L G Balakrishnan & Bros Ltd

March 31, 2014

Key Stock Indicators

BSE Code 521248 NSE Code KITEX

Reuters Code KITE.NS Stock Beta 1.2643 Price (Rs) as on 22

TH June 2015 895

Equity Capital (Rs Cr) 4.75 Face Value (Rs) 1.00 Market Cap (Rs cr.) 4725

Book Value (Rs) 55.55 Avg. Volume (52 Week) 186,385

52 wk H/L (Rs) 1074/219.10 Shareholding Pattern Shareholding Pattern Shareholding Pattern Shareholding Pattern

(As on Mar 31, 2015) % Holding Promoters 54.24 Institutions 14.27 Non Institutions 31.49 Total 100.00

Kitex Garments Ltd (Kitex), incorporated in the year 1992, is an India based company engaged in the manufacture of fabric

and readymade garments. Its products are readymade garments. It operates in two segments: Garments and Fabric.

CATALYSTS FOR GROWTH

Eyeing organic and inorganic growth through expansion into newer geographies. In final stage of a brand launch and tie-up

with US brand.

Investment in capital expenditure may yield excess return.

Sustained operating margins.

KEY RISKS

Client concentration risk

Increase in input costs, especially that of cotton yarn

Rupee appreciation to impact margins.

RECOMMENDATION

We believe that KITEX will be able to sustain its operating and profit margins throughout our forecasted period. With strong

and experienced promoters, strong margins and its planned expansion plans, we are recommending a BUY on the stock at the

CMP (31.24xFY17E EPS) for a target of Rs.1250 (44.5x FY17E EPS of Rs.28.10) over the next 1 year.

FY 2014 FY 2015 FY 2016 E FY 2017 E

Total Income 455.55 524.52 610.54 710.67

EBITDA 108.48 182.16 224.25 275.24

EBITDA margin 23.81% 34.73% 36.79% 38.69%

EBIT 98.8 160.83 187.21 217.91

Net Income 57.37 98.52 114.68 133.48

NET margin 12.59% 18.78% 22.66% 21.35%

EPS 12.08 20.74 29.13 31.94

PE 10.76 31.34 30.31 27.64

July 22, 2015

KITEX GARMENTS Ltd.

Research Analyst VINAY GOWDA Aditya Trading Solutions vinayaka@adityatrading.com 080 4356 1171 / 9900778510

BUSINESS OVERVIEW

Kitex Garments Ltd. key Products/Revenue Segments include

Garments contributed Rs 479.02 Cr to Revenue (93.72% of Revenue),

Duty Drawback received contributed Rs 29.12 Cr to Revenue (5.69% of Revenue),

Other Operating Revenues contributed Rs 1.21 Cr to Revenue (0.23% of Revenue),

Scrap sales contributed Rs 1.05 Cr to Revenue (0.20% of Revenue),

Job Work contributed Rs 0.69 Cr to Revenue (0.13% of Revenue), for the year ending 31-Mar-2015.

KEY HIGHLIGHTS

Credit rating agencies upgraded its term loan programme to AA- (43.02 Cr) and Short term debt to A1+ (20 Cr).

Key Ratios 2011-03 2012-03 2013-03 2014-03 2015-03

Debt-Equity Ratio 1.38 1.23 0.92 0.79 0.67

Long Term Debt-Equity Ratio 0.65 0.17 0.04 0.11 0.13

Current Ratio 0.85 0.84 0.93 1.04 1.27

Interest Cover Ratio 3.1 3.14 4.35 8.16 7.7

(Source: ICRA, ATS Research)

Kitex is planning to reduce debt in its capital structure, aims to reduce to zero in coming years.

Interest coverage ratio is at 7.7 far above its peers. We believe that reduction of debt will further improve this ratio.

It is blessed with substantial benefit from duty drawback (≈7%).

It plans to invest around Rs.100 Cr over the next 3 years for expansion inorganically by acquiring smaller brands in US or organic route. Majority of it will be funded by raising debt.

Management

Name Designation

Sabu M Jacob Chairman & Managing Director

Benni Joseph Director

C Mohan Director

Erumala Mathew Paulose Director

K L V Narayanan Director

A Babu Company Secretary

Sindhu Chandrasekhar Whole-time Director

94%

6%

0.23%

0.20%

REVENUE DISTRIBUTION

Garments

Duty Drawback

Other Operating Revenue

Scrap

INVESTMENT RATIONALE

Kitex has consistently reported CAGR of above 25% over the past years. However over the next 4-5 years we believe company will growth at 16.81% before attaining saturation growth

of 9% thereafter.

Capital Expenditure may yield excess return: Company is increasing capital expenditure of 100 Cr over next 3 years and majority of this is expected to be funded by debt. The capex is

distributed equally over three year’s time horizon for simplicity. It is expected to create growth assets which will increase the new worth of the company. EPS growth is substantially

reduced because of this reason.

For valuation purpose we have considered the changing capital structure for analyzing growth and discount rate. We also made assumption that company over the long run intend to

finance 100% equity. Debt free will attract more DII and FII inflow but also company will lose tax advantage because interest expenses are tax deductable. We presume tax over next

few years will be constant and Forex fluctuations are subtle.

Expansion to US and Europe: Company wants to enter other markets organically an inorganically. News articles suggest that Kitex is in final talks with a US based firm for its tie-up to

launch new brands. If rupee depreciates even further, this will boost exports and profits significantly. Forex net earnings increased 54.15% from Rs. 231.85 Cr last year to Rs 357.4 Cr

this time.

In 2-3 years, Kitex will look at having two to three private labels and an own brand. Given the popularity of the private label (well-known toys brand in the US), management believes

that it will not have to invest significantly in brand promotion. It expects additional capacities to be devoted exclusively towards private label and the own brand. In five years time,

management targets to have 100% of revenue from direct sales, thus transitioning it into a complete B2C player.

VALUATION

We at ATS Research, expecting its revenue to grow at 16.81% CAGR and even greater 27% CAGR in net profits over FY15 to FY 18 driven by greater operational efficiencies owing to

integrated operations and scale selected benefits. Improvement in execution, stabilization of margins, peaking of working capital cycle and cash flow improvement to remain key

drivers for the stock. Company has sustained EBIDTA margin of 45.09% and Net margin of 28.19%.

We value Kitex at Rs. 2549.11 Cr, Rs. 1172.84 per share using DCF valuation (Free Cash Flow to the Equity). Currently stock is trading at Rs. 895 per share. We believe the stock could

touch levels of Rs.1250 a year from now. Kitex is trading at 10-12% discount with its top competitors using PE valuation method.

Technical analysis suggests stock price may wave from 895 to 1120 in the medium term.

We recommend BUY at CMP of 895. One can hold on to the stock for a year or odd to avail 30-35% returns.

INDIAN TEXTILE INDUSTRY

The Indian textiles industry, currently estimated at around US $108 billion, is expected to reach US $ 141 billion by 2021. India has the second largest manufacturing capacity globally.

The textile industry accounts for about 24% of the world’s spindle capacity and 8% of global rotor capacity. India holds a strong production base of a wide range of fiber/yarn from

natural fibers like cotton/jute, silk and wool to synthetic/ man-made fibers like polyester, viscose, nylon an acrylic.

India enjoys comparative advantage in terms of skilled manpower and cost of production over major textile producers. There is also increased penetration of organized retail, favorable

demographics and rising income levels to drive textile demand.

7 Million Tones of FBP in 2013-14.

2nd largest textile manufacturer in the world.

2nd largest producer of silk and cotton.

The textiles sector has witnessed a spurt in investment during the last five years. The industry (including dyed and printed)

attracted foreign direct investment (FDI) worth US$ 1,522.51 million during April 2000 to December 2014, has helped industry

to absorb pain it had over years due to lack of effective policy, irregularity of monsoon in India, etc.

Major growth drivers include

Rising per capita income

Favorable trade policies and superior quality will drive textile exports

Favorable policies instituted by the government. Indian government has introduced “Skill India”; the integrated skill development scheme aims to train over 2.675 million people

up o 2017, covering all sub-sectors of the textile sector – textile and apparel, handicrafts, handlooms, jute ad sericulture.

100% FDI is allowed under the automatic route in the textile sector.

INVESTMENT RISKS

80% of the revenue comes from top 4 clients. Change in demand from these companies could impact Kitex’s revenue.

Rupee appreciation will impact negatively impact export margins.

US economic growth has been revised up to 3.6% largely due to more robust private domestic demand. Slow down in US will bring down demand for goods and Kitex which is

export oriented company will lose revenue.

China, Europe, Japan along with the U.S. (the four largest economies in the world) will largely determine the direction of the global economy through the rest of this year and into

2016. We have already seen slow down in China. Favorable policies from Chinese government to boost their economy could impact export oriented companies in India.

Source:IBEF

FINANCIAL PROFILE

Kitex Garments Limited is in the business of manufacturing and exporting garments. The Company manufactures different types of garments, such as hosiers, shirts, pants, jackets,

innerwear and outerwear. The company also exports infant and children’s wear, and jackets to the United States. Kitex Garments Limited is based in Kochi, India.

Kitex Garments Ltd. was incorporated in 1992. It made its public issue in the year 1995. It is promoted by Boby M Jacob, Kitex Exports Ltd, Sabu M Jacob and Somy Varghese.

During the fiscal year ended March 31, 2010, the export sales mainly consisted of infant and children's wear and jackets intended for the United States market.

Kitex is a part of the larger Anna-Kitex Group, which has diversified interests in aluminium vessels, home appliances, spice trading and textiles. It has a fully integrated manufacturing

facility at Kizhakkambalam (Kerala) with a facility to manufacture 2.2 lakhs pieces per day and a fabric processing capacity of 42MTPD. It also supplies fabric to group entity Kitex

Children’s wear Limited, which in turn holds 15.47% in the Company as on 30.06.2014. Kitex is listed both in the NSE and the BSE.

The company has reported Net sales of Rs. 479.02Cr, up 19% from last year Sales of Rs. 402.8 Cr. For the quarter ended 31-June-2015, sales grew 6.78% from last year same quarter of

Rs. 105.2 Cr to Rs. 114.98 Cr. Company has reported net profit after tax of Rs. 15.98 Cr and EPS stands at Rs. 3.36 in latest quarter.

4.345.71 6.19

12.08

20.77

24.14

2011 2012 2013 2014 2015 2016

EPS

261.34

318.35 321.01

455.55

524.52

610.54

50.6 64.59 64.14108.48

182.16212.03

20.63 27.17 29.3857.37

98.52 114.48

2011 2012 2013 2014 2015 2016

Revenue EBIDTA PAT

RETURN

NIFTY v/s KITEX

INCOME STATEMENT Yearly FY 2013 FY 2014 FY 2015 FY 2016 E FY 2017 E

Total Income 321.01 455.55 524.52 610.54 710.67

Total Expenditure 256.87 347.07 342.36 386.29 435.43

EBITDA 64.14 108.48 182.16 224.25 275.24

Interest 11.47 10.62 19.16 22.30 25.96

PBDT 52.66 97.87 163 189.73 220.85

Depreciation 8.62 9.68 21.33 24.83 28.90

PBT 44.04 88.19 141.67 164.90 191.95

EBIT 55.52 98.8 160.83 187.21 217.91

Tax 14.66 30.82 43.15 48.84 66.18

Reported Profit After Tax 29.38 57.37 98.52 138.36 151.73

EBITDA margin 19.98% 23.81% 34.73% 36.79% 38.69%

NET margin 9.15% 12.59% 18.78% 22.66% 21.35%

EPS 6.19 12.08 20.74 29.13 31.94

PE 10.76 31.34 30.31 27.64

Disclaimer: This report is only for the information of our customers. Recommendations, opinions or suggestions are given with the understanding that readers acting on this

information assume all risks involved. The information provided herein is not to be constructed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not

as assume any responsibility or liability resulting from the use of such information

INCOME STATEMENT Quarterly 1st Qtr 201406 2nd Qtr 201409 3rd Qtr 201412 4th Qtr 201503 1st Qtr 201506

Net Sales 96.18 120.95 114.2 147.69 96.83

Other Operating Income 6.58 7.25 7.9 10.34 12.25

Other Income 2.43 5.26 5.1 0.63 5.9

Total Income 105.2 133.46 127.19 158.66 114.98

Total Expenditure 75.56 94.55 80.18 92.07 78.93

EBIDT 29.64 38.91 47.02 66.59 36.74

Interest 3.56 4.11 6.55 4.95 4.77

EBITDA 33.2 43.02 53.56 71.54 36.74

Depreciation 5.04 5.18 5.28 5.83 5.46

PBT 21.04 29.63 35.18 55.82 30.59

Tax 6.6 10.31 12.05 14.19 9.84

Reported Profit After Tax 14.44 19.32 23.13 41.63 15.98

No of Shares 47500000 47500000 47500000 47500000 47500000

EBITDA margin 30.82% 32.17% 41.17% 45.09% 37.23%

NET margin 15.01% 15.97% 20.25% 28.19% 16.50%

EPS 3.04 4.07 4.87 8.76 3.36