Kitex Garments Limited


(MHS) #878

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:


(Amit Mantri) #879

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.


(saurabh shankar) #880

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


(aashu24ahuja) #881

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


(Gary) #882

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.


(Tirath Muchhala) #883

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


(MHS) #884

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.


(Aksh) #885

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


(Tirath Muchhala) #886

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.


(eyesice) #887

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.


(manjushree) #888

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.


(Growth_without Debt) #889

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


#890

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.


(dmobile) #891

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.


(gauravksinha) #892

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.


(Janarthanan Natarajan) #893

@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.


(bmathew) #894

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 !


(JKS) #895

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 !!)


(vishal kumar) #896

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:-


(MHS) #897