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Kitex Garments: Seasonality factor hurts
Jul 23, 2015

Kitex Garments Ltd (Kitex) has announced the first quarter results of financial year 2015-2016 (1QFY16). The company has reported around 6.1% YoY growth in sales while net profits have increased by 10.6% YoY during the quarter.

Performance summary
  • Sales increase by 6.1% YoY during 1QFY16.
  • Operating profits increase 10.8% YoY during the quarter on account of better cost management and production efficiency.
  • Net profits increased 10.6% YoY due to sharp rise in other income.
  • The merger between Kitex Garments and Kitex Children's wear is on the cards but management did not give any definite timeline to it.

Standalone performance snapshot
(Rs m) 1QFY15 1QFY16 Change
Income from operations 1,028 1,091 6.1%
Expenditure 756 789 4.5%
Operating profit (EBDITA) 272 301 10.8%
Operating profit margin (%) 26.5% 27.6%  
Other income 24 59 142.3%
Interest 36 48 34.2%
Depreciation 50 55 8.2%
Profit before tax 210 258 22.7%
Tax 66 98 49.1%
Profit after tax/(loss) 144 160 10.6%
Net profit margin (%) 14.1% 14.6%  
No. of shares (m)   47.5  
Basic earnings per share (Rs)   3.4  
P/E ratio (x) *   37.8  
* On trailing 12 month basis

What has driven performance in 1QFY16?
  • Topline increased by 6.1% YoY in 1QFY16. Growth was a bit subdued as first quarter is generally a lean period. Management expects to clock 15-20% growth in FY16, with a target of Rs 6 bn. It aims to double its topline in about 3 year's time.

  • Operating profits increased 10.8% YoY during the quarter. However, margins were more or less flat on a YoY basis, albeit showing minor improvement.

  • The net profits increased 10.6% YoY on the back of strong operating performance and 142.3% YoY rise in other income. However, high interest (+34.2% YoY) and depreciation (+8.2% YoY) expenses curtailed profitability growth to an extent. Tax rate for 1QFY16 stood at 38.1% as compared to 31.4% in 1QFY15. Management gave a guidance of 35% for the year.
What to expect?
At the current price of Rs 797, the stock is trading at a multiple of 37.8x its trailing 12 month (TTM) earnings. It may be noted that post the announcement of results, the stock has fallen by 20 odd percent. However, overall, it is up by about 62% from our recommendation price. Single digit growth in the first quarter was presumably the reason why the stock price corrected recently. However, it may be noted that the first quarter is generally a lean quarter while fourth one is the best when it comes to revenue bookings. Further, management stated that revenue growth in FY16 is likely to be in the region of 15-20% thereby evading any growth concerns that emanated from poor performance in the first quarter. Also, no major capex would be required to fund this growth as capacity expansion provisions have already been made.

Going forward, margins are also expected to improve a bit as technological efficiency (has cut down time, improved production & reduced wastage) is expected to start bearing fruits. The launch of its own brand and licensing with private labels in the US is also expected to augur margin growth.

Thus, we do not foresee any material challenges to growth or margins going forward. Nonetheless, considering the sharp appreciation from our recommendation price those investors who have already put 25% of their money into the stock should continue HOLDING on to it but should not BUY more at current levels.

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