Trying to solve few puzzles…
10% EBITDA levels is the norm. â Even Jay Jay mills reported average EBITDA margins for 2009-12 were around 15% [without any adjustments, taking reported nos by Care, one can download care reports from care websites]. Kitex reported margins were much higher than this. Yes 2013 margins fallen steeply, reported margins at 11%, but this could be due to increase in overheads or some company specific issue. So 10% EBITDA margins WERE NORM BEFORE 2008, if at all, when both JJ and Kitex were purchasing majority of processed RM from outside
EBITDA margins improved due to INR depreciation: This is little tricky. Kitex processing plant begin functioning to full capacity from FY2008 end and in 2010 new capacity garment capacity and processing plant became functional. Company had been repeating from 2007-08 that once processing plant becomes functional, their margins will improve drastically. Processing charges which were above 15% for FY08 & 09 declined drastically to low single digit by FY12 & 13.
Further note that during FY05-08/09, emp cost increase by 3x, but during FY09-14 emp cost increased only at a CAGR of 7%, during same time garment sales increased at 11% CAGR. Emp cost as a % of sales declined by 200 to 300 basis point during FY11-14 compared to FY05-10.
INR depreciation/ Appreciation: From above, aleast we can say that entire increase in EBITDA margin post 2009 is NOT DUE TO INR DEPRECIATION. There must be some benefit without doubt, but not entirely. Letâs see what happened when INR appreciated to INR 41-42 during FY07-09. EBITA margin remained flat and there was NO decline in gross margins.
Steep increase in cotton prices in FY 11 lead to 31% decline in garment sales [i.e excluding fabric sales]. Despite such a massive decline in garment sales, there was no pressure on Gross & EBITA margins. Ofcourse, FY11 was period in which company was getting advantage of its additional processing plant and reduction in processing charges, but it does indicate company has weathered turbulence in its operations well.
EBITDA margins sustainability Vs JJ mills: For the time being letâs not get stuck with comparison with Jay Jay mills. As highlighted earlier they have 40% fabric sales as exports, we do not know whether these sales are at breakeven levels, loss or at premium. My GUESS is IT COULD BE AT LOSS, as in India there are no tax benefits to textile companies. [ JJ mills standalone profits is merely 6 crs but consolidated profits are 29crs for FY13, which indicates much higher profits at subsidiary levels. Thanks to Vinod, for highlighting higher subsidiary profits]
Better way to think about sustainability could be to think what could put pressure on margins. Two things 1) First pressure on ASP 2) company not able to pass on the RM price hike. I highlighted earlier that despite, massive increase in cotton prices during 2011, there was no pressure on margins. Company, probably took decision to take hit on sales rather than cutting margins. Secondly regarding pressure on ASP, we should note that company is running on full capacity for most of the time in last 5-7 yrs, except for may be in 2011.
In my view most imp. variable to track and understand is the China capacity and ability of other Indian/Asian countries to quickly add capacity. Even if some one start from today, it will take atleast 3-4 years to match Kitex capacity [Kitex took 20 yrs to come to this level]… and Yes we need to understand about labour, because if something could break this story, it WILL BE LABOUR.
Automation: Donald as already talked in detail about this and I broadly agree with him. Mgt is saying no labour, but even if we assume 100% labour there wonât be any impact on margins, but YES the issue remains on AVAILABLITY OF LABOUR and if FULL AUTOMATION IS REALLY POSSIBLE, then why western countries need to depend on Asian countries, or is it a Mix OF AUTOMATION AND LABOUR.