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Stock Tales - KPR Mill - ICICI Securities

Posted On: 2020-09-14 08:50:35

KPR Mill is among select vertically integrated textile players in India (from fibre to fashion) that has displayed consistent revenue growth and positive operating margin trajectory with strong return ratios. The strength of its integrated model is visible in its FY12-20 financial performance with revenue, PAT CAGR of 13%, 35%, respectively, average EBITDA margin of ~18%, average RoCE of 15%+. KPR has transformed itself from a commoditised yarn player (capacity: 104000 tonnes) to value-added garment manufacturer & is currently among largest garment manufacturers in India (capacity: 115 million pieces). It has a healthy balance sheet with D/E ratio comfortably placed at 0.4x. KPR through its strong promoter pedigree and long standing relationship with marque clients is expected to tide over the situation better than small peers.

Garmenting division to benefit from shift of business from China

Global brands in textile, apparel are exploring competitive sourcing alternatives to China. India, owing to its competence due to abundant availability of raw material (cotton, manmade yarn/fabric), strong pool of skilled labour at competitive wages can garner a higher share of global garmenting business. Global brands have shown higher preference for vertically integrated garment manufacturers who have control over quality, delivery timelines. KPR, with a vertically integrated model from yarn to garmenting seems well set to benefit from shift in demand from China to other low cost Asian countries. We expect garmenting business to post 10% CAGR in FY20-23E, share of garments in revenue to move up from 42% to 45%.

Higher value addition to aid improvement in margins

The company has over the last two years invested in more than doubling its processing capacity to 22000tpa. It has also added 7500 TPA of printing capacity. This would enable KPR to produce more value added products and, hence, garner higher realisation for its products thereby improving its operating margin profile. Furthermore, the company has entirely upgraded its conventional yarn capacity to value added yarn (Compact, Melange, Vortex yarn) that fetch higher realisations. KPR is also expected to benefit from the improved scenario for the sugar business. For Q1FY21, sugar business revenues doubled to Rs. 113 crore driven by near 2x sugar volumes and commencement of the ethanol plant (steady profitability) with EBIT margins improving 310 bps YoY. We build in EBITDA CAGR of 11% in FY20-23E with margin expansion of 140 bps to 20.0% in FY23E.

Valuation & Outlook

KPR's strategy of focusing on high asset turnover garmenting segment for future growth provides scope for improvement in return ratios over the medium to longer term. We like KPR as a structural long term story to play the apparel export space. We continue to remain positive on KPR due to its competitive advantages due to lower power & labour cost, vertically integrated operations, focus on value-added products and robust balance sheet. The recent ethanol capacity addition is likely to reduce volatility in the sugar business. We ascribe BUY rating to the stock with a target price of Rs. 735 (10.0x FY23E EPS).

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Shares of K.P.R. Mill Limited was last trading in BSE at Rs.600 as compared to the previous close of Rs. 577.95. The total number of shares traded during the day was 7737 in over 1366 trades.

The stock hit an intraday high of Rs. 609.55 and intraday low of 577.15. The net turnover during the day was Rs. 4624694.

Source: Equity Bulls

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