The Contours of the basic “Story” hasn’t changed - Industry structure, Competitive positioning, India advantage, etc. (despite the gaps)
What has changed is the more-than-bullish near-term projections.The reality-check (on Management Speak) coming so soon is good. Gives us time to do more diligence on the story and Management.
Disc: I am invested 3-4% in the Company.
Let’s wait for more updates on what went wrong?
on daily chart there is a gap to be filled between 160-180 and 108-117. as per gap theory every gap has to be filled but it doesn’t say when.
225 is a strong support, if its breached with good volumes then 160-180 gapcould befilled
projections.The
Couldn’t agree more.
Although I think that one should not evaluate a company like Kitex on QoQ basis.
But surely(and hopefully)gives more time todig on the storyand we should be checking/waiting on updates to see what went wrong?
CKG group holds 20% in Kitex. Is there anybody from Kerala who can get their view on the company as well. Does somebody have any contacts that can be utilised to reach them. It is always good to be able to get a view from people who hold large chunks ofa stock (If they can be accessed).
Cheers!!!
Discl: I hold Kitex in my portfolio.
As we understand, there could be 3-4 explainations for Q1 results coming in below expectations:
1). There could be a slack in customer orders for whatever reason (seems unlikely though, from whatever was shared at AGM)
2). There could have been trial-run and stabilisation periods - especially as fabric capacity was recently enhanced. This could have led to production gaps for some extended period during the quearter ( Anyone knows date of commissioning of new fabric capacity?)
3). Some have also pointed out to Seasonality in Sales. Except for FY13, Q1 sales have usually been lower than Q4 of preceding year
Meanwhile, we are trying to get official updates from the company. My sense is it could well be a mix of above factors.
Let’s keep trying to find out more on the whole story.
Not following this scrip but did the cold weather in the US starting from Dec 13 to Feb 14 have anything to do with this?
All the US retailers reported poor sales as the cold weather forced a number of store closures and generally depressed demand . The past winter was unusually cold.
There was a lot of inventory build up and possibly cancellation or postponement of orders from customers could have resulted in lower sales for Kitex. There is usually a lag of a few months between ordering and actual delivery.
Is the kids wear business seasonal? I would imagine that it should be least seasonal as compared to all other categories.
Carter’s first quater results suggest Strong sales growth in Q1 2014.
The 10th slide shows a Carter’s display at Babies “R” US (a KGL client).
Donald’s assumption looks fair here.I witnessed seasonality elements in Kitex.
Check attached file.
I have analyzed last 10 quarters data to know EBIDT margin, NP margin, NP QoQ growth, Sales QoQ growth and found that
It looks like some seasonality here but we should cross check data.
Disc : Not invested because of higher valuation. But may buy around 225 - strong support level.
There is slightly mis calculation in Sales and NP QoQ growth.
However 50% times QoQ growth is negative in last 10 quarters, that is my key finding here.
Will using Robots in plants - as Kitex is planning to do- really reduce production costs?
If that were the case more advanced countries such as Turkey, Mexico etc would have leapfrogged lower income countries such as Vietnam, Bangladesh, Cambodia etc in garment exports but that is far from the case. This business still remains mostly a labor cost game which accounts for 50-60% of COGS.
Fine reading of the results throws following observations:
QOQ Results Comparison (June 14 vs June 13) (Rs. in Lakhs)
Observations:
We met up with someone who has looked at several textile/infantwear/innerwear companies especially in the southern belt - both listed and unlisted entities.
Following are some of the key takeaways, which we will try to dig into more:
1). Stringent customer process for supplier selection - usually takes 6-9 months the first time. There is also lot of scrutiny on labour processes and compliance norms - especially Effluent/Discharge treatment plant.
2). Post that the accent is on Quality at the right cost and on-time delivery
3). Many customers want to operate on near-zero inventory and require suppliers to supply direct to the Showrooms - in show-room ready condition - with branding and bar-coding tags, etc.
4). While there is negotiations on margin front it is unlike the Auto OEM situation- where perforce every year there is a squeeze. Infact most have contracts that allow room for increase in RM, Cotton and even Power to be passed on with a lag.
5). Labour/ Scaling up is the main issue given the current rural wages/MNREGA situation
6). 10% EBITDA levels is the norm. He was of the opinion 20% plus EBITDA levels are not sustainable (price points are mostly same, people supply to similar customers)
7). Main Process Components
Spinning/Yarn making >>>Dyeing/Bleaching>>>KnittingWeaving>>>Fabric>>>Cutting m/c>>>Sewing m/c. Dyeing/Bleaching requires alongside the effluent treatment plants
8). Knitting : Inner wear and Infant wear ( products have elasticity properties); Weaving: Shirting/Suiting etc
9). Yarn making is complex Capital Intensive. Knitting/Weaving is capital Intensive. Most capital intensive is Dyeing/Bleaching/Effluent treatment plants - easily 120-150 Cr investment according to him. Norms are very strict today. There are many plants in Erode area which had to close down because they couldn’t meet the effluent treatment norms. Cutting & Sewing machines are easier to set up.
10). There are some companies like BEST Corp - which is a completely integrated operations - no process is outsourced. 1000 Cr plus turnover; supplier for Hanes and other innerwear companies
11). Role of Automation/can come in where the process is Labour Intensive. Yarn making is labour intensive. Dyeing/Bleaching there is limited labour so role of automation is limited. Garmenting is labour Intensive. Cutting machines can be completely automated - where part-wise specs can be fed and the machine optimises the cutting completely, there is very little wastage. Stitching also there are advanced machinery.
12). Technology upgrades are necessary usually in 8-10 years. There are people who continue to use for 20 years
13). Utilisation levels are very high in spinning. Also high in Weaving machines. But utilisation levels are usually low in Knitting machinery - couldn’t explain why - maybe due to changeover processes, etc. He has seen utilisation levels being as low as 30-40%. In that way utilisation levels of Kitex being 60% seems good. Management had mentioned they can take utilisation levels to max 70% - cant be more.
14). He was of the opinion while there is room for process optimisation and assembly-line efficiency improvements, this isn’t rocket science. You are not like re-inventing the wheel here. There cannot be very drastic efficiencies over the next guy
15). Processes are not very complex. Anyone with the resources can set things up. Scaling up will be an issue - but not something that is not being managed. Why an Arvind doesn’t enter the field could be to do with the size of the infantwear niche. He doesn’t buy that Arvind wanted to but failed while trying to enter this segment because of some technical complexity!
What remains in the puzzle is how come Kitex is doing 20% EBITDA margins when the norm is 10%? is this sustainable? why?
This is somewhat like the Mayur story - where the norm is somewhere but the shining knight in the industry was operating at some other level. There its was because of continuous process improvements and de-bottlenecking exercises. Mayur used to hire consultants to come down every month from Delhi at RS 2 lakhs/visit. I remember with the help of the consultant Fabric roll changeover - that used to take 45 minutes was brought down to as low as 5 minutes in a years time. That led to a major boost to utilisation levels and small small stuff like that made the difference. However Kitex’s is a much more labour intensive process.
So understanding the sources/key factors behind the high EBITDA and the role/scope of automation in future-scale up are the two key areas to solve the Kitex puzzle, for me.
Balkrishna - and others friends from Textile Industry - please get to work and help us connect with the right folks so we can dig into this better.
I think 20% EBITDA margins is sustainable in niche textile segment like Kitex.
One of my contact in Surat runs Infantwear retail stores (J&K Fashions). He has recently launched 2nd bigger store after huge success in past. According to him Margins are one of the highest in kidswear industry. Also if business is for pure exports then one can expect better margin.
**Some of the textile group having higher margins are
**Vardhman Textiles, Alok Industries, Trident etc
Going forward I think, EBITDA margin along with top line numbers will be important figures to watchout for Kitex. It is challenging to sustain such high margins but not impossible as we can see from some the proven companies.
Kunal
Nicely summarized Donald.The key take away is to
The other important fact which came across during the discussion was the number of pieces/day metric for capacity and the rate/piece metric for realisation. The number of pieces/day can be 5 million or 7 million depending on who the customer is and what is the type of garment he has asked to manufacture. If Jockey’s contribution increases how will this look as undergarment making could be different from making a dress. Same with realisation per peice… it could be misleading.
Cheers
Vinod
Western Buyers are looking to diversify their sourcing after fires in Bangladesh factories and the general sweat shop reputation of most garment factories. Ethical and socially responsible sourcing is becoming the new trend.
Kitex could thus be in a sweet spot with its clean air conditioned factories and good dormitories for workers. If one combines this with good quality and a track record of on time deliveries then it is quite conceivable that western buyers would be willing to pay a premium.
Bobby
Jay Jay MIlls CARE Ratings Report
The key to proper in-depth research is not to take anything for granted. And to question anything that prima facie does not add up.
Jay Jay Mills as you may be aware is at half the capacity of Kitex and supplies to some of the same large Customers. It manufacturers infantwear and also sells fabric - the same as Kitex does. It operates at 10-11% EBITDA margins
It’s not good enough to dismiss/opine western buyers will pay a premium or Infantwear is a niche with very high margins. We all need to become better at collecting facts and question hard - based on the facts.
And then establish whether or not superior EBITDA performance is sustainable. Just as whether the company can continue scaling up at 25-30% for next 5-10 years despite the labour issues. Find the answers as to why this is possible to sustain, or why it won’t.
[
JJ mills fabric sales as % of reported sales is around 40%. Entire fabric is being exported to its subsidiary in Sri Lanka. If like Kitex one assumes that its at nominal or breakeven level, adjusted EBITDA margins will be much higher. Infact 2009-12 will be much closer to Kitex margins…
Jay Report Link: http://www.careratings.com/upload/CompanyFiles/RR/Jay%20Jay%20Mills%20_India_%20Private%20Limited-02-10-2014.pdf ](http://www.careratings.com/upload/CompanyFiles/RR/Jay%20Jay%20Mills%20_India_%20Private%20Limited-02-10-2014.pdf)
Some observations…
As an IT Infrastructure support company I came in close contact with quite a few large garment houses in Bangladesh, Thailand and Vietnam and visited many garment / sweater / knitting shop floors.
From the two Videos of Kitex (links enclosed below) it seems to be one among the finest set up I have seen.
About margin etc., I know for sure most Owners / Promoters keep a large portion of the money outside their home country. There are many mechanisms they deploy in collaboration / collusion / understanding with the long chain of intermediaries and merchandisers in the trade to keep lower profit in the main books. They make comprehensive trade off calculations on exchange rates, export value addition benefits, hedging costs (and off course their personal interest) in mind before arriving at the % of money they want to take directly into company.
If Kitex management is honest, transparent and a real visionary then their may be a possibility that their margin on the books are higher than many.
It is just a possibility.
Secondly, since the factories need only young woman (well 99%), I think scaling up may be easier over time as word of mouth would spread through the existing large pool of rural woman folks would help in spreading the good word of mouth in their neighborhood, villages, relatives about the safety, security and overall environment of Kitex factories. Over time, it self will become a formidable entry barrier for others to penetrate.
If the corporate videos are even 50% true, I guess Kitex is doing a great job in woman empowerment.
I personally don’t think MNREGA etc. are major hurdle in labour market… Employability, skill development, targeting right areas are the issues.
Videos below:
@ T Anil Kumar
If Kitex sold 350 Cr Garments, it also sold 218 Cr Fabric (126 Cr adjusted for inter-segment) or ~90-100 Cr Fabric Sales. Fabrics segment is currently negative ~10 Cr at EBIT level. What would the calculations show once these are taken into account?
@Aveek
By all accounts the Management is visionary. Anyone who has seen the factory does mention it is a world-class set up.
Scaling up to 8000-10000 labour is one thing. Going to 20000-25000 is quite another. Local labour ceased to suffice long back. Most of the labour force now comes from the Bimaru states and there is very very high attrition despite some superb facilities. This is a very big challenge before Management…they are aware of it, and hence the efforts at Automation ongoing.
Collecting more data points will help - not generalisations.
