Kitex Garments Limited

Made a note based on Kitex COnference Call for Private Circulation… Sharing with VP members for their views and opinions…

2 Likes

Aveek,

Thanks for the detailed notes, could barely follow the the CEO’s thick accent!

On your 3 questions, my thoughts are as follows:

1). KGL/KCL- not really a big issue with me, both will mint money as long as there is good business, CEO also categorically stated in the call that 1st preference for order fulfillment goes to KGL as long as there is sufficient capacity.

2). Infant wear growth- you can use US import data in this thread as a proxy, growth rate, it is around 4-5%, more growth will come from taking market share from existing players. This is no different from Cera and Mayur Uni taking share from the unorganized market thus growing above organic market rates.

3). Competition/moat- this is still a question mark for me. The CEO is full of bluster but we need to check this out with others in the game. Ultimately though proof is in the pudding. If Kitex delivers a couple of quarters more of solid earnings then the CEO is probably right.

Bobby

Bobby

  1. KGL / KCL issue is a grey area … MD was clearly ambivalent in his response … My concern is not about KCL’s performance or its potential but their reluctance to merge it … I don’t think he is waiting to give KGL shareholders a wonderful merger ratio when the eventual merger happens … It is just a “red herring” for me.

  2. Yes, I know the growth rate of infant wear market but was talking about very long term… Unlike many other area, unfortunately we will have lesser kids in 0-2 years in any foreseeable future beyond next 2 - 3 years. But that’s not going to affect KGL / KCL in any way being a very small player and primarily growing by replacing other sundry smaller players. Yes, fully agree to your views.

  3. As I mentioned in the note, I don’t get visibility beyond few years for compounded growth … If margins can be as high as 30% with 30% - 40% growth in sales … somebody somewhere would wake up to it, rub his eyes and start chasing madly… !! CPSIA certification, Customer build up etc may be difficult to replicate in 2 -3 years but if the size of the pie is there with so much sugar left, somebody will surely jump and bite.

They have done a wonderful job and MD has all the reason to feel proud of it but as a minority holder I would prefer to be safe … At this price point.

Aveek

Hey guys,

sorry for going missing but kind of been travelling a lot. I have asked a few of my friends to get me in touch with a merchandiser in Ki-Tex & Jay-Jay Mills, lets see what comes out of it.

Meanwhile went through the Annual Report of the Company& this threadto understand the business completely so as to ask intelligent questions to who ever I got in touch. I have a few doubts…

1). Why so much cash in Currrent Accounts?? There should atleast be a FD. There is no cash yield. The limited interest accrued from fixed deposits must be from various FDs submitted to authorities as secrurity deposit.

Before going to next point, let me clarify that in a garment operation generally 40% of cost goes for the fabric. In kidswear I would expect it to be 30%, especially because the workmanship as total percentage of costs is higher and also there is presence of more embroidery / garment-printing.

2). The biggest thorn is the related party transaction.

The capacity of fabric Capacity of KGL seems to be at 40% of their of Garment revenues, then why they have to source fabric from outside? Now one may argue it is due to mismatch between processing and knitting, so to fill this process house they source grey fabric, process it and sell it to fill their capacities.

In the con-call MD said they have 5blocks. and each blocks gives revenue of $13 - 15Mn. So 5 locks * $15 Mn * 60 = 4500Mn. The actual garment turnover of the company is at 3500Mn. The company already has excess capacity.Still the company sources about 50Cr worth of fabric from outside(10Cr from Kitex Limited), which is 30% of total fabric consumption. So though I can understand Fabric sales, I completely dont understand Fabric Purchases.

Also note total fabric consumption is at 176Cr which is at 50% of revenues of 350cr from the garment division. Way too high! Would request Donald to check with his source on this front.

3). The claim of MD that fabric manufacturing is a loss giving business i utter Bulls***. Dyeing charges for fabric in Maharashtra & gujarat are in the range of Rs. 80 per Kg, the same in South(TN/Kerala/Karnataka) is in the range of 120 - 140 per kg. All due to pollution control strictness and problems in this area. In todays times fabric processing is more profitable than garment business.

Knitting is very neglible profit operation & Spinning is cyclical but gives decent profit. If some body has everything inhouse I look forward to a minimum average profit of 20%. so for the 70cr fabric they sell to KCL I would expect a profit of 15Cr and not a loss of 10Cr from fabric division(understanding transfer of stock within the company is on no-profit/no-loss basis).

Given this I dont understand why management is pushing to increase capacities in knitting and not in Sewing which is their biggest profit generator.

3). Donald raised a issue about creditor days decreasing, it is quite natural to happen that way. Earlier they must have been sourcing fabric at credit but now sourcing more of basic raw-material like cotton would lead to faster payments, mostly immediate. Though they would be getting credit on other front like excess fabric purchase, chemicals, dyes, etc…

4). For 8 lines/1 block. MD says they need 500people / workers. They have 5blocks so max. labor required is 2500. why they have 3800??

5). If KCL is 60% of KGL, why does it also have 3800 workers?? And they say the capacity in KCL is still underutilised, so the issue raised by Donald about KCL having capacities more than KGL could quite be true. There is a major possibility that capital incentive Textile business is concentrated in KGL and low-capital Garment manufacturing is concentrated in KCL.

The point that no where lack of details about capacity in terms of number of sewing machines, Dyeing Machines, No. of spindles (yarn spinning) just doesnt seem right to me. Generally companies give these details upfront on website, but here the website itself is under construction for years(That too for a export company). Very un-professional I would say.

6). In branding excercise company projects to employ $10Mn. for a increase of 400 + 400 basis points. (Mentioned in the con-call). This leads to a 40% increase in PAT. So a additional income of 28Cr. Which turns out to be 5% return P.A. completely unjustified.

Also this concept of licensing the brand from Jockey and then re-licensing to Wal-Mart to Target just doesnt make sense. If Wal-mart is intrested in licensing the brand why wouldnt it purschase directly from Jockey?

Coupled with above 2, add the fact that they have recruited a VP from Toys-R-Us as Director of Operations(USA). This says that they are facing selling pressure, doesnt seem like a suppliers market. Garment industry has never been that way.

7). MD takes salary at 6% PAT.

These are some of issues I came up with, will keep prodding and try to get in touch with people of JJ and Ki-Tex. If somebody could answer these concerns of mine, it will be great.

2 Likes

OK some more funny math in this front.

1). MD says per day capacity(combined) of 5.5lakh pcs per day. At average realisation of 1$ per garment the combined turnover should be 990Cr. So expected revenue at 530Cr(KGL) + 300Cr(KCL). Excess capacities exist.

2). 4Cr of incremental investment will add capacities of $13Mn(80 Cr) revenue. but present Plant&Building + Machinery investment of 140Cr gives revenue of only 440Cr?

3). If 4Cr can give such revenue boost, how does investing 15Cr in Knitting line not give any revenue boost only profit increase of few basis points. If its true, whats the logic in investing in Knitting lines, you get so much fabric of best quality readily available.

4). Each line produces 5000pcs per day. So 40lines produce 2lakh pcs per day. But their total capacity is 5.5lakh pcs per day so KCL has to be bigger in Garment Manufacturing. No other logic!

I have a feeling that Im teribbly wrong somewhere. Pls guys point it out.

Total yearly Sales for garment division is Rs. 350Cr. That is approx 1Cr everyday. At the Avg price of $1 - $1.25 per pcs. That is 1.3 - 1.7lakh pcs per day. This corrobates with the Knitting lines calculation of 2lakh pcs per day.

I would say the per day production of KGL is in the range of 1.75lakh pcs.

Now we need to compare the cost and selling price of KGL with other competitors to understand exactly how are they able to get 20% OPM, is it due to lower costs or due to higher prices, that will spell out exactly the competitive advantage of KGL. Donald may be your contact within the industry will be able to give a better picture here.

Hi

Please find attach below link for 1) Mind map 2) extracts of ARs of Kitex since 1997 and some other relevant extracts from ARs of its customers and prospective customers 3) Link for recent Kitex call.

Please note that I prepared this mindmap mid June when price was around INR 230. Stock price has moved a lot since then. So ignore the slides on valuation. I was pretty busy and could not update the mindmap, so some bits might be in contradiction to what mgt said in conference call. Secondly do go through mgt conference call on RB, its gives lot of additional information…

**Link to mindmap:**https://drive.google.com/file/d/0B8Mr8IuAEwz7VEFjTFRnNG9KMG8/edit?usp=sharing

**Link to extracts of ARs:**https://drive.google.com/file/d/0B8Mr8IuAEwz7dDFHTGNaOV8wNzg/edit?usp=sharing

Conference call:http://www.researchbytes.com/Kitex-Garments-Limited-K0213.htm

At the risk of repeating, the recent stock price movement suggest lot of expectations are getting build into the price. So please DO NOT TAKE ABOVE PRESENTATION AS STOCK RECOMMENDATION…just sharing my views…

Fantastic data, thanks Anil.

The earlier AR extracts of Kitex provide a great perspective. My takeaway is that the CEO while super bullish does not intentionally mislead investors, entrepreneurs are a different breed in that they always believe tomorrow will be better than today…

The low share of indian exporters supplying to US buyers can be construed as positive, given the huge share of Chinese exporters even a small loss in share will be a big delta for Indian exporters

Bobby

Guys,

We are delighted to bring to you Kitex Garments Management Q&A: Aug 2014

This kind of an extensive Q&A showcases VP collaboration efforts at its best.Several folks have contributed to make this perhaps the most insightful and extensive Q&A we have had. Preparations for the same were great - and notable contributions came in from almost each one mentioned.

Let’s keep this kind of collaborative drive and energy up :slight_smile: and inspire many more to put their hands up for attempting as comprehensive an in-depth understanding of a quality business, as this one.

Disclosure(s):

Management Q&A:

1). Ayush Mittal :Tracking & buying > 1 year, added more recently;Holdings > 5% of Portfolio

2). Tirumal Rao:Tracking & buying > 1 year, added more recently;Holdings > 5% of the portfolio

3). Pratyush Mittal:Tracking & buying > 1 year, added more recently;Holdings > 5% of Portfolio

4). Anil Kumar:Recent entry; Holdings > 5% of Portfolio

5). Vinod MS:Recent entry; Holdings > 5% of Portfolio

6). Donald Francis:Recent entry; Holdings > 5% of Portfolio

Special Contribution:

1). Kiran D: Recent entry; Holdings > 5% of Portfolio

2). Omprakash Davuluri: Recent entry; Holdings > 5% of Portfolio

1 Like

Hope everyone goes through the Management Q&A quickly.

We need to bring everyone on the same page about a few things that anyone can argue doesn’t completely add-up. And we would like everyone to quickly get down to dissecting the following/help us look at this issues hard, in light of the detailed info/insights theis Q&A brings to You.

Request : Do not attempt to opine/answer any of the below without reading and absorbing the in-depth Management Q&A. Request Admin to actively moderate and delete any superficial/irrelevent comments that add no value to existing discussion.

1). KCL - KGL Management Discretion : This will always remain that Management will continue to have this discretion. We have tried to dissect this every which way we could, and should we now give the Management decisively, the Benefit of Doubt

2). It is certainly arguable that most of the Value Creation is now happening in KCL. KCL too can now boast of a $15mn client - The Children’s Place is a KCL Client - on par with the Gerber, Babies-R-US, and Carter relationships of KGL, and growing. The ultra-modern Garmenting factory that is showcased belongs to KCL. The Processing (Production) set up is completely owned in KGL though

3). Please note that 5.5 L pieces/day is achievable capacity. Installed capacity is higher. It is with 60% utilisation that current capacity of 5.5 L pieces/day is achievable. With 70% utilisation, the achievable capacity will go higher. Average Realisations are quoted at $1 to $1.25/piece - if that were the case group revenues would have been much higher than ~700 Cr (4 sundays and some holidays would account for some 24 days/month x 12 months x 0.55 Mn). So either Production or Average Realisation/unit is lower. We need specifics of Quantity produced over the years to resolve this

4). No of Blocks/lines with KGL and with KCL? Needs to be clarified clearly and match with per block revenue calculations - current figures provided do not add up. KGL needs to augment its Blocks - by when? How long should jobwork at KCL be continued?

5). Asset Turnover Magic: ~4 Cr Incremental Investment per Block vs 80-90 Cr ($13-15 Mn) achievable Revenues per Block??? Even if this were achievable, this can be the KCL story which buys out Fabric from KGL. For KGL, Fabric processing Capital Investment needs to be apportioned in

If everything above becomes too confusing to get a grip on, consider following:

In simpler words, the Q is : "Excellence in this business quality/execution can’t be denied. We couldn’t find a more practical way to answer these questions on what does not add-up, other than by

a) Participating in the story

b) Experience Management walk the Talk, as we stay invested and keep checking/asking

c) A set of specific questions at every interaction with Management"

That seems the only practical way to resolve what doesn’t add up? Can you?

Warning to Novice Investors: What doesn’t add up - are big gaps between stated and what seems to be the current picture (as per current understanding; we retain the right to modify this stance with new data/information, and/or when more clarity emerges from Management-speak)

1 Like

Refer the insightful Management Q&A - that throws enough light on both BQ and MQ and the sustainability of Competitive position.

VP Core Team is of the opinion that if we have been able to get the level of insights that we already have - it couldn’t have happened without a very upfront and transparent Management.

It stands to reason that we should be able to get at the real answers by engaging with Management again on the same - and resolve the few things that don’t seem to add up.

Are these ignorable? Probably not - we should strive to resolve these at the earliest. Request everyone to devote attention on these and help us reach conclusions at the earliest.

Regular readers are advised to adopt a cautious approach, assess if you are comfortable giving the benefit of doubt on above issues, and only then heed the Recommendations, which if you read clearly has been issued with the Caveat - DO NOT CHASE THE STOCK! Buy around CMP! Accumulate on Declines.

**Warning to Novice Investors:**In our considered view, What doesn’t add up - are big gaps between stated and what seems to be the current picture on a few specifics (that are material as per current understanding; we retain the right to modify this stance with new data/information, and/or when more clarity emerges from Management-speak)

Hi Donald/administrator,

May thanks for the wonderful effort. One concern that I have at the moment about the recommendation is that kitex is currently trading at TTM pe of 27 with an expected growth rate of 20-25%(according to mgmt) while stocks like Kaveri and ajanta with possibly a higher expected growth rate and history of consistent growth are trading cheaper at 20-22 PE. What makes kitex a better recommendation to these two at this price. Are we expecting multiples to expand further or growth to be much higher than mgmt expectations?

Donald,

It does look like technology is the main differentiator between Kitex and other manufacturers. If thats the case, Isnt this a value trap? Just wondering where the “sustainable” part of competitive advantage is.

Sorry there was a major typo - in my submission last night - was too groggy to notice! Sorry if that has caused any coinfusion. The corrected text is as below:

2). It is arguable that most of the Value Creation is now happening in KCL. KCL too can now boast of a $15mn client - The Children’s Place is a KCL Client - on par with the Gerber, Babies-R-US, and Carter relationships of KGL, and growing. The ultra-modern Garmenting factory that is showcased belongs to KCL. The Processing (Production) set up is completely owned in KGL though<<

Before the correction this was reading as…

It is arguable that most of the Value Creation is now happening in KGL. KGL too can …<<

Original Post has been edited to correct above. This clarification is just for anyone who had noticed the error and had some confusion on what the fuss was about.

@ Hemant - while your question is certainly legit in times like this, we want to nudge you/all to VP process first. Valuation comes second. First comes MQ, BQ and Sustainability, and then slotting the Business into a Category.

Once that is done, only then can any meaningful discussion be done on Valuation - otherwise again it is your opinion against another. We expect that diligence from everyone, and especially you, as a relatively regular VPickr

@ Pankaj -the key is to see/think/feel - if some can match up or catch up at all, and how long would it take them to reach where Kitex has perched itself today. Form your query it appears you haven’t taken the story seriously enough - just did a cursory first-level dekko. Have you seen the video links - they can be good starting points - for a starting feel. But you need to dive into the details for that “real” feel. Spend time reading all the valuable material in this thread itself. Have you spent time on Anil’s mindmaps, for example? A great resource at one place - He must have spent more than a month on it, if I know him!!

Investing is not about certainty our picture perfect scenario… It’s about embracing the uncertainty and the unknown… Learning this… So rather than have nitty gritty questions that makes the management uncomfortable… I will voice my major 5 concerns (other than KCL)

1). Cash yield

2). Average rate at which processing job work done for KCL

3). Breakup of installed and present quantities of yarn.,Knitting, processing and stitching. We understand that it changes depending on item we just want a ball park figure.

4). Also if low return capital part for the branding exercise can be put forward and try to understand management’s prespective

5). Also when can we expect increase in stitching capacity. Till now focus is on increasing processing, etc… Which is loss making

Hi Donald/Team…

Thanku for a very exhaustive Q&A… Liked some of the tough Q’s to the MD ;)…

And VP is setting the bar higher & rightly with the disclosures… Very happy…

regards

mallikarjun

Following has been appended to my earlier post just after the Management Q&A publish.

For those who have read in the interim, here’s the update. If this has caused any confusion for you, please excuse us - they were unavoidable in the rush to meet Friday Late Night Show :).

In simpler words, the Q is : "Excellence in this business quality/execution can’t be denied. We couldn’t find a more practical way to answer these questions or, what does not add-up, other than by

a) Participating in the story

b) Experience Management walk the Talk, as we stay invested and keep checking/asking

c) A set of specific questions at every interaction with Management"

That seems the only practical way to resolve what doesn’t add up? Can you?

Everyone please also heed the Admin caveats/explicit warning to the readership.

Regular readers are advised to adopt a cautious approach, assess if you are comfortable giving the benefit of doubt on above issues, and only then heed the Recommendations, which if you read clearly has been issued with theCaveat - DO NOT CHASE THE STOCK! Buy around CMP! Accumulate on Declines.

**Warning to Novice Investors:**In our considered view, What doesn’t add up - are big gaps between stated and what seems to be the current picture on a few specifics (that are material as per current understanding; we retain the right to modify this stance with new data/information, and/or when more clarity emerges from Management-speak)

Good Q&A that opens up more of their business however doesn’t t really take the thesis further in terms of fundamental conviction.

The primary thesis of the mgmt is that there is ample business for everyone and the days of cut throat price cutting are over at least for the infant wear segment, so Kitex can continue to grow for a long time on their value proposition of high quality at reasonable prices.

Furthermore mgmt claims that entry barriers are high due to safety issues and scale so new competition won’t emerge overnight and upend them.

If both points above are true then Kitex would be today where Chinese garment exporters were in early 2000. Whether we will see that kind of explosive growth remains to be seen.

In terms of specifics would be good to understand how they compare on costs with Winglu on some specific infant wear items. Also would be keen to understand whether they see acquisitions as part of their growth strategy? Is creating new capacity cheaper than buying existing businesses which they can improve?

The company also seems ripe for PE type investments.

Bobby

One matter of concern is the ongoing investigations by Jharkhand Government on the recruitment process of young women by Don Bosco Tech for Kitex Garments. There have been allegations of human trafficking to Dubai etc. via Kerala. The matter is being under investigation by Jharkhand Womens Commission.

http://www.serialdaily.com/watch.php?vid=abd2dfa10

Sabu Jacob has made a clarification stating that their recruitment process is clean.

http://www.serialdaily.com/watch.php?vid=8c6d9101c

But their dependence on Don Bosco for recruitment could be a problem, in the light of this investigation.

Regards,

Raj.