“BUY” This Small Cap Textile Stock For 66% Upside: Edelweiss

In the midst of the stock markets current volatility, Indias well-known brokerage business Edelweiss Broking Limited has put a buy call on Indo Count Industries Limiteds shares with a target price of Rs. 425. The brokerage estimates a 66 percent growth from the present market price of Rs. 257, and has thus given the stock a buy recommendation. Edelweiss in its research report has said that ICIL recently announced an increase in capacity by 20% to 108mn meters, which is expected to be commissioned by Q4FY21. However, given the surging textile export demand (including home textiles) aided by strong US retail demand and the adoption of China plus one strategy, we believe it is a matter of time that ICIL goes for another round of capacity expansion in the near future. As per our estimates, ICIL would deliver 95mn meters in terms of volume by FY23 (at 88% capacity utilisation) and reach optimum capacity levels by FY24E. With the increase in capacity to 153mn meters (after the addition of 45mn meters of GHFs capacity), ICIL would be able to cater to the growing export demand over the medium term. According to the brokerage Although GHCLs home textile revenue has been on a declining trend over FY17-21 (down from INR821cr in FY17 to INR435cr in FY21), the business witnessed a sharp rebound in H1FY22 (INR386cr revenue) owing to robust bedding export demand. Likewise, EBITDA margins have also been negligible in this division. However, in H1FY22, it recorded a strong EBITDA margin of 15.5%. We believe the improvement in GHCLs home textile business should continue under ICIL too, as GHFs product profile is complementary to ICILs, with 65% of revenues coming from the US. Also, there is enough scope to improve capacity utilisation at GHFs plant, which is operating at 50% currently. On an annualised basis, the valuation stands at ~0.8x FY22E P/S and ~8x FY22E P/E, which we believe is fairly reasonable.Advertisement The brokerage has noted in its research report that GFL has a diverse client base compared to ICIL; plus, it caters to the UK and Canada, countries where ICIL does not have a presence. Therefore, the acquisition would help ICIL penetrate these markets with the addition of new big-box retailers. Although ICIL would need to incur a debt of ~INR250cr for the acquisition, its FY23E D/E remains comfortable at 0.5x. The company has cash & cash equivalents of INR300cr in its books which would partially help in funding the acquisition. According to Edelweiss It would also help ICIL establish itself as the largest provider in the bedding segment and tap the opportunities in this space. We have increased FY23E revenue, EBITDA and PAT estimate by 23%, 16% and 10%, respectively. We maintain our positive outlook on the company with an increased target price of INR425/share (previous TP: INR411), valuing the company at 17x FY23E earnings estimates. The stock has been picked from the brokerage report of Edelweiss Broking Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.