Concall details
India +91 22 67468356/ 39381079
Please dial in at 11:55 hours IST
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This is great. Thanks. The bummer is the timing though. Right in the middle of the working day. Will try to get in though!
Key points from todayâs concall:
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They are planning to separately list KCL and then merge it to KGL for proper price discovery and transparancy. No timeline finalized yet for the same.
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Revenue guidance of c. 575 Cr. to 600 Cr. for this year. Margins to remain stable or slightly grow from here.
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Capacity to double in next 2-3 years as per earlier plan. Capex requirement would be c.15 Cr to 20 Cr. each year for the same
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Guidance to double 2015 revenue by 2018-19 i.e. c. 1000 Cr to 1025 Cr.
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No plans to launch any brands in India in future. They might further negotiate brands in US
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Reg election news article: No family member of promoter group is participating. The industry association (which includes kitex and other companies in the region) will be contesting the same
Disc.: Invested
This is draft summary; feel free to add or correct any points if I have wrongly drafted any of these
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TPP may affect general garments and not the childrenwareâŚ
Import duty at US is between 5% to 12 %, didnât change in the past two years.
Plan to repay debt in this quarter and convert USD to INR⌠waiting for Re to touch 67âŚ
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Are they in the business of textile or currency trading?
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This point raised red flagâŚwhy is promoter waiting for 67?.. I mean why are they speculating on forex rather than focussing on core business. Also, the saving between 67 and 65 exchange rate is just 3-4% and they are paying interest on debt of c.9%âŚnet-net it is loss for companyâŚ
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The answer regarding TPP was evasive. While the question was on the duty impact if TPP was implemented, the focus of the answer was on the quality and scale of his production. This aspect was not explored in the detail it deserved by the people who had the chance to ask questions.
This had me laugh out. No offence meant. A textile company waiting for 67 INR to convert the forex holdings? What if it appreciates to 64? This may be an intelligent decision by forex desk at the company but not a wise decision in the larger interests of the company. What if such decision making percolates to other areas of business decisions?
Iâm not invested in Kitex so take my opinion as that of an outsiderâs.
Just to add my observation on companyâs foray into branded wear in the US. Iâm sorry, but branded companies whack their brains out to gain customerâs mindshare in US. Adidas tried, tried and tried but could not move an inch out of Nikeâs market share. May be an extreme example here. Same piece of clothing sold by GAP but made by a Bangladeshi exporter will sell out easily compared to this Bangladeshi company coming out with its own proprietary brand. Brand building is exorbitantly costly affair. Less expensive means - very long gestation period to build customer loyalty.
Rather than this, company could have expended efforts in widening the current customer base, mining current customers, innovate in the product lines and more.
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You are right. I think Kitex may not have answer for that. Itâs a treaty between the nations, to be addressed by nation heads. At most what they can do is to represent to government the implications of these treaty and how itâs going to be addressed by GOI. is any possibility to address this by a company?
or have I not understood it properly?
Essentially my takeaway was this - The future guidance for upto FY 19 is around a 20% CAGR on top lines and a 24 - 25% CAGR on Net Margins. This for a company trading at a multiple of 35. PEG is 1.4. Keep in mind this guidance is from a management which is historically aggressive on guidances, more so for the mid and long term which it corrects downwards as it comes closer to actual delivery date, so to speak. Over and above this is the overhang from listing and merging KCL. It is not so clear to me that there is such a clear client segregation between KCL and KGL. Am I wrong in saying this ? How then will business be separated. The answer again was extremely unclear, evasive and had a waffle like quality to it. At best , I now classify Kitex as an overpriced compounder with Corp Governance issues. I will be looking to reduce my position in line with what I allocate to compounders in my portfolio.
From what I understand the provisions of the TPP are clear. Duty in the US for nations exporting garments to it, using yarn and fabric from outside the signatory countries will be anywhere from 18 to 38%. Management tried to convey the impression that this duty was applicable to general garments but not special garments like kidswear. Again, it was not clearly stated. It was suggestive, it played around with words. and left an impression without actually saying it.
While waiting for dollar to reach 67, have they lost any interest amount ? Is it accounted for ? What is the current interest rate earned on the dollar deposits and what could have been the interest rate if it was in rupee deposits ? where is the amount in P&L a/c ?
Here are the highlights of the concall with the management of Kitex garments :
Topline guidance: Mr Sabu Jacob was very confident of achieving the topline guidance of 575 â 600 crores. He also stated that he will double the revenue with respect to FY 15 ( i.e 1000 crores ). He reiterated the guidance for the current year and said Q3 and Q4 will be best quarters as fall dispatches takes in these quarters.He further projected the growth of 20 â 25% for next year and 25 â 30% growth for the subsequent year ( so 1000 crores by FY 18- 19 ). He said he wonât add any new clients, but existing clients can increase the order size and their full focus would be on the LAMEZE BRAND and their own brand âLITTLE STARâ for which the dispatch will start by fall FY16.
Any new capacity addition in the factory will be purely for the license brand and its own brand because profit margins are high ( it seems logical )
He was very sure that now his focus is on brand licensing and own brand development to fetch higher returns. LAMEZE BRAND was designed, finished and launched in one month time and got very good response than expected.
As US company is a JV of 50:50 with KCL AND KGL so profits will be divided between the two companies ( here it is conflict of interest unless KCL get listed )
He stated that company has completed the investment and procuring the Fabric and itâs time for the garment manufacturing.
Any fall in the yarn price will be beneficial to the company.
Other Income: Current year other income was 14 crores that was due to sell of wastages.
Merger: He said E&Y had given them 3 options as listed below
- Operate as it is.
- Do merger
- List the KCL and than merge.
KGL choosed the third option, as per Mr Jacob he wanted the clarity in the process and no dispute on the valuation point of view. So this said let KCL get listed and discover the value and than merge with KGL.
He also stated that there is no common clients between two companies. He did not commit any timelines for the listing process of KCL, but stated he need to start the process.
Cash: The main issue. He said he locked around 10million dollar at 67 rupees, but after that RBI intervene and rupee appreciated so could not convert in the rupees.He wanted to be debt free co mpany by this quarter but will be done by Q3 ( he still expects dollar will appreciate in near future, he is timing the forex market ). KGL is holding all the cash in dollars.
2 rupees difference in dollar results in 3% increase in the interest outgo. ( KGL has 20 crores in interest )
On short term borrowing he said that the cost of fund is around 7 â 8% interest.
( I am uncomfortable on this point )
Margins: On margins side he was very confident of maintaining or improvement but no scope of contraction. ( he sounded very confident ). He stated he has invested very much in technology and training of the workers to improve the efficiency, and will still invest in the advanced technology if comes.
Dividend: Since KGL has large amount of cash and declared first time the interim dividend, so they coming up with the dividend distribution policy ( how to use cash ). He stated that dividend distribution should be done in very calibrated way.
TPP: On TPP front he said it is not a threat to the company because they are in the specialised segment and countries like Vietnam, Bangladesh cannot compete them in terms of ( quality, timelines and expertise ). The companies which will be most effected would be those who manufactures the garments, denim etc in bulk.
They already paying import duty in the range of 7 â 12% in US.
Capex: On capex front company said that they have already invested enough in the fabric segment so not much capex required for future, but on garment segment would require capex of 20-25 crores so for four years it would be around 80 crore maximum
OPPORTUNITY SIZE: On opportunity size management told that the infant market size in US is $ 50 billion. Moreover the birth rate in US has increased by 1% which in coming times can add 2-3% growth on sales.
With birth rate going up coming years would be good.
BUSINESS EXPANSION: Management stated increasing business is not a big task, he still double the sales but the issue is the speclization
He said Fabric production is very easy ,one can invest in machines and start the production but when you go to the garment manufacturing one needs trained workforce. He said it takes 3 month of training for a fresher and takes 9 months for that worker to reach full efficiency. So according to him increasing turnover is not an issue but skilled manpower and training is the main constraint in this segment.
BRAND LAUNCHING: Management is very clear that they wonât launch any brand in India, they will totally focus on the US and EUROPE market.
POLITICS: Reports in newspaper that KGL have jumped in the panchayat elections as 20:20 party. He cleared that neither he or his family members is contesting the elections, but it is group of industrialists ( including KGL ) who has created this party to contest the election for the community development agenda.
FINAL NOTE : Lot of issues are been answered I have tried to cover all the issues which are discussed in forum. If anybody has any queries please let me know, if I could help.
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Excellent note and covers, factually, every aspect of the call.
I am in agreement with the reservations raised above vis-a-vis currency, TPP, etc.,.
I was in queue but didnât get chance to ask questions (maybe a preference for institutions/brokers above the retail investors). Most of my questions were covered but I wanted to grill further on the TPP issue and wanted to ask about pledging point raised above earlier.
Some analyst did ask about 3% currency gap whereas interest rate at present paid by company at 9%. Mgmt. didnât answer that question clearly at all and kept repeating dollar INR to come at Rs. 67. Neither did the CFO pitch in on this query and it was Mr. Sabu who attended this query as well.
On TPP front to, the same approach as above. I mean comeon what do you mean by special garment? Why is kidswear a special garment and why wouldnât it be covered under TPP?
Answers around dividend payout were not straight forward either, however when asked for the second time, mr. Sabu did say that they will come out with a Dividend Payout policy.
I can understand that the mgmtâs communication skills may not be the best but the logic and reasoning could surely be explained with whatever communication skills that they have got.
I am still invested (6% of portfolio previously 10-11%) as I had earlier sold to maintain certain allocation levels plus for new purchases and have bought at much lower levels. Would continue to hold as giving the mgmt. benefit of doubt coz of couple of other factors that are visible and also 'coz I like the business.
Cheers.
Another thing which I found confusing was that when asked about Lamaze share of biz between the listed entity and pvt. entity.
Mr. Sabu said that profits will be shared 50:50. The gentleman who asked this question then said that (not the exact words) you mean to say that sales/revenues would be 50:50, then Mr. Sabu said no the profits would be shared 50:50.
I find the above answer also confusing. I mean I donât want the listed entity to end up producing 60% of the Lamaze orders and getting just 50% share in the profits. Maybe Mr.Sabu didnât understand the question properly and benefit of doubt should be given. But still none the less not a clear answer.
Cheers.
Over TPP - Mr. Sabu touched Vietnam and Bangladesh. Can not understand why he did not say anything about Gimmell - singapore based competitor - the 2nd largest infant wear manufacturer. I understand vietnam and Bangladesh can not stand the specialization required. But gimell? Gimell supplies to Nike. Of course it has the finest qualities in the world.
Mgmt is crazy over the cash issueâŚI doubt the Corporate governance of the company.
I agree - brand launching is not that easy thing to do.
Over listing of KCL - it might be a good step - getting a clear picture of the valuations of the company.
Stay away as of now. It is logical to invest in page rather than investing here.
Disc: Not invested.
Ya he did not reply anything to his competitors like gimmell and wingloo which are ahead of him and infact comparing with vietnam and bangladesh which everybody knows will not be able to compete.
I consider that waiting or timing the dollar price is totally foolish thing to do ( you are waiting for 3% gain and giving 8% of short term loansâŚmakes no sense ) how can a business man can do this?
We need to think why he is doing so, what could be the reason?
TPP : Still did not understand and I think we should dig deeper on the implification of this treaty, he sounded confident on that ( I need to check what actually it is, does this treaty really a threat ) then all our textile exporting company will be in threat i.e indocount, nandan denim to name few.
Brand development : I think he knows brand building is very difficult and costly affair and not safe for this size of company, so he has started with brand licensing and along with that developing own brand which can share the shelf in the stores with other brands ( retailers for whom he is manufacturing and doing business for such a long time and having good relations )âŚmy thoughts ( could be not convincing )
Even if they are able to achieve sales of 50 - 100 million dollars for own brand it can be a terrific addition to the bottomline.
I would still give benefit of doubt to Kitex because they are in wonderful business, corporate goverance is a issue ( need to be very vigilant on this issue for every action taken by management )
Disc : Invested
Are we not over analyzing stuffs ? just asking
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