Improved Capacity Utilization, Lower Costs Underlie Himatsingka Seide’s Q2 Performance

Bengaluru-based textile manufacturer Himatsingka Seide Limited announced its financial results for the second quarter of fiscal year 2024, ending September 30, 2023. The company reported strong year-over-year growth in revenue and profitability, driven by higher capacity utilization levels across its key divisions and softening prices of raw materials like cotton.

Himatsingka Seide’s consolidated net revenue for Q2 FY2024 stood at Rs 748 crores, a growth of 17% over Q2 FY2023. Earnings before interest, tax, depreciation and amortization (EBITDA) jumped nearly 200% year-over-year to Rs 156 crores. Profit after tax was Rs 29 crores, compared to a loss of 34 cr.

The company’s EBITDA margins improved significantly to 20.9% in Q2 FY2024, compared to 8.2% in Q2 FY2023. This robust growth in profitability was driven by higher capacity utilization, greater operating leverage and continuous reduction in energy costs.

According to Shrikant Himatsingka, Managing Director of Himatsingka Seide, capacity utilization levels during the second quarter were strong across the company’s key divisions, led by the spinning division at a whopping 99%, followed by the sheeting division and towel division at 67% each.

He also stated that the company continues to see a stable demand environment, driven by an expanding client base and growing presence across new markets.

Reduction in Raw Material Costs Boost Margins

The textile industry has witnessed softening prices of key raw materials like cotton over the past few quarters, which has provided a boost to profitability for manufacturers. Himatsingka Seide has been able to harness this favorable trend of lower input costs to improve its margins.

As per the management, prices of cotton remained stable during Q2 FY2024 compared to the previous quarter, thereby contributing to the better operating performance. The new cotton crop arrival is also on the horizon, which is expected to ensure stability in cotton prices over the coming months.

The company has also been focused on reducing its energy costs through a combination of alternative renewable energy usage and process optimization. The management indicated that these efforts are now bearing fruit, with marginalization of energy costs.

Strong Growth in Home Textiles

Himatsingka Seide operates three key divisions – spinning, sheeting and terry towels. The home textiles division, comprising sheeting and terry towels, recorded strong broad-based growth during the quarter.

The sheeting business manufactures and supplies bed linen, fashion bedding and utility bedding products. The terry towel business completed its first full year of commercial operations in FY2023. It caters to demand for bath towels, hand towels, bath rugs and kitchen textiles.

According to the management, the home textiles business continues to see healthy demand trends from expanding customer base across geographies like North America, Europe, UK and Asia Pacific. The launch of terry towel products has opened up new markets and helped diversify Himatsingka Seide’s revenue streams.

Analysts say that the home textiles market is projected to grow at a CAGR of 5% globally, providing strong tailwinds for players like Himatsingka Seide. Urbanization, growth of the hospitality industry and increasing disposable incomes are driving demand for these products.

China Plus One Strategy to Benefit Himatsingka Seide

With rising manufacturing costs in China and trade tensions between China and the West, global retailers are implementing a “China Plus One” strategy of diversifying their supplier base. This is expected to provide a boost to large Indian textile manufacturers like Himatsingka Seide, Arvind, Welspun and Trident.

In recent years, Himatsingka Seide has made significant investments in enhancing its scale, building global-size integrated facilities and improving cost competitiveness. The company is well positioned to capitalize on the China Plus One trend and gain market share across geographies. Its expertise across the entire value chain – from farm to retail – offers buyers the flexibility to consolidate their supplier base.

The management remains upbeat about the business outlook, given the strong demand environment, high capacity utilization levels and stable input prices. The company’s product offering across spinning, sheeting and terry towels makes it a leading integrated textile manufacturer. Its portfolio of own brands and long-standing relationships with global marquee retailers provide healthy revenue visibility.

Focus on Debt Reduction

Himatsingka Seide’s net debt level remained rangebound in Q2 FY2024 at Rs 2,579 crores, compared to Rs 2,512 crores at the end of Q1 FY2024. The company is focused on deleveraging its balance sheet and reducing debt remains a key capital allocation priority.

As per Himatsingka, the aim is to reduce net debt by Rs 100-200 crores annually going forward. This will be achieved through healthy cash flows from operations, while maintaining sufficient liquidity for working capital needs and organic growth.

Analysts say that meaningful deleveraging will be positive for the company’s valuation and lower the risk profile of the business. It will help bring down finance costs and support balance sheet expansion for supporting future growth opportunities.

Valuation and Outlook

Himatsingka Seide is currently trading at an EV/EBITDA valuation of 5.3 times FY2024 estimated EBITDA. With a strong quarter, the stock is up around 15% over the past month, significantly outperforming the Sensex.

Most brokerages have a positive view on the stock and highlight its reasonable valuation, considering the company’s strong track record, integrated operations and leadership position in the domestic home textiles market.

The company’s focus on sweating its assets, diversifying its end-market mix, deleveraging its balance sheet and the launch of its new Himêya brand for the domestic market will be key to its ongoing performance.