Kpr report

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 in
Bloomberg KPR.IN
FY13. This will further lead to higher capacity utilizations across garments and
NSE KPRMILL
BSE 532889 fabric.
Equity Shares (mn) 37.68
Turnover crosses Rs 10 billion, KPR ready for the big league
Face Value (Rs) 10
Market 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.
FY'07 FY'08 FY'09 FY'10 FY'11 FY'12E FY'13E
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 1.2
available 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

Company Report: KPR Mill 7 Oct’11

Investment Positives

Among top 5 domestic integrated textile companies

Among leaders in both yarn and garments

Amongst the KPR is amongst top five manufacturers of cotton yarn in terms of installed
biggies of Indian spindleage capacity in India and one of the largest manufacturers of garments
cotton 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.

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Vertically integrated operations

KPR’s operations KPR has developed one of the largest vertically integrated operations in South
are vertically India with a total manufacturing capacity of 248,976 spindles; garmenting
integrated 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 per
largest apparel annum; processing facility to handle 23 MT of fabric per day. In FY12, KPR
manufacturing 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 facilities

Breadth 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 close
helped achieve proximity to buyers helps to reduce material handling costs and facilitates
strong revenue immediate feedback regarding the quality of the product. KPR has set up a
traction 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
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 Setter

KPR’s biggest The biggest reason an investor should look at KPR is its clear reputation as an
strength is its innovator in the industry. Its proven ability to think out of the box, and come up
ability to with unique solutions that convert challenges into advantages, is what has enabled
innovate above KPR to deliver growth with superior financials.

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common Here are some examples of its innovative management style and practices:
industry
challenges.

Employee friendly Labour practices

Employees are a Textile industry inherently is manpower intensive. With growing employment
big strength for opportunities in other sectors, manpower training and retention are critical
KPR 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.

Kaizen

Ground-up “Kaizen” is the Japanese word for shop-floor innovation. While you will not
innovation expressly hear KPR say the word “Kaizen”, but that is what they follow. Walk
culture 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 generation

KPR will Power outages have been a problem many textile mills face. The outage forced
achieve 100% production break not only bleeds the top-line through lower capacity utilization
self-sufficiency but hurts the bottom-line due to cost overruns. KPR has overcome this hurdle by
in power by planning towards 100% self-sufficiency in power by 2013.
FY13. This KPR recently commissioned additional windmills of 21.25MW in March 2011
would 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 power
utilizations 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.

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Advanced machinery

State-of-the-art While this isn’t something exactly unique to KPR, but it does tell you a bit about
plants 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 companies

Outperformed KPR’s revenues grew at 3-yr CAGR of 22% over FY08-FY11 to reach Rs
peers in revenue 11,074mn in FY11 as compared to 18% CAGR growth witnessed by peer
growth and group average during the same period.
operational The growth for company was 400 basis points higher than the peer group in
efficiencies 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 payout

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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 Leverage

Low leverage In a sector where D/E ratios have gone haywire due to availability of
enhances subsidised debt (under TUF scheme), KPR is the only major textile company in
attractiveness India which believes in keeping its debt-equity around 1x. The financial
giving sufficient conservatism provides KPR with sufficient scope to pursue aggressive growth
scope 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 Snapshot

KPR achieved 31% In a very tough quarter for the industry, KPR’s first quarter FY12 consolidated
revenue growth revenues grew at 31.3% Y-o-Y to reach Rs 3,212mn boosted by strong exports
YoY 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 to
though 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.

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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%
Q1FY'11 Q1FY'12 Q1FY'11 Q1FY'12
EBITDA EBITDA Margin

Source: Company data, Four-S research

Achieves traction in Textile Exports as well

Doubled exports in KPR exports have more than doubled in last four years. It was able to sustain
4 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-sufficient
expected to be by FY13. This would enable continuity of operations all year around. At
better 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%. In
down, yarn FY13, the company would be able to increase its fabric and garmenting
capacity 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 higher

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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 profitability

EBITDA 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 growth
Management The 16-membered core management team (including board of directors and key
vision evident in managerial personnel) at KPR brings with it a rich experience of 1-4 decades
approach to acquired in textile industry. Mr. K.P. Ramasamy, the Chairman, has rich industry
resolve challenges experience in the production and marketing across all the products segments and

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facing the sector holds memberships in all key industry associations including Southern India
Mill's Association (SIMA).
Management vision evident in approach to resolve challenges facing the sector –
power outages and employee sourcing

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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-FY11

KPR 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 by

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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


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.

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Power & Fuel Cost/Sales

8%
6% 6%
6% 5% 5%

4% 3% 3% 3% 3%
2%

0%
FY08 FY09 FY10 FY11

Source: Company data, Four-S research

PAT Margin outperforming peers in FY10 and FY11

KPR’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


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 ratio

KPR 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

Note: Dividend information is NA for Mudra Lifestyle for FY11

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 Final

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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


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


KPR’s low leverage KPR’s D/E ranges between 0.8x-1.3x over FY08-FY11which is significantly
is one of its most lower than the peer group average range of 1.6x-2.0x. The company’s
attractive 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.

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Q1FY’12 peer comparison – Standalone results
Higher growth and EBITDA Margin in a tough quarter

EBITDA margins Company Revenue (Rs mn) EBITDA Margin (%) Net Margin (%)
Q1FY'12 YoY Growth (%) Q1FY'11 Q1FY'12 Q1FY'11 Q1FY'12
of most of textile
Large Integrated Players
players 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% NA
sudden 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 Players
EBITDA 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% NM
than 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.

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Valuation Comparison
Trading at Attractive Multiples

KPR is trading at Company CMP (Rs.) No. of shares Market Cap Net Debt EV EV/Sale s EV/EB ITDA PE P/B
7th Oct'11 (mn) (Rs mn) (Rs mn) (Rs mn) (x) (x) (x) (x)
very attractive
Large Integrated Playe rs
valuation Alok Industries 18 788 14,220 1,07,550 1,21,770 1.7 6.7 4.4 0.5
multiples 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 1.4
currently
Bombay Rayon 276 99 27,302 30,949 58,251 2.1 10.7 13.2 1.1
compared to Welspun India 27 89 2,420 15,937 18,358 0.9 9.4 19.7 0.4
both the peer Mid-Size Integrated Players
Nahar Spinning 60 36 2,157 13,244 15,401 1.0 10.1 14.9 0.3
group average
Mandhana Industries 210 33 6,959 5,402 12,362 1.4 8.1 10.0 2.0
and the historical Mudra Lifestyle 25 48 1,178 3,766 4,944 1.2 19.9 NM 0.5
valuations 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 Research

Four-S Research 15


Valuation and Price Target
Current valuations depressed on raw material volatility

Valuations will First quarter of FY12 saw unprecedented raw material price volatility. Share
correct as normalcy prices of most of the textile players fell down. Players in cotton textiles were
returns to cotton impacted the most compared to those with interests in manmade textiles, retail
prices 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 Target

KPR should hit a Current valuations of KPR are depressed compared to its own historical
price of Rs 265 by trading levels, and peer group averages. As shown in the table in the
March 2013. We immediate preceding page, KPR has traded at an EV/EBITDA of around 5x or
expect it to rerate more in recent years. Similarly, it has traded at a PE of around 8x. These
towards historical values are also in line with peer averages.
valuation levels We believe, KPR valuations will revert to these values as normalcy returns to
with industry cotton prices. While there is a good case of KPR quoting at a premium to peer
revival 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


KPR’s Business

Vertically Integrated Operations
Amongst the KPR has established one of the largest vertically integrated manufacturing
largest vertically capacities in South India with the capability to produce readymade knitted
integrated players apparel, knitted fabric and carded and combed cotton yarn. The integrated
with focus on Yarn manufacturing operations enable the company to better customize products as
and 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 producers

Yarn is the main KPR is amongst India’s largest cotton yarn producers. The company currently
play for KPR with has installed capacity of 248,976 spindles which translates into an annual
over 50% production capacity of 63,500MT of yarn. This includes both carded and
contribution to combed yarn.
turnover. Yarn After its ongoing expansions go on stream, KPR’s total installed capacity will
capacity is go up to 353,088 spindles. The annual production capacity would increase to
increasing by 50% 90,000MT of yarn.
in 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 the

Four-S Research 17


remaining 70% - 75% is sold in the domestic markets.

Expansion – Adding 132,912 spindles

New unit of Compact Yarn at Karumathampatti

Compact yarn Sensing an opportunity in higher value add yarn segment, KPR is setting up a
capacity addition new unit to manufacture 100% compact yarn. It is adding 103,680 spindles at a
will 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 in
as 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 Sathyamangalam

Bank Loans for the KPR completed modernisation of its existing 30,240 spindleage capacity at
projects sanctioned Sathyamangalam unit in March 2011. This involved replacement of existing
under 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


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 unit

KPR’s fabric KPR’s fabric division equips high speed automatic knitting machines with a
segment 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 facilities
revenues 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 Play

KPR’s garment Knitted Garments segment contributed 27% to the total revenues (during
division is 100% FY11) and enjoys highest margins. Of the total garment capacity, 12mn pieces
export oriented. It of the garment are outsourced through the Tirupur facility and the remaining is
contributed 27% to produced in-house. The company outsources small orders to local
total 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% capacity
largest garment utilisation which provides it with significant scope for growth without further
producers in India expansion.

Four-S Research 19


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 farms

Power has been a The company has installed wind Mill with a total generation capacity of
pain area for Tamil 61.07MW for captive consumption at Tirunelveli, Tenkasi Theni and
Nadu based textile Coimbatore districts with an objective to become self- reliant in power
players. KPR has consumption needs, support its expanding operations and reduce dependence
mitigated this risk on state electrical grid.
to operational With one of the largest in-house power capacity in southern India, company
continuity by achieves substantial competitive advantage in power costs. KPR’s power cost
investing 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


Recent investments in Co-Gen cum Sugar project

KPR’s latest With Tamil Nadu reaching saturation point for wind power generation, KPR
investment in Co- proactively started exploring new avenues for green power. The Company
Gen cum Sugar recently announced participation in the Co-Gen cum Sugar project of 34 MW
project 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 subsidiary.
in 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 (FY'11)
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


Location of Facilities Nature of Work Capacity

Existing

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


Source: Company Data, Four-S Research

Revenue Mix: A diversified sales mix

All three product KPR has vertically diversified within the cotton value chain to reduce
segments – Yarn, dependence on any one part.
Fabric and Yarn is the largest segment contributing over 50% of the company’s revenues
Garments -- have since FY07 onwards. The revenues grew at a 4 yr CAGR of 24% to reach Rs
delivered high 5,794mn in FY’11. Yarn contribution in FY11 increased to 55% of total sales
growth 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.


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


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

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 policy

KPR reduced KPR procures high quality Shankar - 6 cotton from during the buying season
cotton holding in i.e. October - March, to ensure highest & uniform quality of cotton at an
response to volatile economical cost. The harvesting of cotton is done in October ensuring
cotton prices. This increased availability of cotton at relatively lower prices. The company

Four-S Research 23


reduced the extent procures majority of its cotton requirement during December to January when
of 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 costs

Low 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 processes

A player of The manufacturing facilities at KPR are internationally accredited and are
international staffed with trained supervision and equipped with high tech quality control
standards 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


 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 face
Committed to KPR continues to involve itself into the activities aimed at overall development
social development of the society. It has contributed actively towards community welfare
and 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


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’11-13E

Growth led by yarn We expect KPR’s revenues to grow at a CAGR of 27% over FY’11-’13E to Rs
expansion and 17,743mn driven by strong growth across all its product segments. This
increased capacity includes operations of KPR Sugar Mill in FY13.
utilisation due to Yarn division will continue to contribute over 50% of the total revenues with
planned self- CAGR of 26%, revenues from fabric will grow at CAGR of 20% and that for
sufficiency in garments at 22% during FY’11 - FY’13.
power, coupled
with industry We expect yarn sales volume to increase by ~1.6x during the period, on basis
revival 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


Four-S Research 26


Segment-wise Performance

Yarn
With sales volume Yarn would grow at a 2-year CAGR of 26% to Rs 9,130mn in FY13E led by
growing 1.6x to impressive growth (1.6x) in volumes to 53,312MT. Volume growth would
53,312MT, Yarn to result from increase in capacity of installed spindleage from 212,064 in FY11
contribute 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 of
in 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


Fabric
Fabric sales to see We expect fabric revenues to grow at a 2-year CAGR of 20% to Rs 2,136mn in
1.2X sales volume FY13E led by increase in utilisation of existing capacity and improved
increase, due to realizations. FY 12 would be impacted by current domestic challenges, but we
better capacity expect to maintain 45% capacity utilization, based on robust first quarter. The
utilizations. It fabric processing capacity utilisation would increase from 45% in FY11 to
would contribute to 55% in FY13E.
13% of textile
Fabric FY08 FY09 FY10 FY11 FY12E FY13E
turnover
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%

In FY12 and 13 we expect Fabric to enjoy 8% mark-up on yarn prices.

Four-S Research 27


Garments
Garments to see Knitted garment revenues would witness growth at a 2-year CAGR of 22% to
sales volume Rs 4,224mn in FY13E. KPR is adding employees for its garment division so as
increase 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 of
contribute 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

EBITDA to dip in FY12 but revert to over 20% by FY13

The 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 of
down, we expect FY12 we expect stability to return and EBITDA to improve due to added
20% 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 absolute
FY13 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%
FY'08 FY'09 FY'10 FY'11 FY'12 FY'13
EBIDTA EBITDA margin


Four-S Research 28


KPR’s PAT would Net Profit soared at 2-year CAGR of 167% over FY09-11 to reach Rs 722mn
similarly face a while the net margin increased consistently from 1.4% in FY09 to 6.5% in
negative growth in FY11. However, FY12 PAT will be impacted as EBITDA margin gets
FY12 significantly reduced, and increased financial charges due to new debt. We
expect FY12 PAT margin to be 4%.

FY13 would be a FY13 would be a turnaround year as operational profit margins return to
milestone year for normalcy. The Sugar Mill operations with 20% EBITDA margin would further
boost the PAT margin. We expect PAT margin to be 8% in FY13.
KPR’s profitability
as investments in In absolute terms, buoyed by 60% added capacity, increased scale of
fully available new operations PAT would reach Rs. 1,366mn by FY13.
yarn capacity,
1,500 10%
100% self-
sufficiency in 8% 8%
power, and four 1,000 7%
6% 6%
months of sugar
mill operations 4% 4%
500
make its PAT cross
2%
the Rs 1300mn level 101
1% 504 722 566 1,366
0 0%
FY'09 FY'10 FY'11 FY'12 FY'13
Net Profit NET Margin

Attractive Return Ratios

Buoyed by higher
25% 21% 20%
profitability both in 19%
20%
terms of margins 15%
15% 13%
and scale, we would 10% 9% 14%
10%
see return ratios 10%
5% 11%
touch double-digits 5% 9% 8%
2%
in FY13 0%
RoE RoCE
Note: Returns based on Average Equity and Average Capital Employed

FY09 was a roughshed year for KPR with raw material cost increasing by 35%
YoY. Hence the PAT and Return ratios were impacted.
KPR in last 2 years has developed a robust business model by focusing on
exports, capacity additions and captive power generation. In the current cotton
volatility based turbulent quarter, it was able to maintain capacity utilization at
90%. Though its EBITDA saw a decrease, it did post a positive PAT compared
to few other peers.

Four-S Research 29

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