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MPS and Kitex: Valuations ripe for more exposure? - Views on News from Equitymaster
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MPS and Kitex: Valuations ripe for more exposure?
Feb 1, 2016

The most common compliant amongst our subscribers is with regard to the 'buy at lower price' recommendations. In the case of The India Letter particularly, investors wonder what would make good, high growth companies correct to the tune of 20-30%. Also whether taking partial exposures and growing them at opportune valuations is a good long term investment strategy.

Well, the recent market correction brought two The India Letter stocks almost 60% lower from their respective 52 week highs. These were Kitex Garments and MPS Ltd.

The poor quarterly performance added to investor agony. Being entities where 20% to 30% growth was the norm until FY15, the sluggish growth and declining profits were a big worry. There were also speculations about whether the managements were up to something unacceptable. Also whether minority shareholders would finally get a raw deal.

Here is our take on the stocks after the conference call with the respective managements and our updated views on what investors should do...

Kitex Garments

Client concentration is as much a risk for Kitex and MPS as for most other small yet fast growing companies.

Incidentally, a couple of quarters back, the management of Kitex pointed out that 80% of its revenues came from top 4 clients. It, however, was not worried about this concentration risk. Rather the management saw the high customer concentration as a strategic asset. It believed that the concentration helped it enjoy very strong relationships with the clients and thus gave it confidence in execution.

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