Dear Friends,
There are so many concerns from boarders about the company’s dealings into the currency conversion and possible risks of forex fluctuations. To my understanding, the management’s practices are not subject to forex risks. I would put it practically with examples wherever possible:-
As understood from Mr Sabu during con calls, for every season there is a change in price (in $ terms) as per fluctuation in rupee to dollar exchange rate. For example, Price of a $5 cloth when $1 = INR 70 will become $5.38 if $ depreciates to INR 65 at the time of fixing price for next season. This makes both the parties indifferent w.r.t. currency fluctuations. However, Kitex is still exposed to currency risk because they will convert the currency at future date i.e. when they will receive remittance in its account.
Let’s understand the whole transaction. Suppose, Pricing is fixed considering $1 = INR 65 for the whole spring season. Based on contacts with customers, Kitex can enter into currency forward contracts for say 1 or 2 or 3 months at the time of raising invoice.
Transaction with example: Kitex raised invoice on Gerber on 1st April, 2016 for $1 Mn and it is going to receive this on 15th May 2016. Spot rate as on April 1st is say, $1 = INR 65.25, forward rate for 31st May is say, INR 66.50 & forward rate for 30th June is say, INR 68.00. Kitex, for example, enters into a forward contract expiring on 30th June and locks in the rate of INR 68 and thereby mitigates currency risk. The following are various possible scenarios on expiry of forward i.e. as on 30th June –
Spot rate is $1 = INR 67:
Kitex can rollover forward contract: there would be 3 events –
I. Kitex will convert $1 Mn @ 68 = INR 68 Mn (as per forward contract)
II. The co then will again buy $1 Mn @ 67 (Spot rate) = 67 Mn (net gain 1 Mn)
III. Kitex will enter into forward contract (Say, expiring on 31st July) only if the forward rate is more than INR 67.
By doing this, the co has earned INR 1 Mn gain and has again locked in the rate to mitigate forex risk.
Spot Rate is $1 = INR 68
Kitex is indifferent in this case and can roll over only after considering that forward rate they are getting is beneficial to them. (For example, they are getting forward rate of 69).
Spot rate is $1 > INR 68
It is beneficial to get $1 Mn converted into INR, as rollover will attract considerable costs.
In all of the above mentioned scenarios, what needs to be considered is the opportunity cost i.e. interest paid on outstanding loans vs gain due to forward booking. As per last to last con call, they are earning more than interest on loans (they did not quantify / gave proper explanation). As far as risk is concerned, it is not at all risky since you lock in the rate at the time of raising invoice and again lock in at the time of rollover (if any). Only possible risk here is that when forward rate is less than 65 or even more than 65 but the gain is not sufficient to cover up for the interest cost for the period from the date of the funds are received to the date of expiry. However, the management seems to be closely tracking these positions and are not likely to incur any huge losses in the same. More than this, the major concern for minority shareholders is dividend payout ratio which is very less as compared to free cash flows being generated.
Please try to understand that the Company is taking PC in Rupees and selling Dollars in FWD Market. This is an excellent strategy as it brings down the interest cost to 3% - 4%. PC is 10% (as per Annual Report 10.45%) and fwd premium is around 6-7%.
I am currently in Trivandrum and while I was taking a walk the other day… found that Kitex has a factory showroom Trivandrum. I was surprised to see that this showroom or factory outlet, shares floor space with an Aluminium shop. Further to this found that they sell Bedsheets, dothis etc. I was under the impression that Kitex was utilizing its capacity fully and to cater to new customer requirement, it was investing to increase capacity…
http://www.kitexlifestyle.com & Kitex Garments are two separate entities.Kitex Lifestyle,Anna Aluminium (ie Kitex group’s aluminium business),scoobee day bags,Saras Curry Powder,etc are managed by Sabu’s elder brother as far as I remember …
This guy’s forex forecaster is superb. Next time, we should check the expected USD inr rate in the Concall. And make money regardless of stock movement. Lol
I am trying to access the management of company. Need help from members ad seniors.
Pros
The management as you know has been praised by Prof. Sanjay Bakshi as being intelligent fanatic. They are no.3 manufacturers of infant wear and want to become no. 1 in few years
Mr. Sabu Jacob has build an excellent business which speaks about his management capabilities. If you look at their adherence to quality which is the most important criteria for them to be able to sell to big retailers in US speaks for itself. Quoting Prof. Sanjay Bakshi -
"In my view, Sabu is a very good human being. He employs 4,000 workers, pays them above market wages, and houses them in dorms. He provides them with nutritious food, an air-conditioned garment factory which satisfies the most stringent quality and social compliance standards of the western world
Sabu uses his personal money (not the company’s money) to do a lot of charitable work in his community which includes construction of subsidised homes, sale of kitchen appliances, and groceries at 50% discount to market prices for poor people. He’s like a cult hero in his community"
Also Mr. Jacob has been working for the welfare of his village. He has recently swept the panchayat elections wining 17 out of 19 seats and aim to make his village the best by 2020. They use all of the CSR funds for the betterment of the village.
Amount budgeted for the year 2014-15 : Rs.115.00 lakhs
Amount spent upto 31.03.2015 : Rs.148.14 lakhs
Due to overpriced stock which fell from Rs 1000 to Rs 350 in 2015 there are some questions that is being raised recently -
Cons
Despite having 250 crores in cash, company has not cleared all it’s debt though in q3 fy16 conf call they said they will be debt free by q4 fy16.
They did not come up with a consistent dividend policy though they promised so in q3 conf call. Dividend payout has reduced from 10% 10 years back to 6% now.
When Jockey was reducing their orders, the company kept on giving a guidance of 600-650 crore right from q1 to q3. Only in q3 they disclosed that Jockey is moving away due to increasing demand in non-cotton products. Jockey contributed 100 crores to revenues which was reduced to 50 crore in FY16 which will eventually reduce to zero going forward. Despite this they managed to generate 545 crore. So felt a bit lack of transparency in this case. I may be wrong.
Can you help on accessing the management based on positive and negatives given or any other point which I am not able to see. I have so far given them benefit of doubt based on the track record and social good they are doing.
They’ll continue to have a low payout ratio. They’re investing in brands in the US.
Sabu is not market savy, so not good with info flow to the market.
Jockey revenus will not fall further, jockey is not looking to completely get out of cotton underwear business. Only diversifying into synthetic cotton.
They’re now back onto full capacity since feb. June quarter is going to be huge!!!
Value Quest India Moat Fund limited (Prof. Bakshi) bought 122800 shares of Kitex during FY16. Their total holding at the end of March 2016 is 279319 shares.
That is very surprising…how can they bypass stock exchange and give information out to selected few. Also, I am a shareholder of Kitex, but did not receive any e-mail. Thanks for the update.
