30 January 2016
3QFY16 Results Update | Sector: Textiles
Kitex Garments
Buy
BSE SENSEX
24,871
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, INRm
Free float (%)
S&P CNX
7,564
KTG IN
47.5
20.9 / 0.3
1,070/385
-34/-32/-1
132
45.8
CMP: INR440
TP: INR800(+82%)
Results below estimates; growth story intact
Financials & Valuation (INR b)
Y/E Mar
2016E 2017E 2018E
5.3
6.4
7.5
Net Sales
1.9
2.4
2.9
EBITDA
1.1
1.5
1.9
PAT
23.3
31.7
40.1
EPS (INR)
12.2
36.1
26.7
Gr. (%)
75.3 100.0 131.9
BV/Sh (INR)
35.6
36.1
34.6
RoE (%)
43.7
51.6
52.2
RoCE (%)
18.9
13.9
11.0
P/E (x)
5.8
4.4
3.3
P/BV (x)
Estimate change
TP change
Rating change
14%
16%
Results miss expectations:
KTG’s 3QFY16 revenue de-grew 3.2% to INR1.2b
(est. of INR1.4b), impacted by delayed winter and reduced orders from Jockey.
Garments segment de-grew 6%, while net fabric revenue grew 24%. EBITDA
margin expanded 100bp to 35.3% (est. of 35.1%) and EBITDA stood at INR417m
(est. of INR480m); PAT grew 4% to INR241m (est. of INR282m).
Delayed winter and Jockey orders impact earnings:
Management clarified that
delayed winter in the US, where snowfall began late-December instead of
early-November, impacted shipments. To avoid reporting high inventory as at
year-end, its clients like Gerber and Toys R Us have asked Kitex to delay
shipments. However, management highlighted that all the pending shipments
have been cleared in January—once the snowfall began. One of the clients,
Jockey (which contributes ~15% to revenue), decided to shift gradually from
cotton to synthetic—which resulted in 50% de-growth in sales to Jockey;
however, this shall not impact other clients who are into childrenswear since
infants’ garments segment is unlikely to see this shift. Management highlighted
that Jockey will continue to be a customer for the reduced portion (i.e., 50% of
original orders). However, management is confident of increasing wallet share
from other clients—which will compensate for the lost sales.
B2C foray progressing well:
Management highlighted that Lamaze sales have
been shaping up well and is confident of posting USD7m sales in CY16. Little
Stars is on track for launch in 2HFY17. Little Stars will cater to the mass market
(which is a huge opportunity size) while Lamaze caters to premium market;
hence there shall not be any conflict.
On track to be debt free by 4QFY16:
Management clarified that cash of
~INR650m was converted and ~INR600m will be converted in next few weeks—
which shall be utilized to repay short-term borrowings of the company, making
it close to debt free on gross basis by 4QFY16.
Valuation and view:
We cut EPS estimates by 7%/12%/14% for
FY16/FY17/FY18 on the back of Jockey sales impact. We expect 14% revenue
CAGR along with 25% PAT CAGR over FY15-18. Given the huge scalability,
strong return ratios and free cash generation, we maintain
Buy
with a TP of
INR800—valuing it at 20x FY18E EPS (rolled over to FY18).
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Niket Shah
(Niket.Shah@MotilalOswal.com); +91 22 39825000
Chintan Modi
(chintan.modi@motilaloswal.com); +91 22 3982 5422

Kitex Garments
Results miss expectations
KTG’s 3QFY16 revenue de-grew 3.2% to INR1.2b (est. INR1.4b) impacted by
delayed winter and reduced orders from Jockey.
Garments segment reported 6% de-growth, while net fabric revenues grew 24%.
EBITDA margins expanded 100bp to 35.3% (est. 35.1%) and EBITDA stood at
INR417m (est INR480m).
PAT grew 4% to INR241m (est. INR282m).
Delayed winter and Jockey orders impact earnings
Management clarified that delayed winter in the US, where snowfall began late
December instead of early November, impacted the shipments.
To avoid reporting high inventory as at year end, its clients like Gerber, Toys R
Us asked Kitex to delay shipments. However, management highlighted that the
all the pending shipments have been done in January, once the snowfall began.
One of their clients, Jockey (which contributes ~15% to revenues) decided to
shift gradually from cotton to synthetic which resulted in 50% de-growth in sales
to Jockey. However this shall not impact other clients which are into
childrenswear since infants’ garments is not expected to see this shift.
Management highlighted that Jockey will continue to form a customer for the
reduced portion i.e. 50% of original orders. However, management is confident
of increasing wallet share from other clients which will compensate these lost
sales (for example, it expects Carters and Kmart to provide additional business).
Jockey was a higher margin product since there was a single product made for
them throughout the year, which led to stronger operating leverage. For others,
the kinds of products made are frequently changed based on seasons and
trends.
Management also informed that Jockey has given them a proposal to
manufacture their synthetic garments, for which KTG will have to import
material from Taiwan and China from Jockey’s approved sources and process it
in KTG factory. The synthetic orders offered to KTG are double of what it
currently does for Jockey. However, KTG is in the process of assessing the same
and will decide soon. Company intends to keep its relationship with Jockey since
it is a reputed brand and has been a client for 7 years.
Exhibit 1: Revenue growth trend
Revenues (INR m)
58%
52%
56%
28%
Revenue growth (%)
3%
1,005
1,001
1,422
2%
23%
11%
6%
1,091
5%
1,343
1,181
-3%
995
1,028
1,282
1,221
1,580
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16
Source: Company, MOSL
30 January 2016
2

Kitex Garments
Exhibit 2: EBITDA and EBITDA margins trend
EBITDA (INR m)
EBITDA Margins (%)
42%
34%
34% 35%
29%
28%
26% 26%
80%
130 120
Exhibit 3: PAT growth trend
PAT (INR m)
197%
171%
104% 97%
9%
113
61%
160
272 241
4%
PAT growth (%)
16% 17%
20%
159 173 203 417 272 337 419 660 301 451 417
41%
11%
11%
211 144 193 231 416
Source: MOSL, Company
Source: MOSL, Company
Garments segment reports 6% de-growth, fabrics grow 24%
During 3QFY16, garments segment de-grew 6% to INR1,051m while net fabric
revenues grew 24% to INR130m. Fabrics posted strong growth since the part
capacity was utilized for fulfilling third party orders, which were higher this time.
Garment business contribution to total revenue stood at 89% as against 91% in
3QFY15.
Garment margins expanded by 700bp YoY to 42% while fabric margins increased
from 9% in 3QFY15 to 11% in 3QFY16.
Exhibit 5: Fabric revenue and growth
Fabric (INR m)
124%
62% 49%
11%
7%
-6%
154 196
272
299 209
89%
36%
-3%
191 -61% -51%
105 145 181 173 130
-13% -10%
24%
Growth (YoY)
Exhibit 4: Garments revenues and growth
57% 53%
Garments (INR m)
49%
36%
-14%
723
851 805
54%
28%
Growth (YoY)
-4%
1,123 819 1,091 1,116 1,435 910 1,170 1,051
Source: MOSL, Company
Source: MOSL, Company
Exhibit 6: Segment revenue mix (%)
Garments
Fabrics
9% 17% 13% 11%
Exhibit 7: Segment margins
Fabrics
46%
37% 42%
36%
35%
31%
31% 29%
25% 29% 29%
12%
8% 7% 4% 5% 7%
1% 3%
-4%
-34% -34%
Garments
15% 9%
15% 20%
27% 21% 20%
85% 80% 73% 79% 80% 85% 91% 91% 83% 87% 89%
Source: MOSL, Company
Source: MOSL, Company
30 January 2016
3

Kitex Garments
B2C foray progressing well
Management highlighted sales for Lamaze have been shaping up well and they
are confident of posting USD7m sales in CY16.
Little Stars is on track for launch in 2HFY17.
Little Stars will cater to the mass market which is a huge opportunity size while
Lamaze caters to premium market, hence there shall not be any conflicts.
En route to be debt-free by 4QFY16
Management clarified that cash of ~INR650m (USD10m) was converted, and
close to ~INR600m will be done in next few weeks, which shall be utilized to
repay short term borrowings of the company, making it close to debt free on
gross basis by 4QFY16.
Company considers it more beneficial to hold cash in foreign currency given the
currency environment, which it believes gives higher gains through foreign
exchange and hedging than pure interest if invested in India.
Kitex Childrenswear Limited (KC
L) listing and merger
Management informed that due to market conditions, the KCL listing is delayed.
Internally, the company is working on the same; however there are no fixed
time lines. Company plans to list KCL first separately, followed by a merger, as
highlighted by management during 2QFY16.
KTG confident of strong growth
Management guided for total revenues (including other income) for FY16 at
INR5.6b. Management has confirmed bookings for next three quarters.
They informed that KTG will come out with exact details on future capacity
expansions, order book and detailed plans by 4QFY16.
Company is in process of having confirmed order book from its clients, based on
which it will have stronger visibility, exact details of which will be informed by
4QFY16. Management highlights that it expects to grow between 20-30% for
each of the next two years based on these confirmations.
Other conference call highlights
Performance for KCL was similar to KTG, in 3QFY16 it posted flat growth.
Employee costs increased this quarter, since company is investing in labour by
recruiting more people (there has been a ~30% increase in headcount). Training
for these people takes close to a year before they achieve full efficiency.
Capacity expansion entails increasing labour, reengineering through technology
and new machinery.
30 January 2016
4

Kitex Garments
Exhibit 8: Quarterly metrics (%)
3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16
Sales Growth
Garments
Fabrics
Sales Mix
Garments
Fabrics
EBIT Margin
Garments
Fabrics
EBIT Contribution
Garments
Fabrics
27
-26
17
-3
57
62
53
49
-14
124
49
89
-4
36
36
-3
54
-61
28
-51
11
-13
7
-10
-6
24
87
13
83
17
85
15
80
20
73
27
79
21
80
20
85
15
91
9
91
9
83
17
87
13
89
11
23
-6
25
-5
25
-34
29
-34
29
-4
36
12
31
1
29
3
35
8
46
7
31
4
37
5
42
7
104
-4
104
-4
133
-33
140
-40
106
-6
92
8
99
1
98
2
98
2
99
1
97
3
98
2
98
2
Source: Company, MOSL
30 January 2016
5

Kitex Garments
Valuation and view
We value KTG at 20x FY17E EPS, higher than its 5-year average of 12x and in-line
with its current one-year forward multiple of 22x, 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
(43.9% RoCE and 45% RoE), with its business model generating robust free cash
generation (INR4.3b over FY15-18). 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 (Little Stars) as well as licensing of private labels (Lamaze) 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 20x FY18E EPS of INR40.1 (rolled over to FY18), arriving at
price target of INR800. Maintain
Buy.
Exhibit 9: 15 year PE band
42
35
28
21
14
7
0
12.2
8.3
6.2
4.0
0.0
22.2
P/E (x)
5 Yrs Avg(x)
14Yrs Avg(x)
10 Yrs Avg(x)
Exhibit 10: 15 year PB band
16.0
12.0
8.0
3.8 2.6
1.9
7.0
P/B (x)
5 Yrs Avg(x)
14 Yrs Avg(x)
10 Yrs Avg(x)
Source: MOSL, Company
Source: MOSL, Company
30 January 2016
6

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
15
-36
2
FY14
31
82
40
FY15
27
-29
16
FY16E
7
-10
4
FY17E
17
-5
19
FY18E
17
-5
18
75
25
100
84
16
100
79
21
100
87
13
100
89
11
100
91
9
100
93
7
100
19
9
16.5
21
-7
16.2
27
-10
19.3
32
4
28.8
34
10
31.4
37
12
33.3
37
12
32.8
86
14
100
107
-7
100
111
-11
100
98
2
100
96
4
100
97
3
100
98
2
100
Source: Company, MOSL
30 January 2016
7

Kitex Garments
Story in charts
Exhibit 12: Global children’s wear market size is huge
Children's wear market (USD b)
275
259
244
229
292
India
5%
Vietnam
6%
Cambodia
8% Bangladesh
9%
Source: MOSL, Company
Exhibit 13: India has high potential for infant-wear sourcing
Others
20%
216
China
52%
2013
2014
2015
2016
2017
2018
Source: MOSL, Company
Exhibit 14: Kitex is the 3 largest infant-wear player
Global infant-wear suppliers capacity (Lakh Pieces per day)
7.5
6.5
rd
Exhibit 15: Kitex dominated infant-wear exports from India
Others,
15%
Jay Jay
Mills, 15%
Kitex, 70%
5.5
Wingloo (China)
Gimmell (Singapore)
Kitex (India)
Source: MOSL, Company
Source: MOSL, Company
Exhibit 16: Diversified client mix augurs well for margins
Carters,
15%
Gerber,
25%
Mothercare
, 20%
Toys R Us,
20%
Jockey, 20%
Exhibit 17: Kitex reports strong capital efficiency
RoCE (%)
52
44
37
26
44
52
FY13
Source: MOSL, Company
FY14
FY15
FY16E
FY17E
FY18E
Source: MOSL, Company
30 January 2016
8

Kitex Garments
Financials and Valuation
Income Statement
Y/E Mar
Net Sales
Change (%)
EBITDA
EBITDA Margin (%)
Depreciation
EBIT
Interest
Other Income
Extraordinary items
PBT
Tax
Tax Rate (%)
Min. Int. & Assoc. Share
Reported PAT
Adjusted PAT
Change (%)
2011
2,561
-4.3
453
17.7
69
384
125
53
0
312
106
34.0
0
206
206
11.5
2011
48
689
736
1,084
157
1,977
1,540
317
1,223
9
0
1,267
566
393
64
244
522
393
129
745
1,977
2012
3,120
21.9
582
18.7
69
514
176
64
0
401
130
32.4
0
271
271
31.5
2012
48
927
974
1,015
163
2,153
1,613
385
1,228
4
0
1,443
520
318
365
240
522
348
174
921
2,153
2013
3,170
1.6
601
19.0
86
515
115
40
0
440
147
33.3
0
294
294
8.3
2013
48
1,176
1,224
1,012
162
2,397
1,638
465
1,172
23
0
1,755
459
506
412
378
553
333
221
1,202
2,397
2014
4,422
39.5
951
21.5
97
855
106
133
0
882
308
34.9
0
574
574
95.3
2014
48
1,694
1,742
1,342
216
3,299
2,374
562
1,812
7
0
2,219
108
531
1,036
544
738
402
337
1,480
3,299
2015
5,111
15.6
1,687
33.0
213
1,474
192
134
0
1,417
432
30.5
0
985
985
71.7
2015
48
2,591
2,639
1,612
226
4,477
2,625
743
1,882
0
0
3,468
112
627
2,033
696
876
343
532
2,592
4,474
2016E
5,336
4.4
1,894
35.5
237
1,657
156
188
0
1,690
585
34.6
0
1,105
1,105
12.2
2016E
48
3,530
3,577
612
226
4,415
2,925
980
1,945
0
0
3,578
111
604
2,028
836
1,109
389
720
2,470
4,415
2017E
6,364
19.3
2,355
37.0
260
2,094
57
263
0
2,300
796
34.6
0
1,504
1,504
36.1
2017E
48
4,700
4,748
204
226
5,178
3,425
1,240
2,185
0
0
4,454
129
721
2,602
1,003
1,461
464
997
2,993
5,178
(INR Million)
2018E
7,531
18.3
2,862
38.0
301
2,560
14
368
0
2,914
1,008
34.6
0
1,906
1,906
26.7
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
(INR Million)
2018E
48
6,217
6,265
0
226
6,491
3,925
1,542
2,384
0
0
5,842
150
853
3,636
1,203
1,734
549
1,186
4,107
6,491
30 January 2016
9

Kitex Garments
Financials and valuation
Ratios
Y/E Mar
Basic (INR)
EPS
Cash EPS
Book Value
DPS
Payout (incl. Div. Tax.)
Valuation(x)
P/E
Cash P/E
Price / Book Value
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)
Net Debt/Equity (x)
2011
4.3
5.8
15.5
0.4
10.8
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
2015
20.7
25.2
55.6
1.3
7.3
21.2
17.4
7.9
4.0
12.1
0.3
32.0
28.5
1.3
56
81
56
1.4
2011
453
58
-582
-86
0
-156
-107
-263
0
3
-104
0
390
-130
-18
242
-18
81
64
31.7
30.3
1.4
37
61
41
0.7
2012
582
64
114
-134
0
626
-68
558
0
11
-57
0
-69
-176
-22
-267
302
64
365
26.7
26.3
1.3
58
53
38
0.5
2013
601
38
-256
-139
0
244
-48
196
0
4
-44
0
-5
-115
-33
-153
47
365
412
38.7
37.2
1.3
44
9
33
0.2
2014
951
129
315
-242
0
1,154
-720
433
0
8
-712
0
334
-106
-45
183
624
412
1,036
45.0
43.9
1.1
45
8
25
-0.2
2015
1,687
136
-176
-364
0
1,284
-302
981
0
-9
-311
0
271
-192
-56
24
996
1,036
2,033
2016E
23.3
28.2
75.3
3.0
15.1
18.9
15.6
5.8
3.7
10.3
0.7
35.6
43.7
1.2
41
8
27
-0.4
2016E
1,894
188
117
-585
0
1,615
-297
1,317
0
0
-297
0
-1,000
-156
-167
-1,322
-5
2,033
2,028
2017E
31.7
37.2
100.0
6.0
22.2
13.9
11.8
4.4
2.9
7.9
1.4
36.1
51.6
1.2
41
7
27
-0.5
2017E
2,355
263
51
-796
0
1,873
-500
1,373
0
0
-500
0
-408
-57
-333
-799
574
2,028
2,602
2018E
40.1
46.5
131.9
7.0
20.4
11.0
9.5
3.3
2.3
6.0
1.6
34.6
52.2
1.2
41
7
27
-0.6
Cash Flow Statement
Y/E Mar
Adjusted EBITDA
Non cash opr. exp (inc)
(Inc)/Dec in Wkg. Cap.
Tax Paid
Other operating activities
CF from Op. Activity
(Inc)/Dec in FA & CWIP
Free cash flows
(Pur)/Sale of Invt
Others
CF from Inv. Activity
Inc/(Dec) in Net Worth
Inc / (Dec) in Debt
Interest Paid
Divd Paid (incl Tax) & Others
CF from Fin. Activity
Inc/(Dec) in Cash
Add: Opening Balance
Closing Balance
(INR Million)
2018E
2,862
368
-80
-1,008
0
2,142
-500
1,642
0
0
-500
0
-204
-14
-389
-607
1,034
2,602
3,636
30 January 2016
10

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.
Source: MOSL/Bloomberg
Exhibit 1: Sensex rebased
Exhibit 2: Shareholding pattern (%)
Promoter
DII
FII
Others
Sep-15
54.2
0.1
2.9
42.8
Jun-15
54.2
0.5
3.0
42.3
Sep-14
54.2
0.0
0.6
45.2
Exhibit 3: Top holders
Holder Name
CKG Super Market Limited
Gopinathan C K
Acumen Capital Market (India) Ltd
Jinsha Nath C K
Sethuparvathy
% Holding
6.4
5.4
2.7
2.2
1.4
Source: Capitaline
Note: FII Includes depository receipts
Source: Capitaline
Exhibit 4: Top management
Name
Sabu M Jacob
A Babu
Designation
Chairman & Managing Director
Company Secretary
Exhibit 5:
Directors
Name
Benni Joseph
Erumala Mathew Paulose
Sindhu Chandrasekhar
Name
C Mohan
K L V Narayanan
C P Philipose
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Ernst & Young LLP
Kolath & Co
Rajendran, Mani & Varier
SVJS & Associates
Type
Internal
Statutory
Cost Auditor
Secretarial Audit
Source: Capitaline
Exhibit 7:
MOSL forecast v/s consensus
EPS
(INR)
FY16
FY17
FY18
MOSL
forecast
23.3
31.7
40.1
Consensus
forecast
27.3
36.0
39.6
Variation (%)
-14.7
-12.0
1.2
Source: Bloomberg
30 January 2016
11

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30 January 2016
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