My observations
KITEX GARMENT LIMITED
About the Company
Established in 1992, Kitex Garments Ltd (KGL) is into exports of cotton and organic cotton garments especially infants wear located in Kizhakkambalam, Kerala.
World 2nd largest infants wear manufacturer
Per day production 4.5 Lakhs units with 4600 employees in payroll
Kitex also supplies to Jockey International. Most of their sales are export to US market.
Recorded highest turnover of 730 crore in March 2020.
Touched Market capitalisation of 5000 crore in 2015
Company enjoys EBITA margin of around 20% in past several years.
Infant wear is a specialised product.
Figures (based on 18/01/2022)
Market capitalization 1732 crore
Debt-free company
P/E – 22
Future Plan (Based on MD comment, report, MOU, Director’s discussion)
Kitex have a CAPEX plan of 2406 Crore and on the political issue, they have decided to move out from Kerala (Not an investor-friendly state) and invest in Telangana State(Number 1 state for ease of doing business in India).
MOU with Telangana Government has signed by the company for Capex plan of 2406 Crore. Kitex will be investing in 2 textile parks in Telangana state.
• Kakatiya Mega Textile Park, Warangal – 1113 Crore
• Sitarampur – 1293 Crore
Kitex has formed a subsidiary company in Telangana called Kitex Apparel Parks
On completion of the above to project company expects target sales of 4,000 crores. (Current sales of the company is 700 crore). Which is 4 to 5 time upside growth
Kitex will become world largest kids wear manufacturer. Current production is 4.5 Lakh units per day (largest player is from china having 5.5 Lakh units’ capacity per day).
Kitex capacity will become 18 Lakh units post expansion of above mentioned 2 units.
Capex has already stated in Kakatiya Mega Textile Park, Warangal project and expected to commission from December 2022. Project in Sitarampur will kick start from December 2023. So expecting full capacity from the company in 2024 onwards.
Telangana state is 3rd largest cotton manufacturing state in the country. So kitex can easily get these cotton which is the principal raw material for the company.
Offer from Telangana
The government will give an interest subsidy of 8%. So, the company can run the business with 1% or less interest for 5 to 10 years.
Income tax exemption
PF/ESI Exemption
Income Tax 8% Saving u/s 115 and 1% save 80JJA
Easy procurement of cotton from the state because Telangana is the 3rd largest cotton producer in the country.
Cheap labor, water, land cost etc.
Top of that Company will benefit from Central Government PLI scheme of 10,000 Crore.
MD says over 6 to 7 years company is going to get 70 to 80% return from the government in the form of various subsidies.
Management
The success of every business lies in the hands of its management.
No wealth will be made if operator is not capable enough. In other words, a good management can make wealth even if they run bad business.
Kitex group has made nationally recognized brands over last 2 decades that too from not an investor friendly state in India. Their major brands Chakson pressure cooker, Sara’s curry powder (Sister concern of kitex run by MD’s brother) and kitex infant wear.
Many companies failed to manufacture When NASA needs some special dress which will adjust based on climate change including Aravind mill and later the same has manufactured by kitex group for jockey who supply said items to NASA in USA.
My bet on Kitex (Why I invested)
Proven management
• 3 well-recognized brands created by the group.
• Run the textile business for the last 2 decades with above industry average EBITA margin.
• Moving out from Kerala to the best investor-friendly state.
• Infant wear manufacturing is not easy to start so many are not involved.
Business perspective
• Expansion is 4 to 5 times more of the existing plant (Expecting to hit 18 lakh units per day against current capacity of 4.5 Lakh units).
• Incentives from the Telangana government. (Tax exemption under income tax and interest subsidy of 6 to 7% which will result in 75% of investment of 2500 crore over a period of time).
Some calculation corners
My entry was when share was trading at 170/-
Share price - 170
Share Capital – 7 Crore Shares
Market capitalization (170*7=1190 Crore).
P/E – 15/-
IN 2016 Company’s market cap touched 5,000 crores with a turnover of 700 crore. Management says 2022 will have the highest turnover in the company)
On future (perspective)
When they complete plants in Telangana top-line touch 4000 crore
Keeping same profit margin – 10% = PAT = 400 Crore against current year 100 crore PAT)
Multiplying with current P/E = 400+100 = 50015 = 7500 crore market cap
If market is crazy about valuation in 2016 when p/e was 40 then valuation will be 50040 = 20,000 crore.
So share price may hit = 20,000/7 = 2875/- (Oh my god). Forget even if it touches 1000 great return (fingers are crossed. Time will tell).
Assume when they get 8% tax exemption and 8% interest subsidiary the profit can double or triple. No, I don’t want that calculation.
Summary “Heads I win; Tails I don’t lose much” borrowed from Mohnish Pabrai whose thoughts have influenced me a lot
Concern
Management runs a non-listed sister concern of similar business
No idea about company funding plan for new CAPEX of 2400 crore.
The market is all-time high and any correction can have an impact of all shares irrespective of the performance of the company
Highly labour and CAPEX intensive industry. Scaling up with such huge labor can be a concern
All figures are based on comments from management. Need to wait and see how demands pick up
Highly dependant on 3 to 4 suppliers.
Vietnam and Bangladesh are more competing companies in the sector when china plus move starts.
These return will be expecting 4 to 5-year time frame.
My entry was at 170 range and now share trade at 265 Range (30/01/2022) Seems bit priced based on current earnings.
My view can change and I will exit based on future developments so keep it as only a discussion for education purposes.
