Kitex Garments: Strong margin expansion drives profitability

13 January 2015

Results Update | Sector:

Textiles

Kitex Garments

BSE SENSEX

27,426

Bloomberg

Equity Shares (m)

S&P CNX

8,299

KTG IN

47.5

CMP: INR558

TP: INR720 (+29%)

Buy

Strong margin expansion drives profitability

Kitex Garments Ltd (KTG) reported 3QFY15 numbers with a revenue of INR1.22b (est.

M.Cap. (INR b)/(USD b)

26.5/0.4

INR1.31b), compared to INR995m in 3QFY14, marking a YoY growth of 22.8%. Growth

52-Week Range (INR)

602/81

was lower than our estimates due to higher-than-normal yearend spill-over of sales by

1, 6, 12 Rel. Per (%)

3/132/516

US clients from 3QFY15 to 4QFY15. EBITDA grew by 106% this quarter to INR419m

Avg Val/Vol ‘000

54/152

(est. INR302m), EBITDA margin stood at 34.3% (est. 23%) in 3QFY15, compared to

Free float (%)

45.8

20.4% in 3QFY14, an expansion of 13% YoY driven by lower cotton prices, higher

pricing and lower wastages due to technology upgradation. Hence, PAT for 3QFY15

Financials & Valuation (INR Billion)

stood at INR231m (est. INR173m), compared to INR113m in 3QFY14, marking a YoY

Y/E MAR

2015E 2016E 2017E

growth of 104%. Capacity utilization in the processing unit is ~50-55%, while in the

Sales

5.4

6.6

8.1

sewing unit it is ~100%. KTG is planning to double the sewing capacity in the next

EBITDA

1.6

2.0

2.6

three years and further upgrade technology, thus driving further efficiencies.

0.9

1.3

1.7

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

19.6

61.9

54.0

43.1

47.8

28.5

10.3

27.5

40.4

77.9

41.6

56.2

20.3

7.2

36.0

31.2

107.0

39.0

58.2

15.5

5.2

Brand launch on the right path

We expect KTG to capture a larger pie of the value chain through its forward

integration with the launch of its own brand in the US market and licensing of private

labels in the US market. During the quarter, company already made significant in-

roads in both these endeavors and expects revenue from brands and private labels to

generate in 1HFY16. Forward integration holds high significance for the company as

margins in its own brand will be double of the current business (~60% v/s ~30%

currently), along with higher realization. We have not factored additional growth from

brands business, which provides further upside to our estimates.

Valuation and view

Management has guided for doubling of current turnover to INR10b over the next

three years, along with margin expansion led by foray into brands business. Further,

capital expenditure over the next three years will be limited to INR0.4-0.5b, thus

resulting in significant free cash generation. We upgrade FY15/16/17 earnings by 6%

each to factor in stronger margins and expect 23% revenue CAGR and 36% PAT CAGR

over FY15-17E. With huge scalability, strong return ratios and free cash generation, we

believe KTG deserves a multiple of 20x one-year forward. We maintain

Buy

with a

target price of INR720, valuing the stock at 20x FY17E earnings.

Estimate change

TP change

Rating change

5.6%

10.8%

Niket Shah

(Niket.Shah@MotilalOswal.com); +91 22 3982 5426

Atul Mehra

(Atul.Mehra@MotilalOswal.com); +91 22 3982 5417

Investors are advised to refer through disclosures made at the end of the Research Report.

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.

Kitex Garments

Strong margin expansion drives profitability

Kitex Garments Limited reported 3QFY15 numbers with a top-line of INR1,221m

(est. INR1,313m) as compared to INR995m in 3QFY14, marking a YoY growth of

22.8%.

Growth was lower than our estimates due to higher-than-normal year end

spillover of sales by US clients from 3QFY15 to 4QFY15.

EBITDA grew by 106% this quarter to INR419m (est. INR302m), EBITDA margins

stood at 34.3% (est. 23%) in 3QFY15 as compared to 20.4% in 3QFY14 an

expansion of 13% YoY driven by lower cotton prices higher pricing and lower

wastages due to technology up gradation.

Consequently, PAT for 3QFY15 stood at INR231m (est.INR173m) as compared

to INR113m in 3QFY14 marking a YoY growth of 104%. Capacity utilization in the

processing unit is ~50-55% whereas in sewing unit it is ~100%.

KTG is looking to double the sewing capacity in next 3 years and further upgrade

technology thus substituting labor.

Interest cost during the quarter was higher as company has complied with RBI

guideline which state that Interest subvention scheme may be withdrawn and

hence company has taken provision of for the same.

Other income includes, INR 45m on account of forex gain.

Average price of consumed yarn for the quarter has been INR189 as against

INR219 in 2QFY15.

Exhibit 1: Revenue growth trend

Source: Company, MOSL

Exhibit 2: EBITDA and EBITDA margins trend

EBITDA (INR m)

29%

16%

17%

20%

EBITDA Margins (%)

34%

26%

Exhibit 3: PAT growth trend

PAT (INR m)

197%

171%

104%

120

113

211

11%

144

61%

193

231

PAT growth (%)

80%

203

417

272

337

419

130

159

173

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15

Source: Company, MOSL

13 January 2015

Kitex Garments

Business mix grows in favor of garments

During 3QFY15, garments segment grew 54% to INR1,116m while fabric

segment grew 11% to INR569m.

Garment business contribution to total revenue has increases to 91% as against

73% in 3QFY14 which has resulted in improvement in overall margins.

Margins during the quarter has improved significantly with garment margin

improving from 29% to 35% and fabric margin improved from -4% to 8%.

Exhibit 5: Fabric revenue and growth

Fabric (INR m)

124%

54%

36%

-4%

62%

89%

49%

36%

272

1,091

1,116

154

196

299

209

-3%

-61%

105

Growth (YoY)

Exhibit 4: Garment revenues and growth

Garments (INR m)

57%

53%

-14%

49%

Growth (YoY)

723

851

805

1,123

191

819

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15

Source: Company, MOSL

Exhibit 6: Segment revenue mix (%)

Garments

Fabrics

Exhibit 7: Segment margins (%)

Garments

25%

29%

36%

12%

Fabrics

31%

29%

35%

15%

20%

27%

21%

20%

15%

-4%

85%

80%

73%

79%

80%

85%

91%

-34%

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15

Source: Company, MOSL

Brand launch on the right path

We expect KTG to capture a larger pie of the value chain through its forward

integration with its launch of own brand in the US market as well as licensing of

private labels in the US market.

During the quarter, KTG has already made significant in-roads in both these

endeavors, and expects revenues from brands and private labels to kick-in in

1HFY16.

Forward integration holds high significance for the company as margins in its

own brand will be double of the current business (~60% v/s ~30% currently),

along with higher realization.

We have not factored in additional growth from brands business which provides

further upside to our estimates.

13 January 2015

Kitex Garments

Other concall highlights

KTG take the price revision with the customers based on seasons, while with

some customer prices revision is done bi-annually, with other customers it is

done twice a year. On an average price revision is done bi-annually.

Capacity utilization in the processing unit is ~50-55% whereas in sewing unit it is

~100%. Going forward company will spending INR100-150m on technology. KTG

is looking to double the capacity in processing in next 3 years while in sewing

unit company is planning to add technology without adding labour.

KTG has received bulk order from Walmart to deliver huge shipment of USD15m

annually which will improve the profitability.

Management believe that KTG is significantly better than its Chinese peers in

terms of quality, timeliness of orders, safety standards etc.

Management indicated that spring season generally have better margins than

fall season, hence there can be margin expansion in 4QFY15.

In volume terms company has a current capacity of 265,000 pieces/day which

can reach to 275,000-280,000 piece/day with technological efficiency.

Management guided that merger process is under way and has appointed E&Y

for the same.

Technological upgradation has resulted in improvement in production from

6,000 stitches/minute to 9,000 stitches/minute.

Exhibit 8: Quarterly metrics

1QFY13

Sales Growth

Garments

Fabrics

Salex Mix

Garments

Fabrics

EBIT Margin

Garments

Fabrics

EBIT Contribution

Garments

Fabrics

-5%

-49%

2QFY13

18%

-3%

3QFY13

27%

4QFY13

17%

1QFY14

57%

119%

2QFY14

53%

22%

3QFY14

-14%

45%

4QFY14

49%

62%

1QFY15

-4%

2QFY15

36%

18%

3QFY15

54%

11%

85%

15%

80%

20%

87%

13%

83%

17%

85%

15%

80%

20%

73%

27%

79%

21%

80%

20%

85%

15%

91%

22%

-10%

28%

-8%

23%

-6%

25%

-5%

25%

-34%

29%

-34%

29%

-4%

36%

12%

31%

29%

35%

109%

-9%

108%

-8%

104%

-4%

104%

-4%

133%

-33%

140%

-40%

106%

-6%

92%

99%

98%

Source: Company, MOSL

13 January 2015

Kitex Garments

Valuation and view

We value KTG at 20x FY17E EPS, higher than its historical average of 7.9x and in-line

with its current one-year forward multiple of 22.5x, which we believe is justified

considering:

Large opportunity:

Kitex has presence in the highly niche USD20b global infant-wear

clothing market and is the 3rd largest vendor globally. With India’s market share

being low single-digit, and with India’s growing competitiveness against erstwhile

low-cost countries like China (~52% market share), we believe the long term

opportunity for KTG is large.

High entry barriers:

KTG is the largest exporter of infant-wear clothing out of India

and commands a 70% market share for all infant-wear clothing exports out of India.

Adhering to stringent safety measures, maintaining high quality standards, higher

degree of complexity (than adult garments) due to involvement of small sizes, need

for greater variety, smaller batch size orders and high labor requirements are some

of the key entry barriers that support superior profitability for the company.

Industry leading return ratios:

KTG commands strong, industry leading return ratios

(44% RoCE and 41% RoE), with its business model generating robust free cash

generation (INR3.0b over FY15-17). We believe KTG stands out amongst listed textile

exporters (with most of them present in capital intensive, low RoCE businesses of

yarn and fabric manufacturing (averaging ~10% RoCE).

Opportunity to enter the brands business:

We expect KTG to capture a larger pie of

the infant-wear value chain through its forward integration with its launch of own

brand in the US market as well as licensing of private labels in the US market.

Forward integration holds high significance for the company as margins in its own

brand will be double of the current business (~60% versus current margins of ~30%),

along with higher realizations.

We thus expect current multiples of 22.5x one year forward earnings to sustain, and

value the stock at 20x FY17E EPS of INR36, arriving at a March-2016 price target of

INR720. Maintain

Buy.

Exhibit 9: 15 year PE band

7.9

6.0

4.6

0.0

4.0

2.4

2.0

1.5

1.9

P/E (x)

5 Yrs Avg(x)

13 Yrs Avg(x)

10 Yrs Avg(x)

22.5

8.0

6.0

Exhibit 10: 15 year PB band

10.0

P/B (x)

5 Yrs Avg(x)

13 Yrs Avg(x)

10 Yrs Avg(x)

7.8

Source: Company, MOSL

13 January 2015

Source: Company, MOSL

Kitex Garments

Operating metrics

Exhibit 11: Operating matrices and key assumption

Y/E March (INR m)

Growth (%)

Garments

Fabric

Net Revenues

Contribution (%)

Garments

Fabric

Net Revenues

EBIT Margins (%)

Garments

Fabric

Segment EBIT

EBIT Contribution (%)

Garments

Fabric

Segment EBIT

FY12

FY13

15%

-36%

FY14

31%

82%

40%

FY15E

23%

15%

21%

FY16E

25%

15%

23%

FY17E

25%

15%

23%

75%

25%

100%

84%

16%

100%

79%

21%

100%

80%

20%

100%

82%

18%

100%

83%

17%

100%

19%

16.5%

21%

-7%

16.2%

27%

-10%

19.3%

27%

21.7%

28%

23.3%

29%

24.5%

86%

14%

100%

107%

-7%

100%

111%

-11%

100%

98%

100%

96%

100%

Source: Company, MOSL

13 January 2015

Kitex Garments

Corporate profile

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.

Exhibit 12: Sensex rebased

600

450

300

150

Jan-14

Apr-14

Jul-14

Oct-14

Jan-15

Kitex Garments

Sensex - Rebased

Exhibit 13: Shareholding pattern (%)

Sep-14

Promoter

DII

FII

Others

54.2

0.0

0.6

45.2

Jun-14

54.2

0.0

0.4

45.4

Sep-13

54.2

0.0

45.8

Exhibit 14: Top holders

Holder Name

C K G Super Market Limited

Gopinathan C K

Acumen Capital Market (India) Ltd

Jinsha Nath C K

Sethuparvathy

% Holding

6.4

5.2

2.9

1.5

Note: FII Includes depository receipts

Exhibit 15: Top management

Name

Sabu M Jacob

Benni Joseph

K L V Narayanan

Erumala Mathew Paulose

C Mohan

Designation

Chairman & MD

Director

Exhibit 16: Directors

Name

Sabu M Jacob

Benni Joseph*

K L V Narayanan*

Name

Erumala Mathew Paulose*

C Mohan

*Independent

Exhibit 17: Auditors

Name

Kolath & Co

Ernst & Young LLP

Rajendran, Mani & Varier

Type

Statutory

Internal

Cost Auditor

Exhibit 18: MOSL forecast v/s consensus

EPS (INR)

FY15

FY16

FY17

MOSL forecast

19.6

27.5

36.0

Consensus

forecast

16.8

21.8

31.0

Variation (%)

16.9

26.2

16.3

13 January 2015

Kitex Garments

Story in charts

Exhibit 19: Global children’s wear market size is huge

Children's wear market (USD b)

259

275

292

India

Vietnam

Cambodia

Bangladesh

Exhibit 20: India has high potential for infant-wear sourcing

Others

20%

China

52%

216

229

244

2013

2014

2015

2016

2017

2018

Source: Company, MOSL

Exhibit 21: Kitex is the 3rd largest infant-wear player

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

7.5

6.5

Exhibit 22: Kitex dominated infant-wear exports from India

Others, 15

5.5

Jay Jay

Mills, 15%

Kitex, 70%

Wingloo (China)

Gimmell (Singapore)

Kitex (India)

Source: Company, MOSL

Exhibit 23: Diversified client mix augurs well for margins

Carters, 15

Gerber, 25

Exhibit 24: Kitex reports strong capital efficiency

RoCE (%)

Mothercare

, 20%

Toys R

Us, 20%

Jockey, 20%

FY13

FY14

FY15E

FY16E

FY17E

Source: Company, MOSL

13 January 2015

Kitex Garments

Financials and valuations

Income Statement (Standalone)

Y/E March

Net Sales

Change (%)

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income - Rec.

PBT bef. EO Exp.

EO Expense/(Income)

PBT after EO Exp.

Current Tax

Deferred Tax

Tax Rate (%)

Reported PAT

PAT Adj for EO items

Change (%)

Margin (%)

FY10

2,676

34.5

437

16.3

372

152

278

33.4

185

85.7

6.9

FY11

2,561

-4.3

453

17.7

384

125

312

34.0

206

11.5

8.1

FY12

3,120

21.9

582

18.7

514

176

401

124

32.4

271

31.5

8.7

FY13

3,170

1.6

601

19.0

515

115

440

149

-2

33.3

294

8.3

9.3

FY14

4,422

39.5

951

21.5

855

106

133

882

254

34.9

574

95.3

13.0

FY15E

5,366

21.3

1,599

29.8

202

1,397

164

153

1,387

458

33.0

929

61.9

17.3

(INR Million)

FY16E

6,601

23.0

2,046

31.0

226

1,820

176

1,946

642

33.0

1,304

40.4

19.8

FY17E

8,130

23.2

2,601

32.0

250

2,352

203

2,554

843

33.0

1,711

31.2

21.1

Balance Sheet (Standalone)

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Minority Interest

Deferred Liabilities

Total Loans

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates; * Adjusted for treasury stocks

FY10

505

552

144

697

1,393

1,435

249

1,187

635

223

279

437

295

142

198

1,393

FY11

689

736

157

1,084

1,977

1,540

317

1,223

1,267

566

393

244

522

393

129

745

1,977

FY12

927

974

163

1,015

2,153

1,613

385

1,228

1,443

520

318

365

240

522

348

174

921

2,153

FY13

1,176

1,224

162

1,012

2,397

1,638

465

1,172

1,755

459

506

412

378

553

333

221

1,202

2,397

FY14

1,694

1,742

216

1,342

3,299

2,374

562

1,812

2,219

108

531

1,036

544

738

402

337

1,481

3,299

FY15E

2,518

2,565

216

842

3,623

2,674

764

1,910

2,547

294

588

1,012

653

888

445

443

1,659

3,623

(INR Million)

FY16E

3,655

3,703

216

3,919

2,974

990

1,984

2,988

166

723

1,315

783

1,119

548

572

1,868

3,919

FY17E

5,033

5,081

216

5,297

3,274

1,240

2,034

4,675

205

891

2,639

940

1,494

675

819

3,181

5,297

13 January 2015

Kitex Garments

Financials and valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

Return Ratios (%)

RoE

RoCE

Working Capital Ratios

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Wkg. Capital Turnover (Days)

Leverage Ratio (x)

Current Ratio

Debt/Equity

FY10

3.9

5.3

11.6

0.3

9.0

FY11

4.3

5.8

15.5

0.4

10.8

FY12

5.7

7.2

20.5

0.6

12.2

FY13

6.2

8.0

25.8

0.8

15.1

FY14

12.1

14.1

36.7

1.0

9.7

46.2

39.5

15.2

6.1

28.2

0.2

39.5

28.6

1.9

1.5

1.3

32.0

28.5

1.3

2.4

1.5

31.7

30.3

1.4

2.8

1.0

26.7

26.3

1.3

3.2

0.8

38.7

37.2

1.3

3.0

0.8

FY15E

19.6

23.8

54.0

1.9

11.4

28.5

23.4

10.3

4.9

16.5

0.3

43.1

47.8

1.5

20.0

2.9

0.3

FY16E

27.5

32.2

77.9

3.0

12.8

20.3

17.3

7.2

3.8

12.3

0.5

41.6

56.2

1.7

9.2

2.7

0.0

FY17E

36.0

41.3

107.0

6.0

19.5

15.5

13.5

5.2

2.9

9.2

1.1

39.0

58.2

1.5

9.2

3.1

0.0

Cash Flow Statement

Y/E March

NP/(Loss) before Tax & EO Items

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

Others

CF from Operations

EO Expense

CF from Operating incl EO

(inc)/dec in FA

Others

CF from Investments

(Inc)/Dec in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

E: MOSL Estimates

FY10

278

113

516

-99

873

-23

-14

-682

-113

-11

-807

FY11

312

130

-86

-582

-156

-107

-104

390

-130

-16

-2

242

-18

FY12

401

176

-134

114

626

-68

-57

-69

-176

-22

-267

302

365

FY13

440

115

-139

-256

244

-48

-44

-5

-115

-33

-153

365

412

FY14

882

106

-242

315

1,158

-720

-716

334

-106

-45

183

625

412

1,036

FY15E

1,387

202

164

-458

-202

1,093

-347

-500

-164

-106

-769

-24

1,036

1,013

(INR Million)

FY16E

1,946

226

-642

1,673

-312

-842

-50

-167

-1,059

302

1,013

1,315

FY17E

2,554

250

-843

1,973

-315

-333

1,324

1,315

2,639

13 January 2015

Kitex Garments

NOTES

13 January 2015

Disclosures

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