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Thursday, July 23, 2015


Scrip Code: 521248 KITEX
CMP:  Rs. 840.10; Market Cap: Rs. 3,990.47 Cr; 52 Week High/Low: Rs. 1,074.00 / Rs. 241.50.
Total Shares: 4,75,00,000 shares; Promoters : 2,57,65,597 shares – 54.24 %; Total Public holding : 3,19,18,226 shares –14.38 %; Book Value: Rs. 55.55; Face Value: Rs. 1.00; EPS: Rs. 21.06; Dividend: 125.00 %; P/E: 39.89 times; Ind. P/E: 46.20; EV/EBITDA: 20.84.
Total Debt: Rs. 140.75 Cr; Enterprise Value: Rs. 3,931.13 Cr.

KITEX GARMENTS LIMITED: Incorporated on 1991 and is based in Kochi, India. Kitex Garments Ltd (Kitex) is engaged in manufacture and export of readymade garments (RMG) and fabrics for men, women and children. Kitex Garments Limited also manufactures and sells infant wear and fabrics primarily in India. The company offers body suits, sleepwear, rompers, burps, bibs, and training pants. It came with the Initial Public Offer (IPO) in 1995; the shares of the company are listed on BSE. Kitex has an in-house manufacturing facility at Kizhakkambalam, Kochi, with an installed capacity of producing 1.1 million units of garments per day. The company derives majority of its revenue from export sales, with exports to international markets contributing 71 % to sales revenue in FY12. It exports its products to the United States and Europe. With unmatched global connections, this company caters to prominent and renowned conglomerates in USA and Europe. The company currently employs over 7000 people at its facility, and has been a business provider to many satellite businesses in the state. Kitex has state of the art manufacturing units. Its vertical set-up is with Knitting & Processing of fabrics, until finished garments are done in-house. A 240 meters long and 70 meters wide process house that covers an area of 180,768 sq. ft, is one of the largest in the world under one roof, makes fabrics for its garmenting units. Its units are equipped with digital dispenser system for error-free, automatic and computer-controlled preparation of colour recipes, high quality knitting machines, most modern dyeing, printing and finishing machines that use cutting-edge technology, the plant produces 50,000 Kilograms of knitted fabrics that are of exceptional quality, and is well appreciated and recognized by reputed children’s wear apparel brands in the United States and Europe. Its garmenting unit uses latest machinery for pattern CAD, plotting and grading. Automatic spreader machines enhance the speed of spreading. Automated cutting machines enable faster & precision cutting. Latest sewing machinery ensures stain-free, quality sewing. Most modern embroidery machines are on hand. Needle detector machines ensure safety of products before shipping. State-of-the-art spectrophotometer ensures electronic colour reading & transmission. Kitex Garments Limited is locally compared with Kewal Kiran Clothing, Zodiac Clothing, Page Industries, Indian Terrain Fashions Ltd, Goenka Business, Garware-wall Ropes, Welspun India, Siyaram Silk Mills, Voith Paper Fabrics, Lambodhara Textiles, Binny Mills, Rajapalayam Mills, Shri Dinesh Mills, Gini Silk Mills, RSWM LTD, Amarjothi Spg. Mills, Future Lifestyle, Cantabil Retail, Mafatlal Industries, Century Enka, Aarvee Denims & Exports, Nandan Denim, Maxwell Industries, Kamadgiri Fashions, Birla Cotsyn, Arvind Mills, Digjam, Alok Industries, Vandana Knitwear, Bombay Rayon Fashion, Raymond, Morarjee Textiles, Welspun Syntex, Mandhana Industries, Spl Industries Ltd, lovable lingerie, Rupa & Co, Monte Carlo Fashions and globally compared with Yamaki Co., Ltd of Japan, American Apparel Inc of USA, Carters Inc of USA, Columbia Sportswear Co of USA, Delta Appareal Inc of USA, Nike Inc of USA, Arab Cotton Ginning of UAE, Delta-Galil Industries of UAE, Square Textiles Ltd of UAE, Adidas Ag of USA, Burberry Group Plc of London, PUMA SE of Germany, Prada S.P.A of Italy .

Investment Rationale:
Kitex Garments is leader in Kids wear. It is a part of the renowned Anna-Kitex group of companies, founded by the legendary Late Shri M. C. Jacob, Kitex Garments Ltd is the largest employer in private sector in the state of Kerala. It is located near Kochi and has easy access to sea and air ports. The company had started with Rs. 1.8 Crores turnover in the year 1995-96, now has grown to a turnover of over Rs. 524 Crores in 2014-15. The company is currently the second largest producer of children's apparel in the world, and is now in the process of setting up operations in the United States of America. Indian textile industry largely depends on textile manufacturing and export. It also plays a major role in the economy of the country. India earns about 27 % of its total foreign exchange through textile exports. Furthermore, it contributes about 14 % to industrial production, 4 % to the gross domestic product (GDP) of India, and 17 % to the country's export earnings. The sector is the second-largest provider of employment after agriculture. It not only generates jobs in its own industry, but also opens up scopes for other ancillary sectors. The industry currently generates employment to more than 3.5 Cr people. The fibre and yarn produced in India is comparable with the best in the world. Indian fabrics are known for their excellent workmanship, colours and durability. Due to heavy investments in world-class manufacturing plants, continuous innovation, new product mix, and strategic market expansion, Indian man-made fibres (MMF) are all set to take centre stage in the global arena. The potential size of the Indian textile and apparel industry is expected to reach US$ 221 billion by 2021. The big business houses in the USA and Europe manufacturing and dealing in textiles and garments depend upon India and China and the other neighbouring countries as the availability of the raw materials and these countires have skilled labour at lower prices, this helps to get the required output at the lowest possible cost. KITEX is taking all efforts to improve the quality and productivity to get more orders at competitive rates. Due to the own processing plant the company is able to quote better rates and maintain high quality & productivity in the finished goods manufactured. Barring unforeseen circumstances the company is confident of achieving better results in the current year. KGL is now eyeing for next phase of growth by acquiring licenses of few private labels in US and also through launching of its own brand in US for which company has already got the necessary clearances and approvals from US government. Company is already negotiating with few private labels for acquiring its licenses and expects to finalise couple of private labels by this fiscal year. The sales from licenses of these private labels will start from FY16E onwards. It has also registered its merchandising company “Kitex USA LLC” in US and expects sales to start kicking in from FY16E from its own brand. Both these initiatives will boost companies EBITDA margins significantly. Company is expecting to do $1.5 Cr sales in CY16E and by 2020 they expect to clock in $10 Cr sales from these two initiatives. Management expects to reach 50 % plus margins in next few years with these initiatives which are an improvement of 17 % improvement in its FY15 margins of 33 %. This will significantly increase company’s bottom line going forward. KGL has outlined minimal capital expenditures of Rs. 10 Cr to Rs. 15 Cr a year for next three years as major capital expenditure of Rs. 75 Cr was undertaken in FY14 to replace the old machines with the new ones. These will help in improving productivity and reducing wastage. Also the recently replaced sewing machines will have increased speed from 6,000 stitches per hour to 9,000 stitches per hour. All these efforts will lead to increased output thereby increasing the top line. Management expects company to post Rs. 1000 Cr to Rs. 1200 Cr in top line in next three years with these initiatives which would result is Sales CAGR of 25 %. Management plans to merge the unlisted entity KCL with itself in FY16E. It has already appointed E&Y as an internal auditor for the merger. The company wants to merge both the companies together because it desires to be a larger player in infant wear company in the world. As clients of both the companies are more or less same and when both operates in same line of business i.e. infant wear manufacturer this merger makes sense. Capacity and margins of both the companies are somewhat similar so merger will help. KCL holds 15 % plus stake in KGL. The swap ratio of the merger is unknown, but this merger can lead to substantial equity dilution in the listed Kitex garments thereby dragging its EPS lower and stretching the valuations higher, but this would be an short term phenomenon. But due to Kitex's ability and management quality, the company would perform better and can give better returns in coming years. 

Outlook and Valuation:
Kitex Garments Ltd (KTG) is based in Kochi, India. Kitex Garments Ltd has presence in the highly niche market of infant-wear clothing segment which currently accounts for US$20 billion in sales globally. Kitex is the 3rd largest Vendor for infant wear globally. India has etched its name amongst the topmost promising markets for apparel due to the burgeoning economic activities taking place here and the ever widening consumer base. Kids wear is not a small business anymore. Driven by huge demand from brand conscious children, the Indian kidswear retail market is expected to touch Rs. 58,000 crore by 2017. At present, the size of kidswear market in India is estimated at about Rs 38,000 crore which accounts for 25 % of the total Indian apparel category. Growing at the rate of 17 %, this is one of the most attractive categories. The increased media exposure, double-income parents and peer pressure as the reasons for children becoming more fashion and brand conscious. Brands are also realising the potential of this market and are increasing their presence in this segment. In April 2009, the Mahindra Group launched Mom & Me stores to tap into this segment. Exclusive children's brands, such as Gini & Jony, Lilliput and Catmoss, have also expanded their presence exponentially in the last two to three years. These brands are developing categories such as infant wear, kids' formal wear, kids' ethnic wear, swim wear and casual wear, along with a wide range of other merchandise for children. Even international brands like Reebok, which focused on adults till now, have recently launched the 'Reebok Juniors' concept store to tap into this segment. It has started offering apparel, footwear, accessories and sports equipment for children in the age group of four to 14 years. Gini & Jony started their Freedom Fashions stores, which offer licensed products from brands like Reebok and Levi's, along with their own products. Even premium brands, such as Tommy Hilfiger, Allen Solly and Puma, are not far behind and are now including more kids' product and accessories. Childrens' fashion shows, organised by these brands, is not a new concept. Lilliput started this trend and Catmoss roped in Darsheel Safary, of Taare Zameen Par-fame, to walk the ramp for its collection. KTG is in the business of manufacturing and exporting infant garments. Company derives 80 % of its revenue from the sale of infant garments and the balance 20 % from the sale of fabric to Kitex Childrenwear. Company has major concentration in US markets, where Customers generally demand bulk deliveries. KTG is in the final stages of a tie-up with an US brand and the first shipment will begin in October. Commercials for the brand will only be based on royalty and management guides that there will be no upfront investment. From a two to three-year perspective, KTG will look at having two to three private labels and an own brand. Given the popularity of the private label (well-known toys brand in the US), management believes KTG will not have to invest significantly in brand promotion. Management has hired designers for private label business who are currently, free lancers working for other prominent brands like Toys R Us. With regards marketing, management believes they’re well placed as KTG’s marketing head has 17 years’ work experience with Toys R Us and is working with KTG since 4 years. KTG will not have to invest heavily in brand promotion. Business from existing clients will stay constant and it expects additional capacities to be devoted exclusively towards private label and the own brand. In five years’ time, management targets to have 100 % of revenue from direct sales, thus transitioning it into a complete B2C player. Management expects to double sales in 3 years, showing around 20 % to 25 % sales growth for FY16, around 30 % to 35 % sales growth in FY17 and around 35 % to 40 % sales growth in FY18. With regards to capacity, they are not intending to add any new machines, besides Rs. 5 Cr to Rs. 10 Cr annual capex will be required, and around Rs. 30 Cr to Rs. 50 Cr maximum aggregate capex seen over next 3 years. Management believes market demand is not a concern as far as growth is concerned; key constraint is managing higher production scale. Lack of skilled labour, need for continuous training is key factors that limit quick scalability. Management is targeting higher use of technology with same labour strength to drive capacities higher and incremental growth to come from higher technology investments. Management highlighted that wastage reduction and use of better technology are key driving factors which are leading margins higher. KTG has agreement with buyers with predefined formulas and hence raw material inflation or deflation will not affect margins. Management re-iterated that margins are certainly sustainable at current levels. With new foreign trade policy, even if incentives go down, KTG will be able to sustain margins due to agreements with clients. Other operating income includes duty drawbacks of around 7.5 % incentive. There’s a merger with Kitex Children Wear Ltd and will be concluded by FY16. Kitex Children wear Ltd has revenues of Rs. 250 Cr; however its profitability is lower than KTG, and its debt free on net basis. This merger will increase authorized share capital, and management is considering various alternatives including bonus share issue. With India’s growing competitiveness against erstwhile low-cost countries like China which is 52 % market share it can be safely assume that the long term opportunity for KTG is large. KTG is the largest exporter of infant-wear clothing out of India and commands a 70 % market share for all infant-wear clothing exports out of India. Adhering to stringent safety measures, maintaining high quality standards, higher degree of complexity due to involvement of small sizes, need for greater variety, smaller batch size orders and high labour requirements are some of the key entry barriers that support superior profitability for the company. KTG commands strong, industry leading return ratios of ROCE of 45.1 % and ROE of 44.9 %, with its business model generating robust free cash generation of Rs. 300 Cr over FY15-17. KTG stands out amongst listed textile exporters with most of them present in capital intensive, low RoCE businesses of yarn and fabric manufacturing which averages around 10 % ROCE. It is expected that KTG can capture a larger pie of the infant-wear value chain through its forward integration with its launch of own brand in the US market as well as licensing of private labels in the US market. Forward integration holds high significance for the company as margins in its own brand will be double of the current business with margins improving from current 30 % to 60 %, along with higher realisatioisn. The company declared its quarterly results and first quarter for textile field is always slow and Q2 will be better and Q3 will be further better and in Q4 they will make maxium in result. Kitex Garments has reported a standalone total income from operations of Rs. 109.08 crore and a net profit of Rs. 15.97 crore for the quarter ended Jun '15. Other income for the quarter was Rs. 12.25 crore. For the quarter ended Jun 2014 the standalone total income from operations was Rs. 102.76 crore and net profit was Rs. 14.44 crore, and other income Rs. 6.58 crore. Profit before tax was Rs. 25.82 Cr as against Rs. 21.04 cr in June 2014. And Management expects to do about Rs. 600 to Rs. 650 Cr of revenues in FY16. Kitex export book for FY16 is fully booked. Kitex have more demand than their capacity and so this year Company lans for 15 % to 20 % increase in revenues and within 3 years company plans to double their capacity i.e 100 % growth, so slowly they will be adding the production and that is already planned and orders have been already taken for that. SO the planned capex would be around Rs. 10 to Rs. 15 cr this year. Company have already invested huge on processing side and so the investment is very marginal but substantialy the revenue will be much higer. At current market price of Rs. 840.10 KGL is trading at a PE of 31.00 times its FY16E EPS of Rs. 27.10 and 21.7 times its FY17E EPS of Rs. 38.70 and PE of 14.79 on the EPS of Rs. 56.80 in FY18E. Which is a attractive valuation with growth of 25 % CAGR in sales and growth of 40 % CAGR in PAT from FY15 to FY18E. Kitex would be debt free company by FY18E with strong improvement in margins along with sales from its own brand and licensing of private labels and strong return ratios of 40 % plus the stock can trade at PE of 30 times its FY18E EPS. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.   

SALES ( Crs)511.10613.30766.701,000.00
NET PROFIT (₹ Cr)98.50128.80184.00270.00
EPS ()20.7027.1038.7056.80
PE (x)44.1033.7023.6016.10
P/BV (x)17.8011.808.205.80
EV/EBITDA (x)33.0018.0013.509.80
ROE (%)37.3039.1041.2043.50
ROCE (%)37.2045.1050.9058.10

 As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % on every purchase(Why Strict stop loss of 8 % ?) - Click Here

*As the author of this blog I disclose that I do not hold KITEX GARMENTS Ltd in my any of the portfolios.

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  1. Fantastic, I am surprised to see that FY20, it can be a 1000cr sales company, which it can very much be if it goes that way it is, this correction can be used to buy now I guess. lucky lo get in very early.

  2. Hi Bhavik,

    I don't get why the promoters have pledged shares while the company is making profits , kindly explain.

  3. Hii Kitex at 771 is down by just 8% but also look at its business prospects its a good buy at 770 also

  4. I have looked your information on this blog really I'm very happy that I've find our link here. I'll be back.
    Forex tips

  5. I read your post, It helps to beginers in this indutry.I wish you for the best growth.


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