An integrated model, increased capacities and a larger share of high margin garments will help KPR Mill grow and combat margin pressure.
Readers would agree with Jean Jacques Rousseau, who said that “patience is bitter, but its fruit is sweet”. For every company, the period of expansion is similar to that of ripening of a fruit, thereby demanding that investors be patient.
But while the Tamil Nadu-based textile manufacturer, KPR Mill undergoes this period of sweet-bitter agony, investors have shown little patience towards the stock, which is quoting at less than half its IPO price of Rs 225.
Better operational efficiency, new capacities going on-stream over the next couple of quarters and a greater contribution from high-margin products, warrants a re-look at this growing textile company.
Business
KPR Mill is one of the largest players in the knitted garment space in southern India, with integrated operations of yarn, fabric and apparel manufacturing.
The company sells yarn and fabric in the domestic market, while the entire garment output is exported mainly to European countries; about 70 per cent of the export sales is denominated in Euro, while the balance 30 per cent in US dollar.
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It has a diversified customer base of over 35 international apparel retailers including Carrefour, C&A, Kiabi, Mother Care and Innovations Club with the top 10 clients accounting for about 40 per cent of export revenues.
Exports comprised of 26 per cent of total sales in FY08, but that number is set to change, with the phase-one of its expansion plan already complete.
Expansion
The company embarked on an expansion-cum-modernisation programme in 2006 to set up a new integrated unit at Arasur, Coimbatore in two phases.
Under the first phase, the company invested Rs 541 crore and doubled its yarn capacity to 2.12 lakh spindles, increased its garmenting capacity from 12 million pieces per annum (pa) to 38 million pieces pa and added 19.8 MW of wind-power capacity (raising total power generation capacity to 39.07 MW).
A new facility with a fabric processing capacity of 23 tonne per day (tpd) was also set up at SIPCOT, Perundurai. While the capital expenditure on phase-one was funded from mix of debt, internal accruals and pre-IPO proceeds of about Rs 52 crore, phase-two capex of Rs 122 crore is being funded from the IPO proceeds, it raised in August last year.
Under phase two, the company is increasing its knitted fabric capacity to 17,200 metric tonne (mt) and doubling its fabric processing capacity to 46 tpd.
The second phase also includes setting up a design studio, which will not only enable the company to broaden its product profile, but also work closely with its clients for producing new designs.
Lastly, the company plans to operate its garment capacity on a dual shift basis, which will increasing the garmenting capacity by another 26 million pieces to 64 million pieces.
The company completed phase-one in Q4 FY08 and has already commissioned the new knitting facility and the design studio (in June 2008). The full benefit of the expansion plans will be seen by the start of FY10.
Post expansion, although the contribution from exports would increase to about 40 per cent of the total revenue, US dollar denominated exports would comprise of 10-12 per cent of the total revenue, thereby limiting any threat regarding rupee’s appreciation against the US dollar.
Strategic moves
KPR is an efficient textile manufacturer, thanks mainly to lower power and staff costs, and its raw material procurement strategy.
The company has 39.08 MW of windmills capacity, which supports 75 per cent of its total power requirement and, notably at a cost-efficient price of Rs 1.5 per unit. At about four per cent of sales (industry average of 9-11 per cent), KPR has one of the lowest power costs in the industry.
On the employee front, its business model is such that the compensation is fixed at the start of the employment contract, which expires every three years. Most of the 7,500 workers in KPR Mill are women in the age group of 18-21 years.
The company provides lodging and boarding to its workers, and also other amenities like higher education, yoga, swimming pool, etc. This model not only keeps a check on the staff costs (five per cent of the revenue vis-à-vis industry average of 10-12 per cent) but also results in low attrition rate and higher productivity.
Thirdly, the company procures its key raw-material, cotton, during the peak season (October-March) when the quality is typically best and the prices are low.
In the last one-year, the cotton prices have become dearer by 32-35 per cent. “This will surely have an impact on KPR like other textile companies. However, because of its unique low-cost model, KPR is relatively better placed as compared to its peers,” feels Darshan Singh Bagga of Prime Broking.
Thanks to the removal of import duties (about 14 per cent) on cotton since mid-July 2008, imported cotton has become cheaper than the domestic cotton by Rs 3,000 per candy (356 kgs). The company has already placed orders to import cotton from South Africa and Uzbekistan.
Investment rationale
In the last couple of years, the textile industry has been plagued with issues like appreciation of rupee and stiff competition from countries like China, Pakistan and Bangladesh.
This had impact on KPR’s financials too, with its revenue and earnings increasing at a modest CAGR of 17 per cent and 12 per cent, respectively over FY06-FY08. What is notable is the company’s operating margins (above 20 per cent), which are superior compared to that of its peers (Vardhman Textiles: 16 per cent and RSWM: 8.1 per cent in FY08).
| STRONG NUMBERS | |||
| Rs in crore | FY08 | FY09E | FY10E |
| Net sales | 574.0 | 837.1 | 983.5 |
| Net profit | 79.3 | 85.4 | 105.2 |
| OPM* (%) | 22.7 | 21.0 | 20.7 |
| NPM (%) | 13.8# | ||
* Operating profit includes export incentives
# Low tax outflow due to MAT Credit Entitlement
The company is all set to consolidate its position as an integrated textile player with the completion of its expansion plans. Its current debt-equity ratio of one is also poised to come down in the next couple of years, as the company uses its cash flows to repay debt (a low effective interest rate of 4 per cent nonetheless places KPR in a comfortable position).
With support from new capacities, the company’s revenue and earnings are expected to grow at a CAGR of 31 per cent and 15 per cent, respectively over FY08-FY10E.
Despite firm cotton prices and stiff competition in the industry, the company should at worse experience a marginal dip in its margins, on the back of economies of scale, backward integration in processing and change of revenue mix in the favour of high-margin apparel segment (proportion of garments as a percentage of sales will increase from 26 per cent in FY08 to about 40 per cent by FY10).
At Rs 102.8, the stock trades at a P/E of 4.5x and 3.7x its FY09E and FY10E estimated earnings. Investors can expect returns of 25-30 per cent over the next 12 months.