KPR Mills - Well placed to ride the Textile Boom in India.

Summary

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• KPR is one of the largest Yarn Manyfacturer of India and produces various ranges of Counts of yarn
• The Diversification into the Sugar business has played out well but the entry to Automobile business has become a Diworsification
• The fundamentals of the company is solid and is available at a fair valuation

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Indian Textile Industry Outlook:

The Indian textiles sector is one of the oldest industries in the Indian economy, dating back to several centuriesand the industry is extremely varied, with hand-spun and hand-woven textiles sectors at one end of the spectrum, while the capital-intensive sophisticated mills sector on the other end. The decentralized power looms/ hosiery and knitting sector forms the largest component in the textiles sector.

Market Size

India’s textiles industry contributed 7% to the industry output (by value) in 2018-19. The Indian textiles and apparel industry contributed 2% to the GDP, 12% to export earnings and held 5% of the global trade in textiles and apparel in 2018-19. and the share of the India’s textiles and apparel exports in mercantile shipments was 11% in 2019-2021.TheTextiles industry has around 4.5 crore employed workers including 35.22 lakh handloom workers across the country. Cotton production is expected to reach 36.0 million bales and consumption is expected to reach 114 million bales in FY21—13% growth over the previous year.Exports of textiles (RMG of all textiles, cotton yarn/fabs./made-ups/handloom products, man-made yarn/fabs./made-ups, handicrafts excl. handmade carpets, carpets and jute mfg. including floor coverings) stood at US$ 2.94 billion, as of May 2021.  

Investment

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$ 3.75 billion from April 2000 to March 2021 and in May 2021, Indo Count Industries Ltd. (ICIL), announced an investment of Rs. 200 crore (US$ 26.9 million) to expand its production capacity.

Government Initiatives

Indian government has come up with several export promotion policies for the textiles sector. It has also allowed 100% FDI in the sector under the automatic route.

Initiatives taken by Government of India are:

• In April 2021, Union Minister Smriti Irani has assured strong support from the Textile Ministry to reduce industry’s dependence on imported machine tools by partnering with engineering organisations for machinery production. 

The scheme aims to develop Man Made Fiber (MMF) apparel and technical textiles industry by providing incentive from 3-15% on stipulated incremental turnover for five years.

• To support the handloom weavers/weaver entrepreneurs, the Weaver MUDRA Scheme was launched to provide margin money assistance at 20% of the loan amount subject to a maximum of Rs. 10,000 (US$ 134.22) per weaver. The loan is provided at an interest rate of 6% with credit guarantee of three years.

• Under Union Budget 2020-21, a National Technical Textiles Mission is proposed for a period from 2020-21 to 2023-24 at an estimated outlay of Rs. 1,480 crore (US$ 211.76 million).

 

About K.P.R. Mills Ltd.

KPR is a leading business conglomerate in India, which is engaged in textiles, sugar, ethanol, power generation, Automobiles and Education with over 24,000 dedicated workforces. “Textiles” is its core business, wherein it is vertically integrated, with a presence across the entire value chain from the manufacturing of cotton yarn to processed fabric and ready garments. KPR has earned a great deal of experience over the last 40 years to produce an indelible mark in the textile landscape. KPR Manufactures an impressive product range of textile varieties such as Readymade Knitted Apparel; Fabrics; Compact, Melange, Carded, Polyster and Combed Yarn. It reaches out to global customers with diligence, superior quality and delivery excellence. KPR is one of the largest exporters (in volume terms) of knitted garments from India with a capacity of 115mn pcs/annum. Going forward, it plans to augment its capacity by another 42mn pcs/annum.  In order to leverage its knitting manufacturing expertise and expand its B2C business, it has recently launched a new innerwear and athleisure brand FASO (first of its kind 100% Organic cotton Menswear). The 'K.P.R. Mill Limited' has 12 Manufacturing units of advanced technology equipped with a capacity to produce 1,00,000 MT of yarn per annum; 40,000 MT fabrics per annum; 115 million ready-made knitted apparel per annum, one of the largest Garment Producers in India.

Industry acclaimed ETP embedded Fabric Processing capacity of 25,000 MT per annum equipped with Advanced Cold Processing Technology and Sophisticated Printing Division with a capacity to print 7500 MT per annum; 1,100,1000 High Fashion Garments placement printing per day; 66 Wind mills with a total green power generation capacity of 61.92 MW. Co-gen Cum Sugar Plant with a capacity of 40 MW & 10,000 TCD and Ethanol Plant with 130 KLPD capacity. Prompted by the growth prospects, KPR is expanding its Garment and Sugar based Ethanol Capacities. KPR, built on fabulous values has been continuously adjudged as one of the Top 500 Listed Companies and Top 100 CEO's in India.

Talking about the Brand FASO

''FASO'' is the key brand of the company, the entire FASO products are manufactured with 100% Organic Cotton, super fine compact yarn, and super soft micro nylon elastics with the best workmanship. These key factors ensure ultra-soft comfort and skin friendly. It is currently offering 43 styles, mix of inner wear & athleisure and planning to add some more styles during the current year. FASO is now available in all major locations of Tamil Nadu, Kerala, Andhra Pradesh, Telangana and Karnataka (34 distributors and 2000 retailers). It is also available in some of the Hyper Market and through online in Amazon, Myntra, Ajio, Flipkart, Shoppers stop (online), Fynd & faso.in. The Company is planning to widen its reach gradually. It is planning to launch Faso in North East market during the second Quarter of FY22.

Below are the details of following Wholly Owned Subsidiary Companies
QUANTUM KNITS PVT. LIMITED K.P.R. SUGARMILL LIMITED JAHNVI MOTOR PRIVATE LIMITED GALAXY KNITS LIMITED KPRSUGARANDAPPARELS LIMITED KPR EXPORTS PLC KPRMILL PTE. LTD.   Revenue Distribution
The company exports to over 60 countries, its major export destinations are UK, China, Australia and USA. Top 5 export destinations contribute ~62% of total exports
Financials   Let’s look at the CAGR Growth rate 5 years - CAGR Growth (%)   10 years - CAGR Growth (%) Sales 6   Sales 12.21 EBITDA 8.07   EBITDA 12.70 PAT 12.40   PAT 21.74 EPS 13.97   EPS 22.32   EBITDA has grown at a much higher rate than the Sales, which means the company has made great efforts in reducing their operational Expenses thus increasing the Operating Margins   Operating Profits Vs. Cash Flow Company is able to extract around 80% – 85% Cash from Operating Profits. IF we look at the 5years chart 70% cash is been collected, which signifies company has no major issues in collecting cash. Ratios: If we check the debtor days are reducing, which is a positive sign. ROE is the highest at 25%. Only the Cash Cycle and Working days needs to be worked on.   Peer Comparison -   KPR is trading at fair valuations consider the PE and PEG ratio. Rest all numbers are decent enough.   Some Factors that will act as Tailwinds to the Company’s Growth: KPR is one of the largest captive power generators in the textile Industry. The company has invested in eco-friendly windmills at Tirunelveli, Tenkasi, Theni and Coimbatore districts in Tamil Nadu with the total wind power capacity of 61.92 MW meeting 60% of the company’s textile power requirement.   Further, it has invested in a 40 MW Co-Gen Power Project.  The company has installed windmills, which have a total generation capacity of 61.92MW of green power, for captive consumption at Tamil Nadu, in order to become 75% self-reliant with regards to power requirements. This investment helps it reduce its power costs and improve the margin.    KPR has successfully established an ethanol plant with a capacity of 90 KLPD at a sugar factory in Karnataka. Ethanol’s full-fledged commercial operation has already started in the current fiscal.  The company is planning a capex of Rs.500 crore by setting up a sugar (10,000 TCD) and ethanol plant (230 KLPD). The existing sugar ethanol capacity has a revenue potential of ~Rs.550 Cr and further 50 Cr of revenue contribution is expected from the new capacity.   Global companies have stepped up efforts to implement the ‘China Plus One’ strategy of diversifying their supply chains. This provides a chance for India to emerge as a global manufacturing hub. KPR being one of largest garment exporters from India is likely to benefit out of this. Potential Risks: Worsening Situation in Ethiopia [here, KPR has its wholly owned subsidiary KPR EXPORTS PLC In Ethiopia again the unrest has started there due to political conflicts. Again the militants have captured that area as the war is going on there. Management is planning to bring back the machinery. They have hardly invested about $2 million there. There are sewing machines, cutting machines and garment machinery only which can be used in the existing factory.   In the raw material consumption basket of the Indian textile industry, the proportion of cotton is around 60%. Any significant volatility in cotton prices can impact the operating margins of the company. KPR usually books the cotton price at the time of signing the contracts with the clients, thereby mitigating its exposure to raw material price volatility.   The outbreak of COVID-19 pandemic has impacted the sale of Automobile manufacturers across the country due to which its automobile Segment showed degrowth of approx. 47% compared to last year.  Also, this year the Company could sell 51 Audi Cars and 31 Harley Davidson Motor cycles earning total revenue of INR 50.47 Crores, but Harley Davidson has announced its closure of production activities in India w.e.f. Sept 2020. This might affect the revenues from this segment in the near future.   Any change in government policy towards interest subsidy on term loan for ethanol capacity and ethanol blending can impact the performance of its sugar and ethanol business.  Increasing exposure to sugar business (which is a cyclical commodity business) could impact the valuations that KPR attracts.   Expansion Plans Responding to the market demand, company is expanding its garment capacity by establishing a new factory near Tirupur, with a capacity to produce 42 million garments per annum; almost the largest among the factories that KPR already has.  Upon implementation, the total garment capacity of KPR will reach 157 million garments per annum, by strengthening its ranking as one of the largest Garment Manufacturers in India.

Conclusion

The company to benefit from its 

• Strong balance sheet [increasing Reserves & Cash and decreasing Debts

• Longstanding relationship with marquee Indian and global clients

• Fully integrated presence from manufacturing yarn to garments, and 

• Investment in captive power plants. 

Also, the company’s new venture in B2C branded innerwear segment, the recent commissioning of its ethanol facility, and the expansion of garmenting capacity by 42mn pcs/annum lend it strong growth visibility. Its competitive advantages, integrated operations, focus on value-added products, and strong balance sheet remain the key triggers.

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Stock Disclosures:

The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Author Disclosures:

This Article represents the Author's own personal views. The Author did not receive any compensation and do not have any business relationship with any of the companies mentioned in the Article.