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Kitex Garments: Growth momentum continues
Nov 4, 2014

Kitex Garments Ltd (Kitex) has announced the second quarter results of financial year 2014-2015 (2QFY15). The company has reported around 28.1% YoY growth in sales while net profits have surged by 61.2% YoY during the quarter.

Performance summary
  • Sales increase by 28.1% YoY during 2QFY15.
  • Operating profits increase 94.8% YoY during the quarter on the back of strong revenue growth.
  • Net profits increased 61.2% YoY due to strong performance at the operating level. However, a 71.7% YoY rise in interest and a 134.6% YoY rise in depreciation expenses
  • curtailed profitability growth. Interest expenses were high as debt levels increased from March 2014. Depreciation expenses increased due to higher capex.
  • The debt/equity stood at 0.7x at the end of 2QFY15.

Standalone performance snapshot
(Rs m) 2QFY14  2QFY15  Change 1HFY14  1HFY15  Change
Income from operations  1,001 1,282 28.1% 2,006 2,310 15.2%
Expenditure   828 946 14.2% 1,674 1,701 1.6%
Operating profit (EBDITA)  173 337 94.8%  332  609 83.3%
Operating profit margin (%) 17.3% 26.2%   16.6% 26.3%  
Other income  53  53 -0.5%  150 77 -48.8%
Interest  24  41 71.7%  49 77 57.6%
Depreciation  22  52 134.6%  44  102 134.1%
Profit before tax 180 296 64.9% 390 507 29.9%
Tax 60 103 72.4% 140 169 20.4%
Profit after tax/(loss) 120 193 61.2% 250 338 35.2%
Net profit margin (%) 12.0% 15.1%   12.4% 14.6%  
No. of shares (m)         47.5  
Basic earnings per share (Rs)          7.1  
P/E ratio (x) *         35.1  
*On a trailing 12 month basis

What has driven performance in 2QFY15?
  • Topline increased by 28.1% YoY in 2QFY15. The management expects to double the existing capacity from 5.5 lakh pieces per day to about 11 lakh pieces per day over a period of 3 years. This shall catapult Kitex to number one position in infant wear manufacturing world over. For 2HFY15, management has order commitments to the tune of Rs 2.5 bn. For the next year commitments are in the region of Rs 5 bn thereby providing immediate revenue visibility.

  • Operating profits increased 94.8% YoY during the quarter due to healthy topline growth. With cotton prices having fallen, yarn is set to get cheaper. As a result, management expects a better margin performance in the upcoming quarters as the benefit of fall in cotton prices comes with a lag effect.

  • The net profits increased 61.2% YoY on the back of strong operating performance. However, high interest (+71.7% YoY) and depreciation (+134.6% YoY) expenses curtailed profitability growth to an extent.
What to expect?
At the current price of Rs 485, the stock is trading at a multiple of 35.1x its trailing 12 month (TTM) earnings. With an aim to double its capacity over a period of 3 years Kitex is all set to become number one manufacturer of infant wear in the world. The company has already incurred the necessary capex towards the proposed expansion plan and a part of the augmented capacity is likely to get commissioned during the current fiscal (FY15) itself. Further, long standing relationships with big brands (Mothercare, Carter, Gerber etc), focus on quality, and a diversified client mix provides visibility to the business. While the company is all set to ride the outsourcing Megatrend by the virtue of being preferred supplier to big brands, we reckon the valuations are a bit too expensive at 35x TTM earnings. As a result, we maintain our stance of putting the balance 75% money into the stock in the range of Rs 340-370.

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