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Monday, August 3, 2015

ADANI PORTS & SPECIAL ECONOMIC ZONE LTD : ANCHORED FIRMLY !!!

*As the author of this blog I disclose that I do hold ADANI PORT & SEZ LTD in my investment portfolio.


Scrip Code: 532921 ADANIPORTS
CMP:  Rs. 325.00; Market Cap: Rs. 67,305.93 Cr; 52 Week High/Low: Rs. 357.95 / Rs. 244.10
Total Shares: 207,09,51,761 shares; Promoters : 116,51,78,474 shares –56.26 %; Total Public holding : 90,57,73,287 shares – 43.74 %; Book Value: Rs. 55.63; Face Value: Rs. 2.00; EPS: Rs. 10.54; Dividend: 50.00 % ; P/E: 30.83 times; Ind. P/E: 29.95; EV/EBITDA: 17.86.
Total Debt: Rs. 15,155.33 Cr; Enterprise Value: Rs. 81,978.58 Cr.

Adani Port and Special Economic Zone LTD: The Company was incorporated in 1998 and is based in Ahmedabad, Gujarat- India. It was earlier known as Gujarat Adani Port Limited and was set up as a Special Economic Zone at Mundra. Gujarat Adani Port Ltd was then merged with Mundra Special Economic Zone Ltd in April 2006 and the company was renamed as Mundra Port and Special Economic Zone Limited, to reflect the nature of business. In January 2012 the company board renamed the company as Adani Port and Special Economic Zone LTD. Adani Port and Special Economic Zone Ltd is a subsidiary of Adani Enterprises Limited from September 2010. The company engages in the development, operations and maintenance of multi product special economic zone and related infrastructure in India. The came with an IPO on November, 1st 2007 offering 4,02,50,000 equity shares of Rs. 10 each for Rs. 440 per share raising Rs. 1,771.00 Cr. The object of the issue were to achieve the benefits of listing on stock exchanges & to raise capital for construction and development of basic infrastructure and allied facilities in the proposed SEZ at Mundra; to utilize the funds for construction and development of a terminal for Coal and other Cargo at the Mundra Port; for contributing towards investment in Adani Petronet (Dahej) Port Pvt Ltd, Adani Logistics Ltd and Inland Container Pvt Ltd. The shares got listed on November 27, 2007 at Rs. 770 a share. The company declared split in face value of its shares from Rs. 10 to Rs. 2 on 17 May 2010. The company through its Mundra port located in Gulf of Kutch, India provides cargo handling & other value-added port related services. It operates port infrastructure facilities of bulk cargo at Dahej, Gujarat, handles bulk, liquid and containerized cargo, single point mooring, storage, and transportation of cargo by road, rail and pipeline. Adani Ports and Special Economic Zone Limited, together with its subsidiaries, develops and operates ports and port based infrastructure in India. The company operates a port at Mundra, Gujarat; a dry bulk terminal located in Dahej, Gujarat; a bulk and container handling terminal at the port of Hazira, Gujarat; and coal handling terminals at the port of Mormugao, Goa and Visakhapatnam in Andhra Pradesh. It also operates 4 bulk terminals with 15 berths to handle dry and liquid bulk cargo, 3 container terminals with 6 berths, and 2 offshore single point mooring facilities for handling crude cargo at the port of Mundra; a dry bulk cargo terminal with 2 berths at the port of Dahej; and 1 bulk terminal with 3 berths to handle dry and liquid bulk cargo, and 1 container terminal with 2 berths to handle container cargo at the port of Hazira. In addition, the company is developing a bulk terminal located in Kandla, Gujarat; a rail corridor; and road and highway projects. Further, it offers port services, including marine, handling intra-port transport, storage, other value-added, and evacuation services for terminal operators, shipping lines and agents, exporters, importers, and other port users; and infrastructure leasing and logistics services at the Mundra Port through its surrounding infrastructure. Additionally, the company provides multi-modal cargo storage-cum-logistics services; and non-scheduled (passenger) services through its aircrafts. The company also operates container trains on specific railways routes; and provides multi-model cargo storage and logistics services through the development of inland container depots at various locations. It operates a fleet of approximately 2,517 vessels. In addition, APSEZL provides nonscheduled (passenger) services through its aircrafts. Adani Port and SEZ ltd is compared with Avia Solutions Group Ab, DP World of UAE, Gemadept Corp, Kuwait and Gulf Link Transport Company, Luka Rijeka d.d, Wesco Aircraft Holdings Inc, Isewan Terminal Services Co., Ltd of Japan, Azuma Shipping Co., Ltd of Japan, Meiko Trans Co., Ltd of Japan, Rizhao Port Co. ltd; Shenzhen Chiwan Wharf Holdings Ltd.

Investment Rationale:
Adani Ports and SEZ is a part of global Adani Group, founded in 1988, and is India’s leading business houses with revenue of over $8.7 billion. Group’s logistics division denotes a large network of ports, Special Economic Zone (SEZ) and multimodal logistics like railways and ships. Adani owns and operates three ports – Mundra, Dahej and Hazira and now Dhamra in India. The Mundra Port, which is the largest port in India, benefits from deep draft, first-class infrastructure and SEZ status. Adani is also developing ports at Mormugao and Kandla in India. India has a coastline of 7,517 kilometers (excluding the Andaman and Nicobar Islands), with a port industry that has grown dramatically. India at present has 13 Major Ports and 200 Non-major Ports with total cargo traffic tonnage handled of about 976 million metric tonnes for the fiscal year 2013 and is expected to reach 1,758 MMT by 2017. The handling capacity of the major ports in India is sufficient to match with the trade demands. The capacity of all major ports as on March 31, 2015 was 800.52 MMT against cargo traffic of 555.54 MMT handled in 2013-14. Thus the capacity utilisation is around 70 %, and as per internationally accepted norms the gap between the traffic and the capacity is usually around 30 %. The Ministry of Shipping has formulated a Perspective Plan for development of the Maritime Sector, namely, “The Maritime Agenda (2010-2020).” This Plan has estimated the traffic projections and capacity additions at the ports upto the year 2020. Based on the estimated growth, it has projected capacity of 3,130 MT by 2019-20. Since inception, Mundra Port & SEZ has posted 35 % CAGR and handled around 40 MT cargos in FY10, higher than most other major Indian ports. Also, it has hedged cargo uncertainty risk by getting into long‐term service contracts. The port is expected to continue its current growth momentum over the coming 2 to 3 years, handling around 96 MT of cargo by FY17E. Mundra is one of its kind ports. MPSEZ, under the aegis of the parent company Adani Enterprises, has been instrumental in developing a deep draft gateway port and SEZ strategically on the West coast of India with state–of‐the‐art infrastructure and capability to handle diversified cargo. Such a third generation port acting as one‐stop‐shop for export-import logistics is in unique league of ports and one of its kinds in India. The company has a strong portfolio of ports projects on the Indian west coast other than the flagship Mundra port. The projects are a mix of brown‐field port development i.e. currently at Dahej & Hazira and as terminal operator at the major ports i.e. coal terminal under development at the Murmagao port. Such projects would help the company gain a pan India presence. While the company is looking at setting up a large port on the east cost of India, it has also been scouting for opportunities to go global and has recently evinced interest in port development projects in Australia and Indonesia, in line with its long‐term strategy. ADSEZ has received the letter of award (LOA) from the government of Kerala for development of the Vizhinjam International Deepwater Project. The estimated project cost stands at Rs. 40.89 bn which includes the grant of Rs. 16.35 bn. The project will to get commission in the next four years. The Kerala state will spend additional Rs. 14.63 bn towards break water construction and Rs. 5.3 bn towards land acquisition which is around 53 hectares. The company will receive 75 % of the grant during the period of construction and 25 % once the terminal gets commissioned. The concession period of the project is 40 years with the option of 20 years further extension. Revenue share of 1 % to the Authority are expected to commence from the 15th year of COD as per the Concession Agreement and will be increased by 1 % every year. Vizhinjam port will be competing with Tuticorin, Cochin, Chennai port. The port will also compete with international port Colombo for the transhipment traffic. The first leg of Vizhinjam will try to gain market share from Cochin port due to the availability of similar hinterland for the southern Kerala cargo which contributes around 40 % of the Kerala traffic. The port is being developed as a Transhipment Hub, to cater current largest mother vessel with Design Vessel: 18000 TEU and Birth Length: 2000 Mts. The proposed site has minimal Littoral drift and as such would hardly require any maintenance dredging during the years of operation. This will result in low O&M Costs. The port has natural draught of 18.4 Mts. The key success factors of the APSEZ is the strong availability of Draft Depth and Waterfrontof Mundra and other ports handled by APSEZ, it is closest port to Northern hinterland, the cargo generation is from its parent firm, they have long term cargo contracts. This makes the APSEZ a good pick in the port sector.

Outlook and Valuation: 
Incorporated as Gujarat Adani Port Limited on May 26, 1998, commercial operations began in October 2001, post entering into concession agreement with Gujarat Maritime Board to build, operate and maintain the port for a period of 30 years till 2031 extendable by another 20 years. Adani Port is the largest private Port in Indian with No.1 position in container cargo. Adani Ports is strategically located for global trade. Situated on the northern coast of the Gulf of Kutch on the west coast of India, it provides a convenient international trade gateway to Europe, Africa, America and the Middle East. Mundra has a deep draft (12.5 - 17 meters) which enables large vessels like panamax and super post panamax carriers to dock alongside its berth. The port has the world’s largest fully mechanised coal terminal with a capacity of 60 million tonnes per annum (MTPA). The port is into providing cargo handling services for bulk, crude and container cargo. The company has also received approval to develop the adjacent port land as a multiproduct SEZ. Notification has been issued to 16,000 acres of land while the company is in talks to acquire more land to add to its SEZ portfolio. While the company is also bidding for other domestic and international port projects it has also invested in value added services like logistics support, providing container rail services and inland container depots to diversify from its core port business. APSEZ is the only private sector port operator with presence across six ports in India. The company’s aim is to increase annual cargo handling capacity from 112.8 million MT in 2014 to 200 million MT by 2020. Company has its Economic Moat (A competitive advantage that one company has over the other companies in the same industry – by Warren Buffett) and with its expanding moats indicates a very strong sign of a future Multi-bagger stock. Setting up such ports in India is not easy, acquisition and various permissions and environmental clearance to acquire land in India is a headache especailly port should be ideally located at the point where the ocean meets the river which can easily receive large vessels. Also, it costs estimately around $2.25 billion to $4.85 billion to built small ports and it takes around $8 to$12 billion to build major complex ports in India. These acts as the barriers to the entry providing Adani Port & SEZ a deep economic moat. APSEZ acquired Dhamra Port Company Ltd (DPCL), located in Odisha a JV of Tata Steel and L&T Infrastructure Development Projects (L&T IDPL) and also operates Mundra Port, Hazira Port, Dahej Port, Murmugao Terminal, kandala Terminal. The Indian ports and shipping industry plays a vital role in sustaining growth in the country’s trade and commerce. India currently ranks 16th among maritime countries, with a coastline of about 7,517 km. Around 95 % of India's trade by volume and 70 % by value takes place through maritime transport, according to the Ministry of Shipping. The Indian government continues to support the ports sector. It has allowed foreign direct investment (FDI) of up to 100 % under the automatic route for projects regarding construction and maintenance of ports and harbours. It has also facilitated a 10-year tax holiday to enterprises engaged in developing, maintaining and operating ports, inland waterways and inland ports. Moreover, Government has taken many measures to improve the efficiency of operations through mechanisation, deepening the draft and speedy evacuation. Container-handling in the 11-month period expanded 7.15 % year-over-year to 7.25 million 20-foot-equivalent units from 6.77 million TEUs in the same period of 2013-14. Containerised cargo tonnage grew 4.4 % to 109 million tons from 104 million tons. In fiscal year 2013-14, which ended in March 2014, overall cargo volumes at major ports grew 1.78 percent year-over-year to 555.5 million tonnes (MT). The Indian ports sector received FDI worth US$ 1,637.30 million in the period April 2000–February 2015, as per the Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry. The ports sector was also awarded 30 projects in FY14, investing over Rs 20,000 crore (US$ 3.16 billion) which is a threefold increase over the preceding year. In FY14, coal cargo traffic grew by 20.6 per cent to 104.5 MT from 86.7 MT in FY13. With regard to commodities, there was a rise of 25 per cent in handling of fertilisers in April 2014 as against April 2013. Iron ore handling also grew by 16.8 per cent during that period. ADANI PORT is among the largest beneficiaries of an increasing demand-supply mismatch in India’s port capacity. APSEZ’s competitive advantages and attractive location plus connectivity provides a strong visibility of traffic for APSEZ. It should be noted that 90 % of APSEZ’s estimated traffic comprises of coal, crude oil, and container. Of this, coal and crude oil are not likely to see any impact from global macro concerns, while container traffic should continue to benefit from the shortage of capacity on India’s west coast. The company has been clocking robust earnings of 25 % CAGR surge by cornering 2/3rd incremental cargo growth in India over the last 4 years, apart from pursuing the inorganic growth route. At 43 % capacity utilisation, benefits of some initiatives are yet to translate into earnings growth while RoEs continue to be at a robust 25 %. Based on the SOTP valuation method the value APSEZ comes at Rs. 371.82 per share, implying an upside of 14 % from current levels. The value of Mundra Port (core operating asset of APSEZ) comes at Rs. 236 per share which is around 63 % of total value. Mundra Port, given its strategic positioning & diversified mix of cargo & is expected to deliver strong volume growth. The company having delivered a strong track record of maintaining superior realization & margin has emerged as the preferred port due to superior infrastructure and technology, which facilitates faster transit of cargo, thereby reducing the overall cost of handling for logistic companies and end users. At the current market price of Rs. 325.00, the stock is trading at a PE of 27.77 x FY16E and 22.56 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 11.70 in FY16E and Rs. 14.40 in FY17E. The SOTP (sumoftheparts) valuation of Adani Port & Sez comes at Rs. 371. 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. 

SOTP Valuation :- 
Business Subsidiary
Value Per Share (in  ₹ Rs.) 
Mundra Port
236.00
CT3/4/5
19.00
SEZ
39.00
Adani Petronet (Dahej) Port 
16.00
Adani Mormugao Port 
3.00
Adani Hazira Port 
42.00
Adani Vizag Coal Terminal 
1.00
Ennore Container Terminal
4.00
Adani Kandla Bulk Terminal 
4.00
Dhamra Port
50.00
Adani logistics
3.00
Other Investments
24.94
Cash & cash equivalents
3.06
Less: Net Debt
73.18
TOTAL
371.82

KEY FINANCIALSFY14FY15FY16EFY17E
SALES ( Crs)4,824.006,152.007,172.108,493.10
NET PROFIT (₹ Cr)1,867.702,176.402,413.002,971.60
EPS ()8.4010.5011.7014.40
PE (x)38.9031.1028.0022.80
P/BV (x)7.706.305.304.40
EV/EBITDA (x)27.7021.9018.0014.60
ROE (%)24.6022.3020.4021.00
ROCE (%)13.9013.7013.4015.00

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


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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
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Monday, July 27, 2015

SYNGENE INTERNATIONAL LTD: SUBSCRIBE THIS IPO !!!

Price Band: Rs. 240 - Rs. 250.
Retail Discount : NA . 
Face Value: Rs. 10.00. 
Minimum Lot Size: 60 Shares. 
Issue opens on: 27th July 2015, Monday. Issue closes on: 29th July 2015, Wednesday.
Listing Date on: by 14th August 2015.
Total No. of Shares offered: 2,20,00,000  shares or 11.00 %.
Biocon Shareholders Reservation: 20,00,000 shares of total issue.
Net Public Offer: 2,00,00,000 shares.
QIB Book: 1,00,00,000 shares or 50 % of issue.
Anchor Investor Portion: 60,00,000 shares of QIB
For Mutual Funds Portion: 2,00,000 shares of QIB
Balance for all QIB including Mutual Funds: 35,00,000 shares of QIB
Non – Institutional Bidders: 30,00,000 shares or 15 % of issue.
Retail Book: 70,00,000 shares or 35 % of issue.
Equity Shares outstanding prior Issue: 20,00,00,000 shares.
Equity Shares outstanding post Issue: 20,00,00,000 shares.
Total Size of the Issue: Rs. 528.00 Crs - Rs. 550.00 Cr.
IPO GRADING: Strong Fundamentals
FAIR VALUE RANGE - Rs. 320 - Rs. 340.

KEY FINANCIALS31 Mar 1131 Mar 1231 Mar 1331 Mar 1431 Mar 15
Sales (Cr)322.00417.00550.00700.00860.00
Net Profit (Cr)27.0071.00102.00135.00175.00
Net Profit Margin8.38 %17.02 %18.54 %19.28 %20.34 %
EPS (.)1.403.605.106.708.80
NAV (.)11.0014.8025.9033.0043.70
Net Worth (₹Cr)220.70296.80518.60659.30844.90
ROE (%)12.3323.9219.7020.5020.70
ROCE (%)7.4018.0019.7016.6017.50
*Thee face value of company was Rs. 5 and then it consolidated its face value to Rs. 10 on March 16, 2015.

SYNGENE INTERNATIONAL LIMITED: 
Incorporated in 1993 and headquartered in Bengaluru, Syngene International Limited is a subsidiary of Biocon Limited, a global biopharmaceutical enterprise focused on delivering affordable formulations and compounds. Biocon, owns about 85 % of Syngene, and will reduce its stake to about 74 % through the IPO. Syngene International Ltd is one of the leading Indian-based contract research organizations, offering a suite of integrated, end-to-end discovery and development services for Novel Molecular Entities (“NMEs”) across industrial sectors including pharmaceutical, biotechnology, agrochemicals, consumer health, animal health, cosmetic and nutrition companies. Company’s service offerings also support the development of biosimilar and generic molecules. In the near term, it intends to forward integrate into commercial-scale manufacturing of NMEs. As an experienced CRO with a proven track record of providing quality NME discovery, development and manufacturing services and continued focus on reliability, responsiveness and protection of client’s intellectual property, Syngene is well-positioned to benefit from the expected growth in the CRO industry The company offers services through flexible business models that are customized to their client’s requirements. During Fiscal 2015, Syngene serviced 221 clients, ranging from multinational corporations to startups, including 8 of the top 10 global pharmaceutical companies by sales for 2014. It has several long-term relationships and multi-year contracts with their clients, including three long-duration multidisciplinary partnerships, each with a dedicated research centre, with three of the world’s leading global healthcare organizations Bristol-Myers Squibb Co. (“BMS”), Abbott Laboratories (Singapore) Pte. Ltd. (“Abbott”) and Baxter International Inc. (“Baxter”).

SOME FACTS ON SYNGENE:
Syngene provides contract drug discovery, research and manufacturing services to 17 of the world's top 20 pharmaceutical companies, including Bristol Myers Squibb & Co and Abbott Laboratories Ltd. Its revenue rose 25 % in the last three years. It manages a pool of 2,122 scientists including 258 PhDs and 1,665 scientists with master’s degree, to ensure timely execution of projects, cost effectiveness and quality of the projects, confidentiality and protection of intellectual property. The company owns state-of-the-art research facilities spread over 900000 sq. ft., certified by major regulatory bodies. As an experienced CRO, Syngene is well positioned to capitalize on the advantages of its flexible business models that customizes to their client’s requirements globally. There are great opportunities for CROs from the outsourcing markets and thus increasing their share towards global R&D expenditures. The company’s increasing clientele, expanding capacities as well as capabilities, along with plans for forward integration into commercial manufacturing will enable the company to drive growth by benefiting from the opportunities in future. Syngene is well poised to cash in on growing global pharma R&D outsourcing trend. Global pharmaceutical players are facing structural issues such as profit pressures arising from impending patent cliff, drying product pipeline and rising R&D costs. Surprisingly, however, the new product approvals from the USFDA are on the rise. Hence to maintain the cost balance at one end and maintain the new product introduction at the other, these players are inclined to outsource some of the R&D budget to CROs like Syngene. The parent Biocon is looking for a demerger may be considered when Biocon is less financially dependent on Syngene.

OUTLOOK:
The global CRO market for discovery services was estimated at US$14.7 billion in 2014 and is expected to reach US$22.7 billion in 2018, reflecting a CAGR of 11.5 % (2014-18), according to the IQ4I Report. The global CRO market for development services was estimated at US$28.8 billion in 2014 and is expected to reach US$44.6 billion in 2018, reflecting a CAGR (2014- 18) of 11.6 %, according to the Frost & Sullivan Report. Contract research organisations (CROs) offer outsourced services to support discovery and development for R&D driven organisations across industrial sectors like pharmaceuticals, biotechnology, biopharmaceuticals, neutraceuticals, animal health, agro-chemicals, cosmetics and electronics. CRO services span the range of R&D activities from new molecular entity (NME) discovery, development and manufacturing. Growth in the CRO market has historically been driven by growth in R&D spending and increased outsourcing of R&D activities. CROs offer clients an opportunity to manage costs, have flexible operations and realise efficiencies in R&D and related functions. Also, the need for greater flexibility has reduced the willingness of these players to incur large fixed costs associated with large scale R&D programmes. Outsourcing allows clients to convert a portion of their R&D budgets from a fixed to a variable cost, giving them greater flexibility to shift strategic and development priorities in response to market conditions. India has offered a significant cost advantage and skilled personnel. However, as global pharma outsources more R&D functions, outsourcing to India is increasingly seen as a strategic move to garner quality and value, rather than just a tactical decision to lower costs. High recall value Due to its integrated service offerings coupled with consistent performance and high data integrity ethos, Syngene has enjoyed high recall value, which is reflected from the fact that eight out of top 10 clients have been engaged with the company for the past five years. The company has also established dedicated centre for its three major clients Bristol-Myers Squibb Co (BMS), Abbott and Baxter. BMS has also recently extended this engagement with Syngene to 2020. Syngene stands to gain from forward integration to become a Contract Manufacturing Organization (CMO). Further, Syngene’s plan to foray into CMO of novel drugs will add significant upside over the next 3-4 years. Entry into the CMO business will open up the large revenue source (like Divi’s) and make Syngene a complete turnkey solution provider amongst the Indian bourses.

VALUATION:
Syngene is likely to incur capex of US $200mn in the next 2-3 years for greenfield as well as brownfield expansion. It currently manufactures small & large molecule to support clinical trials for multiple clients. It has shown healthy financial performance in the last 5 years. During the last 4 years, revenue grew 28 % and shown PAT CAGR of 59 %. During the same period its EBITDA grew by 31 %. In FY15, the company derived 96 % of revenue from the export market. During FY15, revenue grew 23 % YoY, to Rs. 860 crore, 95 % of which came via exports, while EBITDA margin was healthy at 34 %, leading to an EBITDA of Rs. 293 crore, up 32 % YoY. Since the company enjoys many tax concessions in form of SEZ unit and additional depreciation on plant and machinery, income tax rates are very low, and stood at just 14 % for FY15. Thus, net profit of Rs. 175 crore was earned in FY15, translating into net margin and EPS of 20.3 % and Rs. 8.89 respectively. On equity of Rs. 199 crore (face value of Rs. 10 each), company has net worth of Rs. 845 crore, as of 31st March 2015. While it has total debt of Rs. 155 crore, balance sheet shows current investments and cash balance of Rs. 262 crore, indicating net cash surplus of Rs. 107 crore, or Rs. 5.36 per share. At upper band of the IPO, Enterprise value of SYNGENE comes at Rs. 5,048 Cr and at lower band it comes at Rs.4,848 Cr. 

According to me one should look for subscribing for SYNGENE INTERNATIONAL LTD IPO, the company has fixed the price band at Rs. 240-250 per share. Based on FY15 annual EPS of Rs. 8.80, SYGENE is offered at P/E range of 27.27x on price of Rs. 240 and at a PE of 28.40x on price of Rs. 250. This Ipo is fairly valued given its operational scale. Extrapolating FY15’s earnings growth rates of 30 % to FY16, company is estimated to clock net profit of Rs. 228 crore for FY16 translating into EPS of Rs. 11.45 , which indicates a PE multiple of 21 times, at upper price band. PE multiple of 22 times, based on current year earnings, is attractive for a high-growth pharma stock clocking healthy margins, with a sound balance sheet, backed by strong management team and pedigree. Since Sun Pharma Advanced Research is loss making and there are no other pure-play CRAMs players listed on Indian bourses, no listed peer is ideal for comparison. Thus, with attractive pricing & strong fundamentals with good institutional holdings the Long term investors should look into subscribing the IPO for good opportunity. Short term investor can subscribe for listing gains.

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 have applied for the IPO.

*Dear Reader friend, if you enjoyed this article, please do share it with your Friends and Colleagues through Facebook and Twitter, and drop in your valuable thoughts in comment box..

READ HERE TO KNOW MORE ON LONG TERM INVESTING - CLICK HERE

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Disclaimer
This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible.
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Thursday, July 23, 2015

KITEX GARMENTS LTD : GROWING BABY !!

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.   

KEY FINANCIALSFY15FY16EFY17EFY18E
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

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