Kitex Garments Limited

Stock Opportunities Not-so-Hidden Gems
102

OK some more funny math in this front.

1). MD says per day capacity(combined) of 5.5lakh pcs per day. At average realisation of 1$ per garment the combined turnover should be 990Cr. So expected revenue at 530Cr(KGL) + 300Cr(KCL). Excess capacities exist.

2). 4Cr of incremental investment will add capacities of $13Mn(80 Cr) revenue. but present Plant&Building + Machinery investment of 140Cr gives revenue of only 440Cr?

3). If 4Cr can give such revenue boost, how does investing 15Cr in Knitting line not give any revenue boost only profit increase of few basis points. If its true, whats the logic in investing in Knitting lines, you get so much fabric of best quality readily available.

4). Each line produces 5000pcs per day. So 40lines produce 2lakh pcs per day. But their total capacity is 5.5lakh pcs per day so KCL has to be bigger in Garment Manufacturing. No other logic!

I have a feeling that Im teribbly wrong somewhere. Pls guys point it out.

103

Total yearly Sales for garment division is Rs. 350Cr. That is approx 1Cr everyday. At the Avg price of $1 - $1.25 per pcs. That is 1.3 - 1.7lakh pcs per day. This corrobates with the Knitting lines calculation of 2lakh pcs per day.

I would say the per day production of KGL is in the range of 1.75lakh pcs.

Now we need to compare the cost and selling price of KGL with other competitors to understand exactly how are they able to get 20% OPM, is it due to lower costs or due to higher prices, that will spell out exactly the competitive advantage of KGL. Donald may be your contact within the industry will be able to give a better picture here.

104

Hi

Please find attach below link for 1) Mind map 2) extracts of ARs of Kitex since 1997 and some other relevant extracts from ARs of its customers and prospective customers 3) Link for recent Kitex call.

Please note that I prepared this mindmap mid June when price was around INR 230. Stock price has moved a lot since then. So ignore the slides on valuation. I was pretty busy and could not update the mindmap, so some bits might be in contradiction to what mgt said in conference call. Secondly do go through mgt conference call on RB, its gives lot of additional information…

**Link to mindmap:**https://drive.google.com/file/d/0B8Mr8IuAEwz7VEFjTFRnNG9KMG8/edit?usp=sharing

**Link to extracts of ARs:**https://drive.google.com/file/d/0B8Mr8IuAEwz7dDFHTGNaOV8wNzg/edit?usp=sharing

Conference call:http://www.researchbytes.com/Kitex-Garments-Limited-K0213.htm

At the risk of repeating, the recent stock price movement suggest lot of expectations are getting build into the price. So please DO NOT TAKE ABOVE PRESENTATION AS STOCK RECOMMENDATION…just sharing my views…

105

Fantastic data, thanks Anil.

The earlier AR extracts of Kitex provide a great perspective. My takeaway is that the CEO while super bullish does not intentionally mislead investors, entrepreneurs are a different breed in that they always believe tomorrow will be better than today…

The low share of indian exporters supplying to US buyers can be construed as positive, given the huge share of Chinese exporters even a small loss in share will be a big delta for Indian exporters

Bobby

106

Guys,

We are delighted to bring to you Kitex Garments Management Q&A: Aug 2014

This kind of an extensive Q&A showcases VP collaboration efforts at its best.Several folks have contributed to make this perhaps the most insightful and extensive Q&A we have had. Preparations for the same were great - and notable contributions came in from almost each one mentioned.

Let’s keep this kind of collaborative drive and energy up :slight_smile: and inspire many more to put their hands up for attempting as comprehensive an in-depth understanding of a quality business, as this one.

Disclosure(s):

Management Q&A:

1). Ayush Mittal :Tracking & buying > 1 year, added more recently;Holdings > 5% of Portfolio

2). Tirumal Rao:Tracking & buying > 1 year, added more recently;Holdings > 5% of the portfolio

3). Pratyush Mittal:Tracking & buying > 1 year, added more recently;Holdings > 5% of Portfolio

4). Anil Kumar:Recent entry; Holdings > 5% of Portfolio

5). Vinod MS:Recent entry; Holdings > 5% of Portfolio

6). Donald Francis:Recent entry; Holdings > 5% of Portfolio

Special Contribution:

1). Kiran D: Recent entry; Holdings > 5% of Portfolio

2). Omprakash Davuluri: Recent entry; Holdings > 5% of Portfolio

1 Like
107

Hope everyone goes through the Management Q&A quickly.

We need to bring everyone on the same page about a few things that anyone can argue doesn’t completely add-up. And we would like everyone to quickly get down to dissecting the following/help us look at this issues hard, in light of the detailed info/insights theis Q&A brings to You.

Request : Do not attempt to opine/answer any of the below without reading and absorbing the in-depth Management Q&A. Request Admin to actively moderate and delete any superficial/irrelevent comments that add no value to existing discussion.

1). KCL - KGL Management Discretion : This will always remain that Management will continue to have this discretion. We have tried to dissect this every which way we could, and should we now give the Management decisively, the Benefit of Doubt

2). It is certainly arguable that most of the Value Creation is now happening in KCL. KCL too can now boast of a $15mn client - The Children’s Place is a KCL Client - on par with the Gerber, Babies-R-US, and Carter relationships of KGL, and growing. The ultra-modern Garmenting factory that is showcased belongs to KCL. The Processing (Production) set up is completely owned in KGL though

3). Please note that 5.5 L pieces/day is achievable capacity. Installed capacity is higher. It is with 60% utilisation that current capacity of 5.5 L pieces/day is achievable. With 70% utilisation, the achievable capacity will go higher. Average Realisations are quoted at $1 to $1.25/piece - if that were the case group revenues would have been much higher than ~700 Cr (4 sundays and some holidays would account for some 24 days/month x 12 months x 0.55 Mn). So either Production or Average Realisation/unit is lower. We need specifics of Quantity produced over the years to resolve this

4). No of Blocks/lines with KGL and with KCL? Needs to be clarified clearly and match with per block revenue calculations - current figures provided do not add up. KGL needs to augment its Blocks - by when? How long should jobwork at KCL be continued?

5). Asset Turnover Magic: ~4 Cr Incremental Investment per Block vs 80-90 Cr ($13-15 Mn) achievable Revenues per Block??? Even if this were achievable, this can be the KCL story which buys out Fabric from KGL. For KGL, Fabric processing Capital Investment needs to be apportioned in

If everything above becomes too confusing to get a grip on, consider following:

In simpler words, the Q is : "Excellence in this business quality/execution can’t be denied. We couldn’t find a more practical way to answer these questions on what does not add-up, other than by

a) Participating in the story

b) Experience Management walk the Talk, as we stay invested and keep checking/asking

c) A set of specific questions at every interaction with Management"

That seems the only practical way to resolve what doesn’t add up? Can you?

Warning to Novice Investors: What doesn’t add up - are big gaps between stated and what seems to be the current picture (as per current understanding; we retain the right to modify this stance with new data/information, and/or when more clarity emerges from Management-speak)

1 Like
108

Refer the insightful Management Q&A - that throws enough light on both BQ and MQ and the sustainability of Competitive position.

VP Core Team is of the opinion that if we have been able to get the level of insights that we already have - it couldn’t have happened without a very upfront and transparent Management.

It stands to reason that we should be able to get at the real answers by engaging with Management again on the same - and resolve the few things that don’t seem to add up.

Are these ignorable? Probably not - we should strive to resolve these at the earliest. Request everyone to devote attention on these and help us reach conclusions at the earliest.

Regular readers are advised to adopt a cautious approach, assess if you are comfortable giving the benefit of doubt on above issues, and only then heed the Recommendations, which if you read clearly has been issued with the Caveat - DO NOT CHASE THE STOCK! Buy around CMP! Accumulate on Declines.

**Warning to Novice Investors:**In our considered view, What doesn’t add up - are big gaps between stated and what seems to be the current picture on a few specifics (that are material as per current understanding; we retain the right to modify this stance with new data/information, and/or when more clarity emerges from Management-speak)

109

Hi Donald/administrator,

May thanks for the wonderful effort. One concern that I have at the moment about the recommendation is that kitex is currently trading at TTM pe of 27 with an expected growth rate of 20-25%(according to mgmt) while stocks like Kaveri and ajanta with possibly a higher expected growth rate and history of consistent growth are trading cheaper at 20-22 PE. What makes kitex a better recommendation to these two at this price. Are we expecting multiples to expand further or growth to be much higher than mgmt expectations?

110

Donald,

It does look like technology is the main differentiator between Kitex and other manufacturers. If thats the case, Isnt this a value trap? Just wondering where the “sustainable” part of competitive advantage is.

111

Sorry there was a major typo - in my submission last night - was too groggy to notice! Sorry if that has caused any coinfusion. The corrected text is as below:

2). It is arguable that most of the Value Creation is now happening in KCL. KCL too can now boast of a $15mn client - The Children’s Place is a KCL Client - on par with the Gerber, Babies-R-US, and Carter relationships of KGL, and growing. The ultra-modern Garmenting factory that is showcased belongs to KCL. The Processing (Production) set up is completely owned in KGL though<<

Before the correction this was reading as…

It is arguable that most of the Value Creation is now happening in KGL. KGL too can …<<

Original Post has been edited to correct above. This clarification is just for anyone who had noticed the error and had some confusion on what the fuss was about.

112

@ Hemant - while your question is certainly legit in times like this, we want to nudge you/all to VP process first. Valuation comes second. First comes MQ, BQ and Sustainability, and then slotting the Business into a Category.

Once that is done, only then can any meaningful discussion be done on Valuation - otherwise again it is your opinion against another. We expect that diligence from everyone, and especially you, as a relatively regular VPickr

@ Pankaj -the key is to see/think/feel - if some can match up or catch up at all, and how long would it take them to reach where Kitex has perched itself today. Form your query it appears you haven’t taken the story seriously enough - just did a cursory first-level dekko. Have you seen the video links - they can be good starting points - for a starting feel. But you need to dive into the details for that “real” feel. Spend time reading all the valuable material in this thread itself. Have you spent time on Anil’s mindmaps, for example? A great resource at one place - He must have spent more than a month on it, if I know him!!

113

Investing is not about certainty our picture perfect scenario… It’s about embracing the uncertainty and the unknown… Learning this… So rather than have nitty gritty questions that makes the management uncomfortable… I will voice my major 5 concerns (other than KCL)

1). Cash yield

2). Average rate at which processing job work done for KCL

3). Breakup of installed and present quantities of yarn.,Knitting, processing and stitching. We understand that it changes depending on item we just want a ball park figure.

4). Also if low return capital part for the branding exercise can be put forward and try to understand management’s prespective

5). Also when can we expect increase in stitching capacity. Till now focus is on increasing processing, etc… Which is loss making

114

Hi Donald/Team…

Thanku for a very exhaustive Q&A… Liked some of the tough Q’s to the MD ;)…

And VP is setting the bar higher & rightly with the disclosures… Very happy…

regards

mallikarjun

115

Following has been appended to my earlier post just after the Management Q&A publish.

For those who have read in the interim, here’s the update. If this has caused any confusion for you, please excuse us - they were unavoidable in the rush to meet Friday Late Night Show :).

In simpler words, the Q is : "Excellence in this business quality/execution can’t be denied. We couldn’t find a more practical way to answer these questions or, what does not add-up, other than by

a) Participating in the story

b) Experience Management walk the Talk, as we stay invested and keep checking/asking

c) A set of specific questions at every interaction with Management"

That seems the only practical way to resolve what doesn’t add up? Can you?

Everyone please also heed the Admin caveats/explicit warning to the readership.

Regular readers are advised to adopt a cautious approach, assess if you are comfortable giving the benefit of doubt on above issues, and only then heed the Recommendations, which if you read clearly has been issued with theCaveat - DO NOT CHASE THE STOCK! Buy around CMP! Accumulate on Declines.

**Warning to Novice Investors:**In our considered view, What doesn’t add up - are big gaps between stated and what seems to be the current picture on a few specifics (that are material as per current understanding; we retain the right to modify this stance with new data/information, and/or when more clarity emerges from Management-speak)

116

Good Q&A that opens up more of their business however doesn’t t really take the thesis further in terms of fundamental conviction.

The primary thesis of the mgmt is that there is ample business for everyone and the days of cut throat price cutting are over at least for the infant wear segment, so Kitex can continue to grow for a long time on their value proposition of high quality at reasonable prices.

Furthermore mgmt claims that entry barriers are high due to safety issues and scale so new competition won’t emerge overnight and upend them.

If both points above are true then Kitex would be today where Chinese garment exporters were in early 2000. Whether we will see that kind of explosive growth remains to be seen.

In terms of specifics would be good to understand how they compare on costs with Winglu on some specific infant wear items. Also would be keen to understand whether they see acquisitions as part of their growth strategy? Is creating new capacity cheaper than buying existing businesses which they can improve?

The company also seems ripe for PE type investments.

Bobby

117

One matter of concern is the ongoing investigations by Jharkhand Government on the recruitment process of young women by Don Bosco Tech for Kitex Garments. There have been allegations of human trafficking to Dubai etc. via Kerala. The matter is being under investigation by Jharkhand Womens Commission.

http://www.serialdaily.com/watch.php?vid=abd2dfa10

Sabu Jacob has made a clarification stating that their recruitment process is clean.

http://www.serialdaily.com/watch.php?vid=8c6d9101c

But their dependence on Don Bosco for recruitment could be a problem, in the light of this investigation.

Regards,

Raj.

118

Thanks Raj Nair.

Good Digging. Appreciate

119

Thanks to all who have put in so much of hard work in putting this up, This also reminds me that full time investing is not easy.

I have gone through entire thread, Q &A, mind maps. Would be grateful if somebody can share some light on fy 15 and fy 16 sales and EPS estimates. I could not find this in entire content, may be I was lost in details.

Thanks !

120

Hi,

Find enclosed my observation based on annual report of FY14 and FY13, which raise some concerns about management conduct. Please consider these as key risk areas being highlighted and I believe collectively we may be able to satisfy on many of these issues. Having said that, based on my decade long experience in dealing with distress companies, I would still like forum to ponder over and take final view:

1)Cash Balance: Rs 98 Cr in Current account FY14 vis a vis Rs 36 Cr in FY13. There is very nominal increase in interest income from Rs 36.9 Lakhs in FY 14 vis a vis Rs 36 Lakhs in FY 13

2)Sale of Scrap is increased from Rs 24 Lakh in FY13 to Rs 14.8 Cr in FY14. That also coupled with Net profit margin being almost doubled. Typically high scrap would adversely affect the margin. Here we find increase in scrap has not only contributed to bottomline, despite such large scrap, the companyâs operating margin has increased (almost doubled)

3)During FY13, The company added Gross block of Rs 3.69 Cr and incremental Depreciation was Rs 1.76 Cr (Rs 8.62 Dep Chage FY13 â Rs 6.86 Dep Charge Fy12). This give ratio of around 48% of Inc in Dep/Inc in Gross block. During FY14, the company added Gross block of Rs 79.35 Cr and incremental Depreciation of Rs 1.06 Cr only ( Rs 9.68 Cr FY14- Rs 8.62 Cr FY13 Dep Cahrge). This give ratio of around 1% of increase in Dep charge/Increase in Gross Block. Even if all addition is after Sep 30, still there would be depreciation charge of around 2.5% (assuming 5% for the year as a per cent of Gross Block).

4)The CA and Secretary and director, all signed there report as on April 3, 2014. Considering that April 1 Being Non-working day for the Bank, even reconciliation would take at least couple of day.

5)While still giving benefit of doubt to efficiency to the company, The sectreatial audit consistently showing deadline being missed by the company during FY13 and FY14 for filing there ROC return. In Fact, ROC filing of Balance sheet is on January 3, 2014 as against normal time line of October 31, 2013. Same is case with ROC charge creation forms. The selective efficiency need greater attention.

6)The company has interest accrued and due in current liabilities in FY14

  1. Mr.SABU MECKAMKUNNEL JACOB has promoted two more companies by name of Kitex Herbal Limited and Kitex Apparel Limited in 2014 and has been director on these companies since 28 Jan 2014. While there has been already issue about related party transaction, we have also new Kitex Apparel Limited, which by name suggest being in similar business.

  2. It would be worthwhile if we have growth back up between volume and realisation. Nothing is available in annual report. However, power consumption (being a rought proxy of actual production of garment), has grown 15% with revenue growth of 39%. Otherthing being same, it would mean 25% growth in Realisation, which is very high unless, company has improved its productivity substantially. One also need to understand that company is increasing automation (with use of robotics etc), which shall mean more use of power vis a vis labour.

Do look forward to view of other members of forum on same,

Dhiraj Dave

Kitex.xlsx (9.07 KB)

121

Super Dhiraj!

Cometh the hour, cometh the man!! We were discussing yesterday about the need to bolster a current weak area of VP Team - Forensic Audit - ability to quickly bring to the fore all inconsistencies.

Thanks a ton for taking the trouble to share your work. Let’s keep assimilating all such inconsistent data points. We will then take the opportunity again with Management to resolve the list of growing inconsistencies. The good part Management so far has been completely upfront about answering every query that we could throw up - that was more forma startegic, business quality and sustainability focus. But the time has now come around to focus critically on What does not add up - and resolve these as quickly as possible. Your are being co-opted in VP Team straightaway - I remember responding to your intro and inviting someone like you to participate more.

Others also - please step forward. The investigation is far from over. I am meeting my contact from the Sourcing industry again this week - for a validation of whatever we have heard - if there exists any counter-thesis to the arguments forwarded.

Let’s go through the new data points from Dhiraj and more that may prop up with a fine comb. While I am no one to comment on this, will request all CA friends/experts to comment on this aspect from their experience, especially

  1. The CA and Secretary and director, all signed there report as on April 3, 2014. Considering that April 1 Being Non-working day for the Bank, even reconciliation would take at least couple of day.

??