kitexgarments

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Sep 28, 2015

Kitex Garments LtdConsumer Discretionary - Apparel & Textile Products Sep 28, 2015

Kitex Garments LtdIndia Research - Stock Broking

Bloomberg Code: KTG IN

BUYStrong Growth Ahead; Unique Business ModelKitex garments is the third largest global player in the infant wear with a significant market share of 70% in India. It has marquee clientele like Mothercare, Toys R us and Jockey who procure products from Kitex, which contributes significantly towards margin improvement and robust revenue growth for the company.

Capacity Expansion to be a Major Revenue Driver: Kitex has current fabric capacity of 48 MT & 0.55 mn pcs/day garmenting capacity; & is targeting a capacity of 1.1 mn pieces/day in two years. The management expects capex of Rs.350-450 mn for the group & Rs.150-200 mn for Kitex garments exclusively over the next 2 years.

Tie-up with Lamaze International helps shift focus from B2B to B2C: Kitex USA LLC (50-50 JV between KCL and KGL) has signed a brand-licensing agreement with Lamaze International for the sale of infant wear in the US and Canada under the Lamaze brand. Kitex USA LLC will be the exclusive supplier for Lamaze infant wear (for children up to five years old) in US and Canada. The contract validity is till 31 December 2020, extendable for five years.

Own Brand “Little Stars” to be launched by Fall 2016: KGL plans to launch its own brand “Little Stars”, owned by Kitex USA LLC by fall 2016. The management plans to target this brand as a mass market product in US and Canada. It plans to launch the brand through the online route.

Strong Client Network & Distribution: Kitex garments has clients namely Mother care, Jockey, Toys R us, Gerber and Carter; and recently added two more large clients- Children’s Place & Kohl to its client base. The garments segment contributes 100% of its revenues from exports, of which 85% comes from US and the rest 15% from Europe.

Valuation and Outlook At CMP, the stock is trading at 29.8x and 22.1x FY16E & FY17E P/E respectively. We believe that the stock is currently available at attractive valuations. We initiate a “BUY” recommendation with a target price of Rs. 954 per share, which represents an upside potential of 18%.

Key Risks1. Volatility in the raw material prices.2. Forex risk. 3. Competition risk

Recommendation (Rs.)

CMP (as on Sep 24, 2015) 811Target Price 954Upside (%) 18

Stock InformationMkt Cap (Rs.mn/US$ mn) 38523 / 64352-wk High/Low (Rs.) 1074 / 4423M Avg. daily volume (mn) 0.2Beta (x) 1.3Sensex/Nifty 25843 / 7874O/S Shares(mn) 47.5Face Value (Rs.) 1

Shareholding Pattern (%) Promoters 54.2 FIIs 2.4 DIIs 0.2 Others 43.2

Stock Performance (%) 1M 3M 6M 12M

Absolute 17 (15) 59 66 Relative to Sensex 18 (9) 73 70 Source: Bloomberg

Exhibit 1: Valuation Summary (Rs. Mn)

YE Mar FY13 FY14 FY15 FY16E FY17ENet Sales 3170 4422 5111 6466 8008EBITDA 601 951 1687 2134 2715EBITDA Margin (%) 19.0 21.5 33.0 33.0 33.9Adj. Net Profit 294 574 985 1293 1743EPS (Rs.) 6.2 12.1 20.7 27.2 36.7RoE (%) 26.7 38.7 45.0 40.1 38.0PE (x) 131.1 67.1 39.1 29.8 22.1Source: Company, Karvy Research

Relative Performance*

Source: Bloomberg; *Index 100

Analyst ContactJagannadham Thunuguntla040 - 3321 [email protected]

For private circulation only. For important information about Karvy’s rating system and other disclosures refer to the end of this material. Karvy Stock Broking is also available on Bloomberg, KRVY<GO>, Thomson Publishers & Reuters

80

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Kitex Sensex

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Sep 28, 2015

Kitex Garments Ltd

Balance Sheet (Rs.mn)

FY15 FY16E FY17E

Total Assets 4272 4901 5780Net Fixed assets 1879 2069 2230Current assets 3412 4041 4897Other assets 56 56 56Total Liabilities 4272 4901 5780Networth 2639 3818 5346Debt 1408 858 208Current Liabilities 1081 1272 1409Deferred Tax 226 226 226

Balance Sheet RatiosRoE (%) 45.0 40.1 38.0 RoCE (%) 43.3 44.1 48.6 Net Debt/Equity(x) (0.2) (0.4) (0.5)Equity/Total Assets(x) 0.6 0.8 0.9 P/BV (x) 14.6 10.1 7.2 Source: Company, Karvy Research

Cash Flow (Rs.mn)

FY15 FY16E FY17E

EBITDA 1687 2134 2715 Other Income 134 97 120 Interest (192) (147) (69)Tax (432) (581) (783)Changes in WC (47) 9 (211)CF from Operations 1090 1397 1657 Capex (245) (400) (400)Investment 0 0 0 CF from Investing (245) (400) (400)Change in Equity 0 0 0 Change in Debt 213 (550) (650)Others (62) 0 (100)CF from Financing 152 (550) (750)Change in Cash 996 447 507

Source: Company, Karvy Research

Company Background

Kitex Garments Limited is based in Kochi, India. Kitex Garments Ltd. was incorporated in 1991. 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.

Kitex Garments Limited is in the business of manufacturing and exporting garments. The company exports its products to US and European markets. With unmatched global connections, this company caters to prominent and renowned conglomerates in USA and Europe.

The company currently employs over 8000 people at its facility, and has been a business provider to many satellite businesses in the state. It is the world’s third largest infant wear supplier and the largest exporter from India. The products of KGL are Body suits, Sleep wear, Rompers, Burps, Bibs and Training pants.

Company Financial Snapshot (Y/E Mar)Profit & Loss (Rs.mn)

FY15 FY16E FY17E

Net sales 5111 6466 8008Optg. Exp (Adj for OI) 3424 4333 5293EBITDA 1687 2134 2715Depreciation 213 209 239Other Income 134 97 120Interest 192 147 69 PBT 1417 1874 2526 Tax 432 581 783 PAT 985 1293 1743 Profit & Loss Ratios

EBITDA margin (%) 33.0 33.0 33.9Net Profit margin (%) 19.3 20.0 21.8P/E (x) 39.1 29.8 22.1EV/EBITDA (x) 22.5 17.3 13.2Dividend yield (%) 0.2 0.2 0.2Source: Company, Karvy Research

Exhibit 2: Shareholding Pattern


Exhibit 3: Segmentation - FY15


Promoters54.2%

FIIs2.4%

DIIs0.2%

Others43.2%

Garments 83.0%

Fabric 17.0%

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Kitex Garments Ltd

Capacity Expansion To Boost Sales and Augur GrowthKitex has current fabric capacity of 48 MT & 0.5 mn pcs/day garmenting capacity & is targeting a capacity of 1.1 mn pieces/day in two years. The management expects capex of Rs.350-450 mn for the group & Rs.150-200 mn for Kitex garments exclusively over the next 2 years. According to the management, the current utilization levels are close to ~65% with 8000 employees (KGL+KCL). The company intends to increase its utilizations to ~75% by FY16E. The 90mn annual capacity (KGL) & 65mn Annual capacity (KGL) translate to the 5.5 L/pieces per day.

A total capex of Rs.7.2mn was completed during FY14. This was mainly for the fabric processing segment. Going forward, capex will be spent on automatic cutting machines, advanced sewing machines and other technology up-gradations. The company recently completed Rs.600mn-Rs.700mn of investments in the robotics assisted fabric processing plant last FY towards enhancing capacities and improving efficiencies.

The management plans to bring in automation in new areas, which would bring in 75% labor saving in the long term. For infant wear, KGL manufactures 10 blocks at present. Each block has eight lines and every line has 25 machines and 40 employees. Each line produces 5500 pieces a day. It plans to increase another 8 blocks (64 lines) over the next two years and can add three more blocks.

The company plans to introduce the brand in US and invests significant amount in developing distribution network and branding exercise. Post capacity expansion, the company expects to cross Rs. 10,000mn export turnover in FY16E against Rs. 7500mn in the previous fiscal.

Huge opportunity in the Infant-wear marketIndia’s apparel market (Rs.2300bn) is expected to grow at a positive 9%, with the rising income levels of Indian working class. Although menswear constitutes the largest apparel market share, kids-wear market is growing at the fastest pace. Overall, the kids-wear market makes up approximately 20% of the total apparel market, and it is expected to grow at a CAGR of 11% over the next ten years. The segment is currently estimated at worth Rs 460bn and projected to reach Rs 1200bn by 2023.

Within the kids-wear segment, boys-wear contributes 52% of the overall revenue share of about Rs. 239bn & is expected to grow at 10% CAGR to reach Rs 610bn by 2023. The girls-wear market stands at Rs 218bn & projected to grow at an optimistic 11% CAGR to reach Rs 616bn by 2023.

According to a Technopak report, the overall childrens market in India can be broadly divided into five segments: super premium (above Rs 2,500), premium (Rs 1,000-2,500), mid (Rs 500-1,000), economy (Rs 250-500) and lower (up to Rs 250). Currently, the mid-segment contributes 30% and is expected to contribute ~60% by 2020.

Key players in the Infant-wear category include The Children’s Place (age group: 0-12); Gap stores-Gap Kids & Baby Gap; Gymboree (age group: 0-7); Gerber, Carter’s etc.

Exhibit 4: Infant-wear share to the overall Apparel Market


Exhibit 5: Infant-wear Market Share


0

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FY13 FY14 FY15 FY16 FY17 FY18Infant-wear Market Share

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FY10 FY11 FY12 FY13 FY14Others as % of Apparel Market Infant wear as % of Apparel Market

Dominant/Significant Market share in India & Third largest Kids-wear Supplier in the World

Kitex garments is the third largest global player in the infant-wear with a significant market share of 70% in India. Its exports contribute ~95% of its revenue pie. It has big clients like Mothercare, Toys R us, Jockey, Gerber and Carter’s who procure products from Kitex, which contributes significantly towards margin improvement and robust revenue growth for the company.

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Sep 28, 2015

Kitex Garments Ltd

Dominant/Significant Market share in India & Third largest Kids-wear Supplier in the World

Kitex garments is the third largest global player in the infant wear with a significant market share of 70% in India. Its exports contribute ~95% of its revenue pie. It has big clients like Mothercare, Toys R us, Jockey, Gerber, Carter’s who procure products from Kitex , which contributes significantly towards margin improvement and robust revenue growth for the company.

Among the global players, Wingloo (China) is the largest supplier of infant wear globally with a capacity of 0.75mnpcs/day followed by Gimmell (Singapore) with a capacity of 0.65mnpcs/day. Kitex garments is the third largest manufacturer with a capacity of 0.55mm pcs/day and the largest supplier from Indian markets. Given the infant wear market’s huge opportunity size, scalability potential for Kitex’s business is huge.

Tie-up with Lamaze International helps shift focus from B2B to B2C

Kitex USA LLC (50-50 JV between KCL and KGL) has signed a brand-licensing agreement with Lamaze International for the sale of infant wear in US and Canada under the Lamaze brand. Kitex USA LLC will be the exclusive supplier for Lamaze infant wear (for children up to five years old) in US and Canada. The contract validity is till 31 December 2020, extendable for five years.

Lamaze is a non-profit-organization established in 1960 and focuses on parenting, educating new moms through its network of 2000 educators, and also licenses its brand for the toys and apparels categories for babies. It has been in the infant wear business since 2008 through a licensing arrangement with Gerber. Lamaze products are sold by well-known retailers like ‘Buy Buy Baby’, ‘ToysRUs’ and other department stores, which we believe reiterates the brand power of Lamaze, providing high pricing power.

The management is confident of clocking US$8m sales in CY16 through th brand tie-up and of achieving the minimum guarantee with royalty rates at ~5% of sales. Most of the products manufactured under the Lamaze brand will be made-to order and inventory risk will not be borne by Kitex.

We believe this long-term agreement not only provides huge visibility of growth in the B2C category for Kitex but will essentially enable Kitex to improve its margins further and utilize its spare capacities better during lean quarters. Kitex plans to position Lamaze garments as premium products, which we believe can aid in higher margins than its existing business. We believe that Kitex’s expertise in infant-wear manufacturing complimented by strong brand recall of Lamaze makes it a sound combination for strong growth with higher margins.

Exhibit 6: Domestic Market Share (%)


Exhibit 7: Capacities of Global Infant-wear Suppliers


Kitex Garments

75%

Jay Jay Mills 12%

Others 13%

0.750.65

0.55

0

0.2

0.4

0.6

0.8

Wingloo Gimmell Kitex Garments

Global Infant-wear Suppliers (mn pcs/day)

Among the global players, Wingloo (China) is the largest supplier of infant-wear globally with a capacity of 0.75 mn pcs/day followed by Gimmell (Singapore) with a capacity of 0.65 mn pcs/day. Kitex garments is the third largest manufacturer with a capacity of 0.55mm pcs/day and the largest supplier from the Indian markets. Given the infant-wear market’s huge opportunity size, scalability potential for Kitex’s business is huge. The management plans to become Number 1 supplier in the infant-wear market globally in the next 2-3 years.

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Sep 28, 2015

Kitex Garments Ltd

Strong Clientele and Distribution Network

Kitex derives its 100% garment revenue from exports; of which 90% are to US and 10% to Europe. However, management downplayed this geographical risk, as majority of customers to whom they supply have global presence. Though KGL faces significant customer concentration with three players (Gerber, Jockey and Toys R US) accounting for majority of revenues till last year. It has recently added major customers like Kohl’s and Children’s Place. The management doesn’t supply more than ~$30mn-$40mn to a single customer. Kitex not ready to supply more than $50 Mn to a single player. It is much safer to spread the same volume between 3-4 leading players.

The company has five large clients – Gerber, Toys R Us, Jockey, Mothercare and Carter’ss and has added two large clients, via Children’s Place and Kohl’s in April-September period of FY15. KGL intends to improve its revenue mix in favor of high margin clients like Toys R Us, Jockey and Mothercare, who procure high value-added products which will drive continued margin improvement.

Kitex Clients: Gerber is the number one wholesaler in the US with ~40,000 stores; Carter’s is a wholesaler (supplies to Wal-Mart, Target), a retailer (~600 outlets) and buys ~US$1.1bn of infant-wear globally.

Kitex won the Best Manufacturer Supplier Award for the year 2011 and 2012 from Toys R Us, U.S.A. The company also won the Best Manufacturer supplier award from Gerber Children wear, USA for the second consecutive year. It is the most preferred player among the US companies in terms of its quality and management.

Own brand ‘Little Stars’ to be launched in Fall 2016

KGL plans to launch its own brand “Little Stars”, owned by Kitex USA LLC by fall 2016. The management plans to target this brand as a mass market product in the US and Canada. It plans to launch the brand through the online route. It has also highlighted that apart from the in-licensed brand, it plans to launch its own brand Little Stars in fall 2016, which was earlier scheduled for launch in the Q2FY16E, would be postponed due to final regulatory and compliance approvals.

The management doesn’t expect any inventory risk for the licensed brand and owned brands business, as it will make samples first, take orders, and then ship.

Exhibit 9: Kitex Clientele


Carters15%

Gerber25%

Toys R us20%

Jockey20%

Mothercare20%

Exhibit 8: Client Share (%)


State-of-the-Art & Cost-efficient Manufacturing Facilities

The company has spend Rs.700 mn last financial year as a capex where they have spend on buying new machines, up-gradation of current facilities etc. In the next two years, the company plans to spend Rs.300mn - Rs.400mn in capex which will help the company to expand its capacity from 0.55mn units per day to 1.1mn units per day. It is a vertical set-up 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, one of the largest in the world under one roof, makes fabrics for its garmenting units. Equipped with digital dispenser system for error-free, automatic and computer-controlled preparation of color 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-wear apparel brands in the United States and Europe.

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Kitex Garments Ltd

Its garmenting unit uses latest machinery for pattern Computer-Aided-Design (CAD), plotting and grading. It has Automatic spreader machines which enhance the speed of spreading and Automated cutting machines that enable faster & precision cutting. The factory is equipped with latest sewing machinery ensures stain-free, quality sewing and state-of-the-art spectrophotometer ensures electronic color reading & transmission.

Strong Growth during FY09-14; Performance to accelerate during FY15-17E

Kitex Garments (KGL) posted a healthy and strong growth in revenues with a CAGR of 19.4% during the period of FY09-14.The company reported high EBITDA and PAT growth of 41.5% & 42.0% respectively on back of strong export demand and growing contribution from new clients. We expect a robust growth of 25% CAGR revenue growth during FY15-17E as the company plans to expand its capacity to 1.1mn pcs/day by the same period.

Exhibit 11: EBITDA and PAT Margins (%)


Exhibit 10: Historical Revenue Performance


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FY10 FY11 FY12 FY13 FY14Revenue (Rs. mn) EBITDA margin (%)PAT margin (%)

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Sep 28, 2015

Kitex Garments Ltd

Exhibit 12: Business Assumptions

Y/E Mar (Rs. Mn) FY14 FY15E FY16E FY17E Comments

Revenues

Revenue 4422 5111 6466 8008 Higher sales on account of improving volume and value realizations.Revenue Growth (%) 39.5 15.6 26.5 23.8

EBITDA 951 1687 2134 2715 EBITDA to grow further due to lower input and manufacturing costs due to technology up-gradation.EBITDA Margin (%) 21.5 33.0 33.0 33.9

PAT (normalized) 574 985 1293 1743 Since Kitex has near zero debt, the company’s lower interest expenses yielding to higher PAT.Normalized PAT Margins 13.0 19.3 20.0 21.8

Fully Diluted EPS 12.1 20.7 27.2 36.7

Fully Diluted EPS Growth (%) 95.3 71.7 31.3 34.8

Capex (ex. Acquisitions) (718) (245) (400) (400)

The company plans for a capex of Rs.300mn-Rs.400mn for the overall group (KCL+KGL) and expects to do capex of Rs.150mn-Rs.200mn for garment expansion for KGL.

Net CFO 1007 1090 1397 1657

Net Debt 158 (625) (1622) (2779)The company has excess cash and plans to become debt free in the near term.

Free Cash Flow 290 845 997 1257 Source: Company, Karvy Research

Exhibit 13: Karvy vs Consensus Karvy Consensus Divergence (%) Comments

Revenues (Rs.mn)

FY16E 6446 6399 0.7 Higher revenue due to new client additions, higher volume, value realizations and also due to capex expansion in the garments segment.FY17E 8008 7910 1.2

EBITDA (Rs.mn)

FY16E 2134 2102 1.5 Higher EBITDA margins on account of lower input costs and increasing revenue growth.FY17E 2715 2652 2.4

EPS (Rs.)

FY16E 27.2 26.8 1.3 Due to near-zero debt, the company wouldn’t incur any interest costs. On account of the same, the PAT is expected to be significantly higher.FY17E 36.7 35.8 2.5

Source: Bloomberg, Karvy Research

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Kitex Garments Ltd

Exhibit 17: EBITDA (Rs. Mn) & EBITDA Margins (%)


Exhibit 18: PAT (Rs. Mn) & PAT Margin (%)


KGL’s EBITDA margins increased from 9.3% in FY10 to 21.5% in FY14 despite soaring cotton prices in FY12, which form a major part of its consumables.

Going forward on lower cotton prices and higher realizations, we expect EBITDA to grow at a 26.8% CAGR during FY15E-17E & EBITDA margins to grow by 34% during the same period.

PAT grew at 42% CAGR during FY09-14, while the PAT margin grew by 13% in FY14 on back of healthy volume dispatches.

The margins are expected to improve further purely based on efficiencies of higher turnover & EBITDA margins. We believe the PAT to grow by 33% CAGR during FY15E-17E on back of robust revenue growth and higher EBITDA margins.

EBITDA margins to Increase on Lower Input Costs

Net Income to continue uptrend with Margin improvement

Exhibit 14: Segment Revenues


Exhibit 15: Revenue (Rs. Mn) & Growth (%)


Exhibit 16: Break-up of Revenues (Rs. Mn)


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Revenues to grow at 25% CAGR during FY15-17EKGL’s revenues have been growing consistently from the past five years. During FY09-14, Kitex posted revenue CAGR of 19% on back of higher volume and value realizations in the garments segment. We expect it to further grow by 25% during FY15E-17E on account of better product mix and operational efficiency. The management plans to increase its current garment capacity to 1.1 mn pcs/day, which makes it the largest in the world. We believe this to contribute significantly to the top-line growth, going forward.

As of FY15, the garments contribute 83% to the overall revenue pie. Going forward, we believe the revenue share to increase to ~95% due to strong export demand and addition of new clients.

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Exports Domestic

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Kitex Garments Ltd

Exhibit 20: Revenue per Employee


Exhibit 21: Debt-Equity Ratio


Kitex currently has a strong labor force of 4000 employees each for KCL & KGL. The sales per employee grew significantly from 0.78mn in FY10 to 1.09mn in FY14. The management plans to increase its investments in technology up-gradation in-order to limit its labor force in the long term.

Kitex has strong market share and pricing power. The Debt-Equity ratio stands at 0.5x as of FY15 and is expected to become debt-free by FY17E on back of excess cash flows that could be used for capacity expansion in the long term.

Revenue per Employee is Increasing Consistently

Kitex to be a Debt-free Company by FY17E

Exhibit 22: Working Capital Ratios


Kitex has good working capital ratios. The cash conversion cycle has improved from 116 days in FY10 to 42 days in FY14 and expected to come down further. The inventory, sales and payable days reduced to 35 days, 43 days and 37 days in FY14 respectively due to strong management capability and improving cost efficiency.

Improving Working Capital Ratios

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FY12 FY13 FY14 FY15E FY16E FY17EDebt-Equity Ratiio

-5

47

99

151

FY10 FY11 FY12 FY13 FY14Cash Conversion CycleSales DaysInventory Days Payable Days

Exhibit 19: RoE (%) & RoCE (%)


RoE & RoCE have improved to 38.7% & 36.2% in FY14 due to increased EBIT margins and high asset turnover.

We expect RoE & RoCE to improve on a similar note to 38.0% & 48.6% by FY17E on account of higher profitability, asset utilizations and growing equity base.

RoE & RoCE to improve significantly

20%

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FY12 FY13 FY14 FY15E FY16E FY17ERoE (%) RoCE (%)



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Sep 28, 2015

Kitex Garments Ltd

Valuation & OutlookAt CMP of Rs. 811 per share, the stock is valued at 29.8x and 22.1x FY16E and FY17E P/E. We reiterate a “BUY” with a target price of Rs.954 per share based on 26x FY17E P/E, representing an upside potential of 18%.

Exhibit 25: Comparative valuation summary

CMPMcap

Rs. Mn

EV/EBITDA (x) P/E (x) CAGR (FY15E-17E) RoE (%) Price Perf (%)

FY16E FY17E FY16E FY17E Sales EBITDA EPS FY16E FY17E 3m 6m 12m

Kitex 811 38523 17.3 13.2 29.8 22.1 25.2 26.8 33.0 40.1 38.0 (16.0) 59.0 66.0 Page 13250 147789 35.8 25.9 54.5 38.8 36.0 33.4 34.4 55.1 53.7 (13.0) (7.0) 69.0 Lovable 263 4402 18.7 15.1 21.2 17.3 13.3 10.8 15.7 14.0 14.7 2.0 (12.0) (29.0)KPR Mills 776 29581 6.5 5.3 13.2 10.4 12.8 15.2 31.1 23.2 24.3 28.0 69.0 177.0 Source: Bloomberg, Karvy Research

Exhibit 26: 1-Yr Forward P/E Band


Exhibit 24: P/E vs. RoE

Source: Company, Karvy Research; * Bubble size reflects the size of Market Capitalization of respective companies

FY17

E P

/E (x

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Kitex

KPR Mills

FY17E RoE (%)

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Lovable

Exhibit 23: Dividend & CFO (Rs. Mn)


Kitex has been consistently paying higher dividends. In FY14, there was a decline in the same due to cash utilizations for capacity expansion. Going forward, we expect the payout ratio to further improve to 18% due to generation of free cash flows in the next 2-3 years.

Dividend payout to Increase Further; Higher FCF

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FY12 FY13 FY14 FY15E FY16E FY17EDividends paid CFO-w/o dividend

-20

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P/E Mean ~1SD ~-1SD ~2SD ~-2SD


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Sep 28, 2015

Kitex Garments Ltd

At CMP of Rs. 811 per share, the stock is valued at 29.8x and 22.1 x FY16E and FY17E EPS respectively. The management has plans to do an overall capex of Rs.300mn-Rs.400mn for the entire group (KCL+KGL). Capex for KGL is around Rs. 150mn-200mn, which would be for the expansion in the garments segment. The company plans to expand its existing capacity of 0.5mn pcs/day to 1.1mn pcs/day, which would make KITEX a leader in the infant wear category. It also plans a capex of Rs.100mn-Rs.150mn for technology up-gradation, going forward. With increasing demand and growth, improving return ratios and increase in dividend payout, we reiterate a “BUY” recommendation with a target price of Rs. 954 per share valuing at 26x FY17E P/E, representing an upside potential of 18%.

During FY10-14, Kitex’s revenues grew at 15.6% CAGR due to its strong positioning in the kids wear segment. Going forward, we expect KTG to post 25% revenue CAGR coupled with 34% EBITDA margin expansion yielding to a better product mix and product pipeline. We believe PAT to post 33% CAGR over FY15E-17E. The company currently has capacity utilization of ~62%-65% & planning to double their capacities in the next two years.

It has a strong and healthy balance sheet with significant free cash flows. RoE is expected to grow by 38.0% by FY17E from 26.7% in FY13. We expect the dividend payout to improve further by 15%-18% by FY17E, given significant free cash generation over the next two to three years.

In the domestic markets, we believe KTG is in a better position with 70% market share in a good position in the export market to capture the infant wear boom on back of its strong clientele, better operating efficiencies, launch of its own brand “Little Stars”, strong return ratios, high entry barriers and increasing cash flows.

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Sep 28, 2015

Kitex Garments Ltd

Peer ComparisonKitex operates in the infant-wear category. It is the largest supplier of kids garments from India and third largest exporter globally. Peers include Page Industries, KPR Mills, and Lovable Lingerie. With strong product pipeline, capacity expansion in the garments segment and management confidence, we remain positive on Kitex in the long term.

Exhibit 27: Revenue Growth (%)

Source: Respective companies, Bloomberg, Karvy Research

Exhibit 29: RoCE (%)


Exhibit 31: RoE (%)


Exhibit 28: EBITDA Margin (%)


Exhibit 30: EPS


Exhibit 32: RoA (%)


9.3%

17.7%

18.7%

19.0%

21.5%

5%

10%

15%

20%

25%

FY10 FY11 FY12 FY13 FY14KPR Miils LovablePage Kitex

23.1%

24.3%

30.4%

25.7%

36.2%

0%

10%

20%

30%

40%


35.7%

3.5%

21.8%

1.6%

39.5%

0%

10%

20%

30%

40%

50%


3.94.3 5.7 6.2 12.1

0

35

70

105

140


39.6% 32.0%31.7% 26.7%

38.7%

0%

20%

40%

60%

80%


10.0%11.5% 14.3% 13.6%

21.0%

0%

10%

20%

30%

40%


Key Risks• Volatile Raw material Prices: Cotton is the largest consumable for Kitex. As cotton prices – due to erratic weather patterns

and government policies – remain a tricky and generic issue for the textiles sector, any adverse price movements could pose margin pressure for the company. If there is an increase in the raw material prices going forward, it could impact the margins of the company.

• Forex Risk: Kitex exports contribute around 95% to the top line. We believe sharp appreciation in INR could affect its overall revenue.

• Competition Risk: Kitex is exposed to competition risks from Asian countries such as Sri-Lanka, Taiwan, China and other African countries. The increase in competition risks can create pressure on margins, market share etc.

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Sep 28, 2015

Kitex Garments Ltd

Financials

Exhibit 33: Income StatementYE Mar (Rs. Million) FY13 FY14 FY15 FY16E FY17E

Revenues 3170 4422 5111 6466 8008 Growth (%) 1.6 39.5 15.6 26.5 23.8 Operating Expenses 2569 3471 3424 4333 5293 EBITDA 601 951 1687 2134 2715 Growth (%) 3.2 58.3 77.4 26.5 27.2 Depreciation & Amortization 86 97 213 209 239 Other Income 40 133 134 97 120 EBIT 515 855 1474 1925 2475 Interest Expenses 115 106 192 147 69 PBT 440 882 1417 1874 2526 Tax 147 308 432 581 783 Adjusted PAT 294 574 985 1293 1743 Growth (%) 8.3 95.3 71.7 31.3 34.8 Source: Company, Karvy Research

Exhibit 34: Balance SheetYE Mar (Rs. Million) FY13 FY14 FY15 FY16E FY17E

Cash & Inventories 412 1036 2033 2480 2987 Sundry Debtors 506 531 627 795 993 Inventory 459 108 112 171 196 Loans & Advances 217 342 462 595 721 Gross Block 1609 2343 2592 2992 3392 Net Block 1172 1812 1882 2069 2230 CWIP 23 7 3 3 3 Other Assets 55 157 179 0 0 Total Assets 2303 3152 4272 4901 5780 Current Liabilities & Provisions 647 885 1081 1272 1409 Debt 918 1194 1408 858 208 Other Liabilities 161 216 226 226 226 Total Liabilities 1726 2296 2714 2355 1842 Shareholders' Equity 48 48 48 48 48 Reserves & Surplus 1176 1694 2591 3770 5299 Total Networth 1224 1742 2639 3818 5346 Total Networth & Liabilities 2303 3152 4272 4901 5780 Source: Company, Karvy Research

14

Sep 28, 2015

Kitex Garments Ltd

Exhibit 35: Cash Flow StatementYE Mar (Rs. Million) FY13 FY14 FY15 FY16E FY17E

EBIT 515 855 1474 1925 2475 (Inc.)/Dec in working capital (204) 338 (47) 9 (211)Other income 40 133 134 97 120 Depreciation 86 97 213 209 239 Interest paid (115) (106) (192) (147) (69)Tax paid (147) (308) (432) (581) (783)Others (2) 55 10 0 0 Dividends paid (44) (56) (72) (114) (114)Cash flow from operations 130 1007 1090 1397 1657 Inc/dec in capital expenditure (42) (718) (245) (400) (400)Cash flow from investing activities (42) (718) (245) (400) (400)Issuance of equity 0 0 0 0 0 (In)/dec in borrowings 34 276 213 (550) (650)Others (75) 58 (62) 0 (100)Cash flow from financing activities (41) 335 152 (550) (750)Net change in cash 47 624 996 447 507 Source: Company, Karvy Research

Exhibit 36: Key RatiosYE Mar (%) FY13 FY14 FY15 FY16E FY17E

EBITDA Margin (%) 19.0 21.5 33.0 33.0 33.9 EBIT Margin (%) 16.2 19.3 28.8 29.8 30.9 Net Profit Margin (%) 9.3 13.0 19.3 20.0 21.8 Dividend Payout Ratio (%) 12.9 8.3 6.0 7.3 5.4 Net Debt/Equity 0.4 0.1 (0.2) (0.4) (0.5)RoE (%) 26.7 38.7 45.0 40.1 38.0 RoCE (%) 25.7 36.2 43.3 44.1 48.6 Source: Company, Karvy Research

Exhibit 37: Valuation ParametersYE Mar FY13 FY14 FY15 FY16E FY17E

EPS (Rs.) 6.2 12.1 20.7 27.2 36.7 DPS (Rs.) 0.8 1.0 1.3 2.0 2.0 BV (Rs.) 25.8 36.7 55.6 80.4 112.6 PE (x) 131.1 67.1 39.1 29.8 22.1 P/BV (x) 31.5 22.1 14.6 10.1 7.2 EV/EBITDA (x) 64.9 40.7 22.5 17.3 13.2 EV/Sales (x) 12.3 8.7 7.4 5.7 4.5 Source: Company, Karvy Research

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Sep 28, 2015

Kitex Garments Ltd

Stock Ratings Absolute ReturnsBuy : > 15%Hold : 5-15%Sell : <5%

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