Kitex Garments Limited

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.

Thanks Raj Nair.

Good Digging. Appreciate

Thanks to all who have put in so much of hard work in putting this up, This also reminds me that full time investing is not easy.

I have gone through entire thread, Q &A, mind maps. Would be grateful if somebody can share some light on fy 15 and fy 16 sales and EPS estimates. I could not find this in entire content, may be I was lost in details.

Thanks !

Hi,

Find enclosed my observation based on annual report of FY14 and FY13, which raise some concerns about management conduct. Please consider these as key risk areas being highlighted and I believe collectively we may be able to satisfy on many of these issues. Having said that, based on my decade long experience in dealing with distress companies, I would still like forum to ponder over and take final view:

1)Cash Balance: Rs 98 Cr in Current account FY14 vis a vis Rs 36 Cr in FY13. There is very nominal increase in interest income from Rs 36.9 Lakhs in FY 14 vis a vis Rs 36 Lakhs in FY 13

2)Sale of Scrap is increased from Rs 24 Lakh in FY13 to Rs 14.8 Cr in FY14. That also coupled with Net profit margin being almost doubled. Typically high scrap would adversely affect the margin. Here we find increase in scrap has not only contributed to bottomline, despite such large scrap, the companyâs operating margin has increased (almost doubled)

3)During FY13, The company added Gross block of Rs 3.69 Cr and incremental Depreciation was Rs 1.76 Cr (Rs 8.62 Dep Chage FY13 â Rs 6.86 Dep Charge Fy12). This give ratio of around 48% of Inc in Dep/Inc in Gross block. During FY14, the company added Gross block of Rs 79.35 Cr and incremental Depreciation of Rs 1.06 Cr only ( Rs 9.68 Cr FY14- Rs 8.62 Cr FY13 Dep Cahrge). This give ratio of around 1% of increase in Dep charge/Increase in Gross Block. Even if all addition is after Sep 30, still there would be depreciation charge of around 2.5% (assuming 5% for the year as a per cent of Gross Block).

4)The CA and Secretary and director, all signed there report as on April 3, 2014. Considering that April 1 Being Non-working day for the Bank, even reconciliation would take at least couple of day.

5)While still giving benefit of doubt to efficiency to the company, The sectreatial audit consistently showing deadline being missed by the company during FY13 and FY14 for filing there ROC return. In Fact, ROC filing of Balance sheet is on January 3, 2014 as against normal time line of October 31, 2013. Same is case with ROC charge creation forms. The selective efficiency need greater attention.

6)The company has interest accrued and due in current liabilities in FY14

  1. Mr.SABU MECKAMKUNNEL JACOB has promoted two more companies by name of Kitex Herbal Limited and Kitex Apparel Limited in 2014 and has been director on these companies since 28 Jan 2014. While there has been already issue about related party transaction, we have also new Kitex Apparel Limited, which by name suggest being in similar business.

  2. It would be worthwhile if we have growth back up between volume and realisation. Nothing is available in annual report. However, power consumption (being a rought proxy of actual production of garment), has grown 15% with revenue growth of 39%. Otherthing being same, it would mean 25% growth in Realisation, which is very high unless, company has improved its productivity substantially. One also need to understand that company is increasing automation (with use of robotics etc), which shall mean more use of power vis a vis labour.

Do look forward to view of other members of forum on same,

Dhiraj Dave

Kitex.xlsx (9.07 KB)

Super Dhiraj!

Cometh the hour, cometh the man!! We were discussing yesterday about the need to bolster a current weak area of VP Team - Forensic Audit - ability to quickly bring to the fore all inconsistencies.

Thanks a ton for taking the trouble to share your work. Let’s keep assimilating all such inconsistent data points. We will then take the opportunity again with Management to resolve the list of growing inconsistencies. The good part Management so far has been completely upfront about answering every query that we could throw up - that was more forma startegic, business quality and sustainability focus. But the time has now come around to focus critically on What does not add up - and resolve these as quickly as possible. Your are being co-opted in VP Team straightaway - I remember responding to your intro and inviting someone like you to participate more.

Others also - please step forward. The investigation is far from over. I am meeting my contact from the Sourcing industry again this week - for a validation of whatever we have heard - if there exists any counter-thesis to the arguments forwarded.

Let’s go through the new data points from Dhiraj and more that may prop up with a fine comb. While I am no one to comment on this, will request all CA friends/experts to comment on this aspect from their experience, especially

  1. The CA and Secretary and director, all signed there report as on April 3, 2014. Considering that April 1 Being Non-working day for the Bank, even reconciliation would take at least couple of day.

??

Santosh,

Not so fast. Looks like there is more work left :slight_smile:

You might have missed listening to the recent 12 Aug Concall by the company? You will find Concalls on www.researchbytes.com

Hi Dhiraj,

Great to have you here, your forensic audits will definitely be of great value for us.

The cash position was high more due to low inventory levels as on Mar-14. Inventory reduced from 46 Cr as on Mar-13 to 10 Cr by end of Mar-14. As explained to us during AGM, they are in a position to manage inventory better with more stable yarn prices.

Sale of scrap was not 24 Lac in FY13, I think you saw the wrong entry. Still the jump was high from 1.6 Cr in FY13 to 14.8 Cr in FY14. But it is still small compared to total sales. The EBITDA margins were also influenced by the INR-$ levels.

Depreciation - we can check with them. But it will surely reflect in the FY15 BS. I think its more of a timing issue.

I think related party thing is something we have to live with in terms of KGL-KCL. But other group companies are not in infant wear business. Kitex Ltd is intoapparels…but domestic market. His Brother is the MD there. It could be just cross-holding in different group companies. They have lots of other businesses - Anna aluminium, Saras, Scoobyday etc. Here I am trusting the MD that he will be fair to shareholders as he has repeatedly mentioned and the group reputation is something they might never like to compromise on. They are particular that the listed entity should do well without any black marks.

Points 4,5 we need to get inputs from CAs here and check with them if required.

Increasingefficiencyof the labor intensive garmenting process is THE “story” aided with latest machines.

@ Vinod,

Appreciate your view on many issues. However, still would like to bring certain point:

Point 1) No problem with efficient working capital management, but it can not be done just on 31 March. The efficiency would come over period of time and hence the surplus fund shall be parked at least in FD and not in current account. Further, I would also like it to attention of forum that in Sep 30 2013, the company has reported Cash and Bank balance of Rs 90.72 Crore. So I assume that efficient working capital was already been effected in first half of year itself. Despite Sep 30 2013 and March 31 2014 Cash and bank balance over 90 Cr, I find no increase in interest income which would require understanding.

Point 2) Accept my error on Rs 24 Lakh which is actually Rs 1.66 Cr. Having said, despite that, scrap sales jumped 10 times and with doubling operating margin. Again need some more explanation

Point 3) On Depreciation also, as on MArch 31, 2014 Net block (incl. Intangible) is Rs 181 Cr which on Sep 30 2013 is Rs 140 Cr, March 31 2013 is Rs 117.2 Cr. So during first half itself, company added Gross block of Rs 25 Cr which shall at 5% depreciation increase charge by Rs 1.25 Cr which shall further added by Rs 60 Cr accretion in second half. So that part also need explanation.

On other issues, particularly Kitex Apparel Ltd, please note that both borthers, Mr. Sabu and Mr. Thomas became director on 28 Jan 2014. Further filing of ROC, the date of registeration of this company is 27 Jan 2014 and contact email of the company is md@kitexgarments.com, which I believe shall be email address of Mr. Sabu. The registered office address is also same as registered office of Kitex Garment. Enclosing ROC details Kitex Apparel Limited for your reference.

I do find positive sign of limited debt as compared with growth in revenue and activitiy level.I do not have any doubt about the business prospect except that margin of major customers also appearing to come under pressure (based on M&A question).However, recent experience says that in extreme fraud, it is next to detect before the event. The conservative tendency of management with excellent growth prospect with the discrepancies highlight would need more detail view before going for final conclusion in my opinion.

Thanks again for providing valuable input to queries and appreciate your efforts.

Dhriaj

Kitex-ROC-Data.xlsx (9.57 KB)

Hi All,

If anyone of you have been able to download KCL Annual Report and Annual Return from MCA website, then please share. I have tried it thrice by paying Rs. 100/- each time but somehow the data didn’t show up. Those familiar with the system may know that MCA gives a window of 3 hours only to download the documents after payment.

I will try again tomorrow but if anyone already got it then kindly share.

Thanks

Aveek

@ Aveek, What you want from MCA site? The report downloaded from MCA would be in XBRL form which you need to convert with help of special software. Instead in listed company, it is easier to download annual report from website of company or BSE/NSE. Additional information filed by company after its is AGM is called annual return where they filed details of all shareholder. In listed companies, since no of shareholders is large, size of file increases and hence company submit as a seperate CD. In any case, since they are listed they need to file shareholding along details of promoters and more than 1% stake held by public on quarterly basis. So except form Charge regeneration, there is hardly anything important which is filed on ROC. Any case, in listed companies those information are available from the company website or stock exchange. Please let me know in case you need any other information and I wrongly interpreted your query

Dhiraj,

I am looking for KCL report… Not KGL … It is unlisted company… I have all the requisite things to read those files downloaded from MCA. Also, I am looking for only two files of Annual Return and Annual Return attachments. All files are displayed separately in MCA public document viewing area against payment of fees.

Please note KCL is a privately held company. It will be ultimately merged with KGL someday.

It is good to know present state of affairs of this company.

Aveek

Disc. Invested in KGL about a week or 10 days back. Allocation less than 2%. Still studying.

Hi Aveek,

I have uploaded few recent files here:https://drive.google.com/folderview?id=0B81O_hmoM5puTG82SFUzNjdHRzg&usp=sharing

You will have to download the file and open using Acrobat reader to see the content.

Best

Hari

HI Hari,

Many thanks … I really appreciate.

However, I am still unable to open the AR and P&L through through XBRL tool of MCA… Seems some problem in my PDF … Other docs opened properly…

Need to dig in my system to find out the issues…

Thanks again.

Aveek

Aveek…it seems you must be having older version of Adobe in which caseXBRL will not open up but in that case the system normally shows up the message to upgrade when you open up XBRL from mca21…do update your adobe version and check, things should get fine then.

Rgds.

Find enclosed holding of Mr. Sabu Jacob and his family in Kitex Children Wear Limited, as on July 9, 2014

Holding Shares hold Face value Value Relation with Sabu Jacob
Almeyya Jacob 15000 100 1500000 Mother 3%
Bobby M Jacob 17001 100 1700100 Brother 3%
Ranjitha Joseph 1500 100 150000 Wife 0%
Sabu Jacob 466395 100 46639500 Self 93%
Other members 54 100 5400 Others 0%
49995000

Dear All,

I am few preliminary questions for anyone to answer…

  1. When ever we talk of total market size of US$ 20 bn what are we exactly referring to? Is it the retail invoice value? If, yes, and if we go by what MD of KItex said in Conference call that “US 3 worth of FOB value sells at US$ 9 at US retail store” then can we assume that total FOB value of exporters would be about US$ 700 Mn - 800 Mn roughly? So, as on date the addressable market size of Kitex is about US$ 800 Mn which is growing at 4% rate? Or is it the FOB value of all exporters or am I missing something here?

  2. Total sell of Kitex is US$ 73 Mn approx. in 2014. Total sales of Cater alone is US$ 2.6 billion and their COGS is US$ 1.5 billion. If I assume this COGS is the cost of goods they received at their warehouse, then it is FOB + say 20% - 25% other costs like freight, insurance, local transport etc. To make a like to like comparison, the FOB value of total goods Carter received at their warehouse is appx. US$ 1 bn to US$ 1.1 billion appx (1.5 billion less 25%). If this assumption is correct, then Carter itself buys US$ 1 bn worth of FOB valued goods worldwide. Assume Carter buys max US$ 30 Mn from Kitex (as it is the max order they accept as per MD) then where from Carter buys rest of the items? If there is only 12 players (as per Kitex MD) then Carter itself is buying much higher amount of Kidswear from other manufacturers than from Kitex. Who are they and where are they?

  3. Carter has a Gross margin of 42% in 2013, 39% in 2012 (Kitex has about 45- 46%)… That they won some formidable Kidswear brand like carter’s and Osh Kosh B’Gosh etc… Do any of these brands get manufactured in Kitex’s KGL factory?

There are other questions of “adding up the numbers for Kitex story” which I guess have already been compiled … So not repeating here…

Aveek

2 Likes

Find enclosed PDF file of Balance sheet FY12 and FY13 and Profit and Loss account for FY12 and FY13 for Kitex Childernwear Limited. The company has Rs 133.58 Cr Sales in FY13 (Rs 192.50 Cr Sales in FY12), PBT of Rs 18.56 Cr FY13 (Rs 24.81 cr FY12) and PAT of Rs 12.63 Cr in FY13 (Rs 16.69 Cr in FY12)

https://drive.google.com/folderview?id=0By0hGT02saLNTk04Wk9URTBmQ2s&usp=sharing

1 Like

Dhiraj,

Very sincere thanks … Now I have been able to open all the files sent by you w/o problem. Really grateful! Did you face any issue while downloading these?

Mahesh,

Thanks. I am facing an Acrobat Pro and Acrobat Reader conflict while trying to download anything with XBRL tool from MCA site. It never happened before. Standard options are not resolving it. I will try to work it out.