Kitex Garments Limited

I spoke to two guys who run small textile export shops - they have heard of kitex and it’s a well respected name but they said a 20 % + EBITDA margin given the productivity levels in kerala is astonishing - while not impossible, they feel it is very very tough to squeeze so much out of a customer like gerber who logically, have the entire world to choose from.

Generally positive feedback but VP-ers who have visited the factory might be able to draw conclusions as to if it is such an efficient factory.

Q2 numbers out, anybody had a closure look ?

I had a quick look, sales up by 30 %, PAT up 65 % yoy, margings increased by 900 basis points, at 16 Rs EPS it trades at 30 PE FY’15,seems failry valued

Seems mgmnt missed the guidance on sales for Q2, as they had indicated 130 cr + sales, actual is 120 Cr, But anybody has any idea/reason of such a sharp increase in margins in Q2 ?

With incresed margins, as per mgnt guidancesales would double in 3 yrs, so PAT may rise to 4 times, so it could be a 4 bagger in next 3 yrs as earnings grow on expected lines. Subsequent gains will be proportional to earnings growth ?

Expert Comments Pls !

When management gave a sales guidance of rs130crs for net sales + other operating income = total income for operations. They have done rs128crs in the quarter which is very close to guidance of rs130crs

Btw the margin guidance was 20 percent.

Motilal report. See this link

Notes from latest Concall

please excuse repitition of some points already well-discussed in the threads. some minor inconsistencies in answers have been reproduced as is.


)- Q1 is typically a weak quarter. Q2 was better. Q3 and Q4 are expected to be even better. or at least as good as Q2.

)- 250 cr. shipment pending (Q3 and Q4). in other words Q3+Q4 target is 250 cr.

)- have commitment (order book) of 500cr. for FY15-16

)- drop in cotton prices leads to drop in yarn prices but with a lag of a month or so. effect of drop in cotton prices will have an effect on Q3 where raw material costs will be less.

)- but this is a short term benefit, since some (but not all, maybe 50% to 75%) benefits of drop in cotton prices will be passed on to the clients.

)- double capacity in 3 years to 1.1 million with maximum increase of 20% to 25% increase in labour costs.

)- use all newly added capacity for direct sales, maybe add a client or two if needed. later on slowly shift to 100% direct sales (own brand + brand licenses).

)- direct sales will see about margin improving by additional 15% to 20%.

Cash, Debt, etc.

)- 160 crore cash, 110 crore debt. Debt taken to get 10% capital subsidy and 5% interest advantage under a govt scheme for textile industry. company is practically debt free because surplus cash exceeds debt.

)- no interest income- the cash is in EFC account in dollars. taking into account the 5% interest advantage and expected rupee depreciation, it is profitable to forgo interest and keep money in EFC account. this money will be encashed at the right time.

)- other operating income, 6.5 crores is forex gain.

90% revenues is export. 10% is domestic (this is all fabric sales).

)- kitex does not hedge forex. whenever we hedged we lost money. plan to hedge for a year if an opportune time comes.

KGL/KCL merger

)- ENY has been engaged to study details related to merger. They will just study and give a report.(no timeline given).

US plans:

)- registration and some legal process are going on to enter the US market. This will take about a month. Some numbers will show up in Q3.

)- efforts are on to get licence and to also launch kitex’s own brand in the US. this might result in slightly more working capital requirements but this will be peanuts as compared to the gain. selling own brand and trying to get brand licenses (about 2 to 3) will result in 15% to 20% margin improvement. note that since 90% sales are from US, such margin expansion will have a big-time effect.

)- US plan is to concentrate on small and medium sectors and it does not conflict with interest of current clients who are not selling there since they are either themselves retailers or they sell to biggies like walmart, target etc.


)- any client should give us 12 to 15 million dollars. maximum 30 million to any client. more than this will give undue bargaining power to the client. no plans to increase this limit.

)- gerber has been a client for 14 years since kitex started production in 2000.

)- 2 or 3 clients were discontinued but by kitex itself in the past because they failed the minimum 12 million criterion.

)- other clients in pipeline and all formality has been done, and they are waiting for production allotment.

)- all additional capacities are planned for direct sales in US, maybe add at most one client if needed. very long term plan is to reduce existing clients and reach 100% direct sales.

Capex plan

)- every 5 crore spent increases revenue by at least 12 million dollars (72 crore rupees).

)- capex required to reach target capacity of 1.1 million pieces per day in 3 years is about 25 to 30 crores. this is in addition to this years 15 crore capex is done. This years 15 crore capex is for replacing all machines which are 5 years old. this itself will result in addition of 5 to 10% capacity

Growth drivers

)- US birth rate going up so expect more orders.

)- lot of buyers shifting from China and other countries to India related to quality, wage and political problems and buyers get best quality from kitex.

)- direct sales in US (2 or 3 brand licenses and launching of own brand).


sanjaybakshigiveshisapproval! Link:

What I heard is prof. bought it at one third of the price. Question should be asked if he will buy at this price if his approval is the only reason to buy this company.

Hi All,

there was a question in the last conference call about the cash company owns, they have ~160 crores of cash on the balance sheet but no interest, Management said no interest but nothing else, Any of experts here have any opinion on that? Thanks a lot for your help

Management indicated that the cash is currently held in USD and is thus yielding no interest. Essentially management is trying to time the forex conversion to improve INR earnings. Does not seem like the brightest idea to try to time the fx conversions rather than having a policy to convert into INR and do away with short term loans.

That’s very odd. There is a FEMA requirement to bring export proceeds into the country within 9-12 months of export, depending on the status of the exporter (EOU, SEZ etc.) If they have held the cash abroad for more than this period how did they manage it?

There is an RBI rule currently that any forex kept in EEFC account must be converted into INR latest by the end of the next month after receipt.

The only way to circumvent is by booking a forward contract to sell forex in EEFC account at a later date. Presently premium on INR/USD exchange rate is about 7.5-8.0% pa over the spot exchange rate. Kitex may be booking forward contracts to sell the EEFC Dollars. In this case the forex premium will compensate them for zero interest. However, all this is just my guess and needs corroboration from the management.

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Kitex has come out with strong Q3 numbers…Key Takeaways (YOY comparison)

Total Income from Operations up by 22.7%

Total Expenditure up by 4.6%

Operating Profit up by 106%

Operating Margins 32.8% vs 19.11%, up by 1298 bps

Net Profit up 104.29%

Profit Margins 20.25% vs 15%, up by 524 bps

EPS 4.87 vs 2.38

Hi Kalyan,

Apart from topline, it has improved on all other imp. parameters like bottomline, OPM and NPM even on QOQ basis. It has already clocked 353 cr. in topline this year. Historically and as per mgmt, Q4 is their best quarter so even if it improves only by 5% on last year’s Q4 sales at 142 cr., it should be very much there at 500 cr, and that is, with better margins. Looking at the momentum built into it, I’ll be disappointed if it posts anything below 20% in sales growth for Q4, which makes the total year sales at 525 cr., and that is, with much better margins.

Have taken many steps to improve margins: Sabu M Jacob, Kitex Garments

Kitex delivered better than expected result. EBITDA is 34.33% highest ever, not even Page has achieved (currently below 20%).

When asked on interview whether it can sustain high EBITDA, here is what Sabu Jacob said


Sabu M Jacob: Actually, our overall performance has gone up. Our efficiency has improved. We have restricted wastages well. We have taken many steps to improve our margins. In addition, we are now negotiating better with our buyers.

For cotton it is the global situation that matters. It is not really going to affect our margins. May be, we will get its benefit in the short run.

We will shortly be adding more clients. It is already in the sampling stage. We may add one more client probably in the first quarter.

Motilal Oswal has come out with a detailed result update on Kitex…

mgmt guided at 2000 cr merged entity turnover in next 3 years with guided pat level fo 15% it should record 300cr np and at 30 times valuation mcap should be 9k crore

Having guided 2000cr for the merged entity. The benefits of this will accrue not only to Kitex Garments. Hence, it will depend a lot on the merger ratio between Garmetns and Childrenswear and how it will benefit Garments shareholders. I know EY is presently working on this merger and supposed to come with a recommendation by March 2015. Anybody else information to add on how the merger will add value?

Caution here : Managment has not always walked the talk, you can go through last five years AR to verify that

Thats because of the sipd issue and delayed expansion , now that expansion is in full swing and prominent investors like sanjay bakshi are boarding corporate governance practices will improve