Strange, New Facts about Employee Cost and Sales to an Unlisted Entity

Below is an extract of the original article published on on 18th Jul-18

Kitex Garments Ltd is a fascinating story of a stock that went up 60 times between July 2007 and July 2016 on the back of massive rise in revenues and profits.

  2007 2012 2016
Revenue (RsCrs) 153 312 546
PAT (RsCrs) 10 27 112
PAT Margins (%) 6% 9% 21%

The narrative about Kitex, until 2016, was one of hard work, perseverance, doggedness, ingenuity, camaraderie and the power of doing good, out of God’s Own Country – Kerala. The Kitex group is the largest private sector employer in Kerala and the 3rd largest infant-wear manufacturer in the world.

However, there have always been some peculiar traits of Kitex Garments that have bewildered the investors.
In 2016, the company kept Rs 255 Crs cash in foreign currency current accounts which earned no interest even though it was paying 12% interest on a loan of Rs 161 Cr. At the very least, this suggests poor cash management practices followed by the company.

Kitex Garments Ltd has an associate company (Kitex Childrenswear Ltd) which is 100% owned by the promoters and operates in the same business ie supplying infant wear to US retailers. In fact Kitex Childrenswear Ltd (KCL) shares the factory and land with the listed company.

With the stock price going up and improving profit margins, explanations were readily available for cases of obvious conflict of interest raised above.

However, all parties have to come to an end and so has the Kitex party started to vane. The stock price has corrected from a peak of Rs 750 in Jul-15 to Rs 13 in Jul-18 a fall of a massive 85%.

New data has come to light

Vastly different profit margins for KGL (listed entity) and KCL (unlisted entity)

PAT (%) 2011 2012 2013 2014 2015 2016 2017
KGL (Public) 9% 9% 9% 13% 19% 21% 17%
KCL (Private) 9% 8% 9% 15% 21% 14% 1%

The listed entity (KGL) and promoter-owned unlisted entity (KCL) have significantly different profit margins (17% versus 1% in 2017) even though both are in identical lines of business

Staff cost is 16% for KGL (listed) versus 48% for KCL (unlisted)

KGL (Public) 2011 2012 2013 2014 2015 2016 2017
Sales (Garments)
(Rs Crs)
171 232 266 350 446 476 459
Staff Costs 21% 16% 16% 16% 17% 18% 20%


KCL (Private) 2011 2012 2013 2014 2015 2016 2017
Sales (Garments) 112 209 147 250 204 205 183
Staff Costs 16% 13% 20% 16% 26% 39% 48%

In 2017, manpower costs are a staggering 48% of sales for KCL (private entity) vis-à-vis 20% for KGL (the listed public company). It is insightful to know that between 2011 and 2015 both the companies had similar manpower costs as a percentage of sales.

Even provident fund data from the EPFO website shows that for less than half the turnover, in the month of May-18, KCL (4,951) has more employees than KGL (4,349).


Is this the case of the management showing profits in the public company by booking part of employee costs in the private entity? Why does the management need to inflate profits in the public company?

What light does the 2018 annual report throw?

Sales to Kitex USA LLC (unlisted associate) has shot up 10 times in one year and is now 45% of total sales.

Kitex USA LLC - Business Done

Decline in sales (Est 230 Crs) because of the bankruptcy of Toys R Us is completely met by sales to un-audited associate company

Kitex USA LLC (50:50 JV between KGL and KCL) is an associate company of KGL which is the retail arm of the Kitex group selling directly to customers in the United States.

Kitex USA LLC has not paid for 1/3rd of the purchases it made from KGL

Kitex USA LLC - Receivables

When companies show sales, but don’t collect the cash, that too from associate companies, it could turn out to be fictitious sales

Unlisted associate is also not audited

What is even more interesting is that the financial statements of Kitex USA LLC with which KGL has done 40% of the business in FY17-18 are not audited.

Extract from KGL annual report 2018
Kitex USA LLC - No Audit

With the stock correcting by 85% from its peak of Rs 750 in Jul-15 to Rs 103 odd on Jul-18, the management will have some answering to do at the upcoming Annual General Meeting of the company on 28th Jul-18 where 36,000 plus shareholders will have some difficult questions to ask.



Disclaimer: The above article is a collation of facts and my opinion and interpretation of the facts. The article is written solely for educational purposes and should not be considered as investment advice.

Disclosure: I hold a single share of Kitex Garments Ltd. Either me or my clients may buy/sell the shares of Kitex Garments Ltd anytime after the publishing of this article

3 Responses

  1. Hello Amey,

    Is it possible to access this after registering as an individual Pan holder in the MCA website ? For some reason, even after signing in to, if when i goto to public documents link, it shows as not signed in.


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