ValuePickr Forum

Kitex Garments Limited

I have been thinking about this since the MD came up with the 5 yrs expansion plan.

Almost until 2016, Kitex was able to generate superior profit growth and returns, with many qualities that formed its moat. The MD talked about his ambition of reaching 2000Cr by 2020.

Since 2016, with the same business characteristics, they failed to grow the revenue, failed to add new major Customers that constitute meaningful % of the total sales, they even lost two key customers. And now they need this expansion or change in course - manufacturing a slew of related but new things, getting the packing in house etc - to grow at 20% per year for next 5 years, from 2018-19.

This means that the business has fundamentally changed, isn’t it? That what seemed a moat earlier is not anymore. Is it?

I think there was never a moat as the business model of textile export in India is all based on low cost which is not a strong moat. Unless there is a brand, and the brand caters to strong local consumption, none of the textile companies in India have a moat as we now have much lower cost producers in Bangladesh and Pakistan.

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Kitex Garments insider trade: Acquisition of 112,781 equity shares worth Rs 114.45 lacs by promoter today.

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these insider traded shares not part of volume reported daily at nse/bse ? … because volume shown at nse bse are much less than what is mentioned above… its 59 k at nse and some 7 k at bse…

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it was acquired on 28th jan , was disclosed to the exchange today.

Has Valuequest India Moat Fund (Prof. Sanjay Bakshi) exited Kitex fully?

Was able to see 4.71% holding for June end, but the name does not feature in the shareholders list for Sept and December.


results not as per estimates
-company says- Turnover for Q3 is lower than projected as buyers have shifted a portion of quarter 3 shipments to quarter 4 to reduce their inventory holding for financial year closing .However
this will have no impact on full year performance.
-estimate for q4 has been given to be 230 cr.( revenue)

Disc - Invested

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seems this is good atleast:

Key Accomplishments in Q3:
As per the US Bankruptcy Court’s confirmation in respect of Toys R US, the claim 9.17 million USD (~INR 75 Crores) has been allowed in favour of the company Interim disbursement of 1.60 million USD has been received by the company in January

1.6 million USD around 11 crores will get added to Q4 results, i believe, and with usual q4 good results this will make overall results looking good… :slight_smile: lets see …

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There are rumours that Sabu might contest from Chalakudy lok sabha constituency, some of the portals have already reported the news. whether this will have an impact on the business positively or negatively one will have to wait and watch

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From where do you track these numbers?

At the end of an extremely painful year in terms of market cap erosion, Kitex has finally closed the year 2018-19 with reasonable operational improvement in terms of sales and and profitability growth of approximately 10% each.

See the results here.

Some of the interesting observations:

  1. Change in CFO: the guy who was at the helm of finance during the bull phase in Kitex is back. Lets see how this is going to pan out.
  2. Receivables position: The US bankruptcy court has accepted the claims of Kitex in relation to receivables from “Toys R US” with 17.5% of the claim is already paid. The remaining receivables from this is about $7.5 Million which would roughly translate to about 52.5 Crore will take its own due course to come. If we remove this from the receivables balance of 163 Core we will end up with a very healthy collection period of about 55 days - which is in line with the historical averages.
  3. Inventory position: Sharp increase in inventories as compared to historical averages - considering Kitex has manufactured goods only based on firm orders, the current inventory levels looks abnormally high. If this is for a significant new order that they have won, then i would take it with a happy face - else this would be the single biggest reason for me to exit from this stock as it is definitely a sign of inefficiency and mismanagement.
  4. Associate burning cash: The loss from associate is on an uptrend, with the current year loss at nearly 10 Crore. Need to really find out the reason for this cash burn. Investors should request the management to place the audit report of this entity at the AGM and also request the management to provide a turn around strategy. This is definitely a red tick.
  5. Cash position: The net cash on the books is significantly low at about 10 Crore. The borrowings has increased sharply to 87 Crore. Don’t think one need more explanation on this considering the elevated inventory levels and cash stuck in the bankruptcy proceedings.

Disclosure: Invested.

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News share :

A good q&a debate in parliament today during question hour on textile industry, one question that got asked was what is Govt doing on illegal dumping of Apparels by China under the garb of “Made in Bangladesh” tag. And Smriti Irani responded that we are bound under SAFTA treaty with Bangladesh however the origin issue will be taken up with the Bangladesh Govt. & that a special knitwear scheme is also being formulated.
Some other relevant questions were what is government doing to revive sick cotton units & industry? Refer the excerpts of the q&a debate here.

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I could not understand why the stock is down to this level. Even you take out growth out, the current price is trading at pe < 10. Any thoughts here

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Observations from the Annual report for the year 2018-19.

Kitex has made a contribution of Rs. 7 Crore in form of donation and an additional 4.7 Crore towards CSR to an enterprise by name “Twenty 20 Kizhakkambalam Association”. It is interesting to note that the donation of 7 Crore alone will account to 5.4% of PBT. Out of curiosity, I just checked the name of this enterprise in the election commission of India’s website (Notification dated 15.03.2019) and it shows a political party by name “Twenty 20 Party”(is this a coincidence? - i’m not sure). The contributions are with in the limits prescribed under section 181 and 182 of companies act and hence not a regulatory issue.

The CSR contribution of 5.58 Crore for the current year is also way in excess of the prescribed limits.

AJ

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so CSR is another way for SMART promoters :slight_smile: obviously excess CSR spend smells bad as most of the companies find way to run away from it

Twenty20 Kizhakkambalam is a charity outfit floated by the Anna-Kitex Group to effectively contribute to the social and economic development of Kizhakkambalam with an aim to make it the best developed village in India by 2020.

It is a Kitex group entity only.

Disclosure: Not Invested Anymore.

Did anyone attend AGM? A summary of what transpired would be very helpful. Thanks in advance.

Some interesting statements in the investor presentation

  • Repeat orders from existing clientele have been increasing rapidly,
    displaying the confidence clients have on the Company’s production
    and delivery capabilities.

  • Increased orders and changing customer preferences such as quick
    turnarounds necessitating non reimbursable air freight charges have
    affected margins. The Company has accommodated these increased
    orders to avoid existing clients scouting for new suppliers for their
    incremental requirements. The Company is confident of comfortably
    meeting these increased requirements while retaining historical
    margins once ongoing capacity expansions become operational.

  • Given the combination of a robust unexecuted order book, a strong order pipeline and Q1 revenue of INR147crores, the Company conservatively expects to end the year FY 2019 20 with a revenue of INR 730 crores ,registering a ~16% growth from FY 2018-19

Given how things panned out in the past, would be slightly skeptical of bullish revenue guidance. However would like to know if there were more details about order book and customers shared in the AGM?

Also, would like to now if there were more details about expansion plans shared in the AGM?

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KITEX AGM

Attended the kitex AGM yesterday.

It was good to see kitex add a second level of management for the first time

Mr.Suryanarayan is elected as the Vice President of Corporate Strategy. He will be looking after the investor relations , can be a good pint of contact for all the shareholders.

Mr. Harkrish Singh Sodhi is elected as the Vice President of Business Operations. He had earlier worked with Kitex in 2013 -14 as head of business operations. He has been appointed as Mr. Sabu Jacob would like to focus more of his time on future growth strategies – investments and expansion.

The AGM started with a normal corporate presentation by Mr. Suryanarayan. The presentation incorporated financial performance of the company till now , future growth plans and projections. The ppt has been attached here.

Revenue guidance for the year FY20 has been given as 730 cr, however Mr Sabu in his speech later added that he is confident of crossing 810 cr(his projection last year) . The order book for this year is very strong.

After the presentation there was a Q & A session. The following things were discussed –

Our present capacity is 4.5 lac pieces per day. our capacity has increased by 3.5 lac pieces a day. This has mainly been due to better operational efficiencies. They explained that earlier we used to have 8 hours of inventory in the assembly line, that has been replaced by having 32- 40 hours of inventory in each assembly line. This eliminates the bottlenecks in the system and has been beneficial for improving their capacities. Each line is 30-32 machines. . Right throughout the process we need to keep higher inventory to achieve higher outputs through this method We have also added additional people at the bottlenecks in each line. So without capital investment we increased productivity.

Our competitors have similar inventory levels with lower margins.

We will be also outsourcing some production to achieve the 810 cr revenue target.

Our payments made to sister concern ( KCL) for processing work is much lower than other companies.

After Jockey and TRU issue we are selective about selecting customers.

Our receivable position going up is not an abnormality. The nature of industry has changed as such. As far as Toys R Us is concerned, we have only 1.4 million dollars remaining. The claims of 9.7 million dollar should not be viewed as receivable. Basically out of 165 cr only around 10 cr is from Toys R Us pending. Anything received above that will be extra. Kitex USA and Gerber our biggest debtors. Logic for selling through Kitex USA is value addition to customers, instead of FOB we are giving LDP.

We also do this as we get a percentage of profit in Kitex USA, as we are trying to build our brand over there.

With little star and Lamaze we are doing well . We might be able to get into Walmart stores by next year. We have entered into Walmart , Amazon and Target websites. Getting into Walmart stores will be a huge step forward.

Chinese players are our major competitors. US China trade war is benefiting us. But they also said they operate in a specialized segment. They are many safety regulations in this segment. So they see themselves insinuated from global conditions. For us only issue is capacity. Never faced demand problems.

Last 27 years we are taking every efforts to grow the company. last 2 years losing the jockey business along with Toys R Us has affected growth. Otherwise we are on the right track. We have lots of orders to execute before March 31st. Demand side there is no problem. But we are struggling with production (capacity)issues. We have reached no.2 position in infant wear industry.

Although our buyers appreciate our product quality, our infrastructure we do not get any credit for it. They pay the same price as they pay Chinese players. Only advantage is that if we come up with more capacity it will be consumed quickly by our buyers.

50 cr land purchased last year. Difficult to get big plots in Kerala. Got 4 – 5 plots for this money.

100 cr roughly stuck with government authorities .

11 cr is stuck with textile ministry for 3-4 years. expect this to come within next few months.

44 cr is stuck with GST & VAT department . Accumluating since 4 years.

33 cr is stuck in MEIS. Claims have been submitted, part received of it has been received.

Buyback – management does not plan for any buyback as they feel they will need funds for aggressive investment planned ahead.

Will be planning investor meetings regularly.

Will be planning to make around 60 mother units as a part of expansion plans. Will be employing 300 people per ahead in these mother units . Have one of this mother units starting this December.

Plan to invest 910 cr in a span of 5-6 years.

Walmart, Target , Gerber, Mother Care- our top customers.
Disc - Invested

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Sharing my notes:

This time apart from the board members and MD, 5-6 senior level management people were also present for the AGM.

Recently investor relations person has been appointed. He made a presentation (uploaded on BSE):

Flat growth globally and less growth of exports from India. Yet, Kitex could deliver 12.5% growth over last year in turnover and 16% growth in profits.

Automation - 25% complete till date. Expect to complete the balance during the year. Expect to improve efficiency by 15%

Order book is swelling.

No 2 manufacturer in the world now (vs no 3 till last year).

US-China trade war is a positive for us.

Q&A Session:

Pending subsidies and other receivables from govt departments - 11 Cr subsidy refund is pending since 3-4 years. We have taken up the matter in several ways. Recently we had meeting with Bank and govt and seem that outcome will be positive and soon.

32 Cr of MEIS is pending to be released - we should get in few months.

ToysRus due - In our books receivable was about $3mln. We got $1.6 mln and rest is pending. The claim is of higher amount at $9.7mln

Increase in trade receivables - the same is industry trend and can’t do much. All our receivables are less than 90 days.

Mr. Sabu:

Last 27 years we are taking all the efforts to grow your company.

Two in-fortunate things happened - Jockey & ToysRus bankruptcy. Both these things impacted our plans. We could make up for the shortfall quickly and are now growing.

The question is - are we on the right track - Yes.

We have much higher internal targets than the one shared by IR. I stand by the projections I had given earlier and working hard to deliver on the same.

Last 27 years by being focused on the same segment, we have become specialised in infant garments. No other company would be comparable to us in terms of efficiency and profitability. Bring me any technical comparison and I’ll show how we are better.

On questions on increasing inventory - Each line has about 30-34 machines and we have done lots of investments and process improvements to improve efficiency. This is why we have been able to increase production by 1.5 lac pcs per day without making capital investments. We now provide much higher materials etc on each line and at different stages so that there is no loss of productivity and this is the reason why growth has happened and will continue in coming years.

Price paid by customer to us is same as what they pay to other countries etc. It’s a competitive industry where the customers expects some discount every year or tries to push vendors to match lower prices being offered by smaller or unhealthy competition. This is also the reason why credit period has increased over the years.

Opportunity for a player like Kitex is huge. We can do much higher business but we need to solve the capacity issue.

We have plans of building large no of satellite mother units. (Will start with about 10). Each unit will be build on 1-2 acre land (have acquired 4-5 such lands) and will employ local mothers/female workers of about 250-300 at each unit. We have floated several subsidiaries as there is land acquisition limit in Kerala and through these cos we will expand on this new concept and scale up. If successful this can become large.

Little star and Lamaze have done well on the online platforms. It will take sometime for Walmart & Amazon to bring them to their stores. Once that happens, we can grow a lot. As of now turnover from these was about $2mln. We expect to reduce losses and become profitable in US in 2-3 years.

We will add about 600 people during this year. We are also outsourcing some production. Demand is very strong.

On buyback - no plans as of now. Have appointed a person as IR to improve communication and interact with investors.

The incentives had decreased over last 2 years specially after GST and that had its impact on profitability. Going forward additional 3% incentive has been approved for the industry. As of now we are not accounting/getting the same as some procedural issues are there, once that gets started, we will get this benefit.

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