Kitex Garments Limited

Just voicing a hunch - do not have any data to support it :

Is the company playing around with scrap income (2nd quality garments) to manipulate NP? Most companies account for scrap on cash basis rather than accrual basis as it is an insignificant item. So has KGL accumulated scrap of several years and sold it together in FY14 to improve the NP?

Hi All,

Since yesterday seems lots of discussion happened in the thread… read all quickly.

  1. Both KGL and KCL have not yet submitted from 23AC U/S 220 to MCA as yet, it is difficult to know the state of affairs in KCL as on 31/03/2014. However, group revenue decreasing from Rs. 524 Cr. in 2012 to Rs. 463 Cr. in 2013 is a point which seems important to me.

If revenue of KCL in 2014 is Rs. 250 Cr. as informed by Vinod MS then we need to know if is it an one time spike or a thing which can be sustained. Seems for the year 2015, it is manageable.

  1. As per Aysuh, total expansion project completed by Feb '14 only and hence there is only about Rs. 1 Cr. of incremental depreciation for Rs. 79 Cr. of incremental asset addition. So, this year, we probably have about Rs. 22 Cr. of minimum depreciation expense. An observation … where is the reflection of additional expanded capacity in Q1 '14 result? In Q1 '13 Garment revenue was Rs. 85 Cr. (Fabric Rs. 51Cr.) and in Q1 '14 Garment revenue is Rs. 81 Cr. (Fabric Rs. 49 Cr.) and profit margins are also very similar. Anyway, let us see, if MD’s projection of Rs. 130 Cr. Sales materialise in Sept '14 and what is the margin expansion.

  2. Increased scrap may be attributed to trial run for expanded capacity or some batch failure or things similar to that. It is very difficult to find out exact nature. We can only look for a QOQ / YOY pattern for this.

  3. To me one observation by Dhiraj is extremely interesting… Electricity consumption didn’t increase in tandem with increase in sales revenue. Is it depend on product mix? Per unit realization increase from same type of item is unlikely hence may be a change in product mix is a plausible reason.

  4. I am unable to fathom why a company who completes audit at lightening speed fails to comply with ROC regulation and pays penalty year after year… It defies logic. I have very casually asked two of my CA friends (in KPMG and E&Y) about the speed of signing which Dhiraj raised. Both said it is theoretically possible but practically difficult. Anyway, on a lighter note, as we all know how auditors work in India and how good is our corporate governance standards, anything and everything is possible and can be justified!!! (Ashish Dhawan in a public forum recently told that “Audit is the biggest joke management makes every quarter” or something very similar… I forgot exact lines).

I would be interested to get the answers to questions raised in my other post on Carter’s purchase etc…

Think its premature to draw any conclusions because of a single year dip in 2013. FY14 Sales for KCL are reportedly at 250 Cr (from the Management). We need to wait of KCL 2014 results to be filed.

As mentioned before, we need to watch closely and see if the Management walks the talk. My sourcing contact is out of the country but is expected back next week. Should be able to give some update by next weekend.

As of now, we do not find anything significantly adverse, though there are sore warts that stick out for a company that seemingly prides itself on benchmarking itself with the best. Perhaps Accounts & statutory Filings are not yet in that ambit. We will surely point these things out.

Q2 results will be the main track point next - as we have seen aggressive guidance. Any disappointment therein could make things volatile!

Meanwhile we need to become very clear - whether that should be treated as an opportunity, or??

Have read and re read everything. Some queries and observations:

)---- Remove other operating income from sales and observe historically. Margins are in the 12 to 14 percent band which is not off the charts and is feasible. This could be the answer for people who believe company makes too much margins.

)----- Last year scrap sales was too large. So maybe one needs to consider that as a one off. If you remove that from numbers and see underlying then even with the aggressive guidance they have given stock seems too expensive.

)------ Even if you get good pat growth in 2q and 3q pat growth should one get excited? Because majority of exceptional scrap income came in 4q. Can that be repeated?

)------ Seems too expensive for company with unresolved corporate governance issues don’t you think. It seems real hard to pull the trigger on this one at current levels. For those who got in early…congrats.

)------- By the way do the pledged shares bother anyone on this forum. Pledged shares usually is warning bell for me. Maybe promoter have pledged shares of KGL to raise loans in KCL or in some other unlisted businesses.

What about the human trafficking allegations

I mean it seems like a great story but has a whole host of other issue KGL KCL, human trafficking allegations, pledged shares, exceptional scrap income.

Year End Mar31 (Rsmn) FY10 FY11 FY12 FY13 FY14 1Q
Net Sales 2,474 2,420 2,963 2,968 4,028 962
Growth % -2% 22% 0% 36% 2%
EBITDA 236 313 425 399 557 206
Growth % 33% 36% -6% 40% 109%
Margins 9.5% 12.9% 14.4% 13.5% 13.8% 21.4%
Depreciation (66) (69) (69) (86) (97) (50)
EBIT 170 244 357 313 461 156
Growth % 43% 46% -12% 47% 103%
Margins 6.9% 10.1% 12.0% 10.6% 11.4% 16.2%
Interest (152) (125) (176) (115) (106) (36)
Other Income 59 52 63 40 133 24
- Interest 2 2 3 4 4
- Others 2 8 11 8 15
- TUFS Subsidy 47 19 32 2 1
- FX 8 24 18 26 113
Other operating income 201 141 157 202 394 66
- Duty drawback Income 201 138 151 179 233
- Service Tax Refund on exports - 1 4 6
- Sale of manufacturing Scrap 3 4 17 148
- Others 0 2 2 7
PBT 278 312 401 440 882 210
Growth % 12% 28% 10% 100% 0%

Tax (93) (106) (130) (147) (308) (66)
Rate % 33.4% 34.0% 32.4% 33.3% 34.9% 31.4%
Recurring PAT 185 206 271 294 574 144
Growth % 11% 31% 8% 95% 11%
Margins 7.5% 8.5% 9.2% 9.9% 14.2% 15.0%

Just an addition. EBITDA margins less than 15% till FY14 end (if you remove other operating income). But 1Q margins are stunning. Why has gross margins improved so much in 1QFY15. Is there anything exceptional here?


Thanks for taking the trouble of making the picture, clearer for everybody. The data/breakups on other operating income is really useful for anyone wanting to understand the sources of profitability for the business - please pay attention there.

Re: some queries

a) You can completely rule out human-trafficking allegations; they are just that - allegations; the Management Q&A devoted significant time to understanding what was behind all these political troubles - and Management views on the same as threats to continued operations. We are convinced, that Management is on strong ground on that front - local support is won over - and is continuing to make significant emotional and financial investment fro the betterment of the community since last 2 years. Please read the Management Q&A specifics on this part again, and follow the wikipedia link on SDPI - the organistaion behind the allegations for a more complete perspective

b) KGL-KCL discretion : This will remain as a concern - especially for distant viewers. Anyone who has met Management and spent some time questioning this aspect though - has come away giving Management the benefit of doubt (includes FIs like Motilal Oswal who reportedly reversed their earlier views). The good part is that Management hasn’t flinched from answering very direct questioning on that front - all answers were straight from the hip - no deliberation/no searching for answers, if you know what I mean. Again read the Management Q&A focusing on just this aspect, and take your call.

I am waiting for the second round with the Sourcing point - that may throw up some inconsistencies between Management commentary on the business/outlook, buyers market vs Sellers market, and their own assessment of Kitex competitive positioning, quality as the biggest differentiator at similar costing, etc.

That will be the time for shifting the discussion on to Valuations, not before. Meanwhile it will pay for everyone to think through - how would you slot a business like this - B+, A, A+, A++ - opinions are very diverse on this aspect - and there lies the decisive key to thinking about whether to participate in the story or not. We would have certainly liked to UNDERPAY - but that’s not always possible in a building bull-market like scenario.

Those interested, please get the framework right by famililarising yourself with what we call as the ART OF VALUATION.

The safer way certainly is to stay out, but we at VP always like to stick our necks out - and take a stand. We may be proven wrong - but if we keep hedging our bets - we will stop learning. We believe different stages of the Market requires slightly differently calibrated strategies - and are willing to get our hands and faces dirty :slight_smile: - while retaining the core focus on business quality as strong as ever before.


From management commentary and stated numbers below, can we safely summarise that margins aree likely to be constant at 13-15% (Mgmt says both parties neeed to survive and hence every 6 month or so prices will be re-calibrated in order to offset the losing party)

What I feel is that Kitex is a play on future sales growth. The company might be looking to leverage its partnership with big retailers when the retailer enter new markets(like India etc). Thats where the growth would come from.

Merger is obviously a icing on the cake, but that would not be the investment rationale. Other future savings in cost (like interest, manpower costs etc) are also a extra dollop on the ice-cream.

Am I getting it right ?


We have been maintaining that Management commentary will need to be cross-checked. There can be more to the Story than is being put out. Some salient data points from my industry contact:

1). Atleast 7 players of comparable sizes to Kitex and supplying to common customers. Some are expanding in a big way too.

2). BEST Corp, SP Apparels, First Step, Jupiter Knitting, CMI, Jay Jay Mills, Kitex

3). First Step Bangalore has expanded recently and put up a new state-of-the-art facility near Bangalore

4). Quality being a big differentiator - NOT TRUE - too much of a drum is being beaten on the Quality front. Harping too much on the product. While it may be debatable that Kitex supplies fabric made of better quality yarn - that’s hardly the buying differentiator ever - as everyone meets the minimum standards needed. “Unnis-bees” ka difference doesn’t sway buyer order placement who are focused on profitability. At best it is a good selling point. Price and on-time delivery record sways buyer behaviour. **Have you guys asked Vendors about their on-time delivery record?**Ask about past 4 seasons - and you may get a better grip on the situation.

5). Atleast one of the big buyers mentioned by Kitex - sources 5x higher from BEST Corp and First-Step 2x higher than it sources from Kitex. All things being equal (read minimum specified quality), Price, On-time delivery record, and Relationship has more sway on the buyer order placement and scale-up from season to season

6). Almost all Buyers put a cap on max 30-40% exposure to a single vendor. It is safer for both parties. Some have expanded capacities in place now to scale up on relationships.

7). First-Step quality is like “Makkhan” - the exact words used. There is another player like Prime-Tex whose quality is the best - super premium - but his overheads are higher. Volumes for this particular vendor is at 65% of Kitex for that one player cited above.

8). Bangladesh is also scaling up in Infant-wear. Jay Jay Mills in particular is one audited facility (when quizzed about prevalent social ethical norms) as is Inter-Stop Bangladesh. Besides Bangladesh has the advantage of zero duty (LDP=0) even if say India could match competitive pricing

9). Baby Suit Realisation per Vendor : ~$1.1 on an average

10). Retail MRP in US is 3x average vendor realisation. However there are low-downs. On actuals, on an average there would be only a 20-40% mark-up on the vendor price depending on the player. Some like TESCO operate at lower markups but higher volumes.


Please spend some time on these established manufacturers from India with significant infant wear presence. Lets collect more data-points for a more objective assessment than we have done so far



I had a brief look at the most of the competitors websites. Most of them look generic manufacturers like men, ladies, children and infantwear and not specializing in infantwear.
To me it appears as if kitex is the only one specializing in infantwear.

Even firststep is getting into childrenwear(age 3-8) etc from the earlier being only a infantwear manufacturer
what could be the reason ? Is it that infantwear is saturated and no growth or there are some other difficulties in scaling up business in infantwear ?
revenue growth for last 3 year for firstep is at 16% per year, Is that the reason they are getting into childrenwear (3-8 years) ?

)- Knitted garments for Men, Women, Teeners, Schoolers and Toddlers. Specialization in Underwear and Babywear
)- customers: hanes, kirland, champion, mothercare, next, sainburys, ASDA, destination XL
)- uses oeko tex ???
)- employees : 7500
)- total revenues: $100million

)- 50% infantwear 45% children and 5% ladies
)- capacity:2.50L per day (comparable to kitex)

)- 2011-12 capacity 29M annually
)- Enhancing our product portfolio to include offerings for toddlers (ages 3-8).
)- Modest capacity expansion based on demand from customers.
)- First Steps has on its rolls 4000 employees and produces 29 million garments annually.(2012 data)
)- kitted garments for new borns upto the age of 15 yrs

FY12: 56.9 Million (42.M + 14.3 M)…29M picies…close to 2$ per piece…would not match with infantwear…something wrong here ??
Is FY12 revenue only 42M ? what is the second table ?
FY13: 66 Million
FY14: 77 Million
FY15 revenue: 88million (projection)

revenue CAGR FY12 to FY15 - 16%…too low ?

Kitex - 3800 employess annual capacity = 87million per year . Is kitex 3 times more efficient based on FY12 data of firststeps ??? - 60% to UK

jupiter india:
)- children women men - both garments and undergarments
)- 1.5L per day undergarments
)- Hanes pciture in background

ladies innerwear ?? no links in website

JayJay mills:
Newborn / Infant
)- Bodysuits, Sleepsuits, Caps, Mittens and Booties, Blankets. Bibs, Hooded Towels, Washcloths, Fitted Sheets for Bassinets / Cradles / Cribs / Cots
)- T-Shirts
)- Thermal Nightwear
)- Long Johns (Pyjama sets)

sorry forgot to remove the blank lines in between. It does looks dirty.

Guys, (Dhiraj,Aveek,ananth,Ashwini,Venkatesh,Ayush,Donald)

The kind of collaborative effort on digging info, questioning assumptions and replies we have seen in this thread is what makes vp such a lovable place.

The learning’s for aspiring investor’s is not not just limited to his knowledge and money gains on Kitex Garments. It goes deeper & wider, impacting the way he approaches investing.

A big thanks from my side to everyone.

Notwithstanding anything that has come up so far, post the Management Q&A - Kitex Business looks set to do the 25% CAGR business growth for next 2-3 years. That picture/visibility has not changed.

The picture that has changed however is the undisputed/unassailable leadership position even from within India. That can come under threat in a couple of years time, or even sooner, if Competition can get its act together. From the Large Buyers side, it does not appear that there is a marked preference for one or the other player.

Everyone - both buyers and manufacturers - seem to be looking to limit their exposure to 30-40% from a single source/buyer - which is a pretty healthy thing for the Infantwear Industry in India I guess. All things being equal say for the top 5-7 players, Relationship scale-up will happen where larger capacity becomes available.

Will competition get its act together - why or why-not and how-soon or never??Encourage everyone to dig deeper into the Competitive Picture and make sure we have the right data-sets for the next Management Q&A :-). Appropriate Industry/Sourcing contact establishment should always be the first step in our data-gathering/research/analysis process for any new sector!! (Process Learning).

Having spent considerable energy on BQ, MQ and Industry Position, it is time now perhaps for us to shift attention to the Valuation question.

Allow me to first put up a simple framework exercise, and then all of us can have a go :-).

I concur with Raj. I hope to be able to contribute back as much as you all are teaching us.


Note: Work-in-Progress Borrows heavily from STAR framework as described by Ambit Strategy Report : Cusp of Greatness

Strategic Assets



Distinctive Capabilities



- Patents

Architecture/Organisation Style

- Proprietary Know-how

- Customer Relationships

- Licence/Franchise

- Supplier Relationships

- Regulatory Permissions

- Distributor Relationships

- First Mover Advantage

- Employee/Team Relationships

- Legal Rights

- Co-operation across Relationships

- Monopoly/Duopoly

- Oligopoly


- Natural Resource access

- Leader vs Follower

- Raw Material Chain control

- Doing things differently

- Replicability/Catch up distance


- Price-Premium vs Peers

- Branding-Spend % of Sales

- Time since Leadership position

- Media recognition

Please use this as a starting point to organise our thinking around placing a measure or value to the Intangibles in the Business. The idea is to use these Intangibles (along with the Tangible Fundamentals) to slot or categorise the Business first.

Why should Kitex claim a place in VP Portfolio - rubbing shoulders with the likes of Mayur, Astral, Ajanta, Polymed, Kaveri, Shilpa, Shriram City?? Is it A Category business, or A+ category Business or A++ business - even though we know it operates in the near-commoditised Textiles space - so was a Mayur Uniquoter, remember??

Or were we wrong in our Assessment? We could be, but instead of being hostage to subjective opinions, we feel this kind of an exercise by everyone will help establish much more objectively - the Valuation Case for Kitex Garments.

Over to you Guys!

PS: Sample Excel with above Table attached for members to capture their thought process on above parameters. Perhaps we can attach Excel-workings and describe/highlight findings in the discussion

Valuation-ART.xlsx (10.1 KB)

On What basis Kitex is rallying so hard ? Is it expectation of a super super Q2 ? Some insider news ? What is cooking guys !

Learnt that 22nd is a board meeting to appoint a new auditor ? This cant be a big trigger ?

Recently learnt on twitter that Prof Bakshi has also entered the stock ?

Comments Pls, Thanks !

disc : invested

You can be focused on Quality of Business/Management or you can be focused on newsflow.Choice is yours!

Looks like folks are unwilling to try a valuation exercise …spoon-feeding isn’t going to lift discussion/understanding levels …active participation will.

Oh - wow. this is so exciting - read the entire thread at one go and it feels like a financial thriller - lots of twists and turns.

I will speak to a M & A head in an indian textile company who I knew in the past and also to another guy in textiles to see if they know kitex and if they have any inputs.

I worked with someone who exported high - end upholstery (where margins are 15-18%) and even they used to whine a lot about not having pricing power. one of my favourite areas is to find out if the numbers add up - I use triangulation which means one needs 3 independent data points to confirm a thesis - if one of them is wrong, start all over again in defining the thesis. For eg, using that I found out that shakthi pumps numbers were not exactly most reliable

Think about it, himatsingka which is possibly one of the few brands which has global standards of textile design runs at 15-16% EBITDA margin and have a brand of their own ('atmosphere"). why should kitex have a higher margin ? people spend $ 800- $ 900 on upholstery/bedding for a good design.

anyway, let me do some digging and come back on this.

Such a privilege to be a part of such curious, focussed people.


Today Motilal has started coverage on Kitex with a strong buy on 12 month target of 651, an upside of 50 % from current levels.

disc : invested