Kitex Garments: Results below estimates; FY16 growth outlook remains intact

22 July 2015

1QFY16 Results Update | Sector:

Textiles

Kitex Garments

BSE SENSEX

28,505

Bloomberg

Equity Shares (m)

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

S&P CNX

8,634

KTG IN

47.5

31.1/0.5

1070 / 244

-21/52/200

130/206

45.8

CMP: INR839

TP: INR970 (+15%)

Buy

Results below estimates; FY16 growth outlook remains intact

Kitex Garments Ltd’s (KTG) 1QFY16 revenue was up 6.2% YoY to INR1.09b (est.

INR1.23b) compared with INR1.03b in 1QFY15. Garments segment reported 11% YoY

growth; however, a 13% decline in fabric revenue negatively impacted revenue

growth. EBITDA grew 11% to INR301m (est. INR353m), while EBITDA margin stood at

27.6% (est. 28.7%) in 1QFY16 compared with 26.5% in 1QFY15—a 120bp YoY

expansion. PAT stood at INR160m (est. INR201m) compared with INR144m in 1QFY15

(10.7% YoY growth). The management highlighted that 1Q is seasonally the smallest

quarter (20% of annual revenues) as all shipments for ‘Spring’ are largely concluded by

March while shipments for ‘Fall’ commence by August first week. Even in FY15, 1Q

saw 2% growth while the balance three quarters saw 21% average growth. Given this

background, the management is confident of posting 15-20% growth in FY16.

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

Avg Val/Vol ‘000

Free float (%)

Financials & Valuation (INR Billion)

Y/E MAR

Sales

EBITDA

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

P/E (x)

P/BV (x)

2015 2016E 2017E

5.1

1.7

1.0

20.7

71.7

55.6

45.0

43.9

40.5

15.1

6.0

2.1

1.3

26.7

28.7

78.7

39.7

48.7

31.5

10.7

7.3

2.8

1.8

37.1

39.2

108.9

39.6

56.7

22.6

7.7

Brand launch delayed due to legal hiccups; to finalize over the next quarter

The management highlighted legal hiccups have delayed brand tie-up with US brand.

However, the company expects to conclude the agreement over the next quarter. The

brand will be owned by Kitex LLC (KTG will own 50% stake and Kitex Children’s wear

will own the remaining 50%). The management outlined that the JV structure will de-

risk issues around capacity constraints and both companies will invest equally in

building the licensed brand. On KTG/KCL merger, the company highlighted that E&Y

has given three distinct options for the merger and the management will evaluate and

take a call by the next quarter. The merger, once approved, would take approximately

a year’s time to fructify.

Estimate change

TP change

Rating change

15%

Valuation and view

With foray into the brands business, we expect strong 20% revenue CAGR along with

400bp margin expansion, driving 34% PAT CAGR over FY15-17. Capital expenditure

over the next three years will be limited to INR0.4b-0.5b, thus resulting in significant

free cash generation. With huge scalability, strong return ratios and free cash

generation, we believe KTG deserves a multiple of 26x one-year forward. We maintain

Buy

with a target price of INR970, valuing the stock at 26x FY17E earnings.

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

Results below estimates; growth outlook for FY16 remains intact



Kitex Garments Ltd (KTG) reported 1QFY16 results, with a revenue of INR1.09b

(est. INR1.23b), compared to INR1.03b in 1QFY15, marking a YoY growth of

6.2%.

Garments segment reported growth of 11% YoY; however, revenue growth was

negatively impacted by 13% decline in fabric revenue.

EBITDA grew by 11% this quarter to INR301m (est. INR353m), while EBITDA

margin stood at 27.6% (est. 28.7%) in 1QFY16, compared to 26.5% in 1QFY15, an

expansion of 120bp YoY.

PAT for 1QFY16 stood at INR160m (est. INR201m), compared to INR144m in

1QFY15, marking a YoY growth of 10.7%.

Management highlighted that 1Q is seasonally the smallest quarter (20% of

annual revenues) as all shipments for ‘Spring’ are largely concluded by March

while shipments for ‘Fall’ commence by August first week.

Even in FY15, 1Q saw 2% growth while balance three quarters saw on an

average 21% growth. With this background, management is confident of posting

15-20% growth in FY16.

Exhibit 1: Revenue growth trend

58%

52%

Revenues (INR m)

56%

Revenue growth (%)

1,580

995

1,005

1,001

1,422

1,028

28%

23%

11%

1,282

1,221

1,091

Source: Company, MOSL

Exhibit 2: EBITDA and EBITDA margins trend

EBITDA (INR m)

EBITDA Margins (%)

42%

29%

16%

159

17%

173

20%

203

417

34%

26%

28%

Exhibit 3: PAT growth trend

PAT (INR m)

197%

171%

104% 97%

120

113

211

61%

11%

144

193

231

416

11%

160

PAT growth (%)

80%

419

660

301

130

272

337

Source: Company, MOSL

22 July 2015

Kitex Garments

Brand launch delayed due to legal hiccups; to finalize over next quarter



Management highlighted that due to legal hiccups, brand tie-up with US brand

has been delayed. However, management expects to conclude the agreement

over next quarter.

The brand will be owned by Kitex LLC in which KTG will own 50% stake while

Kitex Children’s wear will own the balance 50% stake.

Management highlighted that JV structure will de-risk issues around capacity

constraints and both companies will invest equally in building the licensed

brand.

Similarly, on KTG/KCL merger management highlighted that E&Y has given three

distinct options for the merger and the management will evaluate and take a

call by next quarter. Merger when approved would take approximately a year’s

time to fructify.

Garments segment reports strong growth and margins



During 1QFY16, garments segment grew 11% to INR910m while net fabric

revenues de-grew 13.4% to INR181m.

Garment business contribution to total revenue has increased to 83% as against

80% in 1QFY15.

Garment margins have remained flat 31% as in 1QFY15 while fabric margins

increased from 1% in 1QFY15 to 4% in 1QFY16.

Exhibit 5: Fabric revenue and growth

Fabric (INR m)

124%

28%

11%

62%

49%

272

89%

36%

-3%

-61% -51%

299

209

191

105

145

181

-13%

Growth (YoY)

Exhibit 4: Garment revenues and growth

Garments (INR m)

57%

53%

-14%

723

851

805

1,123

-4%

819

1,091 1,116 1,435

910

49%

36%

Growth (YoY)

54%

154

196

Source: Company, MOSL

Exhibit 6: Segment revenue mix (%)

Garments

15%

20%

21%

20%

Fabrics

15%

17%

Exhibit 7: Segment margins (%)

Garments

25%

29%

36%

31%

Fabrics

29%

35%

46%

31%

27%

12%

-4%

85%

80%

73%

79%

80%

85%

91%

83%

-34%

Source: Company, MOSL

22 July 2015

Kitex Garments

Growth outlook robust – expect to double revenues in 3 years



Management expects to double sales in 3 years, 15-20% sales growth for FY16,

30-35% sales growth in FY17, 35-40% sales growth in FY18.

Management believes market demand is not a concern as far as growth is

concerned; key constraint is managing higher production scale.

Kitex currently has a capacity of 360k pieces daily. Going forward, the company

is looking at backward integration into spinning with INR1.5b capex over 3 years.

KTG will invest INR0.5b every year and will add 20k spindles annually. This will

improve quality of products through better yarn.

Management highlights that it will look at importing fiber from US (since it is of

high quality and is duty free) and will set up a plant in India. Quality of cotton

imported from US is better and cost is cheaper, additionally clients would

appreciate the products made from 100% US cotton, driving better margins.

Lack of skilled labor, need for continuous training are key factors that limit quick

scalability. Management has entered into an agreement with the government to

recruit 400 people monthly to scale up manufacturing.

Other conference call highlights



On utilizing capacities better:

With orders being of custom made items (distinct

colors, design, styles, etc) – hence KTG can’t manufacture and stock up. Every

season, buyers give separate designs, thus resulting in high customization.

Order book and revenue visibility:

Entire factory is fully booked for FY16; expect

INR6b to INR6.5b revenues for FY16 translating into growth of 17-27%.

With higher surcharge, expect 34.6% tax rate for FY16.

Company is still looking at the avenues to deploy the cash available on balance

sheet to maximize wealth.

No new clients added in 1Q and the company does not plan to add newer

clients.

Exhibit 8: Quarterly metrics (%)

1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16

Sales Growth

Garments

Fabrics

Sales Mix

Garments

Fabrics

EBIT Margin

Garments

Fabrics

EBIT Contribution

Garments

Fabrics

-5

-60

-43

-26

-3

-14

124

-4

-3

-61

-51

-13

-10

-8

-6

-5

-34

-4

109

-9

108

-8

104

-4

104

-4

133

-33

140

-40

106

-6

Source: Company, MOSL

22 July 2015

Kitex Garments

Valuation and view

We value KTG at 26x FY17E EPS, higher than its historical average of 8.3x and in-line

with its current one-year forward multiple of 28.3, 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

(45.1% RoCE and 44.9% 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 value the stock at 26x FY17E EPS of INR37.1, arriving at a March-2016 price

target of INR970. Maintain

Buy.

Exhibit 9: 15 year PE band

PE (x)

Peak(x)

Avg(x)

32.8

Min(x)

28.3

Exhibit 10: 15 year PB band

PB (x)

12.0

10.0

8.0

7.0

6.0

4.0

2.0

0.0

2.3

0.3

Peak(x)

Avg(x)

11.4

Min(x)

9.8

0.9

Source: Company, MOSL

22 July 2015

Kitex Garments

Operating metrics

Exhibit 11: Operating metrics and key assumptions

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

-36

FY14

FY15

-29

FY16E

FY17E

100

16.5

-7

16.2

-10

19.3

28.8

31.3

34.6

100

107

-7

100

111

-11

100

Source: Company, MOSL

22 July 2015

Kitex Garments

Story in charts

Exhibit 12: Global children’s wear market size is huge

Children's wear market (USD b)

259

275

292

India

Vietnam

Cambodia

Bangladesh

Exhibit 13: 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 14: Kitex is the 3rd largest infant-wear player

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

7.5

6.5

Exhibit 15: 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 16: Diversified client mix augurs well for margins

Carters, 15

Gerber, 25

Exhibit 17: Kitex reports strong capital efficiency

RoCE (%)

Mothercare

, 20%

Toys R

Us, 20%

Jockey, 20%

FY13

Source: Company, MOSL

FY14

FY15

FY16E

FY17E

Source: Company, MOSL

22 July 2015

Kitex Garments

Financials and valuations

Income Statement

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 (%)

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

FY15

5,111

15.6

1,687

33.0

213

1,474

192

134

1,417

422

30.5

985

71.7

19.3

(INR Million)

FY16E

6,036

18.1

2,143

35.5

237

1,906

156

188

1,938

671

34.6

1,267

28.7

21.0

FY17E

7,340

21.6

2,753

37.5

260

2,492

263

2,698

934

34.6

1,765

39.2

24.0

Balance Sheet

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

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

1,480

3,299

FY15

2,591

2,639

226

1,612

4,477

2,625

743

1,882

3,468

112

627

2,033

696

876

343

532

2,592

4,477

(INR Million)

FY16E

3,692

3,739

226

612

4,578

2,925

980

1,945

3,792

129

683

2,144

836

1,160

440

720

2,632

4,578

FY17E

5,123

5,171

226

204

5,601

3,425

1,240

2,185

4,948

149

831

2,965

1,003

1,532

535

997

3,416

5,601

22 July 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

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

FY15

20.7

25.2

55.6

1.3

7.3

FY16E

26.7

31.7

78.7

3.0

13.2

FY17E

37.1

42.6

108.9

6.0

18.9

40.5

33.3

15.1

7.7

23.4

0.1

31.5

26.5

10.7

6.4

17.9

0.4

22.6

19.7

7.7

5.1

13.5

0.7

32.0

28.5

31.7

30.3

26.7

26.3

38.7

37.2

45.0

43.9

39.7

48.7

39.6

56.7

1.3

1.4

1.3

1.1

1.3

7.8

1.3

7.4

2.4

1.5

2.8

1.0

3.2

0.8

3.0

0.8

4.0

0.6

3.3

0.2

3.2

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

(inc)/dec in FA

Free Cash Flow

CF from Investments

(Inc)/Dec in Debt

Interest Paid

Dividend Paid

CF from Fin. Activity

Inc/Dec of Cash

Add: Beginning Balance

Closing Balance

FY11

312

130

-86

-582

-156

-107

-263

-104

390

-130

-16

242

-18

FY12

401

176

-134

114

626

-68

558

-57

-69

-176

-22

-267

302

365

FY13

440

115

-139

-256

244

-48

196

-44

-5

-115

-33

-153

365

412

FY14

882

102

-242

315

1,154

-720

433

-712

334

-106

-45

183

624

412

1,036

FY15

1,417

213

188

-364

-176

1,284

-302

981

-311

271

-192

-56

996

1,036

2,033

(INR Million)

FY16E

1,938

237

156

-671

1,731

-297

1,434

-297

-1,000

-156

-167

-1,322

111

2,033

2,144

FY17E

2,698

260

-934

2,120

-500

1,620

-500

-408

-57

-333

-799

821

2,144

2,965

22 July 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 80% of its revenue from the sale

of infant garments and the balance 20% from the

sale of fabric to Kitex Childrenwear.

Exhibit 18: Sensex rebased

Exhibit 19: Shareholding pattern (%)

Jun-15

Promoter

DII

FII

Others

54.2

0.5

3.0

42.3

Mar-15

54.2

0.2

2.4

43.2

Jun-14

54.2

0.0

0.4

45.4

Exhibit 20: 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

5.3

2.7

2.1

1.4

Note: FII Includes depository receipts

Exhibit 21: Top management

Name

Sabu M Jacob

Benni Joseph

K L V Narayanan

Erumala Mathew Paulose

C Mohan

Designation

Chairman & MD

Director

Exhibit 22: Directors

Name

Sabu M Jacob

Benni Joseph*

K L V Narayanan*

Name

Erumala Mathew Paulose*

C Mohan

*Independent

Exhibit 23: Auditors

Name

Kolath & Co

Ernst & Young LLP

Rajendran, Mani & Varier

Type

Statutory

Internal

Cost Auditor

Exhibit 24: MOSL forecast v/s consensus

EPS (INR)

FY16

FY17

MOSL forecast

26.7

37.1

Consensus

forecast

26.9

33.0

Variation (%)

-0.8

12.3

22 July 2015

Kitex Garments

NOTES

22 July 2015

Disclosures

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Kitex Garments

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