Kitex Garments Limited

Stock Opportunities Not-so-Hidden Gems
21

hi

i also held kitex since 50-60 levels…but book some profits…below 70 levels would exit.

the problem with kitex seems to be the fabric division…here the profit margins are below 1% and still co is increasing the the capital employed into fabric div from the profits of garments…hence the cash generated from garment(30% profit ) going into fabric(1% profit)division on expansion…this will slowly lower its roce and roe and npm…

i want to ask how is fabric div related to garment…can they run in isolation or have to be seen together?

22

Kitex have come out with an excellent set of numbers.

Stock surged from 90 levels to 128 levels…

I have been invested here but exited weeks back after reading news of pollution issues company faced by local govt.bodies…Thought stock can correct …see what a bad timing and bad decision it was.

rz,

Shanid V H

23

Hi,

sharing some thought on Arvind’s garment business.

recently met the management of Arvind ltd. they are very optimistic about their garment business. thus, putting up a new plant in gujarat and increasing capacity big time.

since labour is the main issue with Garment business… they are following the kitex model of importing labour from other states and providing them with dormitory and other facilities.

the capital turnover and ebit margins are quite high in garment as we can see from Kitex case.

they are seeing huge demand as the customer is turning more towards one stop shop kind of model where in it would want to source fabric and garments from the same vendor. Guess, Kitex is also on the same path thus increasing fabric capacity. china is loosing share big time in global export.

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24

Up 20% toady

25

Up 20% toady

26

Today was AGM of Kitex Garments. anybody gone to the AGM? If so please provide the info…there must be some news which made stock hit upper circuit today?

27

Interview in Hindu business on the sildelines of AGM

link: http://www.thehindubusinessline.com/companies/kitex-garments-sews-up-125cr-expansion-plan/article6026183.ece

-The 100 per cent EoU has a production capacity of 5.5 lakh pieces per day at its unit in Kizhakkambalam in Ernakulam district. This will be increased to 1.1 million pieces by 2015-16.

-The company plans to introduce robotic technology to meet the labour shortage, said Sabu M Jacob, Managing Director.

-Out of the total investments, he said, â¹25 crore has been earmarked for upgrading sewing technology. The company has installed the longest bleaching machine in the world (62 metres), he told_Business Line_on the sidelines of the companyâs annual general meeting.

-Efforts are on to introduce the brand in the US and the company plans to invest another $10 million to develop distribution network and in the branding exercise, he added.

-Despite the stiff competition, Jacob said international buyers have shown preference to Kitex Garments products for its quality and timely delivery. Major international buyers include Kohlâs, The Childrenâs Place, Gerber, ToysâRâUs, Carterâs, and Mothercare.

-After capacity expansion, he said, the company hopes to cross â¹1,000-crore export turnover in the current financial year against â¹750 crore in the previous fiscal. When asked whether the slowdown in the US had affected business, he said, âthe infant garments business is a recession-proof industry as parents do not compromise on products for the new bornâ.

-He added that Chinaâs prominence in the garment business is fast eroding due to high wages and low safety standards in the industry. Several apparel manufacturing units have now shifted operations to Vietnam and Bangladesh.

-Earlier, 65 per cent of the garments exported to the US were from China. This has come down to 45 per cent. Though Cambodia, Vietnam and Bangladesh are strong competitors, he said that safety issues and lack of potential for scalability had minimised their opportunities.

-This has provided India a good business opportunity to source a major chunk of the global garment manufacturing business.

-Today, India exports 25-30 per cent of the textile goods to the global market, he said.

Disc: invsted

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28

The co.'s stock price has moved up big time but still looks good for longer term because of two reasons,in my opinion:

1). Increasing potential to export because of China losing it’s competency. Proven track record on delivery and compliance makes Kitex a preferable vendor. The plans to add capacity is a move in direction to cash in on the opportunity.

2). Plan to launch it’s own brand in the US. This will take good time to materialise but co.'s tried and tested quality in the same market should act as a big plus in getting acceptance. Being fully integrated vertically,the co. will earn superb margins on this front.

Ayush Bhai or people invested in the co.,any further clarity on Corp. Governance?? What exactly does Kitex Childrenwear do?? Is fabric division a problem and it’s sale to Kitex Childrenwear??

Can’t find answers to above questions. Please help.

29

technichally also getting highly bullish in charts

30

Hi Nikhil,

I had gone to the AGM and have provided a brief update at our blog.

Kitex Childrenwear (KCL) is a sister concern which is also manufacturing infant garments. The co is unlisted and owned by promoters. It was started to avoid customer conflict. But this has grown well and is not about 60% the size of KGL. The management seemed quite honest and he assured that all the transactions between KGL and KCL are at arms length…infact just to not have corporate governance issues, often KGL is given the preference. They may also look to merge the company in 2-3 years.

Regards,

Ayush

Disc: I hold Kitex

1).

31

I also attended the AGM and had captured some notes. Here is a brief -

  • Kitex specializes in infant wear (0-24 months). This is the only market which is not affected by recessions (as infant wear is the last thing to cut on parentsâ minds) and there is lesser competition due to the specialized nature of the business. Only 12 companies in the world manufacture such large volume required for the large players. There are multiple small players manufacturing 5K pieces, but the big players are not interested in such volume. Kitex manufactures 5.5L pieces per day

  • Kitex is the 3rd largest player with 5.5L pieces per day in FY14

  • Fabric capacity was expanded from 24T per day to 48 T per day along with technology upgradation in both fabrics and garments. The total cost of expansion was around 100 cr.

  • We supply to Gerber, who is the No. 1 wholesaler in infant wear, reselling to 14000 stores in the US (including Walmart, JC Penney). We have been supplying to Gerber for the past 14 years. We also supply to Carter, who are one of the biggest retailer and wholesaler. They own 600 outlets, and we have been supplying to them from the last 4 years.

  • We also supply to Babies R Us, who are No. 1 in the US in infant wear (retailer). Babies R Us also sources from Gerber and Carter, who in turn buy from us. Net-net, most of the garments in a Babies R Us store are from Kitex.

  • Even after 10-20 washes, Kitex products retain their quality, while competitors products donât.

  • KGL sells fabric to KCL at 20-25% more than the market price.

)- There is a market demand out there, but recruiting labor has become extremely difficult. An indent of 2000 labor demand generates 100 resumes. Out of that, 25 leave due to home sickness, 25 leave after initial 1 month of training. Currently, the labor force is 60:40 in favor of the locals.

  • No one makes profit on spinning or fabric. In-house processing like us assures us of 100% quality compared to outsourced fabric. There is huge wastage in outsourcing. Between spinning, fabric and garments, itâs difficult to apportion costs and profits.
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32

Thanks for the update Ayush and Kiran. This is informative.

Cheers!!!

33

Hi Kiran and Ayush,

Very insightful. What are your earning estimates for FY15e and FY16e for Kitex?

Do you believe that the management will be successful in their distribution foray in US, do they have that capability?

34

Few days back was National Garment Fair organised by Clothing Manufacturers Association of India(CMAI) at BEC, Mumbai. It is the biggest garment exhibition for manufacturers in India in all kids, men and women category. I was surprised to have not found any Kitex Garment presence in the exhibition whatsoever out of around 650 exhibitors.

This could mean few things,

Kitex is not interested in the Indian markets. And they are focusing on the export market in the US etc.

They have a brand presence in south india only. Mumbai is the business city for most textile firms and to not have their brand felt here was a big miss. To command PE like Page Ind, Zodiac and Raymond they will have to play the brand game sometime. Exhibitions likes CMAI’s r the best place to make ur presence felt.

Any thoughts?

35

The US imports approx. 2.5 bn USD worth babies’ garments annually. The size is quite big. Check out the link.

http://otexa.ita.doc.gov/msr/catV239.htm

Notice the stagnant share of China (contributes half of 2.5 bn USD) and increasing share of Cambodia,Vietnam and India . Even Bangladesh’s share is near stagnant.

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36

I was quite positive on this company despite some negativity earlier about the corporate governance issue and possible conflict of interest. A fast growing business with ok management available at good price of 10-11 PE. I was in the middle of my research and price shot up sharply from 125 to current 235-240 so couldn’t take the position. I think it’s consolidating at these levels for a while before next up move.

Do we have next 2-3 quarters projections? Is it good to accumulate at these levels? Ayush? other senior members tracking it?

37

I do not believe it - why would KGL sell to KCL at 25 % more than market price ? Any auditor in his sane mind would dissuade it - typically when a management tries to act too honest, they could be acting the other way around.

Also, given Kerala location, won’t there be an issue in scaling up production ?

Just playing devil’s advocate here and inverting to make sure we are not missing an obvious downside.

2 Likes
38

Thanks for digging out the data Nikhil. I broadly knew the market size, but that table puts a lot of meat to what we are talking about here. Much appreciate it.

Aksh - Think of a 30-40-50% growth in revenues from 2014 and similar net profit margins as 2014 and arrive at a figure. After attending the AGM and understanding the business, a 30% growth in revenues and similar net margins as 2014 seems the bare minimum to me. Anyway, I personally think we need to look at this story from a 2-3 year perspective than a one year perspective (and much less a qtr-by-qtr perspective).

Varadharajan - An accusation can be made either way. Do we have data to prove it?

Also, the MD did mention that Kerala hasn’t had a strike for over 2-3 years now (at pvt enterprises). From a Kerala location perspective, it wouldn’t be an issue. But from increasing labor to produce perspective, I have already elaborated on the issue in my AGM notes.

Before we actually get to number crunching, understanding the business in depth is extremely important. Imagine the customer stickiness -Extreme customer stickiness due to infant wear (the gateway customer of a parent wouldn’t want to take a chance), only 12 companies in the world manufacture such large volume required for the large players (there must be a reason why other hundreds of large garment manufacturers haven’t got into the infant-wear segment), large customers-relationships from a long time, MD’s statement of “itâs a sellerâs market â if you can produce it, you can sell it” etc. These are MAJOR strengths for any business.

I think this line from the MD during the AGM sums up the business - “Our sales secret is that a baby in the 0-24 months category grows 40 gms every day. Every 10 days, the parents need new set of clothes. US consumption is very high, even compared to Europe, and we are seeing no signs of a slowdown in the infant wear market.”

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39

http://otexa.ita.doc.gov/msr/catV239.htm

40

Thanks a lot Nikhil, this is excellent data for this story.

The main bone of contention, apart from valuation, here is the sustainability of competitive advantage. We need more clarity on the global competitive landscape. Are the trends marked this table more of a aberration (degrowth from China, lower growth from Bangaldesh) or the new normal. Will the emerging growth ones throw up new competition ?

Kitex without any brand aegis like Page, is already clocking excellent operation/net margins comparable with the best. So launching of own brands/ forward integration will only improve the picture from here.

https://www.edelweiss.in/market/compfundcomp.aspx?co_code=4621,12521,3930,29

The US imports approx. 2.5 bn USD worth babies’ garments annually. The size is quite big. Check out the link.

http://otexa.ita.doc.gov/msr/catV239.htm Link: http://otexa.ita.doc.gov/msr/catV239.htm

Notice the stagnant share of China (contributes half of 2.5 bn USD) and increasing share of Cambodia,Vietnam and India . Even Bangladesh’s share is near stagnant.