Kitex Garments Limited


(Bheeshma Sanghani, PhD) #1058

Hi @hemenrk70

I dont know about recent but you can access the publicly available version at

Sometimes in your journey as an investor you are waylaid and gravitate towards things like giving a dispropotionate amount of attention to tech analysis ( like i have in recent times). You tend to forget the basics. When you are in that situation it helps immensely to read the lectures. I do it all the time.

A note to myself in this raging bull market we are in i would be a fool to forget ben grahams timeless tenet.

_ Investing is more intelligent when it is most businesslike_

Best
Bheeshma


(bennet_am) #1059

Try https://fundooprofessor.wordpress.com/


(Bheeshma Sanghani, PhD) #1060

while you are on the blog you could also read his legendary post - " The Vantage Point". It has been inspired by the movie by the same name. You can also see the movie.


(kashif kidwai) #1061

In my opinion, this maxim should work both ways and the entrepreneur should also empathise with the investors. The least I expect as an investor is honest and straightforward communication from the management. I refuse to invest in any company where management takes minority shareholders for granted and does not respect their intelligence.

The list of red flags here is so long - with the case of missing cash, FX speculation, related party transactions, lightning fast release of audited results, management’s political ambitions, inconsistent communication, projections which always fall short of reality. Have i missed anything?

While all of these red flags might ultimately prove to be baseless and this might turn out to be a great business. But on what basis should an investor ignore the warning signals??


(Bheeshma Sanghani, PhD) #1062

Hi @kashif_1461

While i am not an investor in kitex it is a great investment study. Your post raises an important philosophical question wrt investing

Is the mgt guilty until proven innocent or innocent until proven guilty?


(eyesice) #1063

Thanks. You just summed up the Kitex thread in a short paragraph. I shall bookmark this for reference whenever I feel like re-entering this stock!


(us121) #1064

When i am betting my own money i would like to presume the former part of your statement.

Is the mgt guilty until proven innocent or innocent until proven guilty?

My interest always remains to protect me first, even if it is at a cost of not being able to grab the opportunity.


(Bhaskar Jain) #1065

The situation should not arise in the first place if the management/promoter of a company was transparent in his communication and final actions. So markets always give a discount to such companies with questionable promoter governance. So to answer your question, markets always assume the mgmt is guilty till he/she proves otherwise through their final actions.

P.S - Am also not invested in Kitex but have been watching the show from the sidelines for a few years now. I generally stay away from any company where there is a slight hint of corporate governance issues even if the underlying business growth is huge.


(Bheeshma Sanghani, PhD) #1066

Again an interesting point which leads me to another poser ( i am just playing the devil’s advocate so request you not to shoot the messenger) to clarify my own thoughts.

Investors decide to enter a company due to business reasons (they rightly believe it has great business prospects) but frequently exit a company due to non business reasons (in this case discomfort with the management). If the management is perceived to be poor but the business is rock solid AND you didnt consider the management during your buying decision then why should you not just ignore the management now?

Any views?


(Sunnytv) #1067

Sometimes you have to give a long rope to companies that are evolving and growing. We all read Buffett and Munger and automatically try to apply western sensibilities which may not be applicable in the Indian context.

Even in western markets, if you read Shoe Dog you would have never invested in Nike, if you read what he was upto in the early stages of the company- some real questionable actions. I missed investing in Apple cause I didn’t like the behavior of Jobs- psychopathic behavior, way he treated his child and often reported anti social behavior at work. Compared to him, Sabu will be a innocent lamb.

If we hold such extreme demands, you would have missed reliance in the beginning stages - I doubt Father Ambani was the epitome of good governance. Maruti has done well despite beating manager to death, repeat labour issues and alleged poor treatment of workers. I have invested in Garware Ropes - recent Ambit report cites some questionable conduct of CEO- leasing of a flat, some related party transactions etc. Do I sell it cause that falls short of some stringent standards or ignore some short comings considering the big picture and long runway ahead. I don’t want to make another mistake like Apple.

The analogy is - often the tastiest and the best food in any Indian town or city will be a very old, small restaurant which has a niche dish: it’s unlikely to be the taj or Oberoi. If I eat in the small place I may have to ignore a bit of hygiene issue- if I am very stringent Inwill eat only in Taj or Oberoi. In the same vein, we need to decide how much should we ignore how much is relevant to the whole business; if the business is world class and the promoter is starting out , we should ignore some oddities and eccentricities.

Unless there is gross fraud, it’s best to close eyes often to some behavior of promoters if the business has a long way ahead. It is understood that price has a bigger role in the buy decision- if kitex comes some to a good price, I personally don’t care if he has political ambitions or he says all kinds of things. We didnt have a problem when Infosys understated and over delvered in late nineties - that’s poor corporate governance if we look at it - you are lying when you knew the business will do much better.

So the bottom line is, as we mature as investors we need to let go a bit of our stringent demands. Which one to let go and which one to consider, is an art not science

Not invested in Kitex


(Value Seeker) #1068

Disclosure: Not interested. Only following for learning application of different models.

One line which keeps coming back to me from Prof. Bakshi’s presentations is “of a scenario when a thug has the keys to the safe” :). While that may definitely not be the case here or anywhere else, the question to ask would be are there better businesses (overall) that provide higher “peace of mind/ Rupee invested” …?


(Bheeshma Sanghani, PhD) #1069

One may also want to check out sp apparels since both of them are roughly in the same business but different gepgraphies to get a sense of whether the business is weakening or not. Comparison with a peer may help. While sp hasnt reported its quarterly results for q417 i get a sense that earnings growth may be under pressure in the baby garments biz.

Kitex opm is roughly twice that of sp and has reduced compared to fy16. Prima facie it seems the margins are under pressure.

Cap turns are also lower for kitex compared to sp. My guess is that competitive pressures have caught up with kitex and returns on capital will have to be fought for rather than taken for granted.


([email protected]) #1070

@bheeshma

You bring up a solid paradox which occurs in Investing, unfortunately quite often in India.

Peter Lynch famously said that, “You should invest in a business that even a fool can run, because someday a fool will.” Meaning emphasis should be laid on the business fundamentals of a company.

Pat Dorsey also suggests that its better to '“Bet on the Horse and not the Jockey”, again reinforcing business moats and soundness.

But remember, Peter Lynch & Pat Dorsey were in US and not India, where corporate governance and their consequences are not taken seriously as of now.

A case in point can be Tree House where the business was simple, had tail winds, ample growth, reasonable moat and showed strong numbers, but went down the drain because the “key to that safe rested with a thug!”. People who remained invested for ‘business reasons’ ended up burning their fingers.

While driving on US roads, people maintain lanes, don’t honk unnecessarily and drive at 80-100 kmph. Applying the same driving tactics in India might prove to be a disaster! (I have first hand experience and end up adapting my driving skills to suit Indian traffic.)

A similar lesson can be applicable to Investing tactics coming from US Investors. I have learned it the hard way, that we cannot simple copy past all the tenets applied in US, when investing in India since the landscape is different. They need slight tweaking, especially while investing in smaller firms.

So, a portion of my thinking is leaning towards exiting businesses when there is reasonable confirmation of management malpractice, even if it is a good business. The difficulty here is identifying “reasonable confirmation of management malpractice.” and doing it before its too late!

Disclosure: Invested


(kashif kidwai) #1071

That is a good point. It is true that we might end up missing some opportunities if we insist on the quality of management. But at the same time, it might save us from some mistakes as well. You may call it playing offense vs defense. At the end of the day, there is no right or wrong investing strategies. Each investor has to figure out for themselves what works best for them depending on their temperament and personality. What is important is we consciously develop a strategy or a set of principles to guide us on this journey. That being said, there are a few points worth highlighting:

There is seldom only one cocroach in the closet. Hence if you are playing offensive, you always need to be cautious and track your positions closely.

As amateur investors, most of us are at a disadvantage when compared to institutional/ professional investors in terms of information. If the proverbial shit hits the fan, the professionals will be first to bolt and we will be left holding the pieces.

If you have a concentrated portfolio, you cannot afford mistakes and hence it might make more sense to play defense.

Personally I hate losing money and hence i’m more focused on risk rather than returns. I make large concentrated bets. Hence i am willing to let go of a lot of opportunities. I’m okay with mistakes of omission. What i would rather avoid is mistakes of commission.


(Bheeshma Sanghani, PhD) #1072

Excellent points!

So how do you draw the line between risk and uncertainty? Mohnish Pabrai comes to mind immediately.


(kashif kidwai) #1073

I recently did a write up on Ambika Cotton. In the last para i did refer to the distinction between risk and uncertainty:

I don’t know the future of Ambika. However, what I can say with certainty is that they will continue to run the business as they have in the past. Their focus will always be in the long-term interest of the business. While doing so, they will steer clear of unnecessary risks and unprofitable growth. I believe that although the future is not clear at this stage, but as Mohnish Pabrai says – uncertainty is not the same thing as risk. Mr. Chandran is building a sustainable business which will be stronger in the future. Looking at his track record, I have no reason to doubt him. It will be very interesting to see where this business goes under his stewardship in the years to come.

The full post is available here - https://reflectionsoninvesting.wordpress.com/2017/04/30/ambika-cotton-mills-ltd-quality-cotton-yarn-manufacturer/


(James Sebastian) #1074

@kashif_1461 I was wondering if this posted to Ambika Cotton Mills that will help investors better…


(Bhaskar Jain) #1075

I don’t subscribe to your views of closing an eye to minor transgressions if you/company ends up making lot of money. I may miss a few companies like you said, but can sleep soundly at night. Process is more important to me than the end result. Thanks for sharing your views though.


(Bheeshma Sanghani, PhD) #1076

Business good management bad = exit

Business good management good = hold

Business bad mgt bad = exit

Business bad mgt good = exit

Lets just say roughly that 50% of businesses are good and 50% of the mgts are good

This means 75% ( 3 out of 4 ) of the companies one should not even look at!

This is just a thought experiment. Not for or against kitex

Further lets assume 1/3rd cos are overvalued - 1/3rd cos are fairly valued and 1/3rd are undervalued. Also lets say all the superformance “multibagging” happens in the undervalued good businesses with good mgt.

On 4000 listed companies. We are left with only 333 companies. This eliminates 92% of all listed companies.


(AJ) #1077

I have been following Kitex for quite some time now and from what information i gathered, the biggest risk i can see for myself is an investor in Kitex is the privately held entity named “Kitex Childrenswear Limited”. Lets look the following:

  1. I have never understood the reason for management to have a privately held entity with in the same business segment and not having any difference in the product offerings. This entity can very well be used to manipulate the results of the listed entity(while i dont want to assume this - it is very well understood to be a practically possible scenario).
  2. It is clear from the management commentary quarter after quarter that Mr. Sabu is not talking about the listed entity alone(It is very clear from the conversations that his understanding of his own companies financial statement is rather poor - he is, by the way the CFO of this company which makes the matter even worse!!). Even during the current quarter result announcement, it is intimated to exchanges that the additional capital expenditure(in excess of 100Cr) would help them achieve revenue in excess of 1000Cr - Its clear that he talking about the entities together.
  3. I remember from an earlier management clarification that they are planning a possible merger(E&Y submitted a report to the management on this matter) but have not heard about the progress of this for a long while now.

From what i have noticed so far, for all practical reasons both these companies are one and the same - with both sharing the same premises, same machinery, and possibly the same employees.

I hope the regulatory bodies including SEBI and NCLT start looking at these sort of matters closely in the coming days and force these companies into a merger so as to bring much needed transparency into the affairs of the company.

While I continue to believe that Kitex has the best in class fundamentals including quality in operations, a brilliant continuity plan and a management which care for its employees and the society at large, I’m really disappointed with the way it is run as a listed enterprise.

I hope Mr. Sabu and management team take the following decisions and avert all concerns of its smaller shareholders like me -

  1. hire a quality CFO and let him improve the quality of disclosures in the financial statement and run the balance sheet and Income statement analysis during con-calls.
  2. merge all the privately held entities with similar business profile with the listed entity.
  3. announce earnings guidance only after proper internal diligence.

Thank you.
AJ

Disclosure: I’m invested in Kitex.