21 July 2016
1QFY17 Results Update | Sector: Textiles
Kitex Garments
Buy
BSE SENSEX
27,711
S&P CNX
8,510
CMP: INR488
TP: INR770 (+58%)
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Confident about meeting growth guidance given new client additions and
capacity expansion
Results in line with expectations:
Kitex Garments’ (KTG) 1QFY17 revenues grew
9.4% YoY to INR1.2b (v/s est. of INR1.1b), led by higher garments (+6.6% YoY)
and net fabric (+23.1% YoY) revenues. EBITDA margin expanded 80bp YoY to
28.4% (v/s est. of 29.5%), while PAT grew 31% to INR209m on account of lower
interest outgo. Management continues to maintain its guidance of 20% annual
growth over the next three years due to new client additions and
commensurate capacity addition. After increasing capacity to 320,000 pcs/day
from 270,000 pcs/day, the company aims to sustain this momentum, which
should aid targeted top line growth of 20% for FY17.
Addition of clients to drive revenues:
KTG recently added a new client, Sam’s
Club, which is a subsidiary of Wal-Mart. Sam’s is a wholesale format business
with lower margins of 15-18% (v/s retailer margins of 50-60%), but we note that
it sells products in large quantities to its members. We view this as a huge
opportunity in terms of business for KTG. The company expects USD5-6m
business in FY17 and USD15m in FY18. Additionally, Kitex has shipped its first
consignment of Lamaze on a test basis (order size of USD50,000), and for the full
year, it intends to clock USD7m of revenues.
New textile policy to be favorable:
Based on available prima facie information,
KTG expects the new textile policy to be highly favorable for the garment
industry. It expects annual benefit of INR18.7m from the Provident Fund
scheme, INR250-300m from increased rate of duty drawback by 5%, and higher
capital subsidy benefit (15-25%) on capex planned. Also, in terms of Income Tax,
it will qualify under section 80JJAA, which should help it save INR100m.
Valuation and view:
We expect 20% revenue CAGR, along with 35% PAT CAGR
over FY16-18 after considering the impact of IT benefit u/s 80JJAA. We expect
EBITDA margins to expand by 390bp over FY16-18E given operating leverage
benefits. Given huge scalability, strong return ratios and free cash generation,
we maintain
Buy
with a TP of INR770—valuing it at 18x FY18E EPS.
Bloomberg
Equity Shares (m)
M.Cap.(INRb)/(USDb)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, (INR m)
Free float (%)
KTG IN
47.5
23.2 / 0.3
934/340
1/-23/-43
95
45.8
Financials & Valuations (INR b)
Y/E Mar
2016 2017E 2018E
Sales
5.5
6.6
7.9
EBITDA
1.9
2.4
3.0
NP
1.1
1.6
2.0
EPS (INR)
23.6
32.8
42.7
EPS Gr. (%)
13.8
39.0
30.2
BV/Sh. (INR)
77.3 103.1 137.6
RoE (%)
35.5
36.3
35.5
RoCE (%)
27.4
32.2
33.6
P/E (x)
20.7
14.9
11.4
P/BV (x)
6.3
4.7
3.5
Estimate change
TP change
Rating change
Niket Shah
(Niket.Shah@MotilalOswal.com); +91 22 6129 1535
Chintan Modi
(Chintan.Modi@MotilalOswal.com); +91 22 6129 1554
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.

Kitex Garments
Revenues meet expectations
KTG’s 1QFY17 revenue grew 9.4% to INR1.2b (est. of INR1.1b) led by garments
which grew 6.6% and net fabric revenues which grew 23.1%. EBITDA margins
expanded 80bp YoY to 28.4% (est. of 29.5%) while PAT grew by 31% to INR209m
on account of lower interest outgo.
The management continues to maintain its guidance of 20% growth every year
over next 3 years on the back of new client additions and commensurate
capacity addition to support growth.
Currently, the company has already increased capacity to 320,000 pcs per day
from 270,000 pcs per day and will continue to increase the same which shall aid
targeted topline growth of 20% for FY17.
Exhibit 1: Revenue growth trend
Revenues (INR m)
58%
52%
56%
28%
3%
1,005 1,001
995
1,422
2%
1,028
23%
1,181
5%
-3%
Revenue growth (%)
11%
6%
17%
9%
1,282 1,221 1,580 1,091 1,343
1,844 1,193
Source: MOSL, Company
Exhibit 2: EBITDA and margins trend
EBITDA (INR m)
34%
26% 26%
28%
EBITDA Margins (%)
42%
29%
16% 17%
20%
38%
34% 35%
Exhibit 3: PAT growth trend
PAT (INR m)
197%
28%
80%
130 120
113
9%
211
171%
144
11%
104%97%
61%
193 231 416
160
11%
41%
8% 32%
4% 449 209
272 241
PAT growth (%)
159 173 203 417 272 337 419 660 301 451 417 693 339
Source: MOSL, Company
Source: MOSL, Company
Garments segment reports 6.6% growth, fabrics grow 23.4%
During 1QFY17, garments segment grew 6.6% to INR970m while net fabric
revenues grew 23.4% to INR223m.
Garment business contribution to total revenue stood at 81% as against 83% in
1QFY16.
Garment margins improved by 150bp YoY to 32.8% while fabric margins
decreased from 4.4% in 1QFY16 to 4% in 1QFY17.
21 July 2016
2

Kitex Garments
Exhibit 4: Garments revenues and growth
Garments (INR m)
57% 53%
723
-14%
851 805
1123
-4%
819
49%
36%
54%
28%
11% 7%
1091
1116
1435
-6%
14%
Growth (YoY)
62% 49%
7%
154 196
Exhibit 5: Fabric revenue and growth
124%
89%
36%
272
299 209
-3%
191
-13%-10%
-61%-51%
24%
47%
23%
Fabric (INR m)
Growth (YoY)
910 11701051 1630 970
105 145 181 173 130 213 223
Source: MOSL, Company
Source: MOSL, Company
Exhibit 6: Segment revenue mix (%)
Garments
Fabrics
Exhibit 7: Segment margins
Fabrics
46%
43%
37% 40%
36% 31%
35%
33%
31%
29%
25%29% 29%
12%
8% 7% 4% 5% 6% 5% 4%
1% 3%
-4%
-34% -34%
Garments
15% 20% 27% 21% 20% 15% 9% 9% 17% 13% 11% 12% 19%
85% 80% 73% 79% 80% 85% 91% 91% 83% 87% 89% 88% 81%
Source: MOSL, Company
Source: MOSL, Company
Management confident of 20% CAGR over FY16-FY19 aided by newer
clients and products
Kitex recently added new client – Sams Club which is a subsidiary of Wal-mart
and is wholesale format business where its (Sams Club’s) margins are lower at
15-18% compared to retailer margins 50-60% margins which is available to its
members but sells in large quantities. This can be a huge opportunity in terms of
business for Kitex, going ahead. The company expects USD5-6m business in FY17
and USD15m in FY18.
Additionally, Kitex shipped out first its first consignment of Lamaze on test basis
(size of USD50,000) but on a full year it intends to clock USD7m of revenue. By
Fall season the company intends to increase traction in business. It also in talks
with COSCO for Lamaze business.
New Textile policy to be favorable
As per prima facie information available, Kitex expects new policy to be highly
favorable for garment industry.
It expects annual benefit of INR18.7m from Provident Fund scheme, INR250-
300m benefit from increased rate of duty drawback by 5% and increased capital
subsidy benefit (15% to 25%) on capex planned.
However, the management has clarified that it is as per prima facie evidence
available but will get clarity once it receives detailed document.
Additionally, under Income Tax it will qualify under section 80JJAA which shall
help savings of INR100m.
3
21 July 2016

Kitex Garments
Cotton price increase will have no impact on margins
The management clarified that recent increase in cotton prices will have no
impact on the margins of the company. The company when it gets a confirmed
Purchase Order from clients it simultaneously books/cover the raw material for
the same and pricing is accordingly done. Therefore, there will never be any
impact on margins of the company.
Other conference call highlights
Current debt on books includes INR500m of packing credit and term loan of
INR190m.
The recent Madras high court order to increase pay hike by 30% will not impact
Kitex as it is located in Kerela. Additionally, the minimum wages prescribed in
Kerela is INR5,500 to 7,000p.m however, Kitex’s starting salary is INR8,000pm
and goes upto INR12,000-13,000pm.
The management clarified that amount lying in dollar need not be converted
into rupee as per FEMA rule if it is already hedged. Kitex has already hedged it
cash lying in dollar denominations.
Exhibit 8: Quarterly metrics (%)
1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17
Sales Growth %
Garments
Fabrics
Sales Mix %
Garments
Fabrics
EBIT Margin %
Garments
Fabrics
EBIT Contri %
Garments
Fabrics
57
62
53
49
-14
124
49
89
-4
36
36
-3
54
-61
28
-51
11
-13
7
-10
-6
24
14
47
7
23
85
15
80
20
73
27
79
21
80
20
85
15
91
9
91
9
83
17
87
13
89
11
88
12
81
19
25
-34
29
-34
29
-4
36
12
31
1
29
3
35
8
46
7
31
4
37
5
42
7
43
5
33
4
133
-33
140
-40
106
-6
92
8
99
1
98
2
98
2
99
1
97
3
98
2
98
2
99
1
97
3
Source: Company, MOSL
Valuation and view
We value KTG at 18x FY18E EPS, higher than its 5-year average of 12.2x, 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.
21 July 2016
4

Kitex Garments
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
(41.8% RoCE and 35.5% RoE), with its business model generating robust free cash
generation (INR4.6b over FY16-18). 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 18x FY18E EPS of INR42.7, arriving at price target of INR770.
Maintain
Buy.
Exhibit 9: 15 year PE band
42
35
12.0
28
21
14
7
6.4
0
0.0
2.0
12.6
8.5
15.5
4.0
3.9
2.6
8.0
4.8
P/E (x)
5 Yrs Avg(x)
14Yrs Avg(x)
10 Yrs Avg(x)
Exhibit 10: 15 year PB band
16.0
P/B (x)
5 Yrs Avg(x)
14 Yrs Avg(x)
10 Yrs Avg(x)
Source: MOSL, Company
Source: MOSL, Company
Operating metrics
Exhibit 11: Operating metrics and key assumptions
Y/E March (INR m)
Growth (%)
Garments
Fabric
Net Revenues
Contribution (%)
Garments
Fabric
In-licensed brands
Net Revenues
FY12
FY13
15
-36
2
FY14
31
82
40
FY15
27
-29
16
FY16
7
7
7
FY17E
19
-5
21
FY18E
19
0
20
75
25
100
84
16
100
79
21
100
87
13
100
87
13
100
86
10
4
100
85
8
6
100
Source: Company, MOSL
21 July 2016
5

Kitex Garments
Story in charts
Exhibit 12: Global children’s wear market is huge
Children's wear market (USD b)
259
275
292
India
5%
Vietnam
6%
Cambodia
Bangladesh
8%
9%
Source: MOSL, Company
Exhibit 13: India has high potential for infant-wear sourcing
Others
20%
China
52%
216
229
244
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%
5.5
Jay Jay
Mills, 15%
Kitex, 70%
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%
Exhibit 17: Kitex reports strong capital efficiency
RoCE (%)
30
24
18
27
31
33
Mothercare
, 20%
Toys R Us,
20%
Jockey, 20%
Source: MOSL, Company
FY13
FY14
FY15
FY16
FY17E
FY18E
Source: MOSL, Company
21 July 2016
6

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 (%)
FY12
3,120
21.9
582
18.7
69
514
176
64
401
0
401
124
6
32.4
271
271
31.5
8.7
FY13
3,170
1.6
601
19.0
86
515
115
40
440
0
440
149
-2
33.3
294
294
8.3
9.3
FY14
4,422
39.5
951
21.5
97
855
106
133
882
0
882
254
55
34.9
574
574
95.3
13.0
FY15
5,111
15.6
1,687
33.0
213
1,474
192
134
1,417
0
1,417
422
10
30.5
985
985
71.7
19.3
FY16
5,458
6.8
1,863
34.1
213
1,650
138
198
1,711
0
1,711
590
0
34.5
1,121
1,121
13.8
20.5
FY17E
6,578
20.5
2,368
36.0
247
2,121
78
248
2,291
0
2,291
733
0
32.0
1,558
1,558
39.0
23.7
(INR Million)
FY18E
7,904
20.2
3,004
38.0
298
2,706
44
322
2,983
0
2,983
955
0
32.0
2,029
2,029
30.2
25.7
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
E: MOSL Estimates
FY12
48
927
974
0
163
1,015
2,153
1,613
385
1,228
4
0
1,443
520
318
365
240
522
348
174
921
2,153
FY13
48
1,176
1,224
0
162
1,012
2,397
1,638
465
1,172
23
0
1,755
459
506
412
378
553
333
221
1,202
2,397
FY14
48
1,694
1,742
0
216
1,342
3,299
2,374
562
1,812
7
0
2,219
108
531
1,036
544
738
402
337
1,480
3,299
FY15
48
2,591
2,639
0
226
1,612
4,477
2,625
743
1,882
3
0
3,468
112
627
2,033
696
876
343
532
2,592
4,477
FY16
48
3,626
3,674
0
206
918
4,798
2,686
956
1,730
12
46
4,401
130
960
2,499
811
1,391
688
703
3,010
4,798
FY17E
48
4,851
4,899
0
206
510
5,615
3,336
1,203
2,133
0
46
5,054
135
956
3,032
931
1,619
621
997
3,436
5,615
(INR Million)
FY18E
48
6,491
6,538
0
206
306
7,050
3,936
1,501
2,435
0
46
6,501
157
1,149
4,121
1,075
1,932
747
1,186
4,569
7,050
21 July 2016
7

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 (%)
FCF per share
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Creditor (Days)
Wkg. Capital Turnover (Days)
Leverage Ratio (x)
Debt/Equity
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
23.5
19.3
8.8
4.5
13.5
0.3
20.7
45.0
30.5
43.6
1.1
8
45
25
40
0.6
FY15
1,417
213
188
-364
-176
1,284
1,284
-302
981
0
-9
-311
271
-192
-56
0
24
996
1,036
2,033
FY16
23.6
28.1
77.3
3.0
14.9
20.7
17.4
6.3
4.0
11.6
0.6
35.0
35.5
27.4
46.2
1.1
9
64
46
34
0.2
FY16
1,711
213
138
-590
261
1,733
1,733
-70
1,663
-46
0
-116
-694
-138
-167
-152
-1,150
467
2,033
2,499
FY17E
32.8
38.0
103.1
6.0
21.4
14.9
12.8
4.7
3.1
8.7
1.2
28.5
36.3
32.2
60.4
1.2
7.5
53
34
22
0.1
FY17E
2,291
247
78
-733
107
1,989
1,989
-638
1,352
0
0
-638
-408
-78
-333
0
-819
533
2,499
3,032
FY18E
42.7
49.0
137.6
7.0
19.2
11.4
10.0
3.5
2.5
6.4
1.4
36.3
35.5
33.6
67.9
1.1
7.3
53
34
21
0.0
11.7
31.7
20.5
18.8
1.4
61
37
41
65
1.0
FY12
401
69
176
-134
114
626
626
-68
558
0
11
-57
-69
-176
-22
0
-267
302
64
365
4.1
26.7
17.5
18.3
1.3
53
58
38
91
0.8
FY13
440
84
115
-139
-256
244
244
-48
196
0
4
-44
-5
-115
-33
0
-153
47
365
412
9.1
38.7
24.2
26.4
1.3
9
44
33
37
0.8
FY14
882
97
102
-242
315
1,154
1,154
-720
433
0
8
-712
334
-106
-45
0
183
624
412
1,036
Cash Flow Statement
Y/E March
NP/(Loss) before Tax & EO Items
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
CF from Operating incl EO
(inc)/dec in FA
Free Cash Flow
(Pur)/Sale of Investments
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
(INR Million)
FY18E
2,983
298
44
-955
-45
2,326
2,326
-600
1,726
0
0
-600
-204
-44
-389
0
-637
1,089
3,032
4,121
21 July 2016
8

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
Jun-16
54.2
0.3
4.0
41.5
Mar-16
54.2
2.1
1.1
42.6
Jun-15
54.2
0.5
3.0
42.3
Exhibit 3: 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
6.2
2.5
1.8
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
Sabu M Jacob
Benni Joseph*
C P Philipose
Name
Erumala Mathew Paulose*
K L V Narayanan
Sindhu Chandrasekhar
Source: Capitaline
*Independent
Exhibit 6: Auditors
Name
Ernst & Young LLP
Kolath & Co
SVJS & Associates
Varma & Varma
Type
Internal
Statutory
Secretarial Audit
Statutory
Source: Capitaline
Exhibit 7:
MOSL forecast v/s consensus
EPS (INR)
FY17
FY18
MOSL
forecast
31.5
41.1
Consensus
forecast
29.0
34.7
Variation
(%)
8.6
18.6
Source: Bloomberg
21 July 2016
9

PRODUCT GALLERY
Kitex Garments
Kitex Garments
Kitex Garments

Kitex Garments
NOTES
21 July 2016
11

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Kitex Garments
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KITEX GARMENTS
No
No
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12