Whenever in doubt, please refer what legends have said. I am just reproducing what Mr Warren Buffet said. It applies in this context. Instead of worrying about so many things like technical charts, qtrly results, half-yearly results, cash balances, other income, etc , lets ask one question Is it a wonderful business to be in. If yes, dont waver. If No , just sell and forget.
“That factor so overrides anything else. If you’re right about the business, you’ll make a lot of money … the timing part of it is a very tricky thing. I don’t worry about any given event if I have a wonderful business … With a wonderful business, you can figure out what will happen, you cannot figure out when it will happen. You don’t want to focus too much on “when”, you want to focus on “what”. If you’re right about “what”, you don’t have to worry about “when” very much”.
It is the business where the cost of final product is not expensive for a consumer but a necessity and in addition to love factor. Just compare AIA.
Has any factor changed the tag " wonderful busines" . Then highlight that factor .
I respect your views and agree to an extent on few things. Saying ‘to an extent’, coz sometime we agree on facts but interpretation maybe different and sometimes even if we agree on facts and interpretation is same then reactions can be different
I started trying to invest seriously only since last 2 years and hence lot to learn. I myself have to put in a lot of efforts to follow the right things on the behavioural part. Find practising difficult Lots to learn on all fronts.
I try to follow what Sethufan has reproduced from Mr. Buffet above. But it becomes easy to practise that. if I think I have bought at the right price. I am not good at determining the right price. But none the less it becomes easy to practise in this case, as I am invested since much lower levels.
In Kitex’s case going by the past comments of the mgmt. I doubt if they will ever sound less excited on any comments on the future
If we take geoeconomics into consideration I think two important long term trends stand out.
The ratification of TPP by the signatory countries’ parliaments would make Vietnam and other southeast asian countries more attractive for imports into USA.
If Bangladesh can sort out its mess, companies operating from there would be a significant threat due to cheaper labour.
This makes it crucial for Kitex to get its branding exercise spot on,otherwise they risk slowly fading away into oblivion from the minds of investors.
raj_kalyan just now
The key implication, based on preliminary research is as follows -
The Yarn Forward Rule
This stipulates that in order to escape duty in the U.S exporters must use yarn or fabric manufactured in member countries. Currently India exports yarn an fabric to those countries who then export textiles. Member countries will push to create local yarn and fabric production with clear implications for Indian exports of yarn and fabric.
If Kitex uses Indian yarn and fabric then it ends up paying anywhere between 18 to 34 percent duty on its finished products exported to U.S, while a Vietnam for example pays zero duty.
Request people with detailed insight on Kitex yarn sourcing to evaluate this.
Solicit a view from Kitex watchers and stakeholdets
Cash & bank balance has increased to 241 Cr from 203 Cr in Mar 15. This is lot of cash, almost 2.5 times FY15 profit.
Fabric segment (71 Cr) has more capital employed than garment (110 Cr). The EBITA contribution from fabric segment is hardly 1 Cr. On the other hand, Garment segment contributed 43 Cr.
Why such low returns in Fabric segment as compare to garment?
And also what happened to the merger? It was expected in this quarter
TPP is a potential threat for Kitex. Forget vietnam, why we are not seeing the threat from Singapore based Gimmell - which is the second largest manufacturer of infant wear after China’s Wingloo. It produces its own yarn and fabric, so the so called restrictive clause of having yarn and fabric from a member country is not applicable to them. They are already backward integrated. They have a good portfolio of brands already - having a good name in the global market. 15-30% duty on US imports is a major chunk which will surely shift the clients to the Singapore based company. Quality which we see as a barrier will not apply here, since gimmell ranks 2nd and Kitex ranks 3rd. Gimmell supplies to brands like Nike - proof of their quality. India needs to do something, else Kitex price is just going to tumble.
Apart from this, the cash issue worries me to a huge extent. I was ready to invest, just didnt because of this reason.
Where is the corporate governance gone - Mr. Sabu M Jacob?? The promoter keeps 250 cr idle in the listed company…and sets a 50:50 JV between his childrenwear and the listed company. If he is so great promoter, he should have invested all the 250 cr idle money in this US company and give the benefit to the investors.
Do not under estimate the promoter…He is also an equity research analyst…and has his own brokerage firm…till I know…He knows well…how to dress the financials and make them look lucrative…
I might be rude towards the promoter…but the fact makes my behaviour correct…
This morning I picked up the phone and got through to the Company Secretary. Asked him his take on the implications of the TPP. He said he was unware of this and that as of now, there were no signs that this was going to be implemented and that as and when there would be clear news company would take action. He also said that that their American entity had not flagged this off to them till date as a possible threat. The response was quite mechanical and it did not even seem like he was fully aware of the TPP issue. Which is quite unnerving. I also asked him his take on if the company would meet guidance. His answer was classic - This is not my portfolio. ONLY the MD can answer this. I asked if I could speak to the MD. His response - As of now, you cant.
Find the monthly chart attached. It has got very good support @ 700. I follow this line for all my LT investments. Price action around this line gives a clue whether to hold or not or book and re enter later.
One way of interpretation is SMART MONEY know better than us and they might have drilled deep instead of wide as they have access to data. We can talk about Wigloo, Gimmel and all that but do we have to data to support that and a draw a meaningful conclusion. NO .It is as simple as that. Dont waver unless there is a drastic change in fundamentals ( we will be the last person to know this) or drastic change in price action.
Please visit Professors site and see the example of WABCO.
Its not like that. Company is entering the US retail market…This is going to increase its topline…Business of the company is good…I would like to say here…ROE ratio will not decrease rather it will increase since now Kitex will eat away the margins of the entire value chain…It has growth in its pipeline…
One more thing which i believe is - do not consider P/E in small and mid cap stocks…if they have real growth potential…just because if growth is there…the EPS and ROE and everything else is just going to grow 2 or 3 folds in years to come. When you look at the the PE (leading PE) - 2 or 3 years leading - you see PE to be real small…We should invest in Kitex at this moment - but the red flags I have above alarm me from doing that.
There is a concall with the kitex management of Friday 30th October.
I have listed falling queries to raise before the management. If anybody has any more queries than please add to the list so that it get answered, and probably ends dilemma of fellow members for investment decisions.
Why cash of 250 crores is lying idle ? ( Why not employed in some short term FMP’s )
Why there was no mention of merger with Kitex childrenwear?
What could be the potential implication or threat by implementation of TPP ( Trans pacific partnership ) and how will company respond to it OR any plan B.
Why topline is flat after 6 months? ( I know that majority sales takes place in Q3 and Q4 )
Will be management be able to achieve the topline growth of 600 - 650 crores?
Why Fabric contribution to the EBDITA is very less compared to the capital employed? ( 1 crore EBDITA compared to 73 crore capital employed ).
That sounds good. Is the call limited or could others take part - even in listening mode - as well? If yes, do share details.
Areas I might seek clarifications are
U.S sales : what kind of volumes and margins and by when? Implications of this on sales to existing clients. If not from client side at least from production constraints side.
TPP
What is their sense of when member countries will ratify and adopt it? What concrete steps is India taking for regional agreements to go around this? Any plans of acquisitions in Vietnam? How long does it take to ramp up capacity to plant optimal scale? Do they prefer greenfield route or acquisition route? Why? How will they respond to glut in India of yarn and fabric once yarn forward principle is applied?
What are growth plans in India? In terms of volumes, values, margins and time frames.
What are growth plans in Europe and Japan in terms of volumes, values, margins and timeframes.
How do they plan to build in house brand building capabilities?
I’m really surprised at the amount of brickbats this company gets and has been receiving since Q2 results.
I’ve done a quick 5 minute comparison analysis for the last 4 years for Page and Kitex (similar businesses according to me apart from balance sheet/m.cap size which is reflected in their P/E I believe) to try and understand if the criticism for Kitex is fair by any means:-
Page (2011-2015)
Revenue Growth - 3x
Profit Growth - 3.2x
Debt to Equity - Down from .85 to .35
RoE - 50-55% consistently
NPM - 12-14% stable
Current P/E - 78
Kitex (2011-15)
Revenue Growth - 2x
Profit Growth - 4.7x
Debt to Equity - Down from 1.25 to .6
RoE - Increased from 25-27% to 32-34%
NPM - Massive jump from 8% to 20%
Current P/E - 32
Based on the above numbers, IMHO Kitex is absolutely fairly valued (give or take 10-15%). As long as their is earnings growth, the valuations should remain stable unless they can no longer increase margins because of low revenue growth.
But with 20-30% PAT growth numbers, I’m not sure what else people are expecting? I’d take 20-30% earnings growth any day even if revenue is muted if I’ve invested with any degree of MoS.
I agree with the fact that there is little MoS at current valuations and it may require a leap of faith to bet big currently. But I certainly don’t see much reason to start predicting doomsday scenarios. Infact, for all those eager to exit any major positions, I’d be very happy to take some big bites at 600-650
Discl - Invested
PS:
1)For the calculations, please allow for 5-10% error as I have calculated some of it mentally
2) I don’t have much knowledge on accounting, so if you’re one of those who believe it’s books are cooked - most happy to listen to that argument with evidence
Sharing an interesting take on ‘Guidance’ by Ian Cassel. The blog is not relevant to discussion on Kitex and I am posting this link only from an educational point of view and not to start a debate on Kitex giving guidance etc.,. Therefore request that lets not clutter the thread with comments about Kitex’s Guidance on the basis of this blog and form our own individual opinions and interpretations on the blog (as there can be more than one).
I see that the Promoters have pledged / encumbered 6 million shares over the past one year as shown in the results - (page 2 of the link - Kitex Q2FY16 rsults). But the shareholding pattern shares filed with the BSE does not show any such pledges / encumbrances (page 5 of the link - SHP 092015)
I do not know which one to believe; but if 6 million shares ~ 24% of their holding, are pledged then it means shares worth Rs 450 crores are pledged (assuming Rs 750 per share). Even at a margin of 50% a sum of Rs 225 crores is probably kept as a line of credit for promoters. We do not know how much of this line has been used.
Over and above this irreconciliable filing, this raises a few questions. One of the promoters of Kitex Garments is Kitex Childrenwear Ltd, which in turn, is apparently fully owned by other Promoters and which is under consideration for a merger with Kitex Garments. So it is possible that Kitex Childrenwear Ltd may use this line to borrow and increase its own valuation creating a fair-value swap ratio that is unfavorable to minority shareholders of Kitex Garments. Imagine I own a listed Company A and an unlisted Company B. Further Company B also owns Company A. Now Company B borrows against the shares of Company A that it owns and uses this capital to increase its valuation (essentially high leverage with low equity to improve valuation metrics) relative to Company A. Consequently when a merger is considered Company B will get a more favorable swap ratio; and upon merger shares held by Company B in Company A is cancelled and I will get more shares in Company A than if Company B had not pledged its shares. In other words I am indirectly using via Company B the value of Company A to enrich myself at the cost of other shareholders of Company A.
What happens if Company B’s borrowings (against Company A shares) default? The lender will simply liquidate the pledgee shares; the shares will tank and the risk will be borne by everyone.
Of course to be sure we do not know how and how much of this pledge is used, but the potential risk to minority shareholders is real.
