Kitex Garments: Unique business model; promising times ahead

Initiating Coverage

Kitex Garments

| Sector: Textiles

Kitex Garments

BSE Sensex

27,090

S&P CNX

8,121

CMP: INR409

TP: INR615

Buy

Soaring high

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Unique business model; promising times ahead

KTG IN

47.5

421/57

30/315/558

19.4

0.3



Financial Snapshot (INR Billion)

2015E 2016E 2017E

Y/E Mar

Sales

5.5

6.9

8.6

EBITDA

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

1.4

0.8

16.7

38.1

51.1

38.0

40.5

24.5

8.0

1.9

1.2

24.6

47.5

72.2

39.9

52.7

16.6

5.7

2.4

1.6

32.9

33.8

98.1

38.6

57.7

12.4

4.2



Kitex Garments Ltd (KTG) has a strong presence in the highly specialized infant

wear (0-2 years) market – a segment where competitors have found the going

tough due to stringent safety norms.

KTG has diversified its clients mix from a single client in FY09 to five currently,

reducing client concentration risk and improving margins.

Going forward, KTG 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.

KTG plans to buy/license a brand for the US market. Also, it aims to be a

wholesaler like Gerber. Apart from this, KTG plans to launch its products through

the e-commerce channel for the US market.

At CMP, the stock trades at 24.5x FY15E, 16.6x FY16E and 12.4xFY17E EPS.

We initiate coverage with a ‘Buy’ rating with a target price of INR615, valuing the

stock at 25x FY16E earnings.

KTG: third largest infant wear supplier globally

The largest manufacturer of infant wear globally is China’s Wingloo, followed by

Singapore’s Gimmell. KTG (Kitex Garments + Kitex Childrenwear) is the No. 3

manufacturer globally. Wingloo has a capacity of 7.5 lakh pieces per day,

Gimmell has a capacity of 6.5 lakh pieces per day and KTG has a capacity of 5.5

lakh pieces per day. Given infant wear market’s huge opportunity size,

scalability potential for KTG’s business is huge. Management targets to be the

No.1 player in infant wear market over the next few years.

Shareholding pattern (% )

As on

Promoter

DII

FII

Others

Jun-14 Mar-14 Jun-13

54.2

0.01

1.18

44.6

54.2

0.0

1.07

44.7

54.2

0.0

1.1

44.7

Strong clientele, with good order book visibility

KTG derives 100% of its garment revenue from exports, of which 90% are to the

US and 10% to Europe. Company has five large clients – Gerber, Toys R Us,

Jockey, Mothercare and Carters and has added two large clients, viz Children’s

Place and Kohl’s in 1HFY15. All of these clients typically run annual FOB imports

amounting to USD1b each and source from 12-13 organized players around the

globe, with KTG being one of them. KTG accepts a minimum order batch size

USD15m with a maximum of USD30m. It has set a minimum order batch sizes to

ensure that no order is sub-scale while it has set maximum order batch sizes to

ensure limited client concentration. Management believes that apart from

addition of new clients, there is significant room to increase wallet share from

existing clients, which will drive growth in the coming years. KTG has a firm one

year order book visibility.

FII includes depository receipts

Stock Performance (1-year)

480

360

240

120

Kitex Garments

Sensex - Rebased

Focus to expand into retail brands to drive margins higher

KTG 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. Company is working at 60% capacity

utilization and plans to ramp up to 70-75% utilization, thus increasing margins.

19 September 2014

Kitex Garments

Focus on automation to drive productivity further

KTG’s management is extremely focused on driving productivity higher. To improve

productivity levels, KTG plans to replace sewing machines older than five years with

newer ones. The new machines would help to increase the speed from 7,000

stitches per hour to 9,000 and would need one-third the power consumed by old

machines. Earlier, KTG had 70-80 people deployed for dyeing gray/white fabric. It

has now introduced an Italian robotic technology, post which only one person is

needed. Similarly, it has installed a bow making automated machine requiring just

one person vs 50 people earlier. All these measures make KTG one of the most

efficient players in the industry, which reflects in increased business from existing

clients and also winning new clients.

Forward integration can be a game changer for KTG

KTG has expertise in infant garment manufacturing and has a sound knowledge of

the business complexity in safety requirement and designing. It plans to buy/license

a brand for the US hypermarket market. Also, it plans to be a wholesaler like Gerber.

Apart from this, KTG plans to launch its products through the e-commerce channel

for the US market, which can capture margins across the entire value chain.

Infant wear needs high specialization

Manufacturing of infant wear is a highly specialized business, with the presence of

certain large organized players. Adhering to stringent safety measures, maintaining

high quality standards, higher degree of complexity than adult garments due to

small size, need for greater variety, smaller batch size orders and high labor

requirement are some of the key entry barriers. The infant garments industry is thus

highly specialized which ensures minimal competition from other textile

manufacturers for leading and established players like KTG.

Valuation and View - Promising times ahead, re-rating underway

We expect KTG to post 24.6% revenue CAGR coupled with 700bp margin expansion

over FY14-FY17E. Hence, we expect PAT to post 40% CAGR over FY14-17E. With 60%

capacity utilization currently, we expect ramp-up of existing capacities and minimal

expansion capex. Given strong balance sheet and significant free cash flows, RoCE

and RoE should improve from ~37% and 39% respectively to ~58% and 39% over

FY14-17E. At CMP, the stock trades at 24.5x FY15E, 16.6x FY16E and 12.4x FY17E

EPS. With growth sustaining, return ratios improving and dividend payout

increasing, we believe Kitex is well poised from a long term perspective. We initiate

coverage with a ‘Buy’ rating with a target price of INR615, valuing the stock at 25x

FY16E earnings.

19 September 2014

Kitex Garments

Company description

Kitex Garments Ltd (KTG) is based in Kochi, India. Incorporated in 1992, its first

public issue was in 1995. Its promoters are Mr MC Jacob, Mr Boby Jacob and Mr

Sabu Jacob. KTG is in the business of manufacturing and exporting infant garments.

Company derives 85% of its revenue from the sale of infant garments and the

balance 15% from the sale of fabric to Kitex Childrenwear.

Finished garments manufactured at KTG’s factories

Source: Company, MOSL

KTG’s garment manufacturing unit

Source: Company, MOSL

19 September 2014

Kitex Garments

Client mix change with higher share of value added

products to drive margins higher



KTG is in the process of adding some large clients in FY15 apart from deepening

business with existing clients like Gerber, Toys R Us, Jockey, Mothercare and Carter’s.

All these clients typically run annual FOB imports amounting to USD1b each and

source from 12-13 organized players around the globe, with KTG being one of them.

KTG has diversified its clients mix from a single client in FY09 to five in FY14. Further

diversification in client base going forward will improve margins from current levels.

Strong clientele, with good order book visibility

KTG derives 100% of its garment revenue from exports, of which 90% are to the US

and 10% to Europe. Company has five large clients – Gerber, Toys R Us, Jockey,

Mothercare and Carters and has added two large clients, viz Children’s Place and

Kohl’s in 1HFY15. All of these clients typically run annual FOB imports amounting to

USD1b each and source from 12-13 organized players around the globe, with KTG

being one of them. KTG accepts a minimum order batch size USD15m with a

maximum of USD30m. It has set a minimum order batch sizes to ensure that no

order is sub-scale while it has set maximum order batch sizes to ensure limited client

concentration. There are two major seasons for KTG – Spring and Fall. Shipments are

from October to February for the Spring season and from June to September for the

Fall season. Currently, it has an order book of one year, which has been increasing

rapidly. Management believes that apart from the addition of new clients, there is

significant room to increase wallet share from existing clients, which will drive

growth in the coming years.

Key clients and FY14 revenue contribution

Carters, 15%

Gerber, 25%

Mothercare, 20%

Toys R Us, 20%

Jockey, 20%

Source: Company, MOSL

Capacity in place for next three years growth

KTG has 10 blocks currently. Each block has eight lines and every line has 25

machines and 40 employees. Each line can produce 5,500 pieces a day. The

company operates on just one eight-hour shift and current capacity stands at

550,000 pieces per day. It plans to add another eight blocks (64 lines) over the next

two years and can add three more blocks in the same campus, if needed. KTG has

also expanded its processing capacity from 24 tons per day to 48 tons per day. It can

double the revenue from current levels without incurring further capex for the next

two to three years. Company is likely to generate significant free cash flows over the

next two to three years.

19 September 2014

Kitex Garments

Focus to expand retail brands, high value products to drive margins higher

KTG has diversified its client mix from a single client in FY09 to five in FY14. Further,

the mix change is more significant from a margin perspective. However,

management’s focus on improving the share of retail brands in clientele and

diversifying the clientele over the last five years ensured substantial margin

accretion. Going forward, KTG 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. Jockey is KTG’s most

profitable customer; it manufactures products containing Outlast technology, which

is also approved by Nasa for space projects.

Gerber’s contribution in FY09 stood at 70%

Gerber’s contribution in FY14 stood at 25%

Others, 30%

Gerber, 25%

Gerber, 70%

Others, 75%

Source: Company, MOSL

Operating levers in place to improve productivity, margins

KTG does not take orders below USD15m as they lower its margins and reduce

productivity per employee due to the higher lead time taken to move from one

order to the other. Also, it does not take orders above USD30m to ensure low client

concentration. Company is working at 60% capacity utilization and plans to ramp up

to 70-75%, which would drive margins. Peak capacity utilization could be 75-80%.

We expect margins to expand from the current levels on the back of increased

proportion of high value garments and lower revenue proportion from lower margin

fabric business.

Higher revenue share from retail brands, diversifying client base and focus on premium garments drive margin accretion…

EBITDA margins (%)

22%

24%

26%

27%

17%

16%

18%

19%

FY09

FY10

FY11

FY12

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

19 September 2014

Kitex Garments

…coupled with lower share of fabric revenue

Garments

Fabric

25%

16%

21%

18%

16%

14%

75%

84%

79%

82%

84%

86%

FY12

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

Attractive industry metrics ensure each player in value chain clocks margins

KTG sells (for example) a garment to Gerber at USD1. The landed cost in the US is

USD1.3. Gerber sells it to Walmart at USD2 (Gerber sells 40% of its stock through

Walmart). Walmart sells to its customer at USD3. The average mark-up at every

stage is 40-50%. While Gerber buys the same product for most part of the year, Toys

R Us changes its designs and fabric four times a year. Hence, the opportunity for

value addition is much higher. The lead time from order to delivery is ~90 days.

Attractive industry metrics ensure each player in the value chain makes adequate

and attractive margins.

Value chain – selling price (SP) and cost price (CP) for individual players

Kitex

SP:USD1.0

CP: USD0.8

Gerber

SP: USD2.0

CP: USD1.3

Walmart

SP: USD3.0

CP: USD2.0

Source: Company, MOSL

Merger of Kitex Garments and Kitex Childrenwear likely in FY16

Kitex Garments’ promoters also own Kitex Childrenwear, an unlisted company in a

similar line of business. In 2007, Kitex Garments had undertaken a massive

expansion program. Its gross block had increased by more than 3.5x and its debt to

equity ratio had risen to 5:1. The promoters needed to expand further to cater to

the demand from clients. As they did not want to burden their listed entity, Kitex

Garments with further debt, they chose to build the additional capacity through

Kitex Childrenwear. They invested INR25m as seed capital. Kitex Garments sells

fabric worth INR700m to Kitex Childrenwear. The listed entity is now in a strong

position financially, and the promoters are now considering the merger of both their

companies. They have appointed Ernst and Young (E&Y) as consultant.

19 September 2014

Kitex Garments

Launch of own brand can be a mega game changer



KTG plans to buy/license a brand for the US market. Also, it plans to be a wholesaler

like Gerber with a shop in the US.

Apart from this, KTG plans to launch its products through the e-commerce channel in

the American market which can result in capturing margins across the value chain.

Merger of KTG and Kitex Childrenwear is also likely in FY16.

Forward integration can be a game changer for KTG

KTG has expertise in infant garment manufacturing and has a sound knowledge of

the business complexity in safety requirement and designing. It plans to buy/license

a brand for the US hypermarket market. Also, it plans to be a wholesaler like Gerber.

Apart from this, KTG plans to launch its products through the e-commerce channel

for the US market, which can capture margins across the entire value chain.

Current value chain – selling price (SP) and cost price (CP) for individual players

Kitex

SP:USD1.0

CP: USD0.8

Gerber

SP: USD2.0

CP: USD1.3

Walmart

SP: USD3.0

CP: USD2.0

Source: Company, MOSL

Expected value chain – KTG to foray into a Gerber-like wholesaler model

Kitex

SP:USD1.0

CP: USD0.8

Kitex

SP: USD2.0

CP: USD1.3

Walmart

SP: USD3.0

CP: USD2.0

Source: Company, MOSL

Ultimate value chain – KTG to enter B2C market through e-commerce portal in US

Kitex

SP:USD1.0

CP: USD0.8

Kitex

SP: USD2.0

CP: USD1.3

Kitex (e-com)

SP: USD3.0

CP: USD2.0

Source: Company, MOSL

Differentiated approach to ensure successful forward integration

KTG plans to deploy a differentiated strategy to capture a larger part of the value

chain. In the initial years, it plans to target the middle market retailers (having 200-

250 stores) and not the bigger players (like Walmart) to ensure better bargaining

power as a wholesaler. It is in the process of identifying such players that buy in the

American market. Similarly, to penetrate the e-commerce market in a better way,

KTG plans to sell through the platform at 20-25% mark-up, against competitors who

sell at 40% mark-up. This will ensure greater scale to begin with.

19 September 2014

Kitex Garments

Strong presence in specialized global infant wear market



KTG has a strong presence in the highly specialized infant wear market where other

players have found it difficult due to requirement of stringent safety measures.

Infant garment manufacturing is an extremely labor intensive process, which makes it

crucial to manage labor effectively. KTG achieves this and also ensures that employee

attrition is low and productivity levels are optimal.

Management is focused on driving productivity and has never faced any labor or trade

union issues in the past.

Infant wear is a highly specialized business

Manufacturing of infant wear is a highly specialized business, with the presence of

few large organized players. Adhering to stringent safety measures, maintaining high

quality standards, higher degree of complexity (than adult garments) due to small

size, need for greater variety, smaller batch size orders and high labor requirement

are some of the key entry barriers. Infant garment industry is thus highly specialized

which ensures minimal competition from peers for leading and established players

like KTG.

Safety standards stringent in infant wear – key entry barrier

Infant garment manufacturers need to follow many quality and safety standards to

ensure children are not harmed. For instance, products need to pass the saliva test,

as babies bite garments. Manufacturers need to ensure that they use only those

chemicals that do not react with saliva. Of the 80 chemicals and dyes normally used

in garments, most are specifically banned for infant wear by CPSI. Garments for

infants aged 0-2 years see maximum infection if poor quality chemicals are used and

hence clients have zero tolerance on safety standards. KTG imports most of its

chemical requirements and manufactures all fabric requirements in-house to adhere

to stringent safety norms. Consistent quality and safety track record make the

company a leader and third largest infant garment manufacturer globally.

Vertical integration from Fabric to Garment

Source: Company, MOSL

19 September 2014

Kitex Garments

Effective labor management is another key requirement

Infant garment manufacturing is an extremely labor intensive process, which makes

it crucial to manage the labor effectively. KTG along with KCL has employee strength

of 7,000-8,000, of which 4,500 are women. Company provides free accommodation,

food and recreational facilities to its employees. Working hours are from 8am to

5pm, a nine-hour shift. KTG follows these rules effectively, which ensures that

employee attrition is low and productivity levels are optimal. It has never faced any

labor or trade union issues.

Focus on automation to drive productivity further

KTG’s management is extremely focused on driving productivity higher. Company

has installed productivity monitoring machines, with a lamp above every

workstation. When an employee completes a job, she presses a button and the work

is registered. Every employee has a daily target and if she lags in the daily target, the

lamp above the workstation glows. The supervisor then helps to increase the

employee’s productivity. When KTG procures machines, it also enters into five-year

maintenance contracts with the suppliers. The contract warrants on-site presence of

maintenance professionals to address mechanical problems immediately.

To improve productivity levels, KTG plans to replace sewing machines older than five

years with newer ones. The new machines would help to increase the speed from

7,000 stitches per hour to 9,000 and would need one-third the power consumed by

old machines. Earlier, KTG had 70-80 people deployed for dyeing gray/white fabric.

It has now introduced an Italian robotic technology, post which only one person is

needed. All these measures, in our view, make KTG one of the most efficient players

in the industry, which reflects in increased business from existing clients and also

winning new clients.

Focus on automation

Advanced machines used by KTG



Style CAD systems



Completely automated Pathfinder computer cutting and spreading machines



Lock stitch sewing machines with thread trimmer



Twin needle lock stitch sewing machines



Twin needle lock stitch sewing machines



Over lock sewing machines with all special applications



Zigzag lock stitch sewing machines



3 needle interlock stitch machines with all special applications.



Flat seam machines



Latest chest print and embroidery machines, fusing machines, pocket machines, placket machines,

button and button-hole machines, pressing machines, etc.



Programmable electronic pattern sewing machines



Bar tacking machines



Button lock stitch machines



Pneumatic snap attaching machine



Heat transfer label fusing machines



Rib cutting machines



Metal detectors

Source: Company, MOSL

19 September 2014

Kitex Garments

Market size – huge opportunity in store



The global children's wear market had total revenue of USD216.2b in 2013 and is

expected to grow to USD291.5b by end-2018, post 6.2% CAGR.

The infant wear market (0-24 months) is a sub-set of the global children wear market

and the size of which is ~USD20b, which is ~10% of the total children’s wear market.

KTG is the third largest infant wear supplier globally and is the largest in India.

Children's wear market to post 6.2% CAGR over 2013-18

The global children's wear market had total revenue of USD216.2b in 2013,

representing a CAGR of 5.5% during 2009-13. Clothing, footwear, sportswear and

accessories retailers accounted for the largest proportion of sales in the global

children’s wear market in 2013; sales through this channel generated USD147.3b,

equivalent to 68.2% of the market's overall value. The market’s performance is

expected to accelerate, with a CAGR of 6.2% for the five-year period 2013-18, which

is expected to drive the market to a value of USD291.5b by end-2018.

Children’s wear market to post 6.2% CAGR

Children's wear market (USD b)

259

275

292

216

229

244

2013

2014

2015

2016

2017

2018

Source: Company, MOSL

Infant wear market – huge opportunity in store

The infant wear market (0-24 months) is a sub-set of the global children wear

market. The size of global infant wear market is ~USD20b, which is ~10% of the total

children’s wear market. Majority of the shoppers first turn to discount department

stores to buy infant and children's clothes. This is followed by traditional

department stores, a source for infant and children's clothing among 60% of

shoppers. Clothing specialty stores is the third choice, used by 41% of children

clothing shoppers.

Key specialty players in children clothing include The Children's Place, with nearly

650 stores targeting children clothing and accessories from infants to the age group

of 12; GapKids and BabyGap, the chain of Gap stores just for kids spun off by the

apparel giant; Gymboree, with 580 stores for infant through age 7, who then

graduate to the company's Zutopia Tween chain; Carter's, a leading brand in infant

apparel, with 160 outlet stores and branded boutiques in department stores and

OshKosh B'Gosh, which operates 150 outlets and specialty stores and distributes

through 4,600 stores nationwide.

19 September 2014

Kitex Garments

KTG: third largest infant wear supplier globally

The largest manufacturer of infant wear globally is China’s Wingloo, followed by

Singapore’s Gimmell. KTG (Kitex Garments + Kitex Childrenwear) is the No. 3

manufacturer globally. Wingloo has a capacity of 7.5 lakh pieces per day, Gimmell

has a capacity of 6.5 lakh pieces per day and KTG has a capacity of 5.5 lakh pieces

per day. Given infant wear market’s huge opportunity size, scalability potential for

KTG’s business is huge. Management targets to be the No.1 player in infant wear

market over the next few years.

Global infant wear suppliers capacity

Global infant-wear suppliers capacity (Lakh Pieces per day)

7.5

6.5

5.5

Wingloo (China)

Gimmell (Singapore)

Kitex (India)

Source: Company, MOSL

Dominant infant wear supplier from India with 70% market share

India exports infant garments worth ~USD130m annually. Of this, Kitex Garments

and Kitex Childrenwear together account for ~USD90m, thus taking KTG’s market

share to 70%. Jay Jay Mills is India’s second largest player with revenue of ~USD20m.

Given high entry barriers and specialized nature of the infant wear industry, none of

the large Indian textile players have a presence in this sector.

KTG commands 70% market share in India’s infant wear exports

Others, 15%

Jay Jay Mills, 15%

Kitex, 70%

Source: Company, MOSL

Greater sourcing from low cost countries like India augurs well for KTG

In 2007, Mothercare derived 80% of its revenue from the UK and the balance 20%

from other markets. Currently, it derives 20% from the UK and 80% from other

countries. As companies like Mothercare expand globally, they would source more

from low cost producing countries like India, and hence KTG would be a major

beneficiary.

19 September 2014

Kitex Garments

Carter’s – Management interaction reinforces the

strength of infant wear category

We interacted with the management of Carters’ to get insights on the global infant-

wear market and prospects for the industry going forward. Key highlights:

Carter’s – Leading player in US infant-wear market

Source: Company, MOSL

Carter’s – Leading player with a dominant 16% market share



The US infant wear category is a niche market with a market size of ~USD19b

with high entry barriers. Carter’s is a 100 years old brand with a dominant 16%

market share in the US 0-7 age group market.

Brand equity – in the form of trust factor associated with the brand is the key

entry barrier in the industry. Hence, Carter’s has been able to sustain its share.

E-commerce is a high-growth channel for Carter’s. Carter’s launched e-

commerce as a channel in 2010, and within a period of four years, this channel

has grown to USD200m, ~7% to consolidated revenues. Given high growth

prospects, management expects e-commerce channel to contribute 10% of

revenues. E-commerce is classified as online sales done on Carter’s portal.

Carter’s has expanded its footprint to global markets which contribute 11% to its

consolidated sales currently. It has presence in China, Brazil, Canada and South

Korea currently. Management believes there is strong growth potential in

international markets and will may look to enter Indian markets in the future.

Private label players have over the years penetrated the infant-wear market and

their marklet share currently would be ~50%.

The average selling price of a garment is USD8.5. Strength of the brand is

immense, having distribution strength of 17,000 distributors.

Carter’s doesn’t t own any manufacturing facilities and sources its merchandise

from twelve different countries globally. These include – China, Cambodia,

Vietnam, Thailand, Bangladesh, India, etc.

Management is looking to reduce exposure to China which currently contributes

1/3rd of total sourcing requirements.

Carter’s resorts to direct sourcing and agency sourcing.

In infant wear, quality and safety is the most important element. Cost would

follow. High reliability is what ultimately matters to consumers.

Carter’s has a dedicated quality assurance team which evaluates vendors as a

continual process. Product testing, chemicals used, and overall diligence

standards are very high.

Sourcing policies – Impact on Kitex



19 September 2014

Kitex Garments

Earnings to post 40% CAGR over FY14-17E…

…led by existing client mining, acquisition of new clients and margin expansion



We expect revenue to post a CAGR of 24.6% over FY14-17E led by further penetration

among existing clients and new client additions. We expect EBITDA to post 37% CAGR

and PAT 40% CAGR over FY14-17E.

With capacities operative at ~60% utilization, we expect it to be ramped up over the

next two years thus requiring limited capex. This would ensure robust free cash

generation over FY14-17E.

We expect return ratios to improve significantly, with RoCE expected to increase from

37% to 58% and RoE to remain stable at 39%.

We expect the dividend payout to increase from 10% to 21% over FY14-17E.

Expect revenue CAGR of 25% over FY14-17E

We expect revenue to post

a CAGR of 25% over FY14-17E led by further penetration

among existing clients and new client additions.

Revenue to post 25% CAGR over FY14-17E

Revenues (INR m)

8,561

6,856

3,170

4,422

5,499

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

EBITDA to post 37% CAGR, margin to expand by 700bp

We expect EBITDA to post 37% CAGR over FY14-17E. Margins should expand 700bp

to 28%, driven by greater contribution from high value products.

EBITDA to clock 37% CAGR over FY14-17E

EBITDA (INR m)

21.5%

25.1%

1,382

601

951

EBITDA margins (%)

27.1%

1,858

28.3%

19.0%

2,423

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

19 September 2014

Kitex Garments

PAT to post 40% CAGR over FY14-17E

We expect PAT to mark a CAGR of 40% over FY14-17E from INR0.5b to INR1.5b.

PAT (INR m)

1,564

1,169

574

294

792

FY13

FY14

FY15E

FY16E

FY17E

Source: MOSL

Working capital cycle to improve

We expect the working capital days to improve from 37 in FY14 to 25 days in FY17.

Cash conversion cycle (days)

Inventory Days

Debtor Days

Current Liability Days

Cash Conversion Cycle

FY13

FY14

FY15E

FY16E

FY17E

Source: MOSL

Operating cash to remain robust; free cash flows to improve significantly

We expect operating cash flow to remain robust and free cash flow to improve

significantly to INR1.8b over FY14-17E. Capex during the period would only be

minimal and is unlikely to exceed INR300m annually.

Operating cash flow to remain robust

Operating Cash Flow (INR m)

1,824

1,500

1,158

893

244

196

FY14

FY15E

FY16E

FY17E

FY13

437

544

1,186

1,507

Limited capex to aid free cash generation

Free Cash Flow (INR m)

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

19 September 2014

Kitex Garments

Return ratios to improve significantly

We expect the return ratios to improve significantly, with RoCE expected to improve

from 37% to 58% and RoE to remain stable at current levels.

RoCE (%)

RoE (%)

FY13

FY14

FY15E

FY16E

FY17E

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

Debt free company by FY15E

With significant free cash generation, we expect net debt to decline from 0.2x in

FY14 to 0x in FY15E.

Debt free by FY15

Debt to equity (x)

0.5

0.2

0.0

FY13

FY14

FY15E

0.0

FY16E

0.0

FY17E

Source: Company, MOSL

Dividend payout to improve from 10% to 21% over FY14-17E

We expect dividend payout to increase from 10% to 21% over FY14-17E.

Dividend payout to improve

Dividend (INR m)

Dividend Payout (%)

21.3

15.1

9.7

38.0

47.5

13.3

14.3

285.0

142.5

90.3

FY15E

FY16E

FY17E

FY13

FY14

Source: Company, MOSL

19 September 2014

Kitex Garments

Valuation and view



We expect KTG to post 24.6% revenue CAGR coupled with 700bp margin expansion

from 22% in FY14 to 28% in FY17E. We expect PAT to post 40% CAGR over FY14-17E.

The stock trades at 24.5x FY15E, 16.6x FY16E and 12.4xFY17E EPS. With growth

sustaining, return ratios improving and dividend payout increasing, KTG is well poised.

Promising times ahead - re-rating underway

We expect KTG to post 24.6% revenue CAGR coupled with 700bp margin expansion

from 22% in FY14 to 28% in FY17E. Hence, we expect PAT to post 40% CAGR over

FY14-17E. With 60% capacity utilization currently, we expect ramp-up of existing

capacities and minimal expansion capex. Given the strong balance sheet and

significant free cash flows, RoCE and RoE should improve from ~37% and 39%

respectively to ~58% and 39% over FY14-17E. We also expect dividend payout to

improve from the current level of 10% to 21%, given significant free cash generation

over the next two to three years. At CMP, the stock trades at 24.5x FY15E, 16.6x

FY16E and 12.4xFY17E EPS. With growth sustaining, return ratios improving and

dividend payout increasing, we believe KTG is well poised. We initiate coverage with

a ‘Buy’ rating with a target price of INR615, valuing the stock at 25x FY16E earnings.

Price to earnings (x)

6.7

5.4

P/E (x)

5 Yrs Avg(x)

10 Yrs Avg(x)

19.9

Price to book (x)

7.5

6.0

4.5

3.0

1.5

0.0

2.0

1.7

6.6

P/B (x)

5 Yrs Avg(x)

10 Yrs Avg(x)

Source: Company, MOSL

EV/EBITDA (x)

1.9

4.6

4.5

EV/EBDITA

Peak(x)

Avg(x)

11.7

Median(x)

Min(x)

11.7

Source: Company, MOSL

19 September 2014

Kitex Garments

Risks and concerns

Sharp increase in raw material prices

A spike in cotton or other key raw material prices could impact margins in the short

to medium term. However, given KTG’s presence in niche infant wear garments, we

expect the company to pass on raw material inflation to clients.

Appreciation in INR

KTG derives 100% of its revenue from exports and has been one of the major

beneficiaries of INR depreciation. Hence, any significant appreciation in INR will

impact realizations and revenue growth for the company.

Execution risk in launch of own brand

KTG plans to introduce its own brand in the US market over the next two to three

years. This involves high execution risk as a new brand will have its own gestation

period and may take time to ramp up fully.

19 September 2014

Kitex Garments

Management team

KTG is part of the Anna Group founded by late Sri M C Jacob in 1968

Source: Company, MOSL

Mr Sabu M Jacob, Managing Director

Mr Sabu M Jacob serves as the CEO of KTG and has been its Managing Director since

August 16, 2006. Mr Jacob also serves as the Chairman of KTG. He has 31 years of

experience and previously served as an Executive Director of Kitex Ltd. He holds a

B.A. Economics degree.

Mr Boby Michael, Chief Financial Officer

Mr Boby Michael, CA serves as the Chief Financial Officer and General Manager of

Finance at KTG. Mr Michael served as Compliance Officer of KTG from July 26, 2013

to March 9, 2014 and also as its General Manager of Finance & Accounts.

19 September 2014

Kitex Garments

Industry overview

Global textile market

The global children's wear market is forecast to hit USD291.5b by end-2018, while

the men's wear industry will touch USD571.8b and women's wear sector to be

worth USD773.1b during the same period. This data is as per the Global Industry

Almanac report titled "Childrenswear: Global Industry Almanac".

Worldwide textile market size in 2013 (USD b)

USD bn (2013)

638

773

423

216

292

572

Worldwide textile market size in 2018 (USD b)

USD bn (2018)

Children's wear

Men's wear

Women's wear

Children's wear

Men's wear

Women's wear

Source: Company, MOSL

Children's wear market to post 6.2% CAGR over 2013-18

The global children's wear market had total revenue of USD216.2b in 2013,

representing a CAGR of 5.5% during 2009-13. Clothing, footwear, sportswear and

accessories retailers accounted for the largest proportion of sales in the global

children’s wear market in 2013; sales through this channel generated USD147.3b,

equivalent to 68.2% of the market's overall value. The market’s performance is

expected to accelerate, with an estimated CAGR of 6.2% for 2013-18, which can

drive the market value to USD291.5b by end-2018.

Children’s wear market to post 6.2% CAGR

Children's wear market (USD b)

259

275

292

216

229

244

2013

2014

2015

2016

2017

2018

Source: Company, MOSL

19 September 2014

Kitex Garments

Men's wear market to post 6.2% CAGR over 2013-18

The global men’s wear market had total revenue of USD423.2b in 2013,

representing a CAGR of 4.8% during 2009-13. Clothing, footwear, sportswear and

accessories retailers accounted for the largest proportion of sales in the global

menswear market in 2013; sales through this channel generated USD232.9b,

equivalent to 55% of the market's overall value. The market’s performance is

expected to accelerate, with an anticipated CAGR of 6.2% for the five-year period

2013-18, which is expected to drive the market to a value of USD571.8b by end-

2018.

Men’s wear market to post 6.2% CAGR

Men's wear market (USD b)

507

538

572

423

449

477

2013

2014

2015

2016

2017

2018

Source: Company, MOSL

Women's wear market to post 3.9% CAGR over 2013-18

The global women’s wear market had total revenue of USD638.1b in 2013,

representing a CAGR of 3.2% during 2009-13. Clothing, footwear, sportswear and

accessories retailers accounted for the largest proportion of sales in the global

women’s wear market in 2013; sales through this channel generated USD438.5b,

equivalent to 68.7% of the market's overall value. The market’s performance is

expected to accelerate with a CAGR of 3.9% during 2013-18, which is likely to drive it

to a value of USD773.1b by end-2018.

Women’s wear market to post 3.9% CAGR

Women's wear market (USD b)

716

744

773

638

663

689

2013

2014

2015

2016

2017

2018

Source: Company, MOSL

19 September 2014

Kitex Garments

Infant wear market – niche and attractive space within children wear

Infants and children wear business consists of hundreds of small independently

owned shops and dozens of larger retail chains. According to the US Census Bureau,

7,349 establishments were engaged in the retail sale of children and infant clothing,

furnishings and accessories in 2008, with industry-wide employment of 91,498

workers. The number grew to 8,413 children and infant wear stores valued at nearly

USD4b, with 75,660 people employed within the industry. As it is a relatively small

market in the apparel industry, the segment traditionally lacked the fierce

competitiveness of other clothing segments. There are ~1,000 children's fashion

vendors supplying retailers, and specialty, mass and department store chains selling

children's fashions totals just 47. Even in children's specialty shops, apparel accounts

for 17% of floor space and 16% of sales (baby furniture accounts for two-thirds of

space and revenue).

In the mid-2000s, trend in this sector was for clothing and accessories that were

smaller versions of the hottest trends for adults, primarily women. The increase in

consumer spending on apparel and accessories, begun in 2003, was growing very

quickly in the children's sector, particularly in luxury and upscale products and

brands. Designers such as Polo, DKNY and Calvin Klein were entering the market

with pint-sized products. Children's apparel sales increased ~6% in both 2006 and

2007. Stores retailing both children and infant wear accounted for 55.2% in market

share, while retailers specializing in children's wear only constituted 40.4% of the

market.

Industry’s evolution

Children and infant wear industry has traditionally been highly seasonal, as with

other clothing businesses. Industry sales generally peak between late August and

December. During this period, stores compete for precious back-to-school sales and

holiday gift purchases. Stores typically generate 30-40% of their annual sales in

these months. With high number of infants, toddlers and children attending pre-

schools throughout the year, clothing purchases for this segment are becoming less

cyclical.

As children and infant wear stores carry narrow product lines, they are classified as

specialty retail stores. Traditionally, children and infant wear stores and specialty

stores in general were small boutique style operations. These "mom and pop" stores

were often undercapitalized and had high overhead costs in proportion to their

sales. However, they did not compete on the basis of price alone. They pursued

customer satisfaction strategies by offering products with low turnover rates and

more sales expertise than competitors.

19 September 2014

Kitex Garments

Financials and valuations

Income statement

Y/E Mar

Net Sales

Change (%)

EBITDA

EBITDA Margin (%)

Depreciation

EBIT

Interest

Other Income

Extraordinary items

PBT

Tax

Tax Rate (%)

Reported PAT

Adjusted PAT

Change (%)

Min. Int. & Assoc. Share

Adj Cons PAT

2012

3,120

21.9

582

18.7

514

176

401

130

32.4

271

31.5

271

2013

3,170

1.6

601

19.0

515

115

440

147

33.3

294

8.3

294

2014

4,422

39.5

951

21.5

855

106

133

882

308

34.9

574

95.3

574

2015E

5,499

24.3

1,382

25.1

209

1,173

104

113

1,183

390

33.0

792

38.1

792

(INR Million)

2016E

6,856

24.7

1,858

27.1

234

1,624

142

1,744

576

33.0

1,169

47.5

1,169

2017E

8,561

24.9

2,423

28.3

259

2,164

170

2,334

770

33.0

1,564

33.8

1,564

Balance sheet

Y/E Mar

Share Capital

Reserves

Net Worth

Debt

Deferred Tax

Total Capital Employed

Gross Fixed Assets

Less: Acc Depreciation

Net Fixed Assets

Capital WIP

Investments

Current Assets

Inventory

Debtors

Cash & Bank

Loans & Adv, Others

Curr Liabs & Provns

Curr. Liabilities

Provisions

Net Current Assets

Total Assets

2012

927

974

1,015

163

2,153

1,613

385

1,228

1,443

520

318

365

240

522

348

174

921

2,153

2013

1,176

1,224

1,012

162

2,397

1,638

465

1,172

1,755

459

506

412

378

553

333

221

1,202

2,397

2014

1,694

1,742

1,342

216

3,299

2,374

562

1,812

2,219

108

531

1,036

544

738

402

337

1,481

3,299

2015E

2,381

2,428

842

216

3,486

2,674

771

1,903

2,428

301

603

871

653

899

456

443

1,528

3,486

(INR Million)

2016E

2017E

3,383

4,613

3,430

4,660

216

3,646

4,877

2,974

3,274

1,006

1,265

1,968

2,009

2,750

4,312

188

232

751

938

1,028

2,201

783

940

1,141

1,530

569

711

572

819

1,610

2,782

3,646

4,876

E: MOSL Estimates

19 September 2014

Kitex Garments

Financials and valuations

Ratios

Y/E Mar

Basic (INR)

EPS

Cash EPS

Book Value

DPS

Payout (incl. Div. Tax.)

Valuation(x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Profitability Ratios (%)

RoE

RoCE

Turnover Ratios (%)

Asset Turnover (x)

Debtors (No. of Days)

Inventory (No. of Days)

Creditors (No. of Days)

Leverage Ratios (%)

Net Debt/Equity (x)

2012

5.7

7.2

20.5

0.6

12.2

2013

6.2

8.0

25.8

0.8

15.1

2014

12.1

14.1

36.7

1.0

9.7

33.8

28.9

11.1

4.5

20.7

0.2

31.7

30.3

1.4

37.2

60.8

50.0

1.0

26.7

26.3

1.3

58.3

52.8

47.2

0.8

38.7

37.2

1.3

43.8

8.9

42.2

0.8

2015E

16.7

21.1

51.1

1.9

13.3

24.5

19.4

8.0

3.5

14.0

0.5

38.0

40.5

1.6

40.0

20.0

40.5

0.3

2016E

24.6

29.5

72.2

3.0

14.3

16.6

13.8

5.7

2.7

9.9

0.7

39.9

52.7

1.9

40.0

10.0

41.6

0.0

2017E

32.9

38.4

98.1

6.0

21.3

12.4

10.6

4.2

2.0

7.1

1.5

38.6

57.7

1.8

40.0

9.9

42.3

0.0

Cash flow statement

Y/E Mar

OP/(Loss) before Tax

Depreciation

Others

Interest

Direct Taxes Paid

(Inc)/Dec in Wkg Cap

CF from Op. Activity

(Inc)/Dec in FA & CWIP

(Pur)/Sale of Invt

Others

CF from Inv. Activity

Inc/(Dec) in Net Worth

Inc / (Dec) in Debt

Interest Paid

Divd Paid (incl Tax)

CF from Fin. Activity

Inc/(Dec) in Cash

Add: Opening Balance

Closing Balance

2012

401

176

134

114

626

-68

-57

-69

-176

-22

-267

302

365

2013

440

115

139

-256

244

-48

-44

-5

-115

-33

-153

365

412

2014

882

106

242

315

1,158

-720

-716

334

-106

-45

183

625

412

1,036

2015E

1,183

209

104

390

-213

893

-348

-500

-104

-106

-709

-165

1,036

871

(INR Million)

2016E

2017E

1,744

2,334

234

259

576

770

1,500

1,824

-314

-317

-314

-317

-842

-21

-167

-333

-1,029

-333

157

1,174

871

1,028

2,202

E: MOSL Estimates

19 September 2014

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Kitex Garments

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Disclosure of Interest Statement



Analyst ownership of the stock

KITEX GARMENTS LTD

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