Kitex Garments Limited

My 2 cents, for any company and more so ones run by single promoters u can’t understand the FX policy. Remember the FX positions stated in con-call is a position on that day. What happens for rest 90 days…ur guess is as good as mine :slight_smile:

The only thing which we can do is estimate what are the chances the company can destroy itself doing this.

And then do portfolio allocation accordingly.

cheers,
saurabh

Great article, the analysis was useful. Thanks for sharing.

To my untrained eye, the cash issue seems to be a red flag. Any way you cut it, the explanation given does not seem logical . And as they say , profit is elusive, cash is real - I’m unable to make the shift from watcher to investor in this counter.

Varun from http://2point2capital.com/blog/index.php/2016/07/14/the-curious-case-of-kitex-garments/ pointed out something very odd
Inventory incl finished goods of 13 Cr vs COGS of 210 Cr + and Rev of 546 cr

Which means they are carrying roughly a month of inventory only. Very suspect.

Against that, Page is 539 Cr of Inventory vs COGS of 690 cr and Rev of 1784 cr

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Please go through the recent concall of Q1 Fy17, where they explained very clearly their inventory management and said they hardly hold any inventory, every thing is on order basis from their coustomers.

Compare any business with Page and when you find some deviance, that business is a suspect? What sort of logic is that?

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Well. I do find it odd that they can hold less than a month of inventory - which includes RM, WIP and Finished Goods.
What business manager would not keep a decent stockpile of fabric for contingencies?

Ordinarily, I wouldnt think much of this… but no business manager would keep so much cash in the US + the relation with KCL makes one skeptical.

I found some products of Lamaze Baby clothing in Amazon.com - https://www.amazon.com/s?ie=UTF8&page=1&rh=n%3A7147444011%2Cp_4%3ALamaze

Are these manufactured and shipped by Kitex? They seem to have very good reviews from customers.

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Also Carter clothing can be seen at hopscotch.in.
Personally I like the overall designs i.e. by viewing only. I haven’t ordered as yet.

SP Apparels IPO at 250 price band will pull down Kitex stock price. Anybody has more info about SP Apparels? What it’s valuation?

The business model of SP Apparels, which is engaged in manufacturing and exporting of knitted garments for kids, is similar to that of its listed peer Kitex Garments. While the revenues of both companies are more or less similar, there is a huge difference in their margin profiles. In FY16, for instance, SP Apparel’s earnings before interest, taxes, depreciation and amortization (Ebitda) and net profit margins stood at 16.8 per cent and 6.5 per cent, respectively – less than half of Kitex Garments figures which stood at 34.1 per cent and 20.5 per cent.
The margins of the two companies are expected to expand going forward, as they reduce the debt on their books. So, although SP Apparels` own margins might improve on the back of lower debt and consequent savings in interest costs, they could take some time to catch up with that of Kitex Garments.

In this backdrop, SP Apparel’s initial public offering valuations are not cheap. Assuming a good 35 per cent growth in its net profit in FY17, the issue is priced at 14.5 to 14.9 times FY17 estimated earnings on a post-issue basis – in line with Kitex Garment’s current valuations of 15 times FY17 estimated earnings. The multiple, though, shrinks to 13.1 to 13.4 times if we assume a higher earnings growth of 50 per cent in FY17 for SP Apparels. However, the company’s earnings growth has been rather lumpy in the past three years and, hence, it is difficult to predict (high profit growth is also aided by a very low base). The higher margins have also led to superior return ratios for Kitex Garments, which posted return on equity of 35.5 per cent in FY16. This metric stood at 29.4 per cent for SP Apparels in FY16. With higher dependence on exports, SP Apparels` prospects are closely linked to growth in developed markets, particularly Europe.

Continued relationship with its five key clients – Tesco International, Primark Stores, Mothercare UK, ASDA Stores (owned by Walmart), and Dunnes Stores – is a key strength of the company.

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I have personally avoided SP as its too UK focused and brexit could become the biggest dampener especially if the contracts are GBP denominated from earlier in the year / last year.

Sir, I am a banker and what I know is that one cannot hold USD in EEFC A/c for more than 90 days… We must know in which foreign a/c has he kept the money. I guess there is a marketing arm (branch office in US) which might be holding the amount.

@gauravksinha

Please go through the below link

You will find an instance where you can retain money in foreign currency in EEFC for future. In the above link you will find that the reason is for repayment of buyers credit. You can also check the clarification from RBI for this specific case. There are many other cases where one can do the same as long as the exporter can show the money in EEFC is required for future commitments. Some of the other reasons could be – payment for import of machinery, materials, investment in foreign subsidiary etc. Also, if the balance in EEFC has forward contracts, these contracts could be rolled over on maturity(however these forward contracts cannot be cancelled/rebooked prior to maturity since 2012 RBI circular). When rollover happens on maturity date you have future contract again. This way foreign currency in EEFC stays for longer duration.

I have personally confirmed all of the above with a retired banker(who spent his entire career in treasury/forex) and who is now consulting with an export unit on forex related matters. He mentioned to me that prior to 2010, there were lots of currency trading by export/import companies and MNC’s thereby adversely affecting Rupee exchange rate. In 2010, there was a blanket ban on all such activities and all money in EEFC had to be converted to Rupee. In 2012, this was relaxed a bit to give some leeway to export/import companies who have genuine need of keeping forex in EEFC account for longer duration.

Also, do listen to the latest conf call of Kitex(Q1 FY17) where there is clarification from Mr Sabu on the same.

Would appreciate if you could do more digging from your side too and take an informed decision on the same. Do post back your findings too. Thanks in advance.

Disclosure - Invested.

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Seeing the Welspun saga because of the inferior cotton, it is very unlikely that they will be the only one who would have used the inferior raw material ; there could be some implications on the industry . Wondering how safe is Kitex !

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I am not giving a clean chit to Kitex but suspecting every Tom in town is equivalent to seeing a ghost in every shadow (by the same count, Indo count should have gone down today but it went up on the back of results !!)

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Newly listed S.P. Apparels has posted pretty decent sets of numbers…

Revenue, EBITDA & PBT are up by 32%, 64% & 123% YOY Basis…
QOQ numbers also in upstream trajectory…

below highlights from NSE filing:-

Hi Guys,

Very detailed thread. Took almost a day to go through everything and another 2-3 days to understand the business. Went through almost all the material available on the company. Trying to write for the first time on this platform, kindly excuse if I get a bit verbose…

Won’t harp upon KCL + KGL issue.

Main concern which I find about this company for the next two-three year perspective is

  1. Currently margins which are highest in the industry and as well as in the history of Kitex. I tried to run some scenarios and find that growth is not a big risk to the company (even 10% would be fine) but margins which used to be around 19% (median of EBITDA post 2010 considering prior to 2010 the business was weak) and now have increased to 35% kind of levels in FY16. Playing on the bear’s side, if I just decrease the EBITDA margin to 25% (25% higher than the historical median), my 2 year PAT growth is 0% CAGR. This is when I am growing the sales by 20%. Not to mention the higher forex gains which the company has generated in FY16 and while giving out the guidance Mr. Sabu includes the forex gain/ losses as well (this may very well be 0 or at worst be negative).
    The biggest way to prove the above statement wrong is by proving that the current margins are sustainable. Hence I went through all the con-calls, reports, Valuepickr thread, but nowhere I could find something which could logically explain this quantum of margin expansion (that too only in two years time…look at FY14 :astonished:) The reason management has been giving is technological advancements, focus on productivity and better capabilities than competitors (please point out if I have missed any logical explanation).
    Now one can argue that in FY14 the company has increased the capacity of fabric which would have led to cost efficiency or lower waste. To this my question why in its entire history, the company has not shown this kind of margins in any quarter. Even after FY10 when fabric capacity was there to meet the internal requirements of fabric, EBITDA margins at best were like 22% in Q4 FY12 (pl note that I don’t include other income in my EBITDA calculation).
    I request anyone who can give me some logical explanation towards this margin expansion. This could be in the form of 1) lower raw material cost due to fall in prices of yarn/ cotton 2) Lower raw material consumption due to better machinery and productivity or similar kind of design orders 3) realisation improvement 4) ???

I understand that growth is a big question for the long term prospects of the company, but if the current margins can sustain and growth rate becomes a bit slower also, I would be happy to be with the company. Growth area is anyways in this thread quite extensively and I believe unless I have the real sales figure for the quarter, I can hardly add any value on this :wink:

Some observations other than the above-

  1. Inventory as % of raw material consumed during the year used to be around 30 to 40% levels prior o FY13 but from FY14 onwards it reduced amazingly to 5-6%. Component wise most of the fall is due to raw material inventory. What explains this sudden fall of raw material inventory?

  2. Company says that while entering the contract with the buyer, KGL, based on the current yarn prices, enter into the supply contract with the buyer and yarn price is a part of the pricing formula. Once the order gets confirmed, KGL enters into the contract with the yarn supplier (in terms of this much yarn to be supplied in this time period). So wanted to check whether the company is able to book the future supply of yarn at the pre-determined prices (at the time of order booking) and if it is able to procure yarn at those pre-determined prices? Is there a case where a vendor backs out incase prices go up or he supplier a lower variety of cotton yarn? How is different than hedging (entering into forward contracts) If this is the case, then margins should at least be stable or increasing in nature since the downside is always protected?

  3. Any cost analysis done on company importing the US yarn vs the current practice of using domestic?

Thanks
Gaurav

Disc - Invested (5% of the portfolio). Position acquired in Feb.

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It is fact that overall cotton production is down and consumption in Indian textile has increased which force cotton yarn price in upward trend and will affect margin of all textile companies