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Kitex Garments: Margins go through the roof - Views on News from Equitymaster
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Kitex Garments: Margins go through the roof
Apr 9, 2015

Kitex Garments Ltd (Kitex) has announced the fourth quarter results of financial year 2014-2015 (4QFY15). The company has reported around 11.1% YoY growth in sales while net profits have surged by 97.5% YoY during the quarter.

Performance summary
  • Sales increase by 11.1% YoY during 4QFY15.
  • Operating profits increase 58.3% YoY during the quarter on account of better cost management and production efficiency. Investments in improving productivity & efficiency has reduced wastages and thus helped improve margins.
  • Net profits increased 97.5% YoY due to strong performance at the operating level. Interest and depreciation expenses increased by 54.7% YoY and 107.7% YoY respectively.
  • The merger between Kitex Garments and Kitex Children's wear is on the cards and the appointed auditor is yet to work out the full details of the plan.
  • The board has recommended a dividend of Rs 1.25 per share.
  • The D/E ratio at the end of FY15 stands at 0.53x.

Standalone performance snapshot
(Rs m) 4QFY14  4QFY15  Change FY14  FY15  Change
Income from operations  1,422 1,580 11.1% 4,422 5,111 15.6%
Expenditure  1,005 921 -8.4% 3,471 3,424 -1.4%
Operating profit (EBDITA) 417 660 58.3% 951 1,687 77.4%
Operating profit margin (%) 29.3% 41.7%   21.5% 33.0%  
Other income (37) 6 NM 133 134 0.6%
Interest 32 49 54.7% 106 192 80.5%
Depreciation 28 58 107.7% 97 213 120.3%
Profit before tax 320 558 74.5% 882 1,417 60.6%
Tax 109 142 30.2% 308 432 40.0%
Profit after tax/(loss) 211 416 97.5% 574 985 71.7%
Net profit margin (%) 14.8% 26.3%   13.0% 19.3%  
No. of shares (m)         47.5  
Basic earnings per share (Rs)          20.7  
P/E ratio (x) *         38.0  
*On a trailing 12 month basis

What has driven performance in 4QFY15?
  • Topline increased by 11.1% YoY in 4QFY15. Management expects to clock 20-25% growth in FY16, 30-35% in FY17 and 35-40% in FY18. It aims to double its topline from about Rs 5 bn in FY15 to about Rs 10 bn in FY18.

  • Operating profits increased 58.3% YoY during the quarter due to fall in raw material costs and technological efficiency which has helped in reducing wastages. The current EBITDA margins of 33% are sustainable in future as per the management.

  • The net profits increased 97.5% YoY on the back of strong operating performance. However, high interest (+54.7% YoY) and depreciation (+107.7% YoY) expenses curtailed profitability growth to an extent. Tax rate for 4QFY15 stood at 25.4% as compared to 34.1% in 4QFY14.
What to expect?

At the current price of Rs 788, the stock is trading at a multiple of 38x its trailing 12 month (TTM) earnings. It may be noted that post the announcement of results, the stock has appreciated by 44% odd. Overall, it is up by about 62% from our recommendation price. Substantial improvement in margins and management's comment over its sustainability has helped re-rate the stock. Over the last 3-4 years, EBITDA margins were in the range of 18-21%. However, since the onset of FY15, the company has registered considerable improvement in margins quarter after quarter. As per management, the current margins of 33% odd in FY15 are very much sustainable into the future as technological efficiency (has cut down time, improved production & reduced wastage) has started yielding results. The launch of its own brand and licensing with private labels in the US is also expected to augur margin growth.

As far as top-line is concerned management expects to double the same in a span of 3 years (i.e. by FY18). No major capex would be required for this as capacity expansion provisions have already been made.

Considering the change in the margin profile of the company we had a re-look at our estimates. However, even after incorporating the best case scenario, there isn't a lot of upside left on the table for investors due to the recent price appreciation. As a result, those investors who have already put 25% of their money into the stock should continue holding on to it and should not buy more at current levels.

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