Kitex Garments Limited

Stock Opportunities Not-so-Hidden Gems
142

Based on EPF Code, 15513, I search on EPFO Site. It is appearing for Kitex Garment Limited. FY12 Audited Report for Kitex Garment has folllowing comment (Signed on April 20 2012)

"The Company is generally regular in depositing with the appropriate authorities undisputed statutory duesincluding provident fund, investor education and protection fund, employeesâ state insurance, income-tax,sales tax, wealth tax, service tax, customs duty, excise duty, cess and any other material statutory dues applicableto the Company.According to the information and explanations given to us, no undisputed amounts payable in respect ofthe aforesaid dues were in arrears, as at 31.03.2012 for a period of more than six months from the date theybecame payable."

MR. M C Jacob, father of Mr. Sabu Expired on 5-6-2011. So Mr. Sabu has been full control of operation in FY2012 since when the high growth started.

I am enclosing EPFO code number for orgnaisation

.No Old Region Code/
Estt.Code/
Estt.Extn		 Region Code/
Office Code/
Estt.Code/
Estt.Extn		 Name Address PIN EPFO Office Under RO Under ACC Payment Insp. Stat.
11 KL/0024263/000 KR/KCH/0024263/000 KITEX CHILDRENS WEAR LTD PB NO.5KIZHAKKAMBALAMERNAKULAM676KL 683562 KOCHI KL - THIRUVANANTHAPURAM TAMIL NADU AND KERALA null -
12 KL/0015513/000 KR/KCH/0015513/000 KITEX GARMENTS LTD P B NO.5. KIZHAKKAMBALAMERNAKULAM 676KL 683562 KOCHI KL - THIRUVANANTHAPURAM TAMIL NADU AND KERALA null

143

On EPF point, the auditor has subsequently mentioned the dispute amount payable to EPFO. So, it might be disputed amount between Kitex and EPFO and to that extent there is disclosure in annual report. Please read the my previous comment in light of this note.

Dhiraj

144

On issue of KGL and KCL revenues , management said clearly in the latest results concall that first preference for orders is to KGL provided there is enough capacity. Management also said several times that KCL needs to scale up / improve performance before they consider merging.

Not really a surprise that KCL is underperforming.

145

Hi, you guys are doing some great digging. Keep going.

The 2014 KCL sales was at 250 Cr. Capacity for KCL is 450 Cr sales.

146

Fantastic work done by Donald and the team, this kind of work is rare, congratulations for that. I think credit also must go to Dhiraj and Balakrishna, for raising some very valid red flags. As for me the quality of the Interview was brilliant, but for me there seems to be something a bit fishy and cocky about the management, this could be completely wrong, and this may well be a multibagger, but I think we have many other opportunities which will perform as well, this for me is a pass.

148

Hi Dhiraj,

Good to see you taking up closer scrutiny of the co. We had discussed a cpl of points at the AGM. Below are some of the views we have:

1). We had asked as to why the co has both debt and cash on balance sheet - the response was that the debt is being continued due to the benefits under TUF and Packing credit. Both of these loans are at much below the normal rates and hence both cash and debt is being continued. On the question of why the cash is parked in current acs - we couldn’t take it up properly but what I remember is - they were undergoing a major capex last year and hence the utlilization was not that effective. (This surely needs a follow up and better utilization from the co…may be a better picture will emerge in coming year)

Also, we need to appreciate the aggressive scaling down of the debt equity ratio from almost 5:1 in 2007 to almost NIL this year. This shows that the business has surely generated cash over the years.

2). The sale of scrap is because of the seconds sale (defective production during the year) and the co doesn’t earn anything much on that. So it would be wrong to assume that the margins have increased due to that.

3). The CAPEX was completed only in late Feb or early March, hence we didn’t see much increase in depreciation last year. If you observe the quarterly nos closely, then the depreciation is increasing. Depreciation over last 4 qtrs - 2.21, 2.51, 2.81, 5.04.

4). Though I agree that its unusual to prepare the acs so early and it leaves scope for some errors, it is not impossible either. Rather, it also reflects that the business has lesser variables and parties and hence accounting and re-conciliation is easier. There are 3-4 more cos, which always declare audited results in first week after the closing qtr/year. But yes, there shouldn’t be such hurry from the co and it won’t yield them bonus points :slight_smile:

5). This is a good question - as to when a co is being so efficient then why delay at some points. But again, I believe its not serious and could be ignorable.

7). As a group they have several business and this seems to be normal. We shouldn’t be questioning till there is a material scale up in any of new co in the same line. On the KCL thing, Mr. Sabu has well explained that he had hit the maximum gearing in KGL (debt equity 5:1) and nobody was ready to fund…so he had to create KCL and take a personal risk.

Thanks & Regards,

Ayush (using Pratyush’s proxy account)

1)Cash

2)Sale companyâs

3)During â

4)The

5)While

6)The Mr.SABU

149

@ Aayush,

Thanks for revert on point. While of the points raised, some are more critical and then others. In an emerging companies, we would always have grey areas on certain issues and that is why those are emerging companies. I have not much to say beyond what I have posted previously and would leave it to forum members individual judgement about to invest in company. My objective was just to highlight certain concern areas and assist all members to take investment decision after considering all points. Finally, equity is risky business and if we would have all answers and clarity then Kitex would also be trading at Page industry P/E multiple :slight_smile:

Regards

Dhiraj

150

I also need to make one disclosure. I have raised serious concern on Capital Point Limited in past on Valuepickr forum and that company had a great run in recent past. So, please evaluate all discussion in totality and take final investment decision.

151

Apology for wrong name of the company, actually it is Caplin Point Laboratories Limited

152

Dhiraj,

Ayush has already answered the more seemingly clear answers like Interest/Scrap and Depreciation

I would want to highlight few other issues to you.

1). Regarding Balance Sheet Filing on 3rd April - No Finance Guy takes an off on 1st April. Many companies (and unlisted one’s too, finalise financials in first week after month end). Infact if you have established processes of monthly closing, and good ERP systems it is not difficult to finalise financials on 1st of the month itself. I can say that with experience, as I have been in the field of account finalisation/audit for more than 6 years now and have seen accounts being finalised on 1st itself across major companies. Its just a matter of discipline/good systems/experienced accounts personnel. Moreover, date of signing is not something to bicker on (In India all financial documents are back dated, even Bank documents – you will find this issue even in the best corporate governance wala company)

)- - - ALso there is a concept of hard-close audit (Auditors dont check everything on the last date. Personal feeling - you are reading too much into this

2). Last year there was a major cconfusion on XBRL Filing with MCA. Chain of events being :

)-- For FY-2012 MCA had permitted first time filing of financials in XBRL mode at a much later date (if I remeber right, it was Dec/Jan) (due to lack of XBRL Training, new software, issues with MCA site etc).

)— MCA failed to provide new dates for FY 2013, and info on their site was crap (in FY2013 they were mentioning deadline dates of Year 2012)

I personally wrote to MCA (on behalf pf my company) asking clarity on submitting financials and they themselves were not clear on date of filing return. May be we can give Kitex benefit for this aspect. Infact a lot of companies faced issue with ROC Filing in 2012-13 due to the shift to XBRL.

)-- EPFO Default is different from dispute. A minor delay can always happen (Wat if the person filing EPF Returns fall’s sick/there is a problem with Bank Site).I am citing issues, I face daily in my company.

Moreover, there can be a dispute with EPF Authorities on policy issue(if Auditor has clearly mentioned this in the Audit Report, then it is not a red flag. Just observe disclosures in Financials)

While I really appreciate your data digging (and some observations were excellent), I would like to point out humbly that, some of the issues were too suspicious. While doing forensic audit, we must not forget business realities/day to day issues.

Please let me know if you find any other grey area

1 Like
153

@Ashwin,

I would suggest you to go through secretarial audit report for FY14 and FY13. There has been constant penalties paid by the company for not filing even ROC charges on time, Cost accountant appointment and filing annual return.

I am also personally director on unlisted public limited with very nominal activity. Despite that, when audit is done, it does take time of 30 days mainly due form 26 AS being not available. In fact, the income tax department give time till 30 April of every year to file TDS. The company might be super efficient on filing its TDS, but Banks (For instance on interest on TDS) would not give TDS certificate (Form 26 AS) before on April 30, 2014. So we are not only assuming that the company is efficient, we also assuming that all associated party with the company are also efficient. This is just an example why a prudent auditor would wait for some time. When I checked with My CA, he cited this as reason for not being able to sign and complete audit before April 30, 2014. Please note that I am not a CA and would seek suggestions from you and other friends on same.

The second part is such efficient company has not parked funds in fixed deposit and not book any interest income (to justify size of cash and bank balance).

Lastly, I think that I did not made the scrap point correctly. In FY13, the company has scrap sale of Rs 1.6 Cr on total material consumed of 161 cr (around 1%) . In FY14, Scrap sale gone up to Rs 14.8 Cr on total material consumed of Rs 235 cr (around 6.3%). Now in this case, since the balance good material with normal margin only 93.7% (as against 99% last year) and we are seeing increase in EBITDA, the growth need to substantial at high at realisation level for balance sale to see jump in EBITDA margin (which is what we have observed in FY14). Scrap can rarely result in EBITDA improvement, more the scrap lower the EBIDTA. So the point was with 5% Scrape increase, we find EBITDA improving which why the concern.

I had nothing more to say and thank you for providing your insight on the issues.As usual, the glass is half full/empty depending on one’s interpretation. Actually, the glass is always full, the problem is content mix of air/water in the glass.

154

Dhiraj,

I’ll check the Secretarial Audit Report.Can you please forward me.

The Financials say, ‘No Adverse Comment’ on Secretarial Compliance.

)- ROC Charge creation is a very small compliance part (its just a for info kind of announcement)

)- Annual Return Delay (is it for year’s other than 2013 and 2014 ?)

Any ther flaw you noticed ?? Let me know.

However, let me assure you, if it contains any serious flaw, a Good Auditor would have highlighted it (that too in bold italics).

Please do not judge a business by small trivial delays. Its good to keep our eyes open (but we cant penalise a company for tiny problems which happen in the course of business)

)- Re-iterating your point on timely Balance Sheet submission - 26AS is an issue only for professionals who provide services (not a big issue for manuf concerns), I am sure Kitex would have no problem. It would have TDS only on interest income (Auditors will not hold back the financials for the small issue. They can always take care of it during Tax Audit).

Trust me, manufacturing concern/disciplined organisations would have no problem in signing of financials on 3rd of a month

155

I read you are not a Chartered Accountant : You might be confusing on Tax Audit and Annual Audit. All these TDS Forms etc, are for Tax Audit. These do not effect Annual Audit and their timely submission.

Would Request You and Donald, to let me know any issues you face. Will help you in judging to the best of my knowledge.

156

@Ashwini

While it is true that tax audit and annual are different, for annual audit also the auditor comment on TDS and advance tax. A prudent CA would wait for same being reflected in Income Tax office or not. In fact, in Company audit, CA insist on Form 26AS to confirm the interest income, which I feel is reasonable. We do not need auditor for TCS (reducing EPS by Audit fees) and are forced upon on Satyam (reducing EPS and not even protecting minority shareholder interest). In my opinion, the Auditor need to give its independent view on financial after checking with management and doing necessary independent check.

I have seen youtube video of Kitex Facility and personally visited Alok Industries facilities in 2004. Alok fabric processing facility at that time was on a larger scale and comparable to what Kitex had today. Did that made Alok a great investment idea? Alok at that time also given same logic that WTO is dismentle and all US companies would source from India as alternative to China. Market share in Garment trade was 2% for India and 25% for China even in 2003. Secondly, What I understand from Valuepickr interview and other sources, that margin of the large customer to the company in pressure. Can we see profitability of auto ancillary suppliers increasing while margin of auto industry under pressure?

When I find many unexplained issues, I would wait for explanation, rather rushing for investment. Other members are anyway if find investment idea attractive shall invest.I have proven wrong many times in past and hope that Kitex also proves me wrong. I would be more than happy for my fellow friends who invested. My experience with Kitex is just 2 months while some members know the company for more than 12 months and hence I would respect their opinion.

157

@Ashwini:

I missed your first post about Secretarial audit. My observation are based on FY14 and FY13 annual report for the company. Rest I have already said in my previous comments.

158

Dhiraj, Aveek and Others are doing a tremendous job of flipping the perspective - and putting on the SKEPTIC hat. Its extremely important for us as investors, to wear a different hat and go after a diametrically opposite perspective - I love that part equally.

Thanks Ashwini & Ayush for your qualifying comments. Look forward to more help in this area.Think there has been fair degree of diligence and also discussion on what does not add up - even if they are minor - some are issues that stick out, and we will point to them and ASK Management for responses.

There are always means & ways to ask uncomfortable questions-in a nice way, without adding our interpretations - but just pointing to a fact - that has happened! just like we pointed to the SDPI protest hoardings - and I am sure everyone reading the Mgmt Q&A would have found that aspect of the discussion both illuminating and re-assuring. Had that been kept under wraps - our comfort level would have been different, isn’t it.

We will be failing in our duty to the investment community, if these are not addressed. I for one do not flinch from asking the toughest or the most minor uncomfortable questions (if we have the opportunity) - once the strategic/Business Quality dissection is over.

Think Dhiraj, Aveek, Hari and others are doing a commendable job of taking the examination further in a way - that VP Team so far - hasn’t been able to. The VP community welcomes and values your contribution highly - this aspect was certainly missing - you Dhiraj in particular, have a natural talent for spotting the small small warts - which most untrained people like me don’t or even if we try will do a poor job (even the CAs), because that’s not what energises us!

We must spot diversity of talent in VP and encourage them, so that together as a team we can always keep improving, always set the bar higher!

159

I think you guys, Aveek in particular, had unearthed a significant red-flag but I am not seeing much discussion or clarity emerging on that. Those who have the KCL data downloaded and available, can you fill up a small table for us, and present?

Comparison KCL KGL KCL KGL KCL KGL KCL KGL
Financial Year FY14 FY14 FY13 FY13 FY12 FY12 FY11 FY11
Sales
EBITDA
PAT
Other1
Other2
160
Particular KCL KGL KCL KGL KCL KGL KCL KGL
FY 14 14 13 13 12 12 11 11
Sales n.a. 422 146 317 209 315 115 256
EBITDA n.a. 108 34 64 41 64 28 50
PAT n.a. 57 13 29 17 27 10 20
Net worth n.a. 174 62 122 49 97 32 73
Total debt n.a. 119 70 92 90 88 60 109
161

KGL Financial are sourced from Screener. Please note that Kitex Childrenwear debt is lower as current portion of Long term debt (part of Other current liablities) is not giving breakup. However, shall be material.

162

Last statement shall be read as “however, Shall not be material” Apology for error.