The quality of the customers, the customer base, and strength of distribution networks are qualitative aspects that mould the future revenue of a company. How Kitex stands against these aspects.
I dont think so. I had taken a small position in this counter 2 years back but I could not build trust over the promoter tracking for 2-3 quarters. Later on I invested in Ambika and as a part of competitive analysis process when I was comparing the numbers, what I saw that Ambika and Vardhman had much stable numbers compared to others and Kitex was one of them where the volatility of operational as well as financial numbers was very high.
My view is its not a capacity crunch problem because if you have a capacity crunch but rising demand,your capacity to deal with customers and suppliers does not suffer but look at the numbers below .
The deterioration in debtor days started in 2015-16 and got further worsened in 2016-17 which means they were not able to get money from customers and look the kind of inventory days deterioration it followed means slowly you started churning your inventory lot lesser. There is just no comparison between 2014-15 and 2016-17. Such a deterioration does not happen without a major demand supply mismatch or something internally wrong. One possible reason could be pushing of in-house labels with lenient credit terms but I am not sure if private labels started in 2016. This led to massive erosion of cash return metrics. So, given the numbers, I see very less chances that it is due to capacity constraints
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Hi Amit
I am the author of the Moneylife article on Kitex posted above.
Also an edited version of the article is available here for those who are not subscribers of Moneylife Magazine
[https://candorinvesting.com/2018/07/14/kitex-garments-a-worthless-multi-bagger/]
I agree with you that we should consider Kitex as KCL+KGL. In fact, from 2018 onwards, Kitex = KGL+KCL+Kitex USA LLC
A staggering 45% (Rs 251 Crs) of the sales of KGL are to Kitex USA LLC
Kitex USA LLC has not paid for 1/3rd of those purchases
Kitex USA LLC accounts are not audited
Management is unwilling to divulge any details about P&L/Balance Sheet of Kitex USA LLC - just try calling up the auditor for information on Kitex USA LLC
There are some serious gaps in corporate disclosure norms.
As investors in KGL (listed entity), we need and deserve some disclosures about associate companies (at least their financials should be audited)
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Just on employees part your assessment should include processing charges paid to Kitex .if you combine then then employees cost are around 23 % which is same as SP parallel alhough SP is not that efficient and not so backward integrated.
on high Kitex USA please understand kitex USA stands as wholesaler in US (think Gerber ) and also front ending kitex branded which will carry invent which they are selling on Amazon as well which will increase inventory. They also have Toy r us inventory which came up in Q4 and it was surprise for all players in Q4.
Second order effect of Toyrus will be they will reduce volumes from Gerber and carter.
Kitex USA need to be audited as per US rules.
None of this is confirmed by management but this what i have figured out from AR and data available.
I have big question is my partner fraud (Sabu Jacob ) or he is stuck in problem . Till now i dont have data of fraud.
People who have not been in sales or have handled business talk lot about corporate governance,
life is not very simple . believe me best guys in India also manipulate numbers q4 to q1 shift expenses , recognize revenues before to show q by q growth.
If you read above i am not comfortable riding with Sabu but i want to believe in data than just emotions or have not go data or motive for him to commit fraud (power of incentives ). Did he commit this fraud to take out more money as salary (he earns more if declares more profit ) so that he can spend more on village or was he interested in making money through shares ( be bought 9 crs of shares , his brother also).
If Sabu is fraud then he will be very very different kind and i will get very expensive lesson.
I did not give expensive valuation to Kitex nor did i think they have any moat etc. I treated that like any other textile company but very focused and with good execution . They have series of challenges Jockey then Toyr us .
I have written to Sabu Jacob but not received any response yet. If we dont get response we should check what are legal recourse available with SEBI etc. Let me know through direct email options available have not researched this option.
As Mohnish Pabari said that you learn more about company when it goes down 50 % and you concentrated bet. If you hold 0.5 % of your net worth then it makes no sense to spent time and people take data at superficial level and comment like experts.
The other thing i am bit pissed with these big investors giving theoretical gyan from Munger etc but will not stand up against these companies ( they have so many resources ) to make it India better . If none of us stand up then frauds will continue . USA was not like this its people (investors ) who made these fraud coporates shit in pants.
Dis : invested 6% so heavily biased now down 60%.
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When you say - Kitex USA LLC has not paid for 1/3rd of those purchases - you mean Kitex USA has not paid this to KGL, isnt it?
Kitex USA is an associate company, part of KGL itself. It is not the case of a receivable from a customer or so. So the point you make - does it really deserve this negative notion?
I can see many companies like Maruti Suzuki which has umpteen number of subsidiaries and the annual report has good amount of such transactions between the parent company and the subsidiaries. Isnt this similar?
Be sure, I am in no way justifying the management of KGL. I would also like to as much details as possible. However I feel this point is biased. Anyhow I am ready to accept if there is anything I can learn from all this.
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Btw, yes for sure the associate company must be audited and we must get all the details and clear picture. No debate on this.
Hi John
There is a fundamental difference between a subsidiary (>50% ownership stake) and an associate (<=50% ownership stake)
The way accounting works, for a subsidiary company, the accounts are merged line-by-line.
So revenue/profits will be added to parent , inventory, loans, receivables etc will also get added to the parent company standalone financial statements.
In the case of an associate, only the profits will get added while consolidating the financials.
For an associate, we are completely in dark about revenues, debt, payables, inventory etc.
So, when KGL mentions in the annual report that Rs 251 Crs of garments are sold to Kitex USA LLC, we have no clue of Kitex USA LLC has been able to sell them to the end-consumer (half of them?)
Picture this - Kitex USA LLC being an associate, even the auditors (Varma & Varma) have no clue what the real revenues/loans/payables/inventory of Kitex USA LLC. You see, its accounts are un-audited and Varma & Varma has to 100% rely on the word of the management with no way to independently verify the accounts.
This was ok if KGL did only say 5% of its sales to Kitex USA LLC. But, the sales is a staggering 45% of total sales.
I am not alleging any wrongdoing, the disclosure standards are very very poor and it creates risk for the investors.
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Wondeful piece by you in Moneylife Amey. Hope to see you write more and more in the future.
Like I mentioned earlier Varma and Varma are auditors to entities owned by me as well. Their integrity is perhaps among the best I have seen and have the least conflict of interest. This is unlike the big 4 who have many other services that potentially puts them in conflict. Based on my limited understanding I suspect they may have asked a legally enforceable undertaking from Kitex to vouch for what the subs and associates represent. Kitex may have said no.
Mr Jacob mentioned that he wanted a bigger firm with international standing, BDO, (and without conflicts) to take over statutory audit. Varma and Varma also has international associations and audits many privately held MNCs here. So that line of logic by him raises more suspicions than it clarifies.
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For your kind understanding - statutory auditors are under fiduciary responsibility to the board of directors of the company(and to law enforcing agencies in exceptional situations). If they ever give out information to public(including an investor/ analyst) they can very well be held responsible for breach of trust. A credible audit form will never entertain any such action. An auditor reporting on the consolidated financial statement is expected to perform adequate procedures on the financial statement of all subsidiaries and associates irrespective of them being independently audited or not to ensure that the consolidated financial statements are free from any material misstatements. I have no reason to believe that âVarma & Varmaâ being a credible and experienced audit firm has not done any such procedures before issuing the audit report for the previous year(unless any of you prove with evidence otherwise).
I request you to understand the legal frame work under which companies are regulated in this country well before writing such articles and i hope you donât get sued for writing things from your imagination.
AJ
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Two articles I saw online yesterday - more in the context of Twenty20
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@Shikhar Thanks for collating the questions to be asked in AGM. Please find my questions below
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In the recent interview, Mr Sabu mentioned that there are tie-ups already in place with customers and hence they are increasing production by 3.5x? Can we get more details about these tie-ups? Will KGL directly deal with it? Or through Kitex USA LLC? Or through the 2 new subsidiaries which are proposed to be created?
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What is the logic of creating 2 new subsidiaries? Canât further business be done through KGL or Kitex USA LLC itself?
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What are plans of listing KCL? Are the earlier proposed timelines still valid?
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Last year in the AGM it was mentioned that automation efforts failed. Has there been more efforts this year done for automation and what are future plans about the same? Are the newly proposed factories in Karnataka/Orissa/AP/Kerala going to be more automated or is it going to be labour intensive?
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When can we expect concrete plans on new plants? Also what is the utilization of current capacity and is there further scope for increasing capacity in the current KGL Kerala campus.
Disc: Invested.
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My mistake - I meant âTry calling up the company secretary for informationâ and I really want at least 10 people to
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Presentation made at AGM today.
https://www.bseindia.com/corporates/anndet_new.aspx?newsid=61a58c05-5eaf-48a9-8e72-3b71a4734534
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The presentation contains projections for turnover up to 2024-25! First time I have seen! What was the need for that?
Disclosure: Got out from the stock around 350 levels.
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Hey Shikhar, How are you. Can you share the details of AGM and what were discussed. Were you able to ask the questions and what was the response from Kitex/Mr. Sabu?
Great, thank you Shikhar. Awaiting the details.
The news on CFO is reassuring!
Why is the Sales to Kitex USA LLC shot up 10 times in an one year and is now 45 % of total sales ? Is the decline in TOYs R Us met through sales to Kitex USA LLC?
- There is a new trend in US market, buyer prefer goods on LDP ( landed duty paid ) and Kitex is the first company to move to this. The top vendor from China hs now moved to a similar model
- Gerber FOB business is now on LDP basis , has no effect on revenue or profit of KGL since it is invoiced on same FOB to Kitex USA LLC.
- Previous year figures are only for 2 months of Kitex USA LLC.
- Toys R Us bankruptcy filing has impacted only in 4th Quarter of FY 17-18 shipment.
Question â Kitex USA LLC has not paid for 1/3rd of purchase made from KGL
- All sales of Gerber were made through Kitex USA this year, hence we have 65 cr out of those 85 cr receivables pending by Gerber( our largest clinet)
- Gerber was in the favor of Kitex USA LLC structure.
- Our overall debtor days Is almost same as last year ( 120 -130 days)
Question â Kitex USA LLC not audited - There is no statutory requirement for conduct of audit of accounts of entity as per the applicable Federal laws in USA.
- Auditor has expressed the view the impact of unaudited figures is not material to the company
Alleged shady related party transactions between KCL & KGL - KCL was incorporated in year 91 , a year before KGL.
- They are in two different lines of business, KCL manufactures for 0- 16 years, while KGL manufactures for 0-24 months.
- KGL is more profitable due to larger revenue.
- Both entities are audited by the same auditor
- Management and promoter has no motive of inflating profits of KGL, he hasnât sold a single share of the listed company since 1995.
- The processing charges paid by KGL to KCL are nothing but the embroidery work done on the garments
Sudden change of auditors
- The company has got on board new auditors ,BDO which is the 5th largest company in the world
- KPMG is already a partner of the company, hence the company was not able to get a top 4 on board.
- Representatives from both the auditors (Varma & Varma , BDO) were present at the AGM.
- Logically it doesnât make sense for the company to cook up its books and hire a better auditor.
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@Shikhar, Thanks, that was useful. Did you manage to get answers for the below queries?
- In the recent TV interview, Mr Sabu mentioned that there are tie-ups already in place with customers and hence they are increasing production by 3.5x? Any more details about these tie-ups?
- From the recent presentation, I understand that land is finalized. They were looking at various states. Was the location disclosed?
- Any news on KCL listing?
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- I think they r planning to scale up existing customers. For example take gerberâŚfor them india wil be a small place in the map. And kitex will be even smaller. They will look up to consolidate their suppliers.hence kitex will in a sweet spot to capitalize on such opportunities.
Also india seems to be gaining competitive advantage with respect to China. China and usa trade war puts us in a sweet spot
Kitex will also be looking to manufacture wet tissues, diapers, socka for children which can be sold to rhe same clients . - Kerala has been finalized. Along with kpmg they evaluated karnataka and AP as well but settled with kerala as the best place finally.
- No plans for kcl listingâŚi am personally not bothered with KCL at all. KCL has no relation what so ever to KGL. Both are in completely different age group of garments.
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