Fundamental Analysis And Intrinsic Value of Nahar Spinning Mills Ltd.

Dated: 27 May 23
Company: Nahar Spinning Mills Ltd.
CMP: Rs.

Introduction

Nahar Spinning Mills Ltd. was established in 1980 and operates in the textile industry. The company produces wide range of yarns like cotton, synthetic and blended yarns which find application in industrial fabrics, home furnishings and apparels.

In this article we will try to analyze Nahar Spinning Mills Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.

Leverage Ratios

Observations:

1. The company has managed to bring down its reliance on debt.
2. Interest coverage ratio has seen a remarkable improvement in 2022.

Operating Ratios

Observations:

1. Company has been maintaining a healthy working capital turnover ratio, though it has not recovered to pre COVID levels. On analysing the balance sheet and P&L we find that the revenue has not caught up with the increase in working caital of the firm. The assets of the company have increased but appears that they have not yet started contributing towards revenue generation. This is in line with the expectation as the company is in expansion mode and is adding more spindles in some of its plants and are supposed to be fully operational only by Mar 2023. So the new machinery have added to the assets however they have not started operations.

Profitability Ratios

Observations:

1. There is sharp improvement in all the ratios in 2022 as compared to previous years.
2. The company is operating on very thin margins as PAT and EBITDA margins are not very commendable. While the company’s revenue is on an upward trajectory bottom line does not seem to improve much. This may be due to unmanaged expenses that are eating away the profits. Company has to identify and resolve this issue.

Intrinsic Value

There were multiple occurrences of negative free cash flow during the period under observation. This is due to heavy capex incurred as a part of company’s planned expansion. Here we have relied on revenue growth and shareholder’s equity growth to figure out the expected free cash flow for future and thus the intrinsic value of the company.

Assumptions:

• The increase in Shareholder’s equity is assumed to be Rs. 5573.89 lakhs per year for the first five years and then Rs 2786.95 lakhs from sixth to tenth year. The growth rate is projected based on the past growth of Shareholder’s equity (refer to figure below). In the past Shareholder’s equity has increased at the rate of Rs. 11147.78 lakhs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

• Terminal growth rate is assumed to be 0%.
• Discount rate is assumed to be 12%.
• Increase in Revenue is assumed to be Rs.10031.50 lakhs per year for the first five years and then Rs 5015.75 lakhs per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 20062.99 lakhs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

• Free cash flow will be 2% of revenues in future as the capex reduces after the initial outlay.

Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free cash flows derived from growth in Shareholder’s Equity and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.

Shareholder’s Equity Growth Model

Intrinsic Value: Rs.172.75

Stock Entry price with 25% margin of safety: Rs.129.57

Revenue Growth Model

Intrinsic Value: Rs.157.80

Stock Entry price with 25% margin of safety: Rs.118.35

The average of the above two stock entry prices works out to be Rs.123.96. When the stock starts trading below this price it becomes attractive for long term investment.

Author

Jibu Dharmapalan

Fundamental Analyst

Disclaimer: This is not a stock advise. Investors must use their due diligence before buy/selling any stocks.

References:

https://www.bseindia.com/stock-share-price/nahar-spinning-mills-ltd/naharsping/500296/financials-annual-reports/

More about the Company:

Board Of Directors

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