Kitex Garments Limited

(Gaurav) #898

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?


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

(Growth_without Debt) #899

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

(Srinivasan Sundaram) #900

Kitex Garments - Updates
Kitex Garments Ltd has informed BSE that 10,96,950 equity shares of Late Mr. M.C. Jacob, promoter of the Company, constituting 2.31 % of outstanding shares of the Company is being transmitted to Mr. Sabu M. Jacob, Chairman & Managing Director who is a Successor as per the Succession Certificate issued by Court of Sub Judge, Perumbavoor, Kochi and now confirmed by respective Depository Participants on October 04, 2016.

(Jay Sanjay Badiyani) #902

please elaborate on this

(Bhaskar Jain) #904

Looks like this fund has invested in Kitex recently. Page 8 has the writeup - KITEX GARMENTS: GROWING UP QUICKLY

disc - not invested

(Saji John) #905

more evidence on Prof and Sanjoy holding and increasing stake…

disc- held on for nearly a year and exited recently not seeing any improvement in price action

(Lav) #906

Thanks for the link.

One thing from the document that got my attention:

“Although the history behind KCW
existence has some plausibility, the
owners have rightly taken the decision
to merge the two businesses, appointing
Ernst and Young as a consultant. And in
order to maintain full transparency
it has been agreed that KCW will be
listed first, before the businesses are
merged, a process we expect to take
18-24 months.”

Is this statement correct? Is there an official confirmation that KGL has appointed Ernst & Young as a consultant to decide on the KGL-KCW merger? Does anyone here have more information on that?


DISCL: Invested in Kitex.

(kaustubhkale) #907

Yes, this has been said by the promoter Mr. Sabu Jacob on the earnings call repeatedly.

(Ashwini Damani) #908

Yes…and this is where it reinforces the belief that this promoter is genuine

(Lav) #909

Thanks @kaustubhkale & @ashwinidamani . I knew that Mr. Jacob had mentioned about the merger during his earnings call many times. But I wasn’t aware about the appointment of Ernst and Young for the same purpose.

(rajput.delhi) #910

Bad results from Kitex. Both sales and profits down big time.

Anyone knows the reasons!!

Disc: Invested

(eyesice) #911

@rajput_delhi Is there any investor presentation? Any idea about the con call details?

I have been itching to get out of kitex and this result might trigger me into doing so if Mr Sabu cannot provide convincing reasons

(rajput.delhi) #912

Sabu has a call tmrw with ET Now at 11:10am to discuss results

(Sukhbinder) #913

Kites results.

(Amit Aggarwal) #914

The balance sheet has become more strong. Significant reductions in Long and Short Term Borrowings. Decrease in Receivables too. Inventory is building up.

(Kumar Saurabh) #915

Mr. Sabu was on ET now. As per him, 35 crore of sales has been hold as inventory as 2 of clients are waiting for USA election results and have asked to hold for few weeks. As per him, he is still committing 20% growth target.

Any reason why USA clients would like to hold on to inventory due to election results ? Any long term/short term impact they see due to elections?

Note : Part of extended portfolio and still under tracking position

(gautham1) #917

I did some search on web trying to understand the correlation between the US election and customers deferring infant wear. No luck sofar.
It will be interesting to hear Mr Subu in the con call.

(Kumar Saurabh) #918

yes, not able to understand. Long term call may be deferred but short term sales, how does it matter for them. Also, if this is the case , it should be for all the vendors and similar numbers should come from everyone else something not good about the statement

(Furkan Alam) #919

If he has still committed 20% sales growth for this year, it sounds a bit too optimistic.

They have done around 226 cr in H1.

So to grow 20% over last full year sales of 546cr, they would need to clock a revenue of 429 cr in H2 of current financial year.

Is that even possible by any chance? To me this sounds difficult to achieve…

(Kumar Saurabh) #920

Even this was asked that it mean to grow at 30%. He said, his guidance is still intact as it is a temporary inventory issue. On jockey, he mentioned, he is out of contract where focus has shifted from cotton to synthetic and focusing more on inner brand business which he is trying to build. Good part is more clarity over debt-cash issue (until there is some accounting creativity, i am not aware if such creativity is possible). Just trying to keep eyes and mind open without any positive or negative bias.