View
2
Download
0
Embed Size (px)
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
