Stock Analysis

Kitex Garments

What is the Business?
Kitex Garments makes infant wear and supplies to the big retailers in the US market

Industry Structure

  • Major players in the US retail industry for infant wear are Carter, Gerber, Kohl, Children’s Place. These players sell through E-commerce websites, supermarket chains like Walmart, JC Penny, Target and also through other standalone and smaller stores apart from having their own exclusive stores.

Market Size for 0 to 7 yrs is estimated at $25 Bn

  • The retailer is responsible for design and branding/marketing of the product.
  • Sourcing is done through commission agents or directly from the manufacturers in China, Bangladesh, Vietnam, Cambodia, Sri Lanka, India.
  • Manufacturer has to comply with strict global standards with respect to environment, employment (child labour), laws & regulations.

Also, garments for 0 to 2 yrs are a specialized segment with few large manufacturers and the segment is dominated by cotton garments.

 

History of Kitex Garments
Kitex Garments was a small unprofitable company in 1997 from where it pursued a concerted strategy of exporting infant wear directly to US retailers bypassing the dominant commission agents. Today it is the 3rd largest manufacturer of infant wear in the world with a production capacity of 2,70,000 garments per day.

What is the competitive advantage of Kitex Garments?

  • 3rd largest infant wear garment manufacturer in the world.

Largest is Winglu (China; 7.5 lacs/day) and 2nd largest is Gimmel (Singapore; 6.5 Lacs/day)

  • Fully compliant with all the global standards wrt material, environment, social & employment related regulations.
  • Strong employee relations with huge emphasis on employee welfare.
  • Direct relationships with the large US retailers since several years (some more than 10 yrs).
  • Extreme focus and specialization.

 

Financials (10-year record)

  2007 2012 2017
Revenue (RsCrs) 153 312 546
PAT (RsCrs) 10 27 93
Operating Margins (%) 8% 19% 35%
PAT Margins (%) 6% 9% 21%
ROCE (EBIT/CE) 12% 23% 30%
Total Debt (RsCrs) 113 102 0
Inventory Turnover 12 6 20
Asset Turnover Ratio 1.83 2.55 3.02

 

Competition and Substitute Products
The garment export market is highly competitive with China, Bangladesh, Vietnam having larger market shares than India. However, the infant garment market is a specialized niche with lesser competition. Also, cotton is the preferred fabric for infant wear and threat of substitution is low

 

What next for Kitex Garments?

  • Kitex has started selling infant wear in the US under its own brands.
  • Lamaze is a non-profit organization that promotes natural, healthy approach to pregnancy, childbirth and early parenting. Lamaze also markets various products including clothes for mothers and babies. Kitex has got into a licensing arrangement with Lamaze on a royalty basis.
  • Kitex’s has also come out with their own brand – “Little Star by Kitex” which they wish to sell through physical stores like Walmart, Target and online companies like Amazon.
  • Carter which is by far the biggest retailer for infant wear in the US (3 times bigger than next competitor) sells 80% of its merchandise with 10 basic designs. What it changes is the fabrics, appliques, embroidery and trim i.e. colour and art.

Interpretation – Mass market is not too prone to changing fashion fads.

 

Concerns or what can go wrong

  • Promoters privately control Kitex Childrenwear which operates in the same business from the same factory. However, till date there is no sign of promoters favouring KCL over KGL. In fact KCL in the past has given corporate guarantee to Kitex Garments (KGL).
  • Marketing of own brand by Kitex does not succeed.

Kitex has been preparing for this since at least the last 3 years and given its history of the past 20 years, the management builds on small successes before committing of more resources. Failure here probably won’t result in dramatic losses.

  • Current customers stop/reduce sourcing from Kitex Garments.

Though Kitex is a large player, the industry is so fragmented that Kitex selling under own brand name does not pose an immediate threat to the other retail players.

 Comparison with other textile manufacturers

  Kitex Trident Vardhman Welspun
Revenue Growth (10 yrs) 15.2% 19.5% 11.5% 19.1%
ROCE (Avg 10 years) 31.1% 9.2% 13.1% 13.4%
Receivables (Days) 53 19 45 32
Net Asset Turnover Ratio 3.02 1.1 2.3 2.0
PAT Margins (Avg 10 yrs) 17% 6% 16% 12%

 

 Valuations
Market Cap =Rs 1,592
Debt-Cash = (3 Cr)-(134 Cr)
Enterprise Value = 1461
EV / EBITDA = 8.4

 

Disclaimer:
The stocks discussed in the above post are only for educational and illustrative purposes.
The post may not be considered as a recommendation to buy/sell
Do your own study and analysis to decide on your investments or get in touch with us to get professional advise

Details of Financial Interest in the Subject Company:
Currently, I do own Kitex Garments mentioned above in my portfolio.
I may/may not buy/sell the above mentioned stocks as and when I consider appropriate

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