Kitex Garments Limited

Infant-wear India Top 4 progress during last 3 years

Discl: this data-set above includes a bit of a projection for FY16 figures (based on 1HFy16 numbers) as reflected in credit reports, First-step data is as of April 2015. So take it with a pinch of salt, if you like :slight_smile:

But the picture that gets painted here isn’t pretty (if we keep things simple, and leave aside the profitability debate for the time being)

a) Others have been able to grow at between 2x-3x Kitex growth rates
b) First-Step has caught up with KGL, and Jay Jay has zoomed far ahead
c) Unlike the productivity/efficiency claims, if the capacity figures are true (Kitex claims, and as cited for others in Credit reports), actually the others are more efficient/productive players than Kitex, isn’t it?

The dominant player has (for whatever reasons - we need to establish those) allowed the space to Competition to significantly scale over the last 3 years. This of course isn’t the complete picture (margins, profitability, debt/equity do matter - we will come to that comparative picture too), but most will agree this is a deteriorating picture - Kitex can’t sit sanguinely (ostensibly refusing profitable business) - while Competition keeps walking away with potential Customer business.

To Do:

  1. @ayushmit - Your comparative data had a snapshot picture only. Please include last 3 year rolling picture as above, to make the comparison data meaningful & holistic
  2. @ashwinidamani - First-step data is from a April 2015 report, 2014 data was for 9 months and pro-rata extrapolated, FY16 data extrapolated with a 25% bump up. For Jay Jay and Best Corp doubled 1HFY16 sales and discounted by 10% :). Please see if you could get latest data and improve the quality of the above data-set.
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But why does Kitex need to worry about capturing mindshare especially when it is well-entrenched as in the case of Lamaze. Also, as the note from Ayush mentions on Private labels as below:

We will sell through ecommerce – its growing 20% every year. We will concentrate on mass volume

Do we need to put emphasis on “concentrate on mass volume”?
Does this imply that they are willing to offer discounts even though Lamaze is a premium play, which pretty much dovetails with the e-tailers advantage over retailers?
Why go through the grind when the writing is on the wall for retailers?

I can think of 2 reasons for the need of doing a customer show at Kitex office:

  • To offset the losses from Jockey, the management had mentioned that they would try to increase the revenue share from existing customers.
  • I think this is the first time where they are trying to push their own designs and “organic” clothing(I mean they were manufacturing to the exact requirements of customers until now). Isn’t this an evidence of the evolution of a “customer pull” strategy to a “customer push” strategy?

Maybe I am being too naive.
But if Lamaze offtake through e-commerce channels is successful, then Little star could piggyback on it and be marketed as a Lamaze(subtle hint rather than explicit association) for the masses(with more discounts)

Ultimately, it would be best to get it clarifed with the management directly.

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@Donald I know i am diverting from the gist of your message. But why would you consider KGL the dominant player when sales wise it is #3 out of the four companies for all three years? And how much can one trust the sales/capacity numbers of non-listed companies like Jay Jay or First step or Best corp?

I am new to analyzing stocks, so please pardon if my questions don’t make any sense.

The VP forum has definitely helped a lot in my learning. :slight_smile:

As per Sabu “Little star” is the mass market product and Lamaze as premium product

From Kitex Concall - Aug 13, 2014

KGL plans to set up a subsidiary in the US as the company earns 80% of its total revenue from the US. The company intends to do this in three phases:
a) The company will sell its products on LDP (landed domestic price) basis. In this case, the company will take export clearance and all other clearances, which is done by the buyers currently, thereby reducing the hassles for buyers. This phase will take three-four months and the company can generate 0.5%-1% margins.

b) Obtaining licence for good brands like Hanes or Fruits etc for the kid-wear market and sell the same to retailers like Walmart by leveraging the influence of those brands. This will generate 15%-20% profit in the business and the company is expected to pay royalty of 5%-7% for obtaining the brand licence for the same. This phase will commence in 6 -12 months (before the start of FY16) and will take one year to ramp up.

c) The company will sell its own brands to the customers. It would enjoy full margins on the business going forward. KGL expects to improve realisation through this channel (establishing a US subsidiary) by ~15%-35% over the long run.

Above highlighted sections gives a window to the alternative approach/hybrid model as suggested by Donald. But the question again arises can they get the same terms from retailers as Gerber, the previous middleman. Would be definitely interesting to monitor.

Couple of other points which i found worthwhile and need to be clarified with management are:

  • On account of labour and quality problems last year, Wing Lu of China reduced its manufacturing capacity from 0.85mn pieces/day to 0.75mn pieces/day. As per media reports, it may reduce the capacity further to 0.50mn pieces/ day. KGL believes it is in a sweet spot because it has integrated facilities. The company has also adopted compliance standards at its production facilities, something which is increasingly being demanded by the clients in developed markets.

  • KGL’s garment capacity utilisation level in FY14 stood at 65%, which can peak at 75%. This is what the management hopes to achieve

I was not able to find any references to Wingloo or Gimmell as spelled by multiple brokerage reports and DRHP of SP Apparels. It was only after i re-read through the below 2 posts did i begin to dig out some useful information pertaining to Gimmill at least.

Wingloo still remains a mystery as pointed by @madhug.

2015 - Dynamics of the Textiles & Apparel Industries in Southeast Asia (incl. China and India)

Excerpts from above paper on Gimmill:

The largest indigenous textile maker in Malaysia is the Ramatex group. This is owned by the Ma family, who are Chinese Malaysians. Ramatex was started in 1976 as a textile manufacturer under the name of Gimmill Industrial Pte. Ltd. in Singapore. In 1982, they established Gimmill Industrial (M) Sdn. in Batu Paha in the south of Malaysia. Then the Ramatex group was born. Since then, they have promoted vertical integration. The Ramatex group includes Fulong Sdn. Bhd. (apparel), Ramatex Textiles Industrial Sdn. Bhd. (spinning, knitting, dyeing, and fabric printing), Gimmill Industrial (M) Sdn. Bhd. (apparel), Tai War Garments Industry Sdn. Bhd. (apparel), and in China Ramatex Industrial (Suzhou) Ltd. (spinning, knitting, dyeing, and fabric printing), and in Singapore Gimmill Corporation Pty. Ltd. (sales).
They are aggressive in terms of their foreign investment and have subsidiaries in China, Mauritius, Namibia, and South Africa. Cotton is imported from the US and China, and design is done in Singapore. Since 1991, they have operated a factory in Cambodia.


Gimmill has managed to retain most of their customers from 2011.
But the key remain how much does infantwear contribute to the revenue mix? Same query applies to Jay Jay Mills as well.

Though the paper is based on 2011 dataset, there are very good insights on the apparel industry map in Asia. To be more precise, on the Buyer-driven Global Value Chain (BGVC).


Found a resume of a TCS Consultant who had worked on the RFP for implementation of ERP in Kitex. Not pasting the source url to respect the privacy of the said employee.


[2013 Presentation by Gerber’s SVP, Sourcing and Compliance]
(https://www.wewear.org/assets/1/7/080113-opportunites-trends-us.pdf)

How does he qualify a vendor?
Supply Chain: 5 C’s

Country: Infrastructure, Country Political Stability, Labor Pool, Vendor Base, Ship to Point – Transit Time

Compliance
–Worldwide Responsible Apparel Production certification?
–JCPenney and Walmart certification and for how long?
–If not, can the plan be WRAP certified in six (6) months?
–CTPAT (Customs Trade Partnership Against Terrorism) certification required.
–CPSIA and children’s wear expertise

Capabilities
–Size of program (# of SKUs / Quantity) – can factory handle the program?
–Development time available – can factory manage timeline?
–Size of program relative to annual plan
–Is this program a good match for the vendor?
–Vertical supply chain – fabric, printing, screening, embroidery, trim
–Professional Management

Consistency
–AQL (Acceptable Quality Level) 2.5 expectation
–Merchandising staff support for program development
–Factory leader or follower – do they provide value added design with new development or are they order takers?

Cost
–FOB Terms
–FOB Price
–Vertical vs. Cut & Sew


Additional Interesting Links:

THE GLOBAL APPAREL VALUE CHAIN

An Examination of Apparel Source Countries’ Exports among U.S. Retail Channels and Product Types.

Upgrading in the Indian Garment Industry: A Study of Three Clusters - SOUTH ASia working paper series

Case Study on Apparel Sectors - Page 209 onwards

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Hey lavpatel,

You are right :slight_smile:
Re: Dominant player
Kitex isnt/wasn’t the dominant player in terms of total Sales. KGL+KCL was once, now that’s no more.
This table is not strictly an Apples to Aples comparison. Was intended to show the slowing sales growth pattern versus others who were acclerating growth
Best Corp has a significant portion coming from innerwear, so we need to factor that. Similarly Jay Jay Sales include subsidiaries which have now started growing very strongly. Jay Jay India Sales in 2014 was 247 Cr
“Dominant player” quote from me was in context of the very strong positioning Kitex had with its Customers for sourcing from India of infantwear garments. The evidence suggests that position has now weakened with other players growing much stronger.

Re: Sales/Capacity numbers of non-listed players
There are 2 authentic sources - Credit Reports (where the company getting rated needs to disclose) & Filings at MCA (where companies need to file P&L and BS).

I think with chance of UK India FTA probability in next six months, KITEX will benefit.

The Curious Case Of Kitex Garments

http://2point2capital.com/blog/index.php/2016/07/14/the-curious-case-of-kitex-garments/

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The comments section under the article makes interesting reading of the “pros” v/s “cons” inputs.

The interesting input is the tabulation of 5 year KCL numbers.

Thanks for sharing!

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Kitex Garments, garment manufacturer and exporter, reported standalone net profit of Rs.20.87 crore for the quarter ended June 30, 2016, registering growth of 30.65% yoy, but decline of 53.52% qoq. The company’s revenue stood at Rs. 119.30 crore, up 9.37% yoy but down
35.29% qoq.

Its standalone core operating profit of Rs. 33.87 crore for the quarter, clocked growth of 12.34% yoy but decline of 51.14% qoq. Operating profit margin for the current quarter at 28.39% expanded by 75 bps yoy but contracted by 921 bps qoq.

Source : http://www.indiainfoline.com/article/equity-earnings-result-commentary/kitex-garments-q1fy17-standalone-net-profit-declines-31-yoy-to-rs-20-87-crore-116072000578_1.html

In last con call management told that they are starting new products shipments to USA from April 2016. So why revenue and profit dropped seriuosly? Is it really true picture of of Kitex? Expect serious correction tomorrow !!

Hello, did anyone attend the con-call arranged by Kitex? If so, can we get the transcript of the con-call ?

Thanks

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Last con call they told that we are adding K-Mart and Kisco new costumers but this time in con call they told that due to financial viability not good that’s why they have dropped it. Why they are declaring new clients addition without having final confirmation about the deals? I just heard today’s con call, looks they are not confident !

Hi @vijaydosapati

I could attend the call only for first 30 mins or so.
Here are some notes that I captured from call. Till the time someone post whole concall details you can go through it :slight_smile:

Business commentary from management

  1. 1st shipment to lamas got out in Q1
  2. Sams club in new client added
  3. Capacity increased 20% already this year. Target is 20% year and year business growth. Plan to have another 15% capacity increase in this year for next year use,
  4. New textile policy is favorable. Current view is, PF scheme can provide us benefit of 1.8cr. TUFS will be enhanced from 15% to 25% to certain machinery. Duty drawback is expected to increase; if this materializes it will be additional 25/30 cr.
  5. IT benefits 10 cr.

Following are Q/A points

  1. COSTCO was added as new client in last Q. Jockey already out from our business.
  2. Not much Jockey sale this quarter. Just few thousand dollars. No execution as such. No more business. In FY 16 Jockey sales was something around 8 MM.
  3. Possible addition of KMart as new customer. However, KMart is going through debt issue, so we are not ready for their financial terms. We are still working through to see how this can be resolved/worked out.
  4. Gerber is visiting us in august. We are working on yearly program. One for Gerber and another one for Wal-Mart through Gerber. Total expected rev is 14 MM.
  5. Current Debt → packing credit 50 cr (6.75% ROI after subsidy), term loan 19 cr. (Cleared 40cr of packing credit in this Q1). By Q2 will create another 40 in packaging and by Q3 all short term will be cleared.
  6. Total ForEx– 30 MN. Currently 25/26 MM is hedged at 69-71 rate
  7. Madras high court ruling which asked garment manufacture to raise pay, what is impact to Kitex → This is state specific ruling and we are not impacted. Kerala has different minimum wage rate. We are paying above anyway. I think he mentioned 30% above
  8. Current Employee count – 4182
  9. Lamas potential – plan to be 25 MM in 5 yr but it can go to 50 MM. 7/8 mil this yr.
  10. Private label business will be minor this year.

DiscL Invested

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You can listen today’s con call audio at https://www.researchbytes.com/Kitex-Garments-Limited-K0213.htm

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Key Takeaways from the Concall for Q1FY17 results:

  1. Added New client, Sam’s Club, a subsidiary of Walmart.

  2. First shipment of Lamaze already done.

  3. No more business from Jockey.

  4. Eyeing 20% growth both in production capacity and revenues every year for three years i.e for FY17-19 which comes to around 675-700cr in FY17 itself.

  5. Talking about the debt situation in the company, packing credit stands at 50cr down from 90cr,cleared around 40% in Q1, which will further be set off to zero by Q3. term Loan stands at 19cr.

  6. $25-26 million is the hedged position at an average rate of 69.50 approx.

  7. Forex balance is of $30 million out of which around $28 million is hedged.

  8. Production capacity in Q1 grew by 20%

  9. Lamaze shipment was of $50000, targeted $7 million in FY17, as per Mr. Jacob Lamaze can be a $50 million business in coming 5 years.

  10. Expects to begin e-commerce sales in next month with lamaze.com and others.

  11. Targeting 60% increase in revenues in coming three years without much increase in labour cost.

  12. Not much was clear from Sabu Jacob regarding the dividend policy.

  13. Aspires to become number 2 in the industry by this year end and number 1 in the next fiscal.

Disclosure: invested.

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I am confused on what to make out of the results & management. With the increasing capacity and clients, the sales & EBIT has not risen proportionally YoY. Requesting senior members to provide views on the results.

Disc : Invested at higher levels.

Latest Motilal Oswal report:

Refer page 4 for clarification on cash in dollars:

“The management clarified that amount lying in dollar need not be converted into rupee as per FEMA rule if it is already hedged. Kitex has already hedged it cash lying in dollar denominations”.

Can some one with Banking back ground and connections cross check, verify/confirm the above please:

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As long as there is a hedge in place, conversion into INR is not required. RBI circular (https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=7483&Mode=0) states that referring to “forward commitments”.

Sabu’s comment that all $s were hedged was a big surprise and left me completely confused. Reasons -

  1. Over the last several quarters, Sabu has said the reason for him to not convert into INR was because he thought the INR will depreciate a lot and he wanted to time the exchange rate. He had even taken credit for his foresight when INR did depreciate. Several members on this forum had raised concerns with this currency speculation by Sabu. However, now it seems Sabu did not indulge in currency speculation as $s were hedged because that’s the only way available that does not force him to convert the $s. If $s are hedged, he cannot benefit from currency speculation. So why has he been saying so for several quarters now? Clearly, he cannot have indulged in currency speculation as well as hedged his $s at the same time. Schrodinger’s $s?
  2. In the Q4 concall, Sabu had said their were forward contracts for $18 mn out of $40 mn in cash. So doesn’t look like Kitex has always completely hedged its $s. You can find reference to it in Motilal Oswal’s Q4 report - http://www.motilaloswal.com/site/rreports/635955272640255549.pdf. So while now he doesnt have to convert because of hedge, earlier he did have to. How did he earlier manage to not convert without complete hedges in place?
  3. If you are hedging your $s with forward contracts it is clearly inferior to converting and investing in FD. Hedge premiums on forward contracts don’t exceed 6% while FD is 7.9%. Forward contracts is therefore almost never used for hedging cash but for hedging outstanding receivables or payables which are not in cash. Motilal Oswal in Q3 report (http://www.motilaloswal.com/site/rreports/635899175486243677.pdf) says - “Company considers it more beneficial to hold cash in foreign currency given the currency environment, which it believes gives higher gains through foreign exchange and hedging than pure interest if invested in India.”. Unless you are indulging in currency speculation, it is not possible to generate higher returns by having hedged $s vs pure interest in India. This is a fact and not an assumption.

The curious case of the $s continues to confound me.

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