) may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Sumpoorna or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Sumpoorna has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Sumpoorna endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Neither Sumpoorna, its directors, employees nor its affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information.