Garment capex to aid margin improvement… KPR Mills (KPR) :: ICICI Securities, link

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Garment capex to aid margin improvement…
We recently met the management of KPR Mills (KPR) to understand the
demand scenario in the textile industry and the company’s growth plans
for the next few years. KPR is a vertically integrated textile player with a
presence in yarn, fabric and garmenting. KPR’s yarn segment contributes
~48% of revenues whereas fabrics and garmenting segments contribute
14% and 16%, respectively, of FY14 revenues. The company also has a
5000 TCD sugar capacity and 62 MW of wind power capacity. Of the total
revenues, ~72% is from the domestic market with 28% from exports. The
major market for its yarn is Tirupur, which contributes ~70% to its yarn
sales. Revenues have grown at a CAGR of 30% in FY10-14 while the
EBITDA posted growth of 33% over the same period. However, the
EBITDA margin has been volatile ranging from 14% to 23% in FY10-14
owing to volatility of cotton prices and yarn realisations. KPR is planning
to focus on expansion of garment capacity, which is less capital intensive
than the spinning segment and has a higher asset turnover ratio. Also, as
margins in the garmenting segment are usually better and more stable
than the yarn segment, it would reduce the volatility of EBITDA margins
and aid in margin enhancement.
Augmenting garmenting capacity; exports to drive growth
KPR has a capacity of 90000 MT and 27000 MT in yarn and fabric
segments, respectively. The company also has a garmenting capacity of
47 million pieces of garments. KPR is not looking at expanding yarn and
fabric capacity and is currently executing an expansion of garment
capacity to 60 million pieces by FY16E. Further, the company is planning
to add 20 million pieces of garment capacity by FY17/FY18 taking the total
garment capacity to 80 million pieces. The entire garmenting capacity is
for the export market and the company’s major market for garments is
Europe, which contributes ~70% of garment export revenues. KPR has a
strong client base in Europe and caters to ~40 major brands in Europe
and is experiencing steady growth in demand. The company expects
garment revenues to grow ~30% annually in FY15 and FY16.
Debt reduction to improve profitability
Strong cash flow generation has enabled KPR to reduce its long term debt
from | 589 crore to | 448 crore. It further plans to reduce debt by
repaying high cost non technology upgradation fund (TUF) debt of ~| 100
crore that should aid in reducing interest cost and improving profitability.
Also, cotton prices have reduced significantly. This is expected to lead to
lower working capital requirement and a further reduction in interest cost.


LINK
http://content.icicidirect.com/mailimages/IDirect_KPRMill_MgmtNote.pdf