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
A. Product base
The company manufactures all kinds of garments for exports. Infant wear dominates with over 90% share in production; Capacity (infant wear) increased to 200,000 pcs per day; Vertical integration through fabric & processing plant.
B. Consumer base
Kitex garments has key focus in US markets , Gerber ,no 1 wholesaler in USA buys products from kitex garments, Turtle another major player in retail market of USA buys from the company and then sells to Wallmart and also sells under its own brand. Mother Care, Tesco are also one of the major buyers of kitex products. Toys r us another major retailer buys from the company and then sells through their own.
C. Economic Moat
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 oneyear order book visibility.
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.
Strong Buyer Criteria:-
Company has strong criteria for taking purchase order where they should have a minimum $15 Millions on FOB (Free on board) basis. In USA Company has a very strong presence where buyers directly approach the company and comes to see sample and gets approved. Elsewhere other companies do send the samples and gets approval after 1 months where they have no assurance of getting confirm order. Hence Kitex Garments has seller power compare to industry where it is buyer industry.
Own Brand:-
Company is planning to launch its own brand in USA in next 3 to 4 months time. Company has filled all the necessary documents for the new name. The company is expected to do a sales of 3-5 $ millions of sales in the coming year.
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
D. Financial brief and Balance sheet analysis.
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 25xFY16E earnings.
The company has a pretty strong balance sheet. It has a high operating profit margins, high ROE and has done exceedingly well over the past two-three years and I believe that we could see impressive growth over the next few years.
E. Near term and Long term growth
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.
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.
F. Sustainability
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.
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.
G. Risk
Clyclical:-
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.
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
A. Product base
The company manufactures all kinds of garments for exports. Infant wear dominates with over 90% share in production; Capacity (infant wear) increased to 200,000 pcs per day; Vertical integration through fabric & processing plant.
B. Consumer base
Kitex garments has key focus in US markets , Gerber ,no 1 wholesaler in USA buys products from kitex garments, Turtle another major player in retail market of USA buys from the company and then sells to Wallmart and also sells under its own brand. Mother Care, Tesco are also one of the major buyers of kitex products. Toys r us another major retailer buys from the company and then sells through their own.
C. Economic Moat
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 oneyear order book visibility.
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.
Strong Buyer Criteria:-
Company has strong criteria for taking purchase order where they should have a minimum $15 Millions on FOB (Free on board) basis. In USA Company has a very strong presence where buyers directly approach the company and comes to see sample and gets approved. Elsewhere other companies do send the samples and gets approval after 1 months where they have no assurance of getting confirm order. Hence Kitex Garments has seller power compare to industry where it is buyer industry.
Own Brand:-
Company is planning to launch its own brand in USA in next 3 to 4 months time. Company has filled all the necessary documents for the new name. The company is expected to do a sales of 3-5 $ millions of sales in the coming year.
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
D. Financial brief and Balance sheet analysis.
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 25xFY16E earnings.
The company has a pretty strong balance sheet. It has a high operating profit margins, high ROE and has done exceedingly well over the past two-three years and I believe that we could see impressive growth over the next few years.
E. Near term and Long term growth
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.
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.
F. Sustainability
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.
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.
G. Risk
Clyclical:-
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.
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
Very Informative. Do you know by any chance what %'s of sales are going to these clients and viceversa?
ReplyDeletePlease post the date of the article that would be helpful to see how old or new are the views.
I Pavan I do not have this information as the management does not disclosed it and more over I do not trust Mr. Sabu Jacob as he failed a lot with his commitment I have exited from Kitex after making 40% of gain due to their management integrity. But as a business this is good so if you haven't yet exit from it you can hold it for a reversal. If you need detailed information about Kitex you should follow ValuePickr forum.
ReplyDelete