Hey guys,
sorry for going missing but kind of been travelling a lot. I have asked a few of my friends to get me in touch with a merchandiser in Ki-Tex & Jay-Jay Mills, lets see what comes out of it.
Meanwhile went through the Annual Report of the Company& this threadto understand the business completely so as to ask intelligent questions to who ever I got in touch. I have a few doubts…
1). Why so much cash in Currrent Accounts?? There should atleast be a FD. There is no cash yield. The limited interest accrued from fixed deposits must be from various FDs submitted to authorities as secrurity deposit.
Before going to next point, let me clarify that in a garment operation generally 40% of cost goes for the fabric. In kidswear I would expect it to be 30%, especially because the workmanship as total percentage of costs is higher and also there is presence of more embroidery / garment-printing.
2). The biggest thorn is the related party transaction.
The capacity of fabric Capacity of KGL seems to be at 40% of their of Garment revenues, then why they have to source fabric from outside? Now one may argue it is due to mismatch between processing and knitting, so to fill this process house they source grey fabric, process it and sell it to fill their capacities.
In the con-call MD said they have 5blocks. and each blocks gives revenue of $13 - 15Mn. So 5 locks * $15 Mn * 60 = 4500Mn. The actual garment turnover of the company is at 3500Mn. The company already has excess capacity.Still the company sources about 50Cr worth of fabric from outside(10Cr from Kitex Limited), which is 30% of total fabric consumption. So though I can understand Fabric sales, I completely dont understand Fabric Purchases.
Also note total fabric consumption is at 176Cr which is at 50% of revenues of 350cr from the garment division. Way too high! Would request Donald to check with his source on this front.
3). The claim of MD that fabric manufacturing is a loss giving business i utter Bulls***. Dyeing charges for fabric in Maharashtra & gujarat are in the range of Rs. 80 per Kg, the same in South(TN/Kerala/Karnataka) is in the range of 120 - 140 per kg. All due to pollution control strictness and problems in this area. In todays times fabric processing is more profitable than garment business.
Knitting is very neglible profit operation & Spinning is cyclical but gives decent profit. If some body has everything inhouse I look forward to a minimum average profit of 20%. so for the 70cr fabric they sell to KCL I would expect a profit of 15Cr and not a loss of 10Cr from fabric division(understanding transfer of stock within the company is on no-profit/no-loss basis).
Given this I dont understand why management is pushing to increase capacities in knitting and not in Sewing which is their biggest profit generator.
3). Donald raised a issue about creditor days decreasing, it is quite natural to happen that way. Earlier they must have been sourcing fabric at credit but now sourcing more of basic raw-material like cotton would lead to faster payments, mostly immediate. Though they would be getting credit on other front like excess fabric purchase, chemicals, dyes, etc…
4). For 8 lines/1 block. MD says they need 500people / workers. They have 5blocks so max. labor required is 2500. why they have 3800??
5). If KCL is 60% of KGL, why does it also have 3800 workers?? And they say the capacity in KCL is still underutilised, so the issue raised by Donald about KCL having capacities more than KGL could quite be true. There is a major possibility that capital incentive Textile business is concentrated in KGL and low-capital Garment manufacturing is concentrated in KCL.
The point that no where lack of details about capacity in terms of number of sewing machines, Dyeing Machines, No. of spindles (yarn spinning) just doesnt seem right to me. Generally companies give these details upfront on website, but here the website itself is under construction for years(That too for a export company). Very un-professional I would say.
6). In branding excercise company projects to employ $10Mn. for a increase of 400 + 400 basis points. (Mentioned in the con-call). This leads to a 40% increase in PAT. So a additional income of 28Cr. Which turns out to be 5% return P.A. completely unjustified.
Also this concept of licensing the brand from Jockey and then re-licensing to Wal-Mart to Target just doesnt make sense. If Wal-mart is intrested in licensing the brand why wouldnt it purschase directly from Jockey?
Coupled with above 2, add the fact that they have recruited a VP from Toys-R-Us as Director of Operations(USA). This says that they are facing selling pressure, doesnt seem like a suppliers market. Garment industry has never been that way.
7). MD takes salary at 6% PAT.
These are some of issues I came up with, will keep prodding and try to get in touch with people of JJ and Ki-Tex. If somebody could answer these concerns of mine, it will be great.