Brokerage house Motilal Oswal is bullish on Kitex Garments and has recommended buy rating on the stock with a target price of Rs 850 in its research report dated April 06, 2015.
Motilal Oswal's report on Kitex Garments
“Kitex Garments Ltd (KTG) reported 4QFY15 numbers, with a revenue of INR1.58b (est. INR1.82b), compared to INR1.42b in 4QFY14, marking a YoY growth of 11.1%. Garments segment reported a robust growth of 28% YoY; however, revenue growth was negatively impacted by 33% decline in fabric revenue. EBITDA grew by 58% this quarter to INR660m (est. INR573m), while EBITDA margin stood at 41.7% (est. 31.5%) in 4QFY15, compared to 29.3% in 4QFY14, an expansion of 13% YoY completely driven by an improvement in gross margin and higher revenue contribution from garments division. Hence, PAT for 4QFY15 stood at INR416m (est. INR350m), compared to INR211m in 4QFY14, marking a YoY growth of 97%. Management expects to double sales in three years, with minimal capex of INR100m annually and expects 20-25% sales growth for FY16, 30-35% sales growth for FY17, 35-40% sales growth for FY18.”
“KTG is in the final stages of a tie-up with an US brand and the first shipment will begin in October. Commercials for the brand will only be based on royalty and management guides that there will be no upfront investment. From a two to three-year perspective, KTG will look at having two to three private labels and an own brand. Given the popularity of the private label (well-known toys brand in the US), management believes KTG will not have to invest significantly in brand promotion. It expects additional capacities to be devoted exclusively towards private label and the own brand. In five years time, management targets to have 100% of revenue from direct sales, thus transitioning it into a complete B2C player.”
“With foray into the brands business, we expect strong 23% revenue CAGR along with 400bp margin expansion, driving 37% PAT CAGR over FY15-17. Further, capital expenditure over the next three years will be limited to INR0.4-0.5b, thus resulting in significant free cash generation. We upgrade FY16E/17E earnings by 2%/7% each to factor stronger margins. With huge scalability, strong return ratios and free cash generation, we believe KTG deserves a multiple of 22x one-year forward. We maintain Buy with a target price of INR850, valuing the stock at 22x FY17E earnings”, says Motilal Oswal’s research report.
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