Kitex Garments Limited

Disclosure - no investment.

I was piqued enough by @varadharajanr observations to do a cursory look at AR 15. My own observations on top of his below.

  1. They hired EY LLP in FY 15 for internal audit for Rs 14,00,000. This was done by in-house personnel until FY 14. Consequently “Payment to auditors” has jumped 3 times to 24 lakhs.

  2. The statutory auditor mentioned last year (FY 14) that internal control systems were commensurate with the size of the company. Then why is it that with just a 15% top-line growth a big 4 internal auditor had to be sought, paying them nearly 3 times the statutory auditor?!

  3. This year’s annual report does not carry Annexure to the Independent Auditor’s Report. My friends in the audit profession will be shocked to know this. This is disquieting for me as an investor as one would have come to know the state of internal controls among others.

  4. I loudly second @varadharajanr 's point that it is well nigh impossible to sign off on audited accounts within 4 days of year closure for a firm of this size and the industry it is in. Maybe it is possible if March was a zero sales month giving enough time to reconcile everything. But that was not the case; JFM quarter had the highest sales for any quarter. Reconciling payables and receivables with creditors and debtors itself takes time. If the auditor managed to do it AND sign accounts in 3 days, it is highly unlikely that he sent out confirmation letters to debtors and creditors and got their satisfactory responses.

  5. The audit firm as @varadharajanr mentioned is auditing only this firm among all the listed firms and among all the 26,000 firms Prowess (a database of firms and their stats) has (KCL is not covered by Prowess). That to me is worrying. Without any prejudice to the auditors or audit practice, I know of one-person audit firms who just sign-off on document given to them without complying with audit procedures either in letter or in spirit.

  6. Their revenue recognition policy in my view is aggressive and does not allow for returns, although they do have sales returns. “Sales are recognized on inwarding of goods at customer’s end, where applicable as per terms of sale (for domestic) and on the date of bill of lading (for exports). Income arising on disposal of scrap/waste is recognized on receipt basis”

  7. I find it surprising that they are not fully funding their gratuity liability of about Rs 3.5 crores when they have about Rs 200 crores in the bank. It is the easiest of all employee liabilities to meet and usually handed over to LIC or such. Typically, a decently run firm would keep its “defined contributions” liability fulfilled, else they may be in violation of Payment of Gratuity Act. They have also not disclosed who’s managing their gratuity.

  8. One final observation is that they say they say they get short-term credit at 10.45% from SBI. But if it is a large export merchandise business, they can avail pre-shipment and post-shipment $ credit based on Letter of Credit - which should not be a problem given marquee clients. That would both hedge their currency risks and reduce their interest rates. So it seems quite un-businesslike to take loans at 10.45% (though their finance charges on average borrowings seemed to be 14%). Maybe I am missing something here?

All-in-all I should allow for the possibility that there are valid justifications or even errors for the above unfavorable observations. So comments welcome.

Warm regards,


Totally beats me, why people would believe the management claims / OR / what some investors claim

Management claims

  • Will start own brand in US
    Does anybody have any idea of how difficult, and expensive it is to build a new brand? Especially in a mature, competitive market like USA. The chances of success are less than 1% probably.

Investor claims

  • Scale advantage
    How can a company with merely 300 cr sales have scale advantage? 300 cr is clearly sub-scale. Anybody with some money in his hands can build a larger manufacturing facility, and find customers to absorb that much in an industry whose size is probably in billions of dollars

  • Switching costs
    In an industry worth billions of dollars, I can’t see why there must be switching costs to switch from a 300 cr player. There must be at least a 1000 players in this industry. If there were switching costs in the industry - the industry structure would have been completely different - there would have been maximum 10-15 players.

On the whole, it boggles my mind… This is purely a garments supplier, which is max valued at 15 PE… If it is fast growing - perhaps at 20 PE max.

Some brokers, and others have been pumping up the stock, I suspect…

Disc. Not invested


Some valid points made above by various boarders and several concerns are valid, however, some thoughts:

  • Because Gerber makes 11 to 15% it is not necessary that a supplier should make lesser margins. There are several global industry examples where supplier margins far exceed those of their customer.

  • They are the 3rd largest manufacturer focused on infantwear. Therefore they have scale. Switching costs are relevant and switching needs to be considered carefully because the infantwear segment is a niche segment. Health hazard issues related to dyes used - potential health issues to infants can result in expensive and damaging litigations in the US.

  • The key monitorable will be the KCL - KGL merger event. This will speak about Jacob’s integrity to the minority shareholders and ultimately impact the P/E multiple Kitex will be able to command.

Disc: Invested, currently holding 4% of portfolio.


How many infantwear suppliers do you think Mothercare has? I presume at least 25. I have gone to multiple mothercare shops in India - and found that they have infantwear manufactured in India, Bangladesh, Vietnam, Philipines, etc. I don’t think it will be very different for mothercare in US/UK.

Why can’t they switch their orders within their existing suppliers? There is no moat here, I am afraid.

Fair point ayush.

No apparently perceivable moat for an outsider.

the buyers would be in the best position to judge if they are able to get required quality at a beneficial price from kitex.

If kitex can indeed double their sales in 3 years while retaining profitability, it would suggest the buyers are sticky and like the value proposition kitex offers.

Time will tell…

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I have been only focussed on this over the last two days and I am convinced that the Rs. 200 Cr. cash raises several questions.

  1. In AR FY 15, there is just a row called cash and cash equivalents for Rs 199. Where is this cash ? which branch /

  2. According to RBI regulations, an exporter has to repatriate the money back to India before 15 months. Surely, some part of this Rs. 200 Cr. consists of money earned in FY 14 and FY 13. Why is it not in a bank in India ? This is inexplicable. So, if they have the Rs. 200 cr. outside, it’s in violation of FEMA or more simply, the RS. 200 Cr. does not exist.

  3. The biggest dud in the logic is that most exporters convert USD into INR and park it in FD/liquid funds as interest rates in India are at least 6-8%. Even if someone makes 2-3 % losses in forex, it still makes a big difference, If in doubt, go look at all the IT serviecs companies and look at the staggering amount of cash they have in FD. Why would someone let go of a RS. 20 cr. interest income from a Rs. 200 Cr. money is beyond me. It can pay for the entire top management salaries for three years. This is a bummer to me - behavioural economics demands that not even reliance will let go of such an easy income -

  4. There is no statutory auditor certification on the cash and cahs equivalents. Who has seen it and wheres the bank certificate ?

  5. the management’s excuse for this Rs. 200 Cr. is that they can play forex/USD interest rate and make gains. If yes, they should be running an investment bank - not a textile company. In any case a 50 bps increase in USD only gives them 0.5 % increaes in yield - why forego 9 % interest here.

  6. they are borrowing here like greyfool said at 10.5 %. why pay 10.5 % here and get zero interest in the US bank - surely they are pleasing US banks like crazy.

My sense is that kitex is just like another textile company with 20-25% margins and the Rs. 200 Cr. cash is a “phantom” cookie jar. Seems like satyam redux - through a merger with KCL, (so like satyam maytas merger), wipe out the cash and keep the scheme going.

Several indicators like audited numbers in 2 days, an auditorwho audits only them, unfunded gratuity, singular relationship with the auditor and no one else, no clear schedules makes me very very nervous.

Discll: Not Invested - I always thought these numbers look too good to be true. I just dont; trust them.



Indeed very valid points.
Don’t know why VP core team is mum over this.

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Listened to the con call. other members have already posted the highlights. a couple of observation from my side.

  1. an analyst asked what would be the bottom line?. md’s response was bottom line on turnover or bottom line on profit?. i have no clue what he meant by that.
  2. for every question ( related to concerns,implications of external things ), his response was its not an issue. they will do better than previous quarter.
  3. in the last quarter con call, he was talking about technology, efficiency etc. now he says they are hiring aggressively.
    disc. no holdings. nor am i planning to buy at any valuation

We are discussing the same issue again and again. Similar discussion have happened one yr back also.
In Q3 or Q4 conference call Jacob has clarified the cash is not abroad, it is in India i think he said SBI. I dont know whether he was lying or sharing the truth. I dont know it is mandatory to mention ac no. in annual report.

All these questions are coming again mostly bec of a soft Q1 ( which was expected anyway). If Management is unethical they could have given a bumper Q1 as well ? like Q4.

I think finally it comes down to individuals, if one is comfortable with the story/promoter/VP/Prof Bakshi ( intelligent fanatics post) etc or not. It comes down to individual call after looking at all view points.
There are view points on both sides.

Some of the answers only time will tell who is right or wrong.
Individuals are advised to use their own judgement and not to borrow conviction from VP Core Team always. After all they are not promoter of Kitex :smile: and may not have all the answers immediately, end of the day everybody is an investor only.

At the same time all of us have all rights to further discuss and arrive at a logical conclusion if any.

disc : invested, views may be biased


Please understand VP Core Team uses its discretion to “intervene” in debates, when its deemed necessary. When it is deemed unnecessary, we will choose to be silent - please allow and respect that space for us. Sometimes it’s prudent to avoid adding fuel to the fire - in both directions !

Seeing so much of hullabaloo over 1 quarter of results, we choose to point out a few things - if only to interject a dose of realism, prevent panic reactions, and cluttering of this thread with the same issues over & over again. These are our complete views at the moment - so we also reserve the right NOT to be drawn into further defending our individual/VP position.

  1. Most/All the issues that have been raised by folks recently (post the Q1 results) are “old” issues; nothing new has been brought out which has NOT been discussed and debated before the investment call by VP - which means in our collective wisdom we had taken the call on the Personality and assigned a suitable discount factor to the personality type, while assigning a Premium to his execution ability

  2. Merger issue existed before as well. We had made the call with the full knowledge that Merger may or may not happen. Even without the merger happening we saw the distinct visibility of a 25% CAGR over 2-3 years. Merger happening is a bonus - not factored in our Valuation case

  3. 200 Cr Cash Issue : If I am not mistaken it has been clarified by Management that the cash lies with a State Bank subsidiary (SB of Travancore?) Kochi branch many months back ??

  4. Once having made a Call we like to keep faith and give the business a reasonably long rope to show walking the talk. Just 1 Quarter of results/newsflow or some event trigger does not sway our FAITH. We question the FAITH only after 2-3 quarters of non-performance or deteriorating performance. Keeping FAITH is the most important trait you need once you have done solid homework, have slotted the Management Quality & Business Quality, and invested for the long term

  5. Having spent extensive time on the Business/Competitive space/Industry, we find this is a high quality sustainable business that is capable of investing capital towards earning high returns for a number of years, with a long runway in front. The business is led by an exceptional Jockey with exceptional focus on executional efficiency - with manic or as Prof Bakshi calls it fanatic focus & energy.

  6. Such exceptional, maniacal folks we don’t run into everyday. Yes there are personal quirks - that are sometimes not defendable as completely rational decisions, but these kind of folks believe they know best - it is their way and they believe this is the way to do it - they don’t care much to listen or explain their rationale. The key question to ask when faced with such a personality/business situation is what do you value more, and in the context of the overall possibilities, can you live with the idiosyncracies (unless you have reached the conclusion there is an intent to defraud - in which case the decision should be clear right, there is no debate). Do you think these are IGNORABLE? Are these interfering with actual business performance on the ground? (A good contrasting example to my mind is the Hawkins case - where business was getting hampered quarter, after quarter, after quarter)
    In our case we took a lot of time to take a considered decision - with all the anamolies right before us - and decided to keep faith in the business led by what we believe is otherwise an Excellent Management - but where “Managementspeak” probably needs to be adequately DISCOUNTED. We have an internal figure for that discount we cant reveal …ha ha…

  7. Normal growth in the business is a given for us, but there are a few “Optionalities” Kitex business throws up that most investors need to focus on. Execution on white label opportunities in the US market, and its own private label branding attempts. These will gradually unfold over next 1-2-3 years - and that is what we want to closely track. So far Kitex has been executing on home ground, Executing well in uncharted territory is the key monitorable for us - which will confirm or deny our main investment hypothesis.

  8. End of the day Investing is an ART form. There is no holy grail. Nothing really right or wrong. Take the decision based on your comfort level. If you are comfortable stay put and keep faith. If you are not comfortable, decide to exit. If you had invested based on the VP call at 300+ levels , there is no reason to complain anyways :smile: We absolutely reserve the right to be proved completely wrong and foolish in our call of keeping faith in the business and the management - for the moment.

  9. There are other things to focus on and investigate in the sustainability of the Kitex story. For example, there are more players (existing & emerging of some scale) in India of supplying infantwear to the same customers - can we list a few names, please… We will urge Members to shift focus to that and refrain from too much of what we call opinion-bazi - one way or the other.

  10. By all means keep track of the events/facts, bring out NEW (disturbing) facts by all means - that will be a skeptic’s job well done - that someone like Dheeraj continues to do - that’s his singular contribution to this community - we welcome more like him. And as promised whenever we are at Kochi next we will take up all these issues with Management - and revert with Management’s way of handing the objections and its responses.


Exactly @sinha124! I was not writing as I didn’t want to be seen defending the company but I’m surprised to see these issues being pushed on several places after the fall in stock price while most of these concerns have been out there well from before and most of the serious investors I know are aware of these and much more and have tried their best to find answers by attending the AGMs and doing homework. I’m not comfortable or 100% sure with all the responses yet continue to appreciate the remarkable work the company has done. One needs to attend the AGM of the company and see the huge and fantastic setup the company has created, the high quality work environment being provided, one of the best global names as customers and giving awards to the company. Plus if you go locally and speak to people, this guy has done substantial amount of CSR work in his local area and really helped people and spent money from his pocket. If one is interested then he should go through the entire thread once again and try to read the positive points also and try to check them. Anyways coming to my thoughts on the points raised (these are my thoughts and I reserve the right to be wrong or change my mind :slight_smile: ) :

  1. On cash balance - yes, its pretty concerning and the most important point. Infact I had raised it at a concall and AGM - the management told that the same is not lying in some foreign ac rather its very much in SBI Bank ac at Kochi. He even said he can give the ac no if needed :smile: So that was comforting however, the question still remains as to why he is not earning interest on the same and why is he speculating on making more gains from dollar appreciation (which I don’t like and concerns me).
    If you check the past balance sheet of the company, the company had a debt:equity ratio of 5:1 in 2007 and by 2013 there was consistent reduction in debt + cash generation and debt:equity ratio came down to 0.5:1. The cash balance has swelled up materially only in last 2-3 years. Earlier debt reduction wouldn’t had been possible if the business was not generating cash.
    Still, I continue to keep this as a key monitorable.

  2. On hiring of E&Y and paying lot of money - I see it as a good point. Earlier the issue could have been that the co has no professional auditors - atleast they took a move and got E&Y as internal auditor. From my CA experience I can tell that most of the cos have unknown auditors till they reach a point and are asked by investors to have known audit firm. And its not easy to change the old statutory auditors all of sudden.

  3. On signing of acs early - We had asked it at the AGM and were told that the company has a process of having acs finalization on a monthly or quarterly basis + they don’t have to deal with too many customers (total customers would be less than 10 I think) + the deliveries are not daily - there are fixed schedules. So its not that its impossible.
    We should ask the company why this excessive focus on being “first to report” - and provide them feedback - that this raises more questions and anyways do not get them any brownie points :smile:

  4. On KCL - KGL issue - Yes, we would prefer to have one entity but that’s not in our hands. If we are to pull out the numbers of KCL from MCA (which one can do by paying 100 Rs) the good thing to me is that KCL has also had good net profit margins over the last several years. There have been years when KCL has grown much faster than KGL and there have been years (like the latest one) where there has been a de-growth at KCL. But there is no clear trend.

Few more things we did to check about the company:

  1. Spoke to people in Kerala about the group - most of the time the feedback has been excellent. Even on our forum several people have given good feedback
  2. There are website like on which one can get shipment details -
  3. Searched on EPF website -
  4. Spoke to some professionals in the industry - and the feedback was good about the quality, infrastructure, technology etc.

Despite all this, given the points raised and short-comings in the company, this investment call can go wrong - so everyone please be careful and do your homework :smile:

I hope this helps.

Disc: I’m invested and my views might be biased.


Thanks Ayush and Donald for the excellent posts.
I am from Kochi,and one thing i can vouch for is the quality of products that Kitex makes.They are top notch. Also whatever feedback that i have heard about them from friends , relatives has always been good.

Disc: I am invested and my views might be biased.


Source: Kitex Garments: Results below estimates; FY16 growth outlook remains intact– Detailed Report

Disc: Remain invested and bought further during the correction, after a long time.


This is where “Outsiders” book helps to evaluate the management.
Reminds me of the iconoclast remark in the book.

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You don’t have to be an insider to know that there is no moat due to switching costs.

Mothercare annual sales is 1.2 billion USD. Assume 10% of that is from infantwear in US/UK - which makes it 120 million USD… Or 780 crore INR… Lets assume that Mothercare makes ~20% gross margins on this - so the purchase cost for Mothercare for this is 620 crores…

Now, let us suppose Kitex supplies 20% of its output to Mothercare… Which means that about 60 crore of Kitex sales are to Mothercare…

Putting the above together - only 60 crores out of 620 crores is coming from Kitex. The rest 560 crores are coming from someone else… Now, since Kitex is the 3rd largest infantwear manufacturer, it is highly unlikely that the rest 560 crores are coming from the top 2… It is most likely coming from a fragmented bunch of 25 or more vendors…

So, it is mind-boggling that some people believe in this switching costs logic and have built up an imaginary moat…

I have read Prof. Bakshi’s note on Kitex, where he talks about moat due to switching costs, scale. etc.

Yes, it is indeed true that Kitex has high return ratios (ROE, ROCE)… And most likely, on seeing the high return ratios - he started searching for a moat which could explain the high return ratios… And he came up with two kinds of moat (scale, switching costs) - both of which are clearly imaginary/fictitious…

Why? I guess most often what people miss is that high return ratios indicate economic efficiency… Not necessarily a moat… Both of them are not the same… Let me give two examples…

All our IT/ITES companies (Infosys, Wipro, TCS, Mindtree, etc) have high return ratios, with no moat (commodity, undifferentiated services)… Which is why they are valued at 15-20 PE…

Similarly there are companies with high moat, but low return ratios/economic efficiency - e.g. Indian Railways… Or so many tolled highways around the world which have an excellent moat, but run on losses/-ive returns - because the traffic/vehicle load is simply not there to earn returns on the invested capital…

You value a stock at 40 PE or more, if the business has both a moat, and has economic efficiency… Both have to be there… If only one is there, then you value it at 10 - 25 PE (the higher end of the PE range being for high growth businesses)… Well, otherwise - you learn it the hard way (sooner or later)! :smile:

Moral of the story: No point being concerned about management quality, when one should be concerned about the valuations.

Disc. Not invested



I tried writing what Ayush has written on : Cash, Accounts Finalisation and Merger. Glad that I deleted what I wrote. Couldnt have written it more better than him.

Other issues which I want to highlight for benefit of new investors

  1. Whenever you make a new investment, please maintain you notes. Categorise your notes into
    a. Your reason for investing (could even be : because Rakesh Jhunjhunwala bought)
    b. Basic Facts you understood about the company
    c. Known Issues (in case of Kitex, it could be Merger, Cash issue etc, For Page it was : It doesnt own brand )
    d. Are you ready to live with known issues and What valuation discount are you ready to give for known issues

This process helps in de-cluttering the thought process when new set of info comes, or say a bad result comes.

In case of Kitex most of the issues which are being raised since past 1 week are known issues. In case we had already written about it, we would not have been unncessarily worried or swayed by other peoples decision.

Regards to valuation, a similar excercise can be carried out. Also for someone like me, who isnt good at selling decisions, I follow a simple stuff. For stories where I believe that there could be a huge industry opportunity, I tend to sell something at higher levels and make my original cost free. This isnt advised for all. But this is something I do for managing my own emotions.

In the end, what I have learnt is that equity markets are much as about controlling your emotions as about understanding financials.

Please note, if you want to make wealth in markets, it is very important that you have a due process. Find your own methodology. You know yourself best. Find a process which suits your emotion.


On the growth mindset,

  1. Why Kitex is just stuck on just setting up US brand for many quarters as if there are no others avenues to growth? That too with legal issues and JV mess. Why not, on parallel, look to expand different geography or adding more clients?

  2. Why not setup brand in India? May be low margin, but when global majors are setting up shops in India, why not pluck the low hanging fruits too?

  3. Not aware of any capex planned for near future and existing utilization is at peak. So is the plan to forgo existing customers order and channel the production to their own brand supply?

  4. As they plan to do it standalone using their own brand, who is going to design their clothes? I don’t think they can use their existing client’s cloth design or borrow their ideas. They definitely need to hire somebody from US/UK who specialize in designing baby clothes. Will the customers like the new designs? Its a big question.


Maybe this has already been addressed but I could not find.

If Kitex plans to launch its own brand in the US and in effect compete with its principals, wouldn’t that effect its existing business?

Would be happy if someone can fill this for me.

Warm regards,


I think you haven’t read the Kitex Management Q&A with due care. There are enough pointers there on the Kitex’s approach to the whole US market initiative. From what we could gather this isn’t a wild swing but a slow, gradual calibrated strategy- the man knows the turf, and the players well and has very deep (personal) relationships going with some of the big customers going back decades. You wouldn’t be faulted if you second-guessed the Man would have been approached several times, by several players/stakeholders in the wholesale/retail chain - with several different possibilities.

Just pause a while - Private Label requirements are whose? Never the brand customers - It’s the Walmarts of the World. Can suppliers to private labels also maintain a very healthy relationship with branded customers??

Selected excerpts - that should prompt more of the guys new (not completely familiar) to Kitex story to devour the 4.5 hour interview - in order to try and understand more of the business/and the maniacal Jockey at the helm. Most of the (logical, folks are asking again) questions incl. when will retail in India be a possibility for KItex are already answered. Please complete your due diligence - at least do justice to the Management Q&A - that we put up so painstakingly for you :smile:

Kindly educate us on the US Wholesale Operations set-up? What are the aims and what is the investment size?
There are 3 ways of entering the US market

A. X or Y Brand manufactured by Kitex (manufactured by Kitex is imprinted on the garment)

B. Kitex made private label for someone like Walmart (where Kitex branding is non-existent)

C. License some established brand – that is not present in infant wear – take advantage of the mother brand while providing best quality manufacturing by Kitex (again Kitex manufacturing brand is enhanced). In US market Quality comes first (probably even before Brand) hence huge Branding exercise may not be required. Since customers can return products even after few days of use, quality is critical, and we can leverage Kitex quality while piggy-riding on the mother brand.

Is it right to conclude that these are probably longer -term initiatives and that initially the most significant impact will be on timely deliveries and logistics cost savings? What impact is this likely to see on the margins front? and by when?
We have hired some office space in US. We will import Kitex garments in bulk ourselves, pay the landed duty price (LDP) and offer our products directly to retailers. This activity should get started in next 2 months and will help shave off 0.5% of current logistic costs.

In time we may be able to replace distributors in between and supply directly to Retail ourselves. Distributors today are marking up as much as 30-50% off us while selling to retail.

There looks to be a conflict of interest here. Why wouldn’t this strain your relationships with existing customers (like Carter) who also procure in volumes for themselves (their retail presence) as well as supply to Walmart and other big retailers.
No, we do not think so. US is a very competitive but business-like place. If you can get additional business from Retailers, good for you.

Why can’t a US manufacturer do a good job with more of the automated machines and efficiency drivers like you have spoken of before?
$12/hour is the minimum cost of Labour. For 8 hours this would cost $96, say $100 or Rs 6000 per day. Rs 6000/- per month is the Labour cost in India. Even if someone were to manufacture in US efficiently, who is going to consume products that will need to priced that much higher?

Once you have a trusted supplier relationship going with a global retailer, kindly give us an idea of the level of penetration possible? $150 Mn is just 5% of Carter’s annual sales today.
We have very good relationship with all our Customers. Over the years of association, in many cases it becomes like personal family relationship. Some of them call me at any time of the night, on business. Some of them I have to call every weekend, wherever I am.

We enjoy preferred supplier status today. We can keep growing the relationship with all of them steadily. As mentioned before, though we have offers to scale up very significantly on one or the other relationship, we prefer to go about it in a balanced way – not expose ourselves to undue risks/pressures.

Does any scale-relationship with any one retailer, restrict or impose any limitation on sourcing by other Brands or direct competitors?
Not at all. US way of business is different – they are very fair. Just like they want us to be fair in all our practices as well like not forcing our Labour force and meet all social compliance norms – hygiene, work timings, fair wages, working conditions, etc.

They don’t/won’t interfere in our business at all, there is complete freedom. Gerber or say The Children’s Place don’t ask us about the level of business that we do with others.

How the whole story will play out - only time will tell :).

Disc: I remain invested fully. My views are biased