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Kpr report

  1. 1. C O M P A N Y R E P O R T India 7 October 2011 KPR Mill Rs 91.35 Sec tor : Tex tile Ready for the BIG League KPR Mill, amongst India’s top five yarn producers and garments manufacturers, BSE Sensex 16,233 offers great value at current market price. Fears about cotton price cycle have pushed Nifty 4,888 52 week high (Rs) 246.85 down the stock to a level where it has downside protection from strong dividend 52 week low (Rs) 89 yield, besides future upside from ongoing capacity expansion. KPR is increasing its yarn capacity by 60% in FY12. KPR will also attain 100% power self-sufficiency through its Co-Gen cum Sugar project commencement inBloomberg KPR.IN FY13. This will further lead to higher capacity utilizations across garments andNSE KPRMILLBSE 532889 fabric.Equity Shares (mn) 37.68 Turnover crosses Rs 10 billion, KPR ready for the big leagueFace Value (Rs) 10Market Cap (Rs mn) 3,442 FY11 has been a landmark year for KPR, with turnover crossing Rs 10bn. With 4 year revenue CAGR of 22%, it is amongst the fastest growing in the sector.  Amongst Industry’s best balance sheet: KPR’s D/E is close to 1 (FY11), Share Price Performance (%) despite Rs 3.7bn of on-going investments in capacity expansion and KPR Sensex modernization. 1 week -6.7 -1.3  Sustainability of revenues: KPR has the ability to make use of its vertically 1 month -9.6 -4.9 integrated operations, diversified product-mix and global customer base in tune 3 month -24.4 -14.9 with prevailing trends. In Q1 FY12, mere 4.7% growth in yarn was made up with 6 month -50.7 -17.1 fabrics and garment exports growths to achieve 31.3% top-line growth. 1 year -58.7 -20.1  Efficient manufacturing: Several innovative practices give KPR a significant cost edge, resulting in better margins compared to the peer group. Shareholding Pattern (Jun’11)  Growth drivers for FY11-13: KPR will increase its yarn production capacity by Promoters 74.5% 60% in FY12. Power self-sufficiency in FY13 will not just save costs but ensure FIIs/FVCIs 8.9% operations continuity year round resulting in increased utilization. Sugar Mill MF/Banks 2.9% operations will commence in third quarter of FY13. Textile sector per se, will Body Corporates 3.9% witness revival as cotton prices have now stabilized worldwide. Others 9.9% At current price, KPR quotes at a PE of 2.5x and EV/EBITDA of 3.2x based on FY13 expected numbers, much below peer average of 10.8x TTM PE or 9.2x EV/EBITDA. Expecting valuations to revive to historical levels as cotton prices settle down, KPR Mill could reach Rs 265 by March 2013. A further attraction is likely strong dividend yield at current price. FY07 FY08 FY09 FY10 FY11 FY12E FY13E Revenue (Rs. Mn) 4,974 6,064 7,477 8,340 11,074 14,003 17,743 EBITDA (Rs. Mn) 1,359 1,384 1,097 1,641 2,493 2,231 3,472 PAT (Rs. Mn) 584 793 101 504 722 566 1,367 EBITDA margin (%) 27 23 15 20 23 16 20 Net margin (%) 11.7 13.1 1.4 6.0 6.5 4.0 7.7 ROE (%) 21 19 2 10 13 9 20 ROCE (%) 15 10 5 9 11 8 14 P/E Ratio (x) NL 4.6 7.7 8.3 9.7 6.2 2.5 EV/EBITDA (x) 5.3 6.7 5.1 5.0 5.5 5.5 3.2 Four-S research reports are also D/E 1.3 1.2 1.0 0.8 1.3 1.6 1.2available on BLOOMBERG, Reuters Dividend Yield (%) 5.2 9.7 4.9 3.3 6.6 7.7 and Thomson Publishers FY 03 FY 06 FY 07 FY 08 FY 09 FY 10 FY 11 FY 12-13E
  2. 2. Company Report: KPR Mill 7 Oct’11 Investment Positives Among top 5 domestic integrated textile companies Among leaders in both yarn and garmentsAmongst the KPR is amongst top five manufacturers of cotton yarn in terms of installedbiggies of Indian spindleage capacity in India and one of the largest manufacturers of garmentscotton textile sector in terms of total units produced. KPR is only below large integrated players like Vardhman Textiles, Nahar Spinning and Alok Industries in terms of installed capacity of spindles. Leading Yarn Players – Capacity in Spindles (000s) Company Name FY 10 FY 11 FY 12 E Vardhman Textiles 870 880 940 Nahar Spinning 346 383 436 Alok Industries 300 300 412 KPR Mill 212 220 353 Nahar Industrial Enterprise 201 201 201 Super Spinning Mills 177 166 166 Source: Company data, Four-S Research KPR would further consolidate its position in the yarn segment with its ongoing expansion of 103,680 spindles in the compact yarn space, 16,128 spindles of melange yarn and 13,104 spindles addition at Sathyamangalam plant. KPR is one of the largest manufacturers of garments in India. Capacity utilisation of the garmenting division still hovers around 55%-60% levels providing significant scope for growth. A leading Garment Producer in India Mn Pieces FY 10 FY 11 Bombay Rayon 38 41 KPR Mill 30 35 Gokaldas Exports 29 29 House of Pearl Fashions 11 16 Nahar Spinning 7 8 Celebrity Fashi ons 6 5 Alok Industries 4 5 Source: Company reports, Four-S Research In FY 11, KPR extended its lead from Gokaldas Exports, with production of 35mn pieces compared to Gokaldas’s 29mn pieces.Four-S Research 2
  3. 3. Company Report: KPR Mill 7 Oct’11 Vertically integrated operationsKPR’s operations KPR has developed one of the largest vertically integrated operations in Southare vertically India with a total manufacturing capacity of 248,976 spindles; garmentingintegrated and facility to produce 63 million pieces per annum of readymade knitted apparel;located in Asia’s 63,500 MT of yarn making ability and production of 21,000 MT of fabrics perlargest apparel annum; processing facility to handle 23 MT of fabric per day. In FY12, KPRmanufacturing will increase its total yarn capacity to 3,53,088 spindles.cluster Its presence across the entire textile manufacturing value chain helps to meet end to end requirements of clients; offering spinning, knitting & garmenting at one location. This also helps the company to maintain strong hold over the quality resulting in premium pricing and repeat orders. Strategically located state of the art manufacturing facilitiesBreadth of business All operations are strategically located within a 50km radius from Tirupur,operations has regarded as one of the Asia’s largest apparel manufacturing clusters. The closehelped achieve proximity to buyers helps to reduce material handling costs and facilitatesstrong revenue immediate feedback regarding the quality of the product. KPR has set up atraction large exclusive showroom of over 7,000 sq ft to facilitate buying for its clients. The location of the facilities helps to utilize the key technical personnel across all plant sites. KPR will achieve 100% self-sufficiency in power with its Co-Gen cum Sugar project coming up at Bijapur, Karnataka. Location of Facilities Nature of Work Capacity Existing Sathyamangalam Spinning 30,240 spindles Karumathampatti Spinning 30,240 spindles Neelambur Spinning & Knitting 50,784 spindles 100,800 spindles Spinning, Knitting & Arasur Garmenting :85,000 pieces per day (single shift) Garmenting Storage : 450 tons Tirupur Garmenting 12mn pieces capacity outsource SIPCOT, Perundurai Fabric Processing 23 tons/day Tirunelveli, Tenkasi & Wind Mills (65 nos.) 61.07 MW Coimbatore Ongoing Expansion FY12-13 Compact Yarn 103,680 spindles; Karumathampatti Spinning Melange Yarn 16,128 spindles Sathyamangalam Spinning 13,104 spindles Co-Gen 34 MW Power generation KPR Sugar Mill Sugar mill 5000 TCD Source: Company Data, Existing facilities as on 31st March, 2011 Industry Innovator and Trend SetterKPR’s biggest The biggest reason an investor should look at KPR is its clear reputation as anstrength is its innovator in the industry. Its proven ability to think out of the box, and come upability to with unique solutions that convert challenges into advantages, is what has enabledinnovate above KPR to deliver growth with superior financials.Four-S Research 3
  4. 4. Company Report: KPR Mill 7 Oct’11common Here are some examples of its innovative management style and practices:industrychallenges. Employee friendly Labour practicesEmployees are a Textile industry inherently is manpower intensive. With growing employmentbig strength for opportunities in other sectors, manpower training and retention are criticalKPR Mill industry challenges. For spinning and garmenting, more than 90% of employees are women, most of them from rural areas. KPR has figured out how to keep them motivated and derive good productivity through friendly accommodation, nutritious food, recreation and formal and vocational education. About 7000 employees have completed school or college using KPR’s program. In fact, in FY11, KPR spent Rs. 12mn on higher education for 2,495 employees. KaizenGround-up “Kaizen” is the Japanese word for shop-floor innovation. While you will notinnovation expressly hear KPR say the word “Kaizen”, but that is what they follow. Walkculture their shop-floors, and you see examples of “Kaizen” and Japanese-style manufacturing practices all around. Examples of “kaizen” abound in KPR. A tiny one: use of skates for employees in the spinning section. This has reduced worker fatigue and cut down requirement of workers. The idea came from the shop-floor. In-house power generationKPR will Power outages have been a problem many textile mills face. The outage forcedachieve 100% production break not only bleeds the top-line through lower capacity utilizationself-sufficiency but hurts the bottom-line due to cost overruns. KPR has overcome this hurdle byin power by planning towards 100% self-sufficiency in power by 2013.FY13. This KPR recently commissioned additional windmills of 21.25MW in March 2011would result in taking its total wind capacity 61.07 MW. Presently, KPR has one of the largest in-higher capacity house power generation capacities capable to meet 75% of its internal powerutilizations and needs.reduced costs. Further, in order to achieve 100% self sufficiency for internal power requirements, KPR has been proactively exploring new avenues for green power. It recently participated in Co-Gen cum Sugar project (with installed capacity of 34 MW of Co-Gen and 5,000 TCD of sugar) established by "K.P.R. Sugar Mill Limited" at Bijapur district, Karnataka by making it a wholly owned subsidiary. The project is expected to go on stream by third quarter of FY13. This move would see KPR save ~Rs 120mn per annum and meet all its power needs in-house. Attaining self-sufficiency in power will ensure operational continuity leading to significant capacity utilization increases in Fabric and Garment segments by FY13.Four-S Research 4
  5. 5. Company Report: KPR Mill 7 Oct’11 Advanced machineryState-of-the-art While this isn’t something exactly unique to KPR, but it does tell you a bit aboutplants the management mindset. Each time KPR implements an expansion, it puts up state of the art plant and machinery. The effluent treatment plant at its processing unit is regarded as a model unit in Tirupur. Its new 100% compact yarn manufacturing facility at Karumathampatti will need to employ only about half the manpower as compared to KPR’s own previous facility of similar capacity. The earlier unit was set up as recently as in FY08. Within 4 years, KPR management has managed to source better machinery and half manpower requirement. Robust Financial Performance Annual Results 2010 – 2011 One of the fastest growing companiesOutperformed KPR’s revenues grew at 3-yr CAGR of 22% over FY08-FY11 to reach Rspeers in revenue 11,074mn in FY11 as compared to 18% CAGR growth witnessed by peergrowth and group average during the same period.operational The growth for company was 400 basis points higher than the peer group inefficiencies terms of revenues. Superior operating and net margins KPR has consistently maintained above average EBITDA and net margin compared to its peer group over the last few years. During FY11, the company’s EBITDA margin stood at 23% as compared to peer group average of 16%. KPR’s net margin stood at 7% as compared to peer group average of 6% in FY11. FY08 FY09 FY10 FY11 EBITDA Margin Peer Group (Mean) 12% 13% 15% 16% KPR 23% 15% 20% 23% PAT Margin Peer Group (Mean) 5% 4% 5% 6% KPR 13% 1% 6% 7% Source: Ace Analyser, Four-S analysis Higher dividend payoutFour-S Research 5
  6. 6. Company Report: KPR Mill 7 Oct’11 KPR has had consistently high dividend payout ratio compared to the peer average with 31% in FY11 compared to peer average of 4%. In FY11 the Company announced Interim dividend of Rs 3 per share and Final dividend of Rs 3 per share, thereby, resulting in total dividend of Rs 6 per share. Dividend Payout Ratio FY10 FY11 Peer Group (Mean) 6 4* KPR Mill 41 31 * Dividend information NA for Mudra Lifestyle Source: Ace Analyser, Four-S Research Financial prudence reflected in strong balance sheet Low LeverageLow leverage In a sector where D/E ratios have gone haywire due to availability ofenhances subsidised debt (under TUF scheme), KPR is the only major textile company inattractiveness India which believes in keeping its debt-equity around 1x. The financialgiving sufficient conservatism provides KPR with sufficient scope to pursue aggressive growthscope to scale up strategy without leading to equity dilution.further in future Company funded its recent capacity expansion programmes through IPO proceeds, internal accruals, preference issue of Rs 150mn and debt of ~Rs 3,435mn (TUFS). The planned Rs 3,258mn investment in Co-Gen cum Sugar mill project would be again funded by a mix of internal accruals and debt. The projected D/E would rise to 1.6 in FY12 due to new debt taken and would come down back to 1.2 in FY 13. Increasing asset turnover KPR’s fixed assets turnover doubled from 0.7x in FY08 to 1.4x in FY11. This reflects improving asset efficiency and better capital management. KPR has always invested in regular modernization of its machineries. Q1 FY12 Consolidated Results SnapshotKPR achieved 31% In a very tough quarter for the industry, KPR’s first quarter FY12 consolidatedrevenue growth revenues grew at 31.3% Y-o-Y to reach Rs 3,212mn boosted by strong exportsYoY in first growth of 73% YoY & increase in price realization across segments.quarter of 2012, EBITDA decreased by 28% YoY to Rs 442mn; EBITDA margin declined tothough margin was 13.8% from 25.1% due to one-time Raw Material write down of Rs 278mn.impacted PAT decreased to Rs 106mn with PAT Margin at 3.3%. However, margins are expected to improve going forward as cotton prices have stabilized after reaching all time highs in the previous quarter.Four-S Research 6
  7. 7. Company Report: KPR Mill 7 Oct’11 Revenue and Growth EBITDA and Margin `Mn `Mn In % 5,000 800 30% 25.1% 700 25% 4,000 3,212 613 600 20% 3,000 2,446 500 442 15% 2,000 400 13.8% 10% 300 1,000 200 5% 0 100 0% Q1FY11 Q1FY12 Q1FY11 Q1FY12 EBITDA EBITDA Margin Source: Company data, Four-S research Achieves traction in Textile Exports as wellDoubled exports in KPR exports have more than doubled in last four years. It was able to sustain4 years an average growth rate of 28% despite recessionary fears in US and Europe by diversifying its markets. It has successfully reduced its dependence on Europe markets from 96% in FY08 to 80% as of today, with increased focus on Asia and Australia. Set to continue strong growth momentum Drivers in place for 27% revenue growth over FY11-13 We expect top-line to grow at a 2-yr CAGR of 27% to reach Rs 17,743mn by FY13. This would include operations of KPR Sugar Mill from Q3FY13 onwards. The strong growth is expected as the 60% yarn capacity increase would be implemented in FY12 itself. FY13 will derive the full benefits of the total 90,000 MT yarn capacity.Rest of FY12 is KPR’s investments in captive power generation would make it self-sufficientexpected to be by FY13. This would enable continuity of operations all year around. Atbetter with cotton present the State witnesses frequent power outages in peak season. In the past,prices settling KPR has focussed on yarn capacity utilization and maintained it at 90%. Indown, yarn FY13, the company would be able to increase its fabric and garmentingcapacity additions utilizations based on self-sufficiency.on track Hence, all key product segments are set for double-digit growth. The yarn segment would grow at 2-yr CAGR of 26% to reach Rs 9,130mn by FY13. Garmenting division, dedicated to exports, would see 22% 2 yr CAGR growth to reach Rs 4,224mn by FY13. Similarly, fabric revenues would grow at CAGR of 20%. Total Revenue from textile segments would grow at 2-yr CAGR of 24% to reach Rs 16,053mn by FY13. This would be slightly higherFour-S Research 7
  8. 8. Company Report: KPR Mill 7 Oct’11 than FY07-FY11 5-yr CAGR growth of 22%. Compact yarn expansion: A high value add product KPR is adding 103,680 spindles at a cost of Rs 3,100mn at its Karumathampatti plant. About 50% of the total capacity has already been commissioned in August 2011. The balance would be operational in phased manner by October 2011. Being one of the largest compact yarn expansions at a single location, the move will help KPR consolidate its presence among premium product segments. As per management estimates, compact yarn realisations are 5% to 10% higher as compared to conventional yarn. The company is also looking to explore international markets and domestic markets out of Coimbatore for export of compact yarn. Sugar Mill operations The Sugar Mill operations are estimated to generate an annual turnover of Rs. 3,350mn with EBITDA of 20%. The Co-Gen will produce 208mn units of power annually at an estimated cost of Rs. 2.7 per unit. Will maintain strong profitabilityEBITDA margins With concerted efforts to shift product mix towards high value add segments,will revive in FY13 KPR would be able to command premium pricing/ realisations for its products. Though, we expect EBITDA margins to be under some pressure in FY12E due to huge cotton price variations, it would bounce back from 16% in FY12E to 20% from FY13 onwards: a) Yarn realisations would enjoy 45% mark-up over cotton prices in FY13, up from the historical average of 41% over FY08-FY11. Compact Yarn capacity (22% of total FY13 MT capacity) would result in higher realizations. Cotton prices are expected to be stable around current levels in FY13. b) We expect fabric division to experience capacity utilization of 55% in FY13, up from 45% in FY11. c) We expect garmenting division to have high realisations after subdued pricing for past few years. Garment realisations would grow to Rs. 110 per piece by FY13 as compared to average of Rs. 85 per piece over FY08-FY11. This is mainly on account of pricing trends observed even in recent quarters. d) Sugar Mill operations are expected to have 20% EBITDA margins. The Co- Gen project will also reduce the power costs. Professional management team to spearhead growthManagement The 16-membered core management team (including board of directors and keyvision evident in managerial personnel) at KPR brings with it a rich experience of 1-4 decadesapproach to acquired in textile industry. Mr. K.P. Ramasamy, the Chairman, has rich industryresolve challenges experience in the production and marketing across all the products segments andFour-S Research 8
  9. 9. Company Report: KPR Mill 7 Oct’11facing the sector holds memberships in all key industry associations including Southern India Mills Association (SIMA). Management vision evident in approach to resolve challenges facing the sector – power outages and employee sourcingFour-S Research 9
  10. 10. Company Report: KPR Mill 7 Oct’11 Peer Benchmarking Defining peer set We have benchmarked KPR with listed Indian textiles companies classified as follows: a) Large and medium-sized integrated players involved in manufacturing and supply of yarn, fabric and garments b) Companies focused on garment exports Presence across the Value Chain Readymade Cotton/ Polyester Garments/ Home Companies Yarn Fabric Designing Dyeing Furnishing Retailing Large Integrated Players Alok Industries Vardhman Textiles Arvind Mills Bombay Rayon Welspun India Mid-Size Integrated Players Nahar Spinning Mandhana Mudra Lifestyle Garment Focused Exporters House of Pearl Fashions Gokaldas Exports Celebrity Fashions KPR Mill Limited Financial Comparison Higher CAGR in revenues over FY08-FY11KPR achieved 50% 44%above par 3yr 40% 35%CAGR of 22% in 28% 27% 30% 23%revenues 22% 20% 17% 16% 15% 10% 9% 2% -16% 0% Vardhman Textile Celebrity Fash. KPR Mandhana Indus Bombay Rayon Arvind Ltd House of Pearl2 Gokaldas Exports Alok Inds. Welspun India Nahar Spinning Mudra Lifestyle -10% -20% Source: Ace analyser, Four-S research KPR posted a strong growth in revenues at 3-yr CAGR of 22% over FY08- FY11 to reach Rs 11,074mn in FY11 as compared to 18% growth witnessed byFour-S Research 10
  11. 11. Company Report: KPR Mill 7 Oct’11 peer group average during the same period. The company outperformed most of its peers in terms of revenue growth driven by strong performance across all its key product segments. The accelerated growth in revenues was led by strong pace of growth in garmenting division at 3-yr CAGR of 27% over FY08-FY11. Superior EBITDA margin KPR has consistently maintained higher margins compared to its peer group during the period FY08-FY11. The company witnessed better EBITDA margin of 22.5% in FY11 as compared to peer group average margin of 16% during the same period. The company’s margins are higher compared to most of the textile players, except for players like Alok Industries and Vardhman Textiles. Benefitting from their large-scale operations, these companies enjoy significant economies of scale especially towards raw material procurement (average raw material cost as a %age of revenue: 51%-55%). EBITDA Margin Comparison (2008-2011) 25% 23% 23% 20% 20% 16% 15% 15% 15% 12% 13% 10% 5% 0% FY08 FY09 FY10 FY11 Industry Average KPR Source: Ace analyser, Four-S research KPR has been able to maintain superior margins compared to industry due to its continuous focus on high margin products and cost consciousness. i) Yarn division contributes over 50% to net sales. Realisation for yarn grew at robust 3-yr CAGR of 21% to reach Rs 178/kg in FY11; ii) Contribution (to net sales) from high margin garment division increased to 26% in FY11 from 23% in FY08; ii) Company is amongst the lowest cost operators in terms of power costs compared to peer group average:  In-house power generation to reduce power cost: KPR has installed 65 windmills with total power generation capacity of 61.07MW. Captive power capacity helps the company to meet ~75% of its power requirements internally leading to significant savings in costs. KPR’s power and fuel costs at 3% of net sales are significantly lower than the peer group average of 6% for FY’11.Four-S Research 11
  12. 12. Company Report: KPR Mill 7 Oct’11 Power & Fuel Cost/Sales 8% 6% 6% 6% 5% 5% 4% 3% 3% 3% 3% 2% 0% FY08 FY09 FY10 FY11 Industry Average KPR Source: Company data, Four-S research PAT Margin outperforming peers in FY10 and FY11KPR’s PAT margin 8% 7%has been higher 6% 6%than peer group in 6% 4% 4%last two years 4% 2% 1% 0% FY09 FY10 FY11 Industry Average KPR Source: Ace analyser, Four-S research KPR’s PAT margin stood higher at 6% and 7% when compared to its peer group average of 4% and 6% during FY10 and FY11, respectively. This was despite the fact that KPR charged additional depreciation of Rs 525mn on windmill in FY11 due to reassessment of useful life of wind mills. The company also charged interest on term loans for new projects in FY11. Consistent high dividend payout ratioKPR has been 75% 80%consistently 70%rewarding its 60% 50% 41%shareholders with 40% 31%significantly higher 30% 20%than peer group 10% 3% 6% 4%dividend payouts 0% FY09 FY10 FY11 Industry Average KPR Note: Dividend information is NA for Mudra Lifestyle for FY11 Source: Ace analyser, Four-S research KPR had consistently high dividend payout ratio compared to the peer average. In FY11 the Company announced Interim dividend of Rs 3 per share and FinalFour-S Research 12
  13. 13. Company Report: KPR Mill 7 Oct’11 dividend of Rs 3 per share, thereby, resulting in total dividend of Rs 6 per share. Improving Return on Capital Employed (ROCE) 12% 10% 10% 9% 9% 8% 8% 7% 6% 5% 4% 2% 0% FY09 FY10 FY11 Industry Average KPR Source: Ace analyser, Four-S research KPR consistently improved and outperformed its peer group average in terms of returns on capital employed (ROCE). The company improved its ROCE from a low of 5% in FY09 to 10% in FY11 with an improving fixed asset turnover ratio. FA turnover ratio doubled from 0.7x in FY08 to 1.4x in FY11. With low leverage on Balance Sheet compared to peers 2.0 2.0 1.8 1.8 1.6 1.5 1.3 1.2 1.0 1.0 0.8 0.5 0.0 FY08 FY09 FY10 FY11 Industry Average KPR Source: Ace analyser, Four-S researchKPR’s low leverage KPR’s D/E ranges between 0.8x-1.3x over FY08-FY11which is significantlyis one of its most lower than the peer group average range of 1.6x-2.0x. The company’sattractive features management operates at lower financial leverage providing it scope for aggressive future expansion. Low leverage on balance sheet helped KPR to raise debt to the extent of Rs 3,435mn during FY11 for its new projects.Four-S Research 13
  14. 14. Company Report: KPR Mill 7 Oct’11 Q1FY’12 peer comparison – Standalone results Higher growth and EBITDA Margin in a tough quarterEBITDA margins Company Revenue (Rs mn) EBITDA Margin (%) Net Margin (%) Q1FY12 YoY Growth (%) Q1FY11 Q1FY12 Q1FY11 Q1FY12of most of textile Large Integrated Playersplayers were Alok Industries 16,456 49.7% 29.7% 27.5% 4.2% 3.5%impacted with Vardhman 9,694 19.5% 22.4% 3.8% 9.7% NAsudden decrease in Arvind Ltd. 8,218 42.2% 16.2% 17.8% 3.3% 8.1% Bombay Rayon 6,038 20.1% 25.5% 24.8% 10.4% 9.4%raw material costs. Welspun India 5,419 14.8% 12.9% 15.9% 3.3% 4.9%Still KPR’s Mid-Size Integrated PlayersEBITDA was Nahar Spinning 3,874 29.8% 16.5% NA 5.1% NM Mandhana Industries 2,050 42.6% 23.3% 18.9% 8.9% 7.6%marginally higher Mudra Lifestyle 832 -26.2% 16.0% 3.8% 2.2% NMthan peer group Garment Focused Exporters House of Pearl Fashions - NM NM NM 10.1% NM Gokaldas Exports 2,444 -7.2% NM NM NM NM Celebrity Fashions 388 -45.7% NM 1.7% NM NM Mean 14.0% 20.3% 14.3% 6.4% 6.7% KPR Mill 2,987 23.5% 25.2% 14.6% 11.7% 3.4% Source: NSE, Company data, Four-S Research In a very tough quarter for the industry, KPR saw a higher YoY growth in revenues (23.5%) in Q1FY’12 compared to peer average of 14%. As a result of unprecedented cotton price volatility, KPR did one time Raw Material write down of Rs 278mn. Hence, its EBITDA decreased to 14.6%. However, EBITDA was still marginally higher than peer group average of 14.3%. PAT margin declined to 3.4%. However, the performance can still be considered above board, as 6 more peers reported negative PAT numbers compared to 2 for the same period last year.Four-S Research 14
  15. 15. Company Report: KPR Mill 7 Oct’11 Valuation Comparison Trading at Attractive MultiplesKPR is trading at Company CMP (Rs.) No. of shares Market Cap Net Debt EV EV/Sale s EV/EB ITDA PE P/B 7th Oct11 (mn) (Rs mn) (Rs mn) (Rs mn) (x) (x) (x) (x)very attractive Large Integrated Playe rsvaluation Alok Industries 18 788 14,220 1,07,550 1,21,770 1.7 6.7 4.4 0.5multiples Vardhman 193 64 12,307 28,738 41,045 0.9 4.3 3.1 0.5 Arvind Ltd. 96 255 24,540 21,523 46,062 1.0 7.5 12.0 1.4currently Bombay Rayon 276 99 27,302 30,949 58,251 2.1 10.7 13.2 1.1compared to Welspun India 27 89 2,420 15,937 18,358 0.9 9.4 19.7 0.4both the peer Mid-Size Integrated Players Nahar Spinning 60 36 2,157 13,244 15,401 1.0 10.1 14.9 0.3group average Mandhana Industries 210 33 6,959 5,402 12,362 1.4 8.1 10.0 2.0and the historical Mudra Lifestyle 25 48 1,178 3,766 4,944 1.2 19.9 NM 0.5valuations Garme nt Focuse d Exporters House of Pearl Fashions 52 20 1,018 2,756 3,774 0.2 4.6 4.8 0.2 Gokaldas Exports 88 34 3,032 2,862 5,894 0.6 NM NA 0.8 Celebrity Fashions 6 20 112 1,458 1,570 1.0 NM NA 0.5 Me an 1.1 9.0 10.3 0.8 KPR Mill 91 38 3,442 6,854 10,296 0.9 4.4 6.4 0.6 *Valuation is based on TTM financials as of June 2011 Source: NSE, Company data, Four-S Research At CMP of Rs 91.35 per share, KPR is trading at 6.4x of its TTM June’11 PE and 4.4x of TTM June’11 EV/EBITDA. The valuation is significantly lower i.e. at discount of 38% and 51% when compared to peer group average trailing P/E and EV/EBIDTA multiples, respectively. The valuation ignores the likely growth in revenues and profits coming from the ongoing expansion in high margin product segments. We believe the company is set for re-rating FY12 onwards. At current TTM EV/EBITDA multiple of 4.4x, KPR presents an attractive value investing opportunity. The company is trading at a discount of 21% compared to its historical 4-yr average EV/EBITDA of 5.6x. 31Mar’08 31Mar’09 31Mar’10 31 Mar’11 7 Oct’11 EV/EBITDA (x) 6.7 5.1 5.0 5.6 4.4 PE (x) 4.6 7.7 8.3 9.7 6.4 Source: NSE, Four-S ResearchFour-S Research 15
  16. 16. Company Report: KPR Mill 7 Oct’11 Valuation and Price Target Current valuations depressed on raw material volatilityValuations will First quarter of FY12 saw unprecedented raw material price volatility. Sharecorrect as normalcy prices of most of the textile players fell down. Players in cotton textiles werereturns to cotton impacted the most compared to those with interests in manmade textiles, retailprices and other businesses. We expect the worst to be over, and overall cotton textiles players to do much better henceforth. Given KPR’s revenue traction, capacity additions led scale-up of operations, we expect KPR to make the most of industry revival. Price TargetKPR should hit a Current valuations of KPR are depressed compared to its own historicalprice of Rs 265 by trading levels, and peer group averages. As shown in the table in theMarch 2013. We immediate preceding page, KPR has traded at an EV/EBITDA of around 5x orexpect it to rerate more in recent years. Similarly, it has traded at a PE of around 8x. Thesetowards historical values are also in line with peer averages.valuation levels We believe, KPR valuations will revert to these values as normalcy returns towith industry cotton prices. While there is a good case of KPR quoting at a premium to peerrevival averages, given its more efficient manufacturing, conservative financials and consistent dividend payouts, we are basing price expectations in line with sector averages. Assuming KPR reverts to its normal trading range of 8x PE and 5x EV/EBITDA by FY13, we get an average price expectation of Rs 265 by March 2013. An investor at current price can also look forward to strong dividend yields, which may also give downside support at current levels.Four-S Research 16
  17. 17. Company Report: KPR Mill 7 Oct’11 KPR’s Business Vertically Integrated OperationsAmongst the KPR has established one of the largest vertically integrated manufacturinglargest vertically capacities in South India with the capability to produce readymade knittedintegrated players apparel, knitted fabric and carded and combed cotton yarn. The integratedwith focus on Yarn manufacturing operations enable the company to better customize products asand Garments per the client specifications and provide consistent quality assurance in a cost- effective manner. KPR’s presence across the Textile Value Chain Processing Apparel Spinning Sourcing of Knitting Processing (23MT of fabric Making (248,976 Spindles) (21,000MT Fabric) (23MTday) per of fabric (63mn pieces, Raw materials (63,500MT Yarn) per day operating double shift) Yarn: Amongst India’s top 5 producersYarn is the main KPR is amongst India’s largest cotton yarn producers. The company currentlyplay for KPR with has installed capacity of 248,976 spindles which translates into an annualover 50% production capacity of 63,500MT of yarn. This includes both carded andcontribution to combed yarn.turnover. Yarn After its ongoing expansions go on stream, KPR’s total installed capacity willcapacity is go up to 353,088 spindles. The annual production capacity would increase toincreasing by 50% 90,000MT of FY12 Leading Players - Installed Spindleage (‘000) Company Name FY 10 FY 11 FY 12 E Vardhman Textiles 870 880 940 Nahar Spinning 346 383 436 Alok Industries 300 300 412 KPR Mill 212 220 353 Nahar Industrial Enterprise 201 201 201 Super Spinning Mills 177 166 166 Source: Company data, Four-S Research Largest revenue contributing segment Yarn continues to contribute over 50% of the company’s revenues. Average yarn realisation consistently increased from ~Rs 102/kg in FY08 to Rs182/kg in FY11. KPR consumes ~25% - 30% of its yarn production in-house and theFour-S Research 17
  18. 18. Company Report: KPR Mill 7 Oct’11 remaining 70% - 75% is sold in the domestic markets. Expansion – Adding 132,912 spindles New unit of Compact Yarn at KarumathampattiCompact yarn Sensing an opportunity in higher value add yarn segment, KPR is setting up acapacity addition new unit to manufacture 100% compact yarn. It is adding 103,680 spindles at awill bring total estimated cost of Rs 3,100mn at its existing facility in Karumathampatti.productivity gains Out of this, 50% of the planned addition has already been commissioned inas well for KPR August 2011. The balance would be commissioned by October 2011 in phased manner. The expansion is funded by a mix of debt and equity. The equity includes IPO proceeds of Rs 710mn and internal accruals. Financial closure has been achieved for all debt requirements under TUF scheme. Conventional Spinning Vs Compact Spinning: Compact spinning Conventional Spinning Installed capacity ~12,000 spindles ~200,000 spindles Planned expansion 1,03,680 spindles - Cost per spindle* Rs. 28,500 Rs. 25,000 Realization 5% to 10% higher Manpower 1,200 employees 2,000 employees Input-Output Ratio 100:77 100:82 Wastage 23% 18% *Cost per spindle includes cost of installation and preparation of land & building The expansion would help KPR to achieve higher productivity and better realisation as compared to conventional spinning. The key benefits of compact yarn spinning would include: i) Higher average realizations: ~ 5 to 10% higher as compared to conventional yarn realizations. ii) Increased automation to help lower personnel requirements. KPR would need to employ only additional 1,200 workers in comparison to 2,000 workers required for similar conventional yarn capacity. Upgrading its existing unit at SathyamangalamBank Loans for the KPR completed modernisation of its existing 30,240 spindleage capacity atprojects sanctioned Sathyamangalam unit in March 2011. This involved replacement of existingunder TUFS ring frames with new ring frames that yield better productivity. KPR is also adding 13,104 new spindles of recently launched LR9/AX 1632. This would result in considerable reduction in per spindle cost. 30% of planned addition has been commissioned by August 2011 and the balance would be completed by January 2012 in a phased manner. Total investment of ~Rs 380mn was incurred on the projects.Four-S Research 18
  19. 19. Company Report: KPR Mill 7 Oct’11 Melange Yarn at Karumathampatti Driven by domestic and export market demands, KPR would install 16,128 spindles of Melange Yarn capacity at its Karumathampatti plant. Melange Yarn is unique in its softness, natural fibre texture and liveliness. The spindle cost is economical at Rs. 11,000 per spindle. 25% of Melange Yarn would be used for captive consumption. The unit is expected to be fully operational by January 2012 in a phased manner. Total Project Outlay is Rs.177mn. Fabric: Captive capacity, feeds garment unitKPR’s fabric KPR’s fabric division equips high speed automatic knitting machines with asegment capacity to manufacture 21,000 MT of fabric per annum. These machines,contributes 14% to manufacturing fabrics of various products/ Dia, are spread across the facilitiesrevenues of Neelambur and Arasur. Fabric contributed about 14% to the total revenues (during FY11). KPR consumes about 25% - 30% of its fabric production for in-house garmenting and the remaining is sold in domestic and export markets. Fabric Dyeing and Processing The state-of the art fabric processing unit at SIPCOT, Perundurai is set up on a 34 acre land and integrates the fabric processing aspects of dyeing, bleaching and finishing. The unit has fabric processing capacity of 23 tons/ day and adheres to highest international standards. Effluent Treatment Plant (ETP) KPR has installed an ETP with capabilities to treat 2.5mn litres a day which enables it to reuse 95% of the waste water to the process again. Zero discharge systems is achieved as per PCB norms. Knitted Garments: Export PlayKPR’s garment Knitted Garments segment contributed 27% to the total revenues (duringdivision is 100% FY11) and enjoys highest margins. Of the total garment capacity, 12mn piecesexport oriented. It of the garment are outsourced through the Tirupur facility and the remaining iscontributed 27% to produced in-house. The company outsources small orders to localtotal revenues in manufacturers and executes bulk orders in-house in order to achieve efficiency.FY11. 100% of the garment production is exported to Europe, US and Australia.KPR is amongst the KPR’s garmenting division currently operates at 55% to 60% capacitylargest garment utilisation which provides it with significant scope for growth without furtherproducers in India expansion.Four-S Research 19
  20. 20. Company Report: KPR Mill 7 Oct’11 Amongst the largest domestic apparel manufacturer KPR plans to increase its annual garment production to +38mn pieces by FY’13 from 35mn in FY’11. Leading Garment Producers in India Mn Pieces FY 10 FY 11 Bombay Rayon 38 41 KPR Mill 30 35 Gokaldas Exports 29 29 House of Pearl Fashi ons 11 16 Nahar Spinning 7 8 Celebrity Fashi ons 6 5 Alok Industries 4 5 Source: Company Reports, Four-S Research Quantum Knits: a 100% subsidiary KPR formed a wholly owned subsidiary, Quantum Knits Pvt Ltd in June 2009, to provide independent and exclusive control of all operations, management and transactions of the Garment Unit at Arasur to its subsidiary. The primary purpose of having a separate identity is to meet additional market demand and avail marketing and administrative advantages for the company. Quantum has a capacity to produce 52 million pieces per annum in double shift. Outsourcing production of Garments at Tirupur KPR outsources production of about 12mn pieces of garments annually. This effectively increases its production capacity to 63mn pieces of garments per annum:  52mn in-house through 100% subsidiary Quantum Knits at Arasur  11mn outsourced capacity at Tirupur. Strategic investments in captive power generation One of the largest windmill farmsPower has been a The company has installed wind Mill with a total generation capacity ofpain area for Tamil 61.07MW for captive consumption at Tirunelveli, Tenkasi Theni andNadu based textile Coimbatore districts with an objective to become self- reliant in powerplayers. KPR has consumption needs, support its expanding operations and reduce dependencemitigated this risk on state electrical operational With one of the largest in-house power capacity in southern India, companycontinuity by achieves substantial competitive advantage in power costs. KPR’s power costinvesting in Wind as a percentage of revenue stood at 3% as compared to industry average of 5%Mill farms during FY’11. The wind mill, operating during April-March of each year, helps the company to meet about 75% of its power requirement through captive consumption.Four-S Research 20
  21. 21. Company Report: KPR Mill 7 Oct’11 Recent investments in Co-Gen cum Sugar projectKPR’s latest With Tamil Nadu reaching saturation point for wind power generation, KPRinvestment in Co- proactively started exploring new avenues for green power. The CompanyGen cum Sugar recently announced participation in the Co-Gen cum Sugar project of 34 MWproject will make it of Co-Gen and 5,000 TCD of sugar established by "K.P.R. Sugar Mill Limited"100% self-sufficient at Bijapur district, Karnataka by making it wholly owned power by FY13 This would help KPR to produce power for 100% of its requirements, saving costs as well. The project would involve a total expenditure of Rs 3,258mn. While KPR would invest Rs 725mn in the project, the balance will be funded through external debt. The project is expected to go on stream by Q3 FY13. KPR Sugar Mill, now a wholly owned subsidiary of KPR, has received all the necessary approvals and licenses. The company would soon begin with the civil construction work at Bijapur, Karnataka. Availability of bagasse from nearby Co-op Sugar mills around 25000 TCD which do not have Co-gen facility would help KPR to procure raw material (bagasse) for its co-gen project sufficient to produce 34 MW of power. Summarising the capacity State-of-the-art Manufacturing Business Mix (FY11) Facilities Capacity •Production Facilities- •Total capacity of •Products: 6 state-of-the-art 248,976 spindles •Yarn (55%) production facilities •Manufacturing •Knitted Garments located in Tamilnadu capacity of 63,500MT (27%) •Sathyamangalam of yarn; 21,000MT of •Fabric (14%) •Karumathampatti, fabric and 63mn •Others (4%) •Neelambur & pieces (double shift) of readymade knitted •Geographies: •Arasur •Domestic (71%) apparel p.a. •Tirupur and Processing facility to •Exports to markets •Perundurai handle 23MT of fabric including per day Europe, US, Australi •Installed wind mills a and others (29%) with a total power capacity of 61.07MW State of the Art Plants KPR has always focused on installation of the best available machinery to ensure that it produces the best output and this enables KPR to charge a premium from its clients. Installation of the best available machinery improves processes by increasing automation and also improves the quality of output.Four-S Research 21
  22. 22. Company Report: KPR Mill 7 Oct’11 Location of Facilities Nature of Work Capacity Existing Sathyamangalam Spinning 30,240 spindles Karumathampatti Spinning 30,240 spindles Neelambur Spinning & Knitting 50,784 spindles Arasur Spinning, Knitting & 100,800 spindles Garmenting Garmenting :85,000 pieces per day (single shift) Storage : 450 tons Tirupur Garmenting 12mn pieces capacity outsource SIPCOT, Perundurai Fabric Processing 23 tons/day Tirunelveli, Tenkasi Theni & Wind Mill (65 nos.) 61.07 MW Coimbatore Ongoing Expansion Karumathampatti Spinning 103,680 spindles – Compact Yarn 16,128 spindles – Mélange Yarn Sathyamangalam Spinning 13,104 spindles Source: Company Data, Four-S Research Revenue Mix: A diversified sales mixAll three product KPR has vertically diversified within the cotton value chain to reducesegments – Yarn, dependence on any one part.Fabric and Yarn is the largest segment contributing over 50% of the company’s revenuesGarments -- have since FY07 onwards. The revenues grew at a 4 yr CAGR of 24% to reach Rsdelivered high 5,794mn in FY’11. Yarn contribution in FY11 increased to 55% of total salesgrowth due to improved price realisations and strong demand in markets. The contribution peaked in FY08 (58%) due to addition of 100,800 spindles at Arasur plant in 2008. Source: Company Data, Four-S Research Revenues derived from the fabric segment increased by CAGR of 16% during FY07-FY11 to reach Rs 1,490mn in FY11. The segment contributes ~14% of the total sales. Garmenting revenues account for ~27% of the total sales in FY11. The segment grew at a strong CAGR of +21% over FY07-FY11 to reach Rs 2,826mn in FY11.Four-S Research 22
  23. 23. Company Report: KPR Mill 7 Oct’11 Global scale of operations KPR caters to both domestic & international clients across India, US, Europe and Australia. While the company exports 100% of its garment production outside India, the yarn and fabric is sold in domestic markets and export markets. The company continues to derive over 25% of its revenues from export markets. Export revenues increased significantly in FY11 amounting to 29% of total revenues. However, domestic markets continue to dominate majority (~71% in FY11) of revenues. Domestic versus Export split 100% 71% 71% 75% 75% 79% 71% 80% 60% 40% 20% 29% 29% 25% 25% 21% 29% 0% FY06 FY 07 FY 08 FY 09 FY 10 FY11 Domestic Export Source: Company Data, Four-S Research Strong & diversified client base KPR has over 15 years of relationship with a diversified customer base of over 1,000 regular domestic clients for yarn and fabric spread across the country and over 40 leading international apparel retailers. Focused Marketing Team The company has a strong marketing team, which is in charge of continuous acquisition of new and potential buyers who would stay with the company for a long period of time. The marketing team pitches for new buyers after making a detailed study of the buyer’s profile with respect to their years of existence, financial strength, track record of performance etc in the market. This helps the company to add large and potential buyers to its portfolio from key markets of EU, US and Australia. Cost Efficient Operations Unique raw material procurement policyKPR reduced KPR procures high quality Shankar - 6 cotton from during the buying seasoncotton holding in i.e. October - March, to ensure highest & uniform quality of cotton at anresponse to volatile economical cost. The harvesting of cotton is done in October ensuringcotton prices. This increased availability of cotton at relatively lower prices. The companyFour-S Research 23
  24. 24. Company Report: KPR Mill 7 Oct’11reduced the extent procures majority of its cotton requirement during December to January whenof raw material the availability is at its peak and the prices are low.write-down done in However, considering the high volatility in cotton prices over the past year,Q1FY12 KPR swiftly shifted to 3 months inventory policy. This was done in order to get benefit of any decline in surging cotton prices so as to keep inventory costs low. In-house power plant to save on power costsLow power costs The captive wind power capacity of 61.07 MW helps the company to meet ~75% of its power requirements. KPR has one of the lowest power costs (3% in FY11 as compared to 5% for peer group) compared to its peer group average. This provides the company a significant competitive edge in the industry. Internationally accredited processesA player of The manufacturing facilities at KPR are internationally accredited and areinternational staffed with trained supervision and equipped with high tech quality controlstandards equipments. The company enforces stringent quality control measures to ensure end products of international standards. International accreditations include:  ISO 9001: 2000 – certification for quality management system.  ISO 14001: 2004 – certification for environmental management systems.  SA 8000: 2001 – certification for social accountability management system for the manufacture of cotton yarn.  World-wide Responsible Apparel Production Certificate (WRAP) – ensuring apparel production under lawful, humane and ethical conditions.  Ethical Trade Initiative (ETI) – for sound working conditions of workers.  Global Organic Textile Standard (GOTS) - for organic cotton products.  OEKO-TEX – for responsible and ethical endeavors.  Certified by International Association for Research and Testing in the field of Textile Ecology with respect to apparel manufacturing operations.  Certified as a Trading House by Ministry of Commerce and Trade.  TUV- SIMA-Five Star category indicating ‘Excellence in Code of Discipline’ for providing women employment Quality control initiatives include:  Procurement of highest quality raw materials.  Installation of high-tech quality control equipment such as Uster Tester-4, Uster HVI Spectrum, Uster AFIS Pro, Zweigle Hariness Tester-G566 and Uster Classimat Quantum.  Uses latest technology equipment Jossi Vision Shield for contamination free yarn.  Installed Schlafhorst Auto Coner that makes sure to spin sophistication in every yarn and ensuring homogenous quality yarn and better productivity.Four-S Research 24
  25. 25. Company Report: KPR Mill 7 Oct’11  Mandatory usage of hand gloves, hair net, mask, aprons, etc for the twin benefits of safety and quality.  Special customer service department headed by a textile technologist for continuous improvement and customer satisfaction.  Inspection at every stage to ensure stringent quality conformance Business with a social faceCommitted to KPR continues to involve itself into the activities aimed at overall developmentsocial development of the society. It has contributed actively towards community welfareand welfare measures, taking several initiatives related to education, health, environmental improvement and other development measures such as:  Installed wind mill having a total capacity of 61.07MW to meet energy requirements through eco-friendly renewable sources of energy.  Collaborated with Italy’s Water Treatment Technology to reuse 95% of the waste water. The ‘effluent treatment plant’ has a total capacity to handle 2.5mn litres of waste water and achieved Zero discharge as per the PCB norms.  Invested in municipal infrastructure by constructing short road linkages to manufacturing facilities from the national highways and state roads with an objective to provide quality infrastructure and connectivity.  Established an educational institution in Coimbatore in 2009 through its charitable trust, ‘KPR Charities’ promoted by M/s K.P.Ramasamy, KPD Sigamani and P.Nataraj (permanent trustees) with an objective to provide education to all. The trust promoted educational institutions in the name of ‘KPR Institute of Engineering and Technology’ & ‘KPR School of Business’ approved from AICTE and affiliated with Anna University.Four-S Research 25
  26. 26. Company Report: KPR Mill 7 Oct’11 Financial Analysis and Growth Outlook FY12 started with turbulence for textile and apparel players. Cotton prices sharply corrected ~ 40% from all time highs achieved in March 2011. As a result, many players were stuck with high cost inventories. On the demand side, economic uncertainties caused weakness. Many spinning Mill had to resort to production cuts to ease their stock positions. Readymade Apparel business was impacted by 10% excise duty on domestic sales. At present, cotton prices have stabilized, the industry is poised for better times. While the FY12 margins would get impacted, FY13 would witness normal profitability. Revenues to grow at a 2-yr CAGR of 27% during FY’11-13EGrowth led by yarn We expect KPR’s revenues to grow at a CAGR of 27% over FY’11-’13E to Rsexpansion and 17,743mn driven by strong growth across all its product segments. Thisincreased capacity includes operations of KPR Sugar Mill in FY13.utilisation due to Yarn division will continue to contribute over 50% of the total revenues withplanned self- CAGR of 26%, revenues from fabric will grow at CAGR of 20% and that forsufficiency in garments at 22% during FY’11 - FY’13.power, coupledwith industry We expect yarn sales volume to increase by ~1.6x during the period, on basisrevival of added capacities. Fabric and Garmenting sales volumes would increase by ~1.2 times in the period. Rs. mn 20,000 17,743 18,000 16,000 14,003 14,000 12,000 11,074 10,000 8,340 7,477 8,000 6,064 6,000 4,974 4,000 2,000 0 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Source: Company Data, Four-S ResearchFour-S Research 26
  27. 27. Company Report: KPR Mill 7 Oct’11 Segment-wise Performance YarnWith sales volume Yarn would grow at a 2-year CAGR of 26% to Rs 9,130mn in FY13E led bygrowing 1.6x to impressive growth (1.6x) in volumes to 53,312MT. Volume growth would53,312MT, Yarn to result from increase in capacity of installed spindleage from 212,064 in FY11contribute to 55% to 353,088 in FY13.of textile turnover The yarn realization in Q1 FY12 peaked to Rs. 209/kg. This was a result ofin FY13 cotton prices peaking in the same period. Now with cotton prices coming down and stabilizing we expect average realization in FY12 to be Rs. 185/kg. In FY13, based on cotton prices stability, we expect average yarn realization to go back to Rs 171/per kg. This would be still a 45% mark-up on estimated cotton prices. We expect KPR to command premium over the market rate from higher value add compact yarn segment. Yarn FY08 FY09 FY10 FY11 FY12E FY13E Sales (Rs mn) 3,335 3,654 4,088 5,794 7,570 9,130 Sales (MT) 32,793 32,440 32,882 32,547 41,024 53,312 Realization Rs./kg 102 115 127 182 185 171 Source: Company Data, Four-S Research FabricFabric sales to see We expect fabric revenues to grow at a 2-year CAGR of 20% to Rs 2,136mn in1.2X sales volume FY13E led by increase in utilisation of existing capacity and improvedincrease, due to realizations. FY 12 would be impacted by current domestic challenges, but webetter capacity expect to maintain 45% capacity utilization, based on robust first quarter. Theutilizations. It fabric processing capacity utilisation would increase from 45% in FY11 towould contribute to 55% in FY13E.13% of textile Fabric FY08 FY09 FY10 FY11 FY12E FY13Eturnover Sales (Rs mn) 776 902 1,139 1,490 1,883 2,136 Sales (MT) 7,325 9,029 10,689 9,408 9,450 11,550 Capacity 39% 52% 60% 45% 45% 55% Source: Company Data, Four-S Research In FY12 and 13 we expect Fabric to enjoy 8% mark-up on yarn prices.Four-S Research 27
  28. 28. Company Report: KPR Mill 7 Oct’11 GarmentsGarments to see Knitted garment revenues would witness growth at a 2-year CAGR of 22% tosales volume Rs 4,224mn in FY13E. KPR is adding employees for its garment division so asincrease of 1.2x by to augment production and sales contribution from garment business.FY13 and would All garment sales are contributed through exports to marquee client base ofcontribute to 25% international retailers.of textile turnover Garments FY08 FY09 FY10 FY11 FY12E FY13E Sales (Rs mn) 1,392 1,749 2,290 2,826 3,491 4,224 Sales (mn units) 15 21 30 33 35 38 Source: Company Data, Four-S Research EBITDA to dip in FY12 but revert to over 20% by FY13The unprecedented The first quarter of FY12 was rough as EBITDA margin declined to 13.8%raw material costs from 25.1% due to one-time raw material write down of Rs 278mn. The write-volatility will settle down was done as cotton prices crashed ~40% from all time highs. In rest ofdown, we expect FY12 we expect stability to return and EBITDA to improve due to added20% margin levels capacities and power savings. We expect FY12 EBITDA margin to be 16%to be retouched in and then FY13 to be a normal year with 20% margin. EBITDA in absoluteFY13 terms would achieve 2-yr CAGR of 19% to reach Rs. 3,471mn in FY13. 4,000 25% 23% 23% 3,000 20% 20%20% 16% 15% 15% 2,000 10% 1,000 5% 1,384 1,101 1,641 2,493 2,230 3,471 0 0% FY08 FY09 FY10 FY11 FY12 FY13 EBIDTA EBITDA margin Source: Company Data, Four-S ResearchFour-S Research 28