Kitex Garments Fundamental Analysis: Weaving international dreams

With rise in world population, there is a growing demand for garments for infants and other fabric products. Rise in income levels and improvement in lifestyle has created a demand for good quality infant garments, especially among parents with good disposable income.

Kitex garments Limited, a Kerala based garments company is in the business of manufacturing and exporting infant garments to countries like USA, Canada and Europe. It is the third largest infant apparels manufacturer in the world. Company’s target market is new born babies from 0-2 years. Key clients for the company are, Mothercare, Toys R us, Gerber, Carters, Jockey, Children’s Place and Kohl’s.

Revenue:

Majority of company’s revenue comes from USA (90%) and Europe (10%).

Company is engaged in manufacturing of garments and fabric. Company has two revenue segments; one is garments, which constitutes 87% of the revenue of the company while fabrics constitute only 13% of the company’s total revenue.

Let’s take a look at company’s financial ratios and analyze its fundamentals

Basic EPS:

Basic EPS is a measure of how much profit a company is making on per share basis. In other words, it’s a measure of how much money each share of the company will receive if all the profits earned during the year is distributed to its shareholders.

Company’s Basic EPS has become almost ten times in the past ten years. Kitex Garments’ Basic EPS in 2007 was Rs. 2.01 per share which, in 2016 is at Rs. 23.6 per share, a growth of almost 28% CAGR per year. In the last 5 years, company’s basic EPS has seen a growth of 32.82% CAGR per year. This shows that Kitex garments has seen a growth at a faster rate in the past 5 years than in the last decade.

Cash EPS:

Cash EPS is a measure that looks at how much cash flow the company has generated during the financial year. Cash EPS shows how much cash the business is generating in a year. Cash EPS not only includes Cash received by the business for the products sold or services provided, it also includes any upfront payments, such as cash advance received by the business.

Company’s Cash EPS has also seen a good growth in last ten years. Company’s Cash EPS in the year 2007 was Rs. 2.42 per share and in 2016 Cash EPS of the company was Rs. 28.08 per share, a growth of 27.78% CAGR. In the past 5 years, company has seen a growth of 31.47% per year in its cash EPS. This shows company is generating more cash every year than its previous years.

Revenue from operation/Share:

Revenue from operations is a measure of how much revenue a company is generating from its core business. Revenue from operations does not include income from non operating activities such as sales of assets, sale of subsidiaries, income from investments made etc. Revenue from operations/share measures how much revenue a company is generating from its core business on per share basis.

Company’s revenue from operations has seen a stellar growth in recent years. In 2007, Company’s Revenue from operations per share was Rs. 34.14 per share, and in 2016 the Revenue from operations was Rs. 114.9 per share, a growth of almost 13% CAGR per year. In the past 5 years, company’s Revenue from operations on per share basis has improved further, and has seen a growth of 26.42% CAGR per year.

Net Profit Margin:

Net Profit margin is the key ratio which is used to compare profitability of two or more companies working in the same sector. Net profit margin is a measure of how much percentage of total sales remains with the company as profit after all the expenses are paid.

Kitex garments has not only kept its net profit margins high, but it has also improved them in the past decade. In 2007 company’s Net profit margin was 5.89% while in 2016; it improved to 20.13%, a growth of 13.08% CAGR per year. In the past 5 years, company’s Net profit margins have seen further growth of 18.29% CAGR per year. Company’s management hope to improves its margins in the future as it launches its own infant brand “Little Star” in USA, targeting mass market.

ROCE:

ROCE or Return on Capital Employed, is a measure of how efficiently the capital of a company is being used to generate profit. ROCE is expressed in percentage terms. A company with ROCE of 20% means out of every 100 rupees employed as capital, company is able to make a return of rupees 20.

Company’s ROCE has seen a decent growth in the past decade. While in 2007, ROCE of Kitex Garments was 9.87%, in 2016, it shot up to 27.96%, a growth of almost 11% CAGR per year, a proof that company is able to generate better returns on its employed capital. In the past 5 years Company’s ROCE has been almost stable, showing a growth of 4.1% CAGR per year.

Debt/Equity:

Debt to equity ratio tells us how much of the total financing of the company comes from creditors (those who lend money at an interest) and investors (those who invest in the shares of a company). Higher debt to equity ratios is an indication that majority of company is financed by loans and other debt (such as debentures and bonds)

Kitex Garments has significantly reduced its debt in the last decade. In 2007, company was deep in debt with debt/equity ratio of 5.14, which means company had 5 times debt compared to its equity, a level which is unsustainable in the long term. In 2016, Kitex Garment has pared down its debt levels to comfortable 0.25 times its equity. Low debt combined with high net profit and ROCE, is an indication of strong business performance.

Dividend Percentage to Net Profit:

The dividend payout ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the year. In other words, this ratio shows the portion of profits the company decides to keep to fund operations and the portion of profits that is given to its shareholders.

Kitex garments dividend Percentage to Net Profit has been stable for the past ten years. In 2007, company paid 7.45% of its Net Profit as dividend. In the year 2016, the percentage remained almost unchanged to 6.35%. However, Company’s dividend per share has seen a good growth in the past 5 years.

Dividend/Share:

Dividend per share is the amount of dividends a shareholder receives on per share basis. Dividend per share includes all the interim dividends paid during the financial year as well as the final dividend paid at the end of the financial year. Dividend per share is calculated by dividing total dividends paid during the year from total number of shares outstanding.

Kitex Garment is currently in its growth phase; however company has been a generous dividend payer. In 2007, company paid a dividend of Rs 0.15 per share but in 2016 the ratio improved significantly to Rs. 1.5 per share.

Future Expansion Plans:

Company has recently entered licensing agreement with Lamaze International for supply of Infant wear in USA and Canada under Lamaze brand targeting kids up to 5 years of age.

Kitex Garments Limited is also launching its own brand “Little Star” in 2016 in US via online route. The brand will be targeting mass market in infant wear.

What makes Kitex Garments a great investment?

•         Company has no debt on its books
•         Company has delivered strong financial performance in the past ten years
•         Company is third largest manufacturer of infant wear in the world
•         Children’s wear market is the most profitable in global apparel industry
•         Company has some big clients in its portfolio such as Toys R Us, Mothercare, Jockey, Caters, Gerber and Kohl’s.
•         Company’s continuous Research and development as well as expansion in capacity will boost earnings.
•         Strong Dollar will boost Company’s revenues
•         With visible recovery in the US economy, company will see a growth in size of orders from US because there will be higher demand for infant clothing as the income of young parents rise.