Kitex Garments Limited


(nirmalsashi) #1133

Kitex to touch 650 crores this year, targeting Rs 2000 crores by 2020.
Will be surprised if its for Kitex Garments alone.
I guess MD might have taken Kitex childrenwear too.
-It presently sells at 28000 stores in US.
-6 lakh clothes are being manufactured every day. In 2020 it will be 11 lakh!

Source: http://localnews.manoramaonline.com/ernakulam/features/2017/07/24/kochi-dress.html
It’s in malayalam language


(sivaprakasamp) #1135

Yet another yoy profit decline posted by Kitex. Top line up 4%, PAT down - 15% yoy.

http://www.bseindia.com/xml-data/corpfiling/AttachLive/c44ed5ae-fd97-4e12-8d37-32aec906ec47.pdf

Please can someone add in management commentary if available.


(nirmalsashi) #1136

Since no BSE notification about result discussion yet, may be Tuesday / Wednesday expect them to come on media for discussing Q1 result.
Expecting conference call this time, last time it was postponed as MD was in US.
Expect inventory holding of may be 10-12 cr because of carter (being listed company)
But management informed in April they they will make good profit in Q1, Q2. Even gave 140 cr guidance. During Q4 carter shipment was delayed so expecting that to add 25 crores to revenue. Guess cotton price and rupee appreciation lead to decline in profit. I think Bangladesh and china currency depreciated giving them natural advantage compared to INR and so margin is less. Last Q1 md mentioned they increased capacity by 18% and then by end of year they would have increased to 30%. Not sure what happened to that. otherwise that should have reflected in sales. Though margin higher in lamaze and their own brand little star, volumes too low for getting reflected at this stage. Guess MD will tell to wait till 2020.

There are challenges ahead as well: Border adjustment tax, end of Indian subsidy for textile sector due to WTO norms which is expected to come to end this year, customers side challenges- major retailers in US are facing risk of bankruptcy and higher competition from Amazon. SP Apparel is expected to add more customer in US resulting direct competition to Kitex. The likes of Jayjay mills and First step baby wear will also affect sales of Kitex due to competition. The management commentary ‘no one can compete with us’ is clearly visible in the repeated failure in achieving their own guidance. CSR was close to dividend paid. MD salary is among highest.
What surprised me is their capex plans, cash in books. They repeatedly told they will double sales with minimum capex, then came the unexpected huge capex.


(nirmalsashi) #1138

Good News :

Border Adjustment Tax Abandoned
This will benefit textile exporters like Kitex, as it has some 90% export to US.
With US moving out of TPP, Cancellation of BAT is +ve

Cotton price expected to decrease September onwards. Cotton production in India estimated at 380 million bales against 340 million bales produced last year. The area sown as on July 14 was 90.88 lakh hectare, up by 17 % from 73.93 lakh hectare sown on the corresponding date of previous year

Interest Rate could be cut 25 bps tomorrow.

Carter, one of the key clients of Kitex has posted good results, Net sales increased 8%, With more stores expansion in plans in US, Canada and other regions, procurement from Kitex are expected to be higher as they have plans for increasing the direct sourcing. Most of the sourcing is through agent currently. I think MD also mentioned that carter could alone grow to $50 mln sales. (320 cr)

Bad news: Dont think need to post it as its already covered in this forum. One +ve is cash spent for reducing debt. With such free cash flow, need to pay attention to future plans- increase in dividends, capex etc.


(nirmalsashi) #1140

Q1 Discussion Highlight :

  1. Q1 Revenue up Rs 11 crores. Profit down due to dollar depreciation. Last time Other Income was @ Rs 6 cr this time nil.
  2. Cost of materials is flat around 40%. However it is 26% increase as there is increase in stock for which raw materials was consumed more.
    3.Processing Charges increased
  3. Debt 0 except for Term Loan, Cash on books Rs 250 Cr.
  4. Merger: 2019, Listing 2020
  5. Negotiating prices with customers as cotton price hiked / rupee appreciated. will adjust in coming season
  6. Fabric : Not expecting increase in Profit ; Garments: Current focus
  7. More Brand Tieups: discussing with customers. Not able to disclose as nothing is finalized as yet.

Observation:

  1. Surprised as MD in last Q4 said that they will adjust cotton price hike and $ depreciation in Q1 and Q2. Normally sales is for six month so may be Q3, Q4 it might be reflected. As per guidance bad result.
  2. Expect listed customer to say hold inventory, so inventory went up. Not sure of company as they have other listed customer such as Carter, Target, Amazon, The children’s place, Walmart as clients too
  3. Processing charge increase is negative as they may have done it in Kitex Childrenwear. MD informed in Q3 / Q4 call that they are using group company for processing and charges are less.
  4. MD said listing plans were not delayed. It was 2019 for listing and 2020 merger. However those who have attended AGM / concall surely know whats the truth
  5. MD failed in meeting brand tieup guidance as well. They told they were in discussion in Q3 call and they would be disclosing the details in Q4. After 6 months also its still not finalised.
  6. Not sure of why sales / profit of last quarter’s Rs 25 crores which was delivered this time not reflected. or if it got reflected then by all means this is pathetic result.
  7. I was expecting more tp discuss in terms of Automation, capex plans. No info on
    Concall too.

(Furkan Alam) #1141

(arvind1ahuja) #1142

My two cents.
Not an investor in Kitex.
Have been following it over two years, right since share price started its upward journey from two digits.
Had complete faith in the story. Never could make an entry, as funds not available when the price was right.
However,
My limited experience is…
whenever the stock story does not gel, for more than 2-3 quarters, jump off, with or without parachute

Please treat my view as a case study, and not as any attempt to spread panic or distress on this board or amongst the august investors.
Thanks


(Ankit) #1143

Hi Nirmal,

Thanks for sharing the notes. Are these from the ET NOW interview or some other source? Can you please share the link to the original source where you got these pointers from.

I understand the management was supposed to appear on ET NOW on Monday to discuss the Q1 results, but am unable to find a link to discussion / interview.


(kkarimyusuf) #1144

(Amit Jain) #1146

Textile industry is taking a severe beating. No segment in the entire vertical is profitable, some are beyond any saving. In this environment, good companies like Kitex and SP apparel are very likely to perform poorly.

This is showing in the numbers: Kitex Sales have stagnated and Margins reduced.

Investors, in general, got attracted to the stock due to the growth it was promising. This equation appears to remain changed for next year or so. In that period, the stock is likely to crash. The price chart also looks dismal.

It is a different story, whether the stock should be purchased at sub-100 price levels.


(jps) #1147

Seems there is a major governance issue in the company. A closer look at AR FY 16-17 shows tremendous jump in other expenses from 62 cr to 88 cr whereas contribution of forex losses is only 4.3 cr. The major jump is in the processing charges from 11 cr to 25 cr, 3 times increase in other production charges & double the freight & forwarding charges which is quite unusual when the sales turnover is stagnant. Keeping huge cash in current account is equally hard to digest. (closely tracking but not invested)


(Amit Jain) #1148

Textiles is an industry which requires heavy assets on balance sheet. Moreover, a steady growth of revenue is very tough to achieve. Such is the nature of everything Textile. Eventually, when there isn’t any sustained success the company’s management resort to taking unhealthy risks or get “creative” using its subsidiaries.

Instead, industries that supply machinery to textiles industries while keeping very low DSO have better chances of giving shareholders value. Like LMW.


(Jeeva Alex) #1149

I am still trying to figure out the impact/contribution of Dan DeYoe on Kitex’s past growth. You can refer his profile in https://www.linkedin.com/in/dan-deyoe-93911122/ . I am not trying to underestimate the capability of an organization, but some people are capable of making a big difference and difficult or takes time to find a suitable replacement…


(nirmalsashi) #1150

Positives

  1. Increase in recruitment for Kitex USA LLC signals business is picking up and they have also advertised for CFO for Kitex Garments.
  2. Key clients like Carter is expanding globally and online sales of Target, Amazon picks up for lamaze infantwear. Saw increase in good reviews.
    https://www.amazon.com/Lamaze-Baby-Organic-Sleep-Play/dp/B07149S5S8/ref=sr_1_1?ie=UTF8&qid=1504961035&sr=8-1&keywords=lamaze+organic
    3.The increasing yarn cotton spread is likely to benefit integrated textile manufacturers
  3. Budget might reduce tax for corporates
  4. Sales might pick up Q2. Estimate q2 Sales at 145cr. ROSL restored till september .

Negatives

  1. Duty drawback rates might be reduced to 2%
  2. Rupee Appreciation vs competitors currency depreciation/ stable like bangladesh / vietnam
  3. Cotton prices increased 7.3% YTD, yarn prices increased 6.2% YTD
    INR appreciation 5.9%
  4. Other players in US entered organic infantwear market. They are very small players in comparison though

#1151

Not sure how much % of Revenue will get affected by this … Seems like toys r us is filling for bankruptcy


(Amit Jain) #1152

Textile companies have little or no moat. Any Vietnamese or Bangladeshi company can start giving competition.

Low margins, high capex leading to high interest costs.

Add to it currency competition and labour laws, you have a dream waiting to be shattered.

These things are of worry to me, because I cannot know the future of a business before it happens. I am probably the last person to know. Therefore, I want to invest in businesses which a lot of predictability for the next decade.

Therefore, kitex, Sp apparel, Raymond, Ambica cotton worry me.


(nirmalsashi) #1153

I think USA gives level playing field for indian textile exporters. Unlike EU which gives Bangladesh and others preferential access in terms of duties.
I would be interested to know about Atlanta based company`s automation plans with kitex.May be its softwear automation. Only guess. MD informed this q2 they will be upgrading automation machines. I don’t expect conference call soon for investors. So only hope is result discussion in tv and agm . Expect subdued other income but substantial increase in revenue and profit due to q2 base effect YOY. Even their client Children place is also recruiting for india which means that sourcing from india could continue. Infantwear exports from india had only increased from last 5 years. Pakistan is struggling. Bangladesh and others including india will continue to take market share from china, which has 45% market share


(Ankush Rajput) #1154

Disclosure: currently invested <1% of my portfolio entry at ~240 level

Kitex still remains a good company to invest in. I think management is currently stretched in terms of problems with labour as well as business development in USA. Any new investory should remember Kitex has all the ingredients to again perform as it had earlier. They should look for signs for turnaround by tracking QoQ sales plus significant volume from new accounts.


(Amit Jain) #1155

If the company is a small cap, and the investor is already invested then it is really bad news if he is praying on a turn around.

Because, small caps fall like there is no tomorrow, and market liquidity dries up quickly. Hitting lower circuits day after day is commonplace. Kitex has broken 2016 lows, and is headed straight for the Rs.45; This kind of weakness in price, is a clear indication of weakness in fundamentals.


(Ankit) #1156

One of Kitex’s key client – Toys ‘R’ Us – files for bankruptcy protection