Kitex Garments Limited

Stock Opportunities Not-so-Hidden Gems
1

Kitex Garments Limited is in the business of manufacturing and exporting garments. The Company manufactures different types of garments, such as hosiers, shirts, pants, jackets, innerwear and outerwear.

Kitex also supplies to Jockey Inernational. It has its own brands also like Adonis.

For the year ending March 2012, the Company has achieved a turnover of Rs. 318 Cr. The operational profits has improved on account of optimizing all the operations of the company.

The company is taking all efforts to improve the quality and productivity to get more orders at competitive rates. Due to the addition of the new processing plant the company is able to quote better rates and maintain high quality & productivity in the finished goods manufactured. Barring unforeseen circumstances the company is confident of achieving better results in the current year.

The Company has embarked upon an ambitious expansion plan for increasing the capacity of the existing Fabric Processing Unit, which is expected to be completed by March, 2013. This project envisages a total investment of Rs. 108 crores in buildings and machinery, which will be financed by availing term loan of Rs. 82 crores from bank and the balance from internal accruals.

Past performance:

FY 2012

FY 2011

FY 2010

FY 2009

FY 2008

Sales, Cr

312

256

247

182

176

Growth %

21.8

3.5

35.7

3.6

15.1

EBITDA , Cr

65

51

44

35

29

Margin %

20.7

19.8

17.7

19.1

16.4

Net Profit, Cr

27

21

19

10

9

Margin %

8.7

8.1

7.5

5.5

5.0

EPS

5.71

4.34

3.33

2.1

1.86

Growth %

31.6

30.3

58.6

12.9

Current Situation:

CMP 54 â 56

EPS 5.7, P/E < 10

Dividend 0.6, Div yield about 1.1%

Figures in

Crores

Market Cap

263

Revenues

312

Operating Income

57.7

Net profit

27.1

Cash

36.5

Current Assets

140.5

Total Assets

267.5

Current Liabilities

145.2

Total Liabilities

170.0

Equity

4.75

Equity + Res

97.4

Debt

88.4

Positives:

1. ROE > 25

2. ROCE > 30

3. Increasing Operating margins to >20%

4. Increasing Net profit margins to > 8.5%

5. High Sales growth, higher EPS growth

6. Market cap < Revenues

7. Projected revenues of 1400 Cr by FY 2015

8. Quick Results and AGM in May itself.

Concerns:

1. Interest costs, as more debt would be taken in current year.

2. Slowdown in west, (70% exports, but share of exports reducing)

3. Pledged shares, 12.63%

4. FY2012, Q4 revenues reduced.. seems some seasonality is there.

I do not have much direct information, but looks very interesting. Could this bridge the valuation gap with Page by at least half?

5 Likes
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Looks interesting.

is the debt under TUFS scheme?

major concern area could be very high debt which will be there post expansions.

3

No… the debt is secured mostly against the assets of the company.

1 Like
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It’s avert old Kerala based co .operating in such a tough state n survival rather well in business over last 15 years means one needs to study the co more closely.any threat from Bangladesh which can export to India at zero duty n to EU n USA due to special status?

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As I had initiated this thread… disclosure… Not Invested.

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it has come up on my filters on screener many times, very good ROCE . Even though it has run up a 20 % i am thinking this is an interesting bet …One thing i noticed is the salary of the MD + director finance totals to about a crore with net profit of about a crore and sales of 300 crore. Is it on the higher side ??

Intersting article here :

http://articles.timesofindia.indiatimes.com/2012-03-06/kochi/31126804_1_uk-firm-mothercare-sourcing

“We plan to achieve revenues of Rs 1,300 crore by fiscal year 2015,” revealed Jacob. “Currently, we supply kidswear to Toysrus, Carter’s, Gerber, and Little Me in the US andMothercareand Tesco in the UK. This year, we will add six US companies and one UK firm to our client base to reduce the risk of client concentration,” he said.

“We rank third among dedicated baby clothing manufacturers in the world, and with increased production capacity we will reach prime position by 2015,” he added. UK-based retail giant Tesco Plc has started sourcing directly from Kitex through its international sourcing arm Tesco International Sourcing, based in Hong Kong. "Mothercare a chain of infant wear stores in the UK

is also sourcing from Kitex and we will be adding H&M, another UK-based retail chain to our European clientele," Jacob said. At present, Kitex exports 80% of its product output to the US market and the remainder to the UK.

1 Like
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i meant net profit of 30 crore in the above. I am not seeing an edit post option . Not sure if iam missing something.

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Don’t know how come I miss this one,

Seems interesting to me, with good ROE, ROCE, growth rate, and reducing debt burden, Interest expense to Profit ratios, DE ratio. I am doubtful about moat. But again they seems to have good customer set, so their quality must be good.

Aysuh/Hitesh/Hemant/Safir bhai,

Expert comment on this one?

9

There is no Sales growth this year… improvement in EPS is fully due to reduction is costs and efficiency. Need to see a pick up in sales growth for the ambitious targets to be achieved.

10

Kitex has decided to scrap its expansion plans…

with limited growth prospects and and low dividend yield, I think there are no immediate triggers in the near term (unless we get more clarity on the China and Sri lanka expansions)

Regards,

Swapnil

11

Hi Subash,

Yes, Kitex has done pretty well in past and the co has stood out as compared to other textile cos. I used to track it few years back when it was in early double digits and always had a good feel about about it…in hingsight, should had done more work. At that time, gave it a go after some volatility in earnings and limited information. They never had a proper website too :frowning:

Anyways, the nos do look good however, we need to have more details to get attracted at 10 PE.

Ayush

12

As I am also from Textile Space and a lot of processing of fabrics of Kitex happens in the mills here. The company has always had bulk orders and payed the suppliers promptly. The company was to start their printing unit but if they have scrapped it then there is something serious coz with the kind of quantities they had it is prudent to have their own facility.

13

As I am also from Textile Space and a lot of processing of fabrics of Kitex happens in the mills here. The company has always had bulk orders and payed the suppliers promptly. The company was to start their printing unit but if they have scrapped it then there is something serious coz with the kind of quantities they had it is prudent to have their own facility.

14

Subash, I heard good stuff on kitex recently. Am working on it to confirm. Will update.

15

Guys,

Kitex garments could be one of the beneficiaries from Rupee depreciation as most/all of their business is in exports.

Any updates on this one?

16

Kitex looks interesting at current levels.

Positives-

  • More than 50% jump in H1 sales, PAT has more than doubled in H1… Stock hasn’t moved.
  • Good historical growth, good ROCE & ROE
  • Selling at less than 7 trailing PE.

Negatives-

  • Mgt compensation is high… but a lot of that is variable which depends on business performance.

Mgt has predicted a sales of 430 crs for FY14. I think they should easily do 400crs with PAT of 45crs.

So at 6.5x PAT & consistently good track record, Kitex looks attractive on risk-return potential.

17

Could you look at the corporate governance issue here?

Kitex Ltd supplies to Kitex Garments. Kitex Garments supplies to Kitex Childrenswear. Only Kitex Garments is listed.Kitex Garments fabrics division is in losses (Kitex Garments supplies Fabrics to Kitex Childrenswear) - and yet they have decided to spend 108 cr on a fabric processing plant.

Of course, Kitex Childrenswear was set up long long ago and the markets know it (and hence the low P/E inspite of the growth). Kitex Garments and Kitex Childrenswear have a similar set of customers (as in, customer profile is same, not the customer themselves).

If you could throw more insight/information on the org structure and governance of this company, that’d be helpful for all of us in digging on this company a bit more and then subsequently think of investing.

2 Likes
18

Hi Kiran,

I have been reading on this co for last few weeks and got pretty excited about the quality of its earnings, good business model, reputation of promoters etc. Have a look at some of the videos on youtube and you will be excited. They have indeed created a good business model and have good relationships with some top global retailers. However, there are couple of things which are quite concerning:

1). The corporate governance issue mentioned by you above.

2). They faced lot of political problems in Kerala because of which they couldn’t grow despite having orders. The problems seemed to have resolved but yet we need clarity on growth plans going forward.

Would be great if we can get answers to above.

Regards,

Ayush

Disc: I hold

listed.Kitex

19

Thanks for pointing at the issues Kiran. I missed looking at Related party transactions earlier.

Yes, there seems to be large transactions with Kitex Childrenswear… Last year 48crs of fabric was sold to that comp out of 140 crs fabric sale. Transactions with Kitex limited were lesser at about 7crs fabric purchase. So, that Related party transaction is a risk.

Fabric division is into losses since last 1.5 yrs & that doesn’t give much comfort given related party transactions But then just have a look at **Garment divisions… 65crs EBIT on 87crs of Capital Employed… **Look at the ROCEs here. This year Garment’s ROCEs will be even better.

Co seems to be having good relations with retailers. Getting Best Vendor awards-

http://www.thehindubusinessline.com/news/states/kitex-bags-best-vendor-award/article4766120.ece

Mgt has target of 430crs as this year sales. Read here-

http://www.thehindubusinessline.com/companies/kitex-net-rises-79/article4928096.ece

Co has sold at about 8-9x PE in the past (according to screener) & with increasing size itcan command higher PEs (of-course with high growth rates).

1 Like
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Results Dec’13

Total Income 99.44 (3% YoY Growth)

Net Profit 11.32 (9% YoY Growth)

Revenue from garments have reduced from 84Cr to 72Cr

Revenue from fabrics increased from 35Cr to 51 Cr.

Overall growth have been poor.

Any idea why garments revenue have decreased?

Regards,

Sunil