Garments business to drive growth and profitability for KPR Mills Ltd.
KPR Mill Ltd (KPR) is one of the largest vertically integrated textile players, based on manufacturing capacities in India. It is engaged in the business of Textile (includes manufacturing of Yarn, Fabric and Knitted garments), Sugar (includes sale of Molasses and Co-Gen Power) and others (includes Automobile and Cotton Waste). Textile business constitutes 86% of FY17 revenue (of this Yarn & Fabric contribute 60% and Garments contribute 26%). Sugar contributes 6% and rest of the businesses 8% to FY17 revenue. On a geographic basis, domestic market contributes 62% to FY17 revenue. KPR’s clientele includes ~1,200 regular domestic clients for yarn & fabric and 50 leading international brands for garments. The company has 12 manufacturing facilities (11 in Tamil Nadu and 1 in Karnataka).
KPR has been moving up the textile product value chain so as to de-risk its business model and diversify product offering with an aim to cater to the increasing demand along with tapping opportunities arising in various geographies. The company has expanded its capacity based on the demand arising from Tirupur region and also its clients. It houses hi-tech machinery which gives quality products that help the company command a premium in the market and also develop products which are in-line with the customers taste and preference. Focus on the higher margin garment segment, this currently caters to the export market, will bode well for the company in the long run following a likely pick-up in consumer demand. The company already has its capacity in place and better utilization of the same would help drive revenue and profitability.
Diversified product mix:
To obtain better realizations and enhance EBITDA margins, KPR has started focusing on value added products which command premium prices. The company has all its facilities in close proximity to Tirupur, Asia’s largest apparel manufacturing cluster. The company being present across the entire textile value chain offers are diversified product basket to customers. In addition, with the manufacturing base shifting towards India due to location and cost advantages, provides a large opportunity for textile players. The company has a good product mix and is looking at expanding its client base. We believe KPR is well placed to benefit from this opportunity.
Garment business – next growth driver:
KPR completed a brownfield garment expansion of 10 million pieces per annum (mppa) (investment of ₹25 crore) at its Arasur garment facility (commenced from Jun’14), set up a new garment facility with a capacity of 12 mppa (investment of ₹75 crore) at Thekkalur, near Tirupur (from Mar’15) and has invested ₹175 crore to set up another green field manufacturing facility with a capacity of 36 mmpa (from Apr’16). With this the total garment capacity now stands at 95 mmpa, making KPR one of the largest garment producing corporates in India. With an aim to de-risk itself from the volatility in raw material prices and enter the next growth phase, KPR is focusing on the high margin garment business. At present it caters only to the export market. Better capacity utilization of the garment segment would not only help improve operating margins, but also the future business growth prospects.
Cost control measure could result in stable margins:
Despite the volatility in cotton prices, KPR has been able to maintain better EBITDA margins owing to its investment in green power and good cotton procurement policy (which limits the risk of raw material price fluctuation). KPR has been able to contain the power cost and has also resulted in it being self-sufficient, as its manufacturing facilities are situated in Tamil Nadu which faces lot of power cut. KPR has invested in 66 Wind Mills at Tirunelveli, Tenkasi, Theni and Coimbatore Districts in Tamil Nadu with a capacity of 62 MW and a 30 MW Co-gen power plant in Bijapur, Karnataka having a crushing capacity of 5,000 TCD. EBITDA margins have thus improved from 17% in FY15 to 20% in FY17 and with the probability of stable raw material prices could improve further.
Even though KPR underwent capacity expansion over the last few years (₹500 crore over FY15-17), it has been able to maintain positive cash flow from operations and free cash flow positions. More over the company has maintained stable asset turnover of 1.2x and we expect this could improve with better volumes. In addition, the company has been repaying debt which has improved its balance sheet position further.
Currently, KPR trades at 14.3x P/E on FY19E basis, which is justified given the healthy financials. We believe the stock is a good long term portfolio stock.