kitex garments: buy at cmp & hold for a year to avail 30-35% returns
TRANSCRIPT
L G Balakrishnan & Bros Ltd
March 31, 2014
Key Stock Indicators
BSE Code 521248 NSE Code KITEX
Reuters Code KITE.NS Stock Beta 1.2643 Price (Rs) as on 22
TH June 2015 895
Equity Capital (Rs Cr) 4.75 Face Value (Rs) 1.00 Market Cap (Rs cr.) 4725
Book Value (Rs) 55.55 Avg. Volume (52 Week) 186,385
52 wk H/L (Rs) 1074/219.10 Shareholding Pattern Shareholding Pattern Shareholding Pattern Shareholding Pattern
(As on Mar 31, 2015) % Holding Promoters 54.24 Institutions 14.27 Non Institutions 31.49 Total 100.00
Kitex Garments Ltd (Kitex), incorporated in the year 1992, is an India based company engaged in the manufacture of fabric
and readymade garments. Its products are readymade garments. It operates in two segments: Garments and Fabric.
CATALYSTS FOR GROWTH
Eyeing organic and inorganic growth through expansion into newer geographies. In final stage of a brand launch and tie-up
with US brand.
Investment in capital expenditure may yield excess return.
Sustained operating margins.
KEY RISKS
Client concentration risk
Increase in input costs, especially that of cotton yarn
Rupee appreciation to impact margins.
RECOMMENDATION
We believe that KITEX will be able to sustain its operating and profit margins throughout our forecasted period. With strong
and experienced promoters, strong margins and its planned expansion plans, we are recommending a BUY on the stock at the
CMP (31.24xFY17E EPS) for a target of Rs.1250 (44.5x FY17E EPS of Rs.28.10) over the next 1 year.
FY 2014 FY 2015 FY 2016 E FY 2017 E
Total Income 455.55 524.52 610.54 710.67
EBITDA 108.48 182.16 224.25 275.24
EBITDA margin 23.81% 34.73% 36.79% 38.69%
EBIT 98.8 160.83 187.21 217.91
Net Income 57.37 98.52 114.68 133.48
NET margin 12.59% 18.78% 22.66% 21.35%
EPS 12.08 20.74 29.13 31.94
PE 10.76 31.34 30.31 27.64
July 22, 2015
KITEX GARMENTS Ltd.
Research Analyst VINAY GOWDA Aditya Trading Solutions [email protected] 080 4356 1171 / 9900778510
BUSINESS OVERVIEW
Kitex Garments Ltd. key Products/Revenue Segments include
Garments contributed Rs 479.02 Cr to Revenue (93.72% of Revenue),
Duty Drawback received contributed Rs 29.12 Cr to Revenue (5.69% of Revenue),
Other Operating Revenues contributed Rs 1.21 Cr to Revenue (0.23% of Revenue),
Scrap sales contributed Rs 1.05 Cr to Revenue (0.20% of Revenue),
Job Work contributed Rs 0.69 Cr to Revenue (0.13% of Revenue), for the year ending 31-Mar-2015.
KEY HIGHLIGHTS
Credit rating agencies upgraded its term loan programme to AA- (43.02 Cr) and Short term debt to A1+ (20 Cr).
Key Ratios 2011-03 2012-03 2013-03 2014-03 2015-03
Debt-Equity Ratio 1.38 1.23 0.92 0.79 0.67
Long Term Debt-Equity Ratio 0.65 0.17 0.04 0.11 0.13
Current Ratio 0.85 0.84 0.93 1.04 1.27
Interest Cover Ratio 3.1 3.14 4.35 8.16 7.7
(Source: ICRA, ATS Research)
Kitex is planning to reduce debt in its capital structure, aims to reduce to zero in coming years.
Interest coverage ratio is at 7.7 far above its peers. We believe that reduction of debt will further improve this ratio.
It is blessed with substantial benefit from duty drawback (≈7%).
It plans to invest around Rs.100 Cr over the next 3 years for expansion inorganically by acquiring smaller brands in US or organic route. Majority of it will be funded by raising debt.
Management
Name Designation
Sabu M Jacob Chairman & Managing Director
Benni Joseph Director
C Mohan Director
Erumala Mathew Paulose Director
K L V Narayanan Director
A Babu Company Secretary
Sindhu Chandrasekhar Whole-time Director
94%
6%
0.23%
0.20%
REVENUE DISTRIBUTION
Garments
Duty Drawback
Other Operating Revenue
Scrap
INVESTMENT RATIONALE
Kitex has consistently reported CAGR of above 25% over the past years. However over the next 4-5 years we believe company will growth at 16.81% before attaining saturation growth
of 9% thereafter.
Capital Expenditure may yield excess return: Company is increasing capital expenditure of 100 Cr over next 3 years and majority of this is expected to be funded by debt. The capex is
distributed equally over three year’s time horizon for simplicity. It is expected to create growth assets which will increase the new worth of the company. EPS growth is substantially
reduced because of this reason.
For valuation purpose we have considered the changing capital structure for analyzing growth and discount rate. We also made assumption that company over the long run intend to
finance 100% equity. Debt free will attract more DII and FII inflow but also company will lose tax advantage because interest expenses are tax deductable. We presume tax over next
few years will be constant and Forex fluctuations are subtle.
Expansion to US and Europe: Company wants to enter other markets organically an inorganically. News articles suggest that Kitex is in final talks with a US based firm for its tie-up to
launch new brands. If rupee depreciates even further, this will boost exports and profits significantly. Forex net earnings increased 54.15% from Rs. 231.85 Cr last year to Rs 357.4 Cr
this time.
In 2-3 years, Kitex 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
that it will not have to invest significantly in brand promotion. 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.
VALUATION
We at ATS Research, expecting its revenue to grow at 16.81% CAGR and even greater 27% CAGR in net profits over FY15 to FY 18 driven by greater operational efficiencies owing to
integrated operations and scale selected benefits. Improvement in execution, stabilization of margins, peaking of working capital cycle and cash flow improvement to remain key
drivers for the stock. Company has sustained EBIDTA margin of 45.09% and Net margin of 28.19%.
We value Kitex at Rs. 2549.11 Cr, Rs. 1172.84 per share using DCF valuation (Free Cash Flow to the Equity). Currently stock is trading at Rs. 895 per share. We believe the stock could
touch levels of Rs.1250 a year from now. Kitex is trading at 10-12% discount with its top competitors using PE valuation method.
Technical analysis suggests stock price may wave from 895 to 1120 in the medium term.
We recommend BUY at CMP of 895. One can hold on to the stock for a year or odd to avail 30-35% returns.
INDIAN TEXTILE INDUSTRY
The Indian textiles industry, currently estimated at around US $108 billion, is expected to reach US $ 141 billion by 2021. India has the second largest manufacturing capacity globally.
The textile industry accounts for about 24% of the world’s spindle capacity and 8% of global rotor capacity. India holds a strong production base of a wide range of fiber/yarn from
natural fibers like cotton/jute, silk and wool to synthetic/ man-made fibers like polyester, viscose, nylon an acrylic.
India enjoys comparative advantage in terms of skilled manpower and cost of production over major textile producers. There is also increased penetration of organized retail, favorable
demographics and rising income levels to drive textile demand.
7 Million Tones of FBP in 2013-14.
2nd largest textile manufacturer in the world.
2nd largest producer of silk and cotton.
The textiles sector has witnessed a spurt in investment during the last five years. The industry (including dyed and printed)
attracted foreign direct investment (FDI) worth US$ 1,522.51 million during April 2000 to December 2014, has helped industry
to absorb pain it had over years due to lack of effective policy, irregularity of monsoon in India, etc.
Major growth drivers include
Rising per capita income
Favorable trade policies and superior quality will drive textile exports
Favorable policies instituted by the government. Indian government has introduced “Skill India”; the integrated skill development scheme aims to train over 2.675 million people
up o 2017, covering all sub-sectors of the textile sector – textile and apparel, handicrafts, handlooms, jute ad sericulture.
100% FDI is allowed under the automatic route in the textile sector.
INVESTMENT RISKS
80% of the revenue comes from top 4 clients. Change in demand from these companies could impact Kitex’s revenue.
Rupee appreciation will impact negatively impact export margins.
US economic growth has been revised up to 3.6% largely due to more robust private domestic demand. Slow down in US will bring down demand for goods and Kitex which is
export oriented company will lose revenue.
China, Europe, Japan along with the U.S. (the four largest economies in the world) will largely determine the direction of the global economy through the rest of this year and into
2016. We have already seen slow down in China. Favorable policies from Chinese government to boost their economy could impact export oriented companies in India.
Source:IBEF
FINANCIAL PROFILE
Kitex Garments Limited is in the business of manufacturing and exporting garments. The Company manufactures different types of garments, such as hosiers, shirts, pants, jackets,
innerwear and outerwear. The company also exports infant and children’s wear, and jackets to the United States. Kitex Garments Limited is based in Kochi, India.
Kitex Garments Ltd. was incorporated in 1992. It made its public issue in the year 1995. It is promoted by Boby M Jacob, Kitex Exports Ltd, Sabu M Jacob and Somy Varghese.
During the fiscal year ended March 31, 2010, the export sales mainly consisted of infant and children's wear and jackets intended for the United States market.
Kitex is a part of the larger Anna-Kitex Group, which has diversified interests in aluminium vessels, home appliances, spice trading and textiles. It has a fully integrated manufacturing
facility at Kizhakkambalam (Kerala) with a facility to manufacture 2.2 lakhs pieces per day and a fabric processing capacity of 42MTPD. It also supplies fabric to group entity Kitex
Children’s wear Limited, which in turn holds 15.47% in the Company as on 30.06.2014. Kitex is listed both in the NSE and the BSE.
The company has reported Net sales of Rs. 479.02Cr, up 19% from last year Sales of Rs. 402.8 Cr. For the quarter ended 31-June-2015, sales grew 6.78% from last year same quarter of
Rs. 105.2 Cr to Rs. 114.98 Cr. Company has reported net profit after tax of Rs. 15.98 Cr and EPS stands at Rs. 3.36 in latest quarter.
4.345.71 6.19
12.08
20.77
24.14
2011 2012 2013 2014 2015 2016
EPS
261.34
318.35 321.01
455.55
524.52
610.54
50.6 64.59 64.14108.48
182.16212.03
20.63 27.17 29.3857.37
98.52 114.48
2011 2012 2013 2014 2015 2016
Revenue EBIDTA PAT
RETURN
NIFTY v/s KITEX
INCOME STATEMENT Yearly FY 2013 FY 2014 FY 2015 FY 2016 E FY 2017 E
Total Income 321.01 455.55 524.52 610.54 710.67
Total Expenditure 256.87 347.07 342.36 386.29 435.43
EBITDA 64.14 108.48 182.16 224.25 275.24
Interest 11.47 10.62 19.16 22.30 25.96
PBDT 52.66 97.87 163 189.73 220.85
Depreciation 8.62 9.68 21.33 24.83 28.90
PBT 44.04 88.19 141.67 164.90 191.95
EBIT 55.52 98.8 160.83 187.21 217.91
Tax 14.66 30.82 43.15 48.84 66.18
Reported Profit After Tax 29.38 57.37 98.52 138.36 151.73
EBITDA margin 19.98% 23.81% 34.73% 36.79% 38.69%
NET margin 9.15% 12.59% 18.78% 22.66% 21.35%
EPS 6.19 12.08 20.74 29.13 31.94
PE 10.76 31.34 30.31 27.64
Disclaimer: This report is only for the information of our customers. Recommendations, opinions or suggestions are given with the understanding that readers acting on this
information assume all risks involved. The information provided herein is not to be constructed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not
as assume any responsibility or liability resulting from the use of such information
INCOME STATEMENT Quarterly 1st Qtr 201406 2nd Qtr 201409 3rd Qtr 201412 4th Qtr 201503 1st Qtr 201506
Net Sales 96.18 120.95 114.2 147.69 96.83
Other Operating Income 6.58 7.25 7.9 10.34 12.25
Other Income 2.43 5.26 5.1 0.63 5.9
Total Income 105.2 133.46 127.19 158.66 114.98
Total Expenditure 75.56 94.55 80.18 92.07 78.93
EBIDT 29.64 38.91 47.02 66.59 36.74
Interest 3.56 4.11 6.55 4.95 4.77
EBITDA 33.2 43.02 53.56 71.54 36.74
Depreciation 5.04 5.18 5.28 5.83 5.46
PBT 21.04 29.63 35.18 55.82 30.59
Tax 6.6 10.31 12.05 14.19 9.84
Reported Profit After Tax 14.44 19.32 23.13 41.63 15.98
No of Shares 47500000 47500000 47500000 47500000 47500000
EBITDA margin 30.82% 32.17% 41.17% 45.09% 37.23%
NET margin 15.01% 15.97% 20.25% 28.19% 16.50%
EPS 3.04 4.07 4.87 8.76 3.36