Kitex Garments Limited Well dressed for the Garments Limited...آ  Private & Confidential Kitex Garments

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  • Private & Confidential

    Kitex Garments Limited – Well dressed for the leap

    1

    Management Meeting Note – September 2014

  • Private & Confidential

    Kitex Garments Limited – Well dressed for the leap

    Tejash Shah | tejash@sparkcapital.in | +91 22 4228 8155 Gnanasundaram | gnanasundar@sparkcapital.in | +91 44 4344 0062 Madhav PVR | madhav@sparkcapital.in | +91 44 4344 0060

    2

    Corporate Factsheet

    Promoter Background Promoted by the Anna Group, Kitex Garments Limited (KGL) is currently

    managed by second generation entrepreneur Mr. Sabu M Jacob whose father

    Mr.M.C Jacob founded the group in 1968.

    Presence KGL currently has no retail presence in India however is expected to launch its

    own retail brand in USA shortly. The company caters directly to wholesalers and

    retailers based out of the United States and European Union.

    Management depth Number of Promoter Directors: 1; Mr. Sabu M Jacob - Chairman & Managing

    Director ; Other Directors: Prof. E.M Paulose ;Mr. Benni Joseph; Mr. C Mohan;

    Mr. K.L.V Narayanan

    Business KGL is primarily engaged in contract manufacturing of infantwear (less than 24

    months of age) to apparel wholesalers & retailers based out of the US and UK.

    The company also manufactures fabric which in addition to being used captively

    is also sold to the group entities.

    Corporate Structure The Company is a part of the larger Anna-Kitex Group, which has diversified

    interests in aluminum vessels, home appliances, spice trading and textiles. Sister

    concerns within the industry include Kitex Ltd, Kitex Childrenswear Limited (KCL)

    and Kitex bags. Group Entity KCL holds a ~15.5% stake in KGL.

    Revenue Model (FY14) KGL derived around 80% of its revenues (in FY14) from contract manufacturing

    for wholesalers and retailers while the remaining was derived from sale of fabric.

    Capacity Fully integrated manufacturing facility at Kizhakkambalam (Kerala) with a facility

    to manufacture ~0.32 million pieces per day and a fabric processing capacity of

    48 MT. However, including KCL’s capacity, total capacity stands at ~0.55 million

    pieces/day.

    Key Clientele Mothercare, Jockey, Wal-Mart,Kohls, The Childrens’ Place, Gerber, Carter’s,

    Toys R Us are the major customers of the Kitex group.

    Key Brands The company plans to launch its own retail brand in the US shortly.

    Credit Rating ICRA A+/Stable (long term facilities)

    ICRA A1 (Short term facilities)

    Corporate Bankers State Bank of India

    Auditors M/S Kolath & Co.

    Market Data

    Market Cap Rs.~16bn

    Shareholding Promoter: 54.3%; Others:

    45.6%

    52-week High-Low (Rs.) Rs.359.70 (Aug 27,2014);

    Rs.54.30 (September 6, 2013)

    All time High-Low (Rs.) Rs.359.70 (Aug 27,2014);

    Rs.0.04 (October 10,2001)

    3M Average daily

    Volume 195,931

    Stock Return (%)

    Correction from 52WH 6%

    Rise from 52WL 522%

    F&O NA

    FII limit 24%

    Stock exchange list BSE,NSE

    3M 6M 1Y YTD

    35% 276% 505% 311%

    Fundamental View

    Current Market Price Rs.338

    Recommended entry

    price NA

    Target Price NA

    mailto:tejash@sparkcapital.in mailto:gnanasundar@sparkcapital.in mailto:madhav@sparkcapital.in

  • Private & Confidential

    Kitex Garments Limited – Well dressed for the leap

    Tejash Shah | tejash@sparkcapital.in | +91 22 4228 8155 Gnanasundaram | gnanasundar@sparkcapital.in | +91 44 4344 0062 Madhav PVR | madhav@sparkcapital.in | +91 44 4344 0060

    3

    Key takeaways from the management interaction and Plant Visit (1/2)

    Industry dynamics and growth potential: KGL is engaged in manufacturing of ‘infantwear’ majorly exporting its produce to USA and UK. USA consumes

    ~20% of all the childrenwear manufactured globally making it the largest and most lucrative market to operate in. Management pointed out that higher purchase

    frequency makes infantwear the most profitable among childrenwear offerings. KGL noted that USA is more design oriented with lots of colours and various

    styling; the market though continues to offer the cheapest infantwear offering in the world. However, customer friendly return and easy claims policy makes

    quality a paramount feature. KGL ventured into USA market supplying mass market offerings to Gerber and only in the last few years has entered into sourcing

    agreements with Carter’s (premium segment player). Management also noted that quality is a key purchase consideration in infantwear; thereby trusted brands

    as Carter, Babies-R-Us, Gerber, The Children's Place, Mothercare and a few others have only endured over several decades. KGL products are currently limited

    to only infantwear offering, but has offlate also started manufacturing innerwear incorporating OUTLAST® technology on a specific request from Jockey.

    Sources of economic moat: Having been exploited in its initial years by the buyers, KGL deciphered the ‘right’ business model and began investing in the

    Safety-Security- Social and Environmental compliance norms, which they believe have given them a significant competitive moat over competition. Management

    pointed that buyers too have graduated to look beyond pricing and have begun to look on additional factors as quality and timeliness of delivery. KGL noted that

    for the first two years vendors and suppliers assess performance and execution of each other beyond which the relationship really matures; KGL noted that all

    their buyers are either in the $13-15mn or $28-30mn range. Management also iterated that buyers face considerable exit barriers in-terms of quality, price and

    comfort, which assists vendors as KGL enjoying lower buyer attrition.

    ……..with financials confirming the robustness of the business model

     Profitable Growth: Sales grew 13% CAGR in FY10-14 complimented by Net Profit growth of 33% CAGR for the same period.

     Enviable Balance Sheet - Cash Flows : Cash surplus in FY14- Rs. ~1032mn (~6% of current market capital), Debt/Equity as on March 31,2014 - 0.7,

    Positive Cash flow from operations for the last five years except in 2011 indicate the sound fundamentals of the balance sheet.

     Healthy Return Ratios: FY10-FY14, Avg. ROCE ~ 20% Avg.ROE ~ 36%-comparable to that of top notch branded players.

     Sustained Operating profitability: Based on its moderate pricing power, established relationship with clients and growing infantwear sector globally coupled

    with the economic moat the company derives, we expect KGL to continue to benefit from healthy operating profitability in the range of 20-25%.

     No dilution of capital: Despite consistently growing at 5x in 10 years, there has been no dilution of capital by the promoters indicating the management’s

    ability to grow even without funding of external sources

     Management stated that they plan to become debt free in the medium term and pointed out that they are already debt free on a net debt basis.

    Competitive Landscape: According to the management, Kitex group is the third largest manufacturer of infantwear in the world and one among the only twelve

    entities globally with a capacity to manufacture more than 0.5 million units per day. Though wages are lower in Bangladesh, higher machine productivity and

    process in infantwear provides KGL a natural moat. KGL did acknowledge that wholesalers/retailers constantly pressurise suppliers for lower pricing, given that

    not many of the wholesalers/retailers themselves are profitable. KGL however believes informing in advance on yarn costs, trims & accessory costs, labour

    costs, and the dollar-Rupee equation does assist in further price negotiations. KGL also iterated in avoiding single client concentration risk.

    mailto:tejash@sparkcapital.in mailto:gnanasundar@sparkcapital.in mailto:madhav@sparkcapital.in

  • Private & Confidential

    Kitex Garments Limited – Well dressed for the leap

    Tejash Shah | tejash@sparkcapital.in | +91 22 4228 8155 Gnanasundaram | gnanasundar@sparkcapital.in | +91 44 4344 0062 Madhav PVR | madhav@sparkcapital.in | +91 44 4344 0060

    4

    Key takeaways from the management interaction and Plant Visit (2/2)

    Growth plans: Management indicated that the infantwear market in India, China and Middle East is rapidly growing and most of the global brands would

    derive a significant portion of revenues from these markets in the medium term. Population and growth potential in emerging economies continue to present

    attractive opportunities. Mothercare has established many stores in India under both the company owned model and franchisee operations. When the market

    further opens up in India over the next 3-5 years, Management expects similar initiatives from the other players as Carter’s, Gerber and Walmart look to

    establish their presence in India.

    Geographical concentration and customer concentration in revenue profile: Three-fourths of KGL’s revenues are derived from US and rest from 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 (Gerbe