[www.niftyviews.com:26554] The Curious Case of Kitex-Amit Mantri, 2Point2 Capital (Dated piece, but worth reading)

[Rajiv Handa]

The last 3 years have been exceptionally good for small cap investors in
India. The BSE Small Cap index has more than doubled, driven by an increase
in P/E multiples and also fairly good earnings growth. There are several
companies in the small cap universe which have delivered astronomical
returns of over 10-50x in a short period of time. Small cap investing is
the latest get-rich-quick scheme. As history has shown, this kind of
euphoria rarely ends well.

Kitex Garments Limited (“Kitex”) is one of the many multi-baggers in the
small cap universe and has delivered over 8x returns in the last 3 years.
This is despite the 50% fall in the stock over the last year (excluding
which the returns are 16x!!!). However, what’s interesting about Kitex is
the numerous questions it raises if you start studying its business and
analysing its financials.  We discuss a few of the key concerns below.

—

*1. The curious case of the unbelievably profitable “commodity” business*

Kitex manufactures and exports infant garments and derives a majority of
its revenues from export of garments to US and Europe. A part of Kitex’s
revenues are from sale of fabric to a related party (Kitex Childrenswear)
which also manufactures infant garments. Kitex has a concentrated customer
base with its top 5 customers (likes of Gerber, Toys“R”Us, Mothercare,
Jockey, Carter’s) accounting for over 80% of revenues.

Apparel manufacturing is an intensely competitive business as large
customers (brand owners and retailers) have significant bargaining power
and product differentiation is fairly low. Likes of WalMart, Gerber and
Toys“R”Us have suppliers across the world and they set the prices. As such,
the apparel manufacturing industry has struggled to generate a high ROE
over the long term. This has been broadly true for the last 100 years.

Kitex, however, seems to be an exception. The company has an
exceptionally high profit margin and ROE. Kitex is probably the world’s
most profitable apparel manufacturing company (measured by ROCE – return on
capital employed). In fact, Kitex which is a B2B company is more profitable
than even B2C apparel companies which have strong brands (like Page
Industries which owns the license for Jockey in India).
*in Crs* *FY12* *FY13* *FY14* *FY15* *FY16*
*Kitex* *Revenue* 321.0 317.1 454.4 524.7 565.3
*EBITDA* 65.7 65.8 110.2 184.1 208.5
*EBITDA Margin* 20.5% 20.8% 24.3% 35.1% 36.9%
*Pre-Tax ROCE** *34.5%* *32.8%* *51.3%* *75.4%* *81.9%*
*Page Industries* *Revenue* 705.7 908.1 1252.7 1622.8 1865.9
*EBITDA* 154.8 189.1 262.7 328.6 384.4
*EBITDA Margin* 21.9% 20.8% 21.0% 20.2% 20.6%
*Pre-Tax ROCE** *54.8%* *58.0%* *57.9%* *54.9%* *55.3%*

**Pre-Tax ROCE is EBIT / Capital Employed (Excl Cash)*

Kitex’s high profitability is a source of mystery. One of the rules of
capitalism is that any company earning supernormal profits will see the
emergence of competition seeking to eat into its profits. The only way a
company can then continue to enjoy supernormal profits is if it has a
sustainable competitive advantage (say brand, network effects, economies of
scale, switching costs). Companies that don’t have such an advantage (also
referred to as moat) will see an eventual decline in their profits.

Kitex’s investors believe that its customers are willing to pay a premium
because of its high standards of quality and compliance with labor and
environment laws. Kitex is also believed to benefit from the high switching
costs of its customers – buyers spend a lot of time in selecting,
evaluating and approving vendors. The above points suggest that Kitex has a
fair bit of leverage when it comes to its customers. However, the practical
reality seems otherwise. While Kitex is largely dependent on 5 customers
for a large majority of its revenues, Kitex accounts for less than 1% of
supplies (rough estimate) to these companies and is one of 100s of
empanelled suppliers. Why would customers with a high bargaining power
knowing that Kitex is dependent on them (and they are not) still allow it
to make supernormal profits? Even if Kitex has some pricing power, despite
the one-sided dependence, is it likely to be so high as to allow them to
have profit margins that are 2-3 times that of peers and even higher than
B2C companies? That just seems too good to be true.

* 2. **The curious case of the zero-interest earning cash and high cost
debt*

When the business has supernormal profitability, it generates tons of cash
from operations. Kitex is no exception. Over the last 5 years, the company
has generated over 340 crores in free cash flow (FCF). Typically, when a
company generates so much FCF it either returns the excess cash to its
shareholders through dividends or pays down its debt. Kitex has been an
exception here. It has paid out very little cash as dividends over the last
5 years (less than 30 crs) and its debt has surprisingly increased in this
period. This is quite odd because debt needs to be regularly serviced with
interest payments 

[www.niftyviews.com:26559] Nifty May Open Gap Down As The Global Market Is Under Trump’s “Fire & Fury” & Escalated NK Tensions; Indian Market May Be Further Under Stress Amid “Shell Cos” Fiasco

[Asis Ghosh]

Market Mantra: 09/08/2017 (09:00)

SGX-NF: 9965 (-39)

For the Day:

*Key support for NF: 9940-9890*

*Key resistance for NF: 10020/10065-10115*

*Key support for BNF: 24500-24250*

*Key resistance for BNF: 24900-25150*

*Hints for positional trading: Strategy-SELL ON RISE*

*Time & Price action suggests that, NF has to sustain over 10020 area 
for further rally towards 10065/10115-10155 & 10205-10275 in the short 
term (under bullish case scenario).*


*On the flip side, sustaining below 1 area, NF may fall towards 
9940-9890 & 9825-9770 area in the short term (under bear case scenario).*


*Similarly, BNF has to sustain over 24950 area for further rally towards 
25050-25150 & 25250-25500 area in the near term (under bullish case 
scenario).*


*On the flip side, sustaining below 24900 area, BNF may fall towards 
24700-24500 & 24250-23900 area in the near term (under bear case scenario).*


As par early SGX indication, Nifty Fut (Aug) may open around 9965, gap 
down by almost 39 points tracking subdued global cues amid escalation of 
NK-US geo-political tensions. As par some intelligence reports from both 
US & Japan, NK may have acquired a miniature nuke head technology 
compatible with its ICBM; i.e. it may have now a nuke capable ICBM/missile.


Following this NK report, Trump has threatened the nation with “Fire & 
Fury, the world has never seen before” and in response, NK may have also 
indicated to attack a US military island (Guam). Thus, all these ongoing 
NK geo-political tensions has made the risk-on sentiment adverse, USD 
has gone lower despite an upbeat JOLTS job openings report yesterday; 
JPY, Gold & also EUR has seen some safe heaven flows.


US market (DJ-30) closed lower (-0.15%) yesterday and SPX-500 also 
closed 0.24% lower, the most in the last 30 days as a result of NK 
geo-political jitters. But EU market yesterday closed upbeat, well off 
the evening lows after EUR tumbled as a result of solid US economic data 
(JOLTS) and some buzz of an early resolution of the Trumpcare fiasco; 
but EU futures are now trading lower amid escalation of NK tensions & 
some rebound in EUR.


Back to home, Indian market may try to cover some shorts after opening 
lower today; but SEBI need to come forward and clarify the “Shell cos” 
fiasco clearly as almost Rs.9000 cr may have been stuck by the investors 
in those scrips; in any way, even if SEBI clarified about this “Shell 
cos”, the credibility of the overall market, specially mid & small cap 
cos may be in disarray in the days ahead as Govt may continue its 
ongoing war on corruption/black money ahead of 2019 general election.


Various banks may be also in focus because some of these so called 
“shell cos” may have also significant exposure to the banks. Apart from 
earnings, all eyes may be on the China border issues, which may turn 
serious in any day amid escalation of “war of words” between the two 
countries.





 SGX-NF

--
Thanks & Regards,

Asis Ghosh

--
Kindly email stock reports at 

STOCKRESEARCHER@googlegroups.com 


For sharing knowledge

-- NIFTYVIEWS.COM NOW A FREE OPEN SOURCE WEBSITE.

http://www.niftyviews.com/ 



Disclaimer :-
"The opinions expressed by the members on this board are based on
their individual experience and perceptions and to share information
with other members with the best of intentions to help fellow members
in investment decisions as equity investment is a risky venture.The administrator of 
www.Niftyviews.com just provide a platform for the authors to express their opinion 
and take no guarantee for the genuineness of the same."ANY member of this forum 
doesnt prepare or publish any research report; or ii. provide research report; or 
iii. make 'buy/sell/hold' recommendation; or iv. give price target;
--- 
You received this message because you are subscribed to the Google Groups "Niftyviews.com" group.

To unsubscribe from this group and stop receiving emails from it, send an email 
to stockresearcher+unsubscr...@googlegroups.com.
For more options, visit https://groups.google.com/d/optout.

[www.niftyviews.com:26558] Nifty “Shell Shocked” By0.87% Amid SEBI Crackdown On The Suspected “Shell Cos”; Tepid Global Cues After Subdued China Trade Data Also Dragged The Indian Market Today

[Asis Ghosh]

Market Wrap 
: 
08/08/2017 (17:00)


NSE-NF (Aug):10004 (-87; -0.87%) (TTM PE: 25.26; Abv 2 SD of 25; Avg PE: 
20; TTM EPS: 395; NS: 9979)


NSE-BNF (Aug):24705 (-293; +0.61%) (TTM PE: 30.94; Abv 3 SD of 30; Avg 
PE: 20 TTM EPS: 795; BNS: 24599)


For 09/08/2017:

*Key support for NF: 9940-9890*

*Key resistance for NF: 10065-10115*

*Key support for BNF: 24500-24250*

*Key resistance for BNF: 24900-25150*

*Hints for positional trading:*

*Time & Price action suggests that, NF has to sustain over 10065 area 
for further rally towards 10115-10155 & 10205-10275 in the short term 
(under bullish case scenario).*


*On the flip side, sustaining below 10045 area, NF may fall towards 
1-9940 & 9890-9825 area in the short term (under bear case scenario).*


*Similarly, BNF has to sustain over 24950 area for further rally towards 
25050-25150 & 25250-25500 area in the near term (under bullish case 
scenario).*


*On the flip side, sustaining below 24900 area, BNF may fall towards 
24700-24500 & 24250-23900 area in the near term (under bear case scenario).*


Nifty Fut (Aug) today closed around 10004, virtually “shell shocked” by 
yesterday’s SEBI directive about freezing of a long list of so called 
shell cos and slumped by almost 87 points (-0.87%) after making an 
opening session high of 10105 and day low of 9958; overall market 
sentiment got affected severely as there may be wider probes into other 
clean cos also and above all valuations may be quite stretched.


The surprised SEBI move may be a logical follow up by the Govt’s 
clampdown on black money/corruption (DeMo) suspected on illegal offshore 
transfers & tax evasion; although the regulator did not specify the 
charge details.


Indian market today opened around 10085, almost flat, tracking mixed 
global cues; but soon after opening it fall into severe selling pressure 
after SEBI decision to bar nearly 331 suspected “shell companies” from 
regular trading and further strict action, if allegation proves right.


Apart from various small companies, there are also so called “multi 
baggers” & “quality names” in that list, which may be very shocking to 
the investors/traders and may also, destabilize the overall market 
mechanism and it may be a serious question of credibility. These “shell 
cos” data has been compiled by MCA (Govt OF India), may be with the help 
of other investigating agencies in an ongoing fight against corruption 
by the Govt.


But, as Govt may also need a vibrant Indian capital market to keep its 
disinvestment target intact, one may expect some soothing clarification 
from the Govt/FMO soon and if there is any wrong communication, SEBI may 
also admit that and will hopefully rectify it soon.


Nifty was today supported by Hindalco (upbeat report card from Novelis & 
optimistic outlook), Tata Steel (upbeat results/guidance & optimistic 
outlook for the domestic industry, thanks to the huge infra spending by 
the Govt), Cipla (new product approval from US FDA), GAIL (OMC 
optimism), Bajaj-Auto (new model launch) & HUL (optimistic outlook & 
near normal monsoon with little probability of an EL-Lino even by 2018 
Spring as projected by the IMD).


Nifty was today dragged by RIL, PSBS (tepid credit growth) & Infratel 
(stake sale by Bharti Airtel to reduce debt), DRL, Lupin, Sun Pharma, 
ITC, ICICI & Axis Bank.


Globally, most of the major Asian markets except Hong-Kong were trading 
in negative tracking mixed global cues after USD softened more amid 
subdued China export/import (trade balance) data. There is also some 
buzz that China may widen its USDCNY trading (fixing) band in its 
ongoing effort of currency reform ahead of Trump’s visit in Oct-Nov. A 
lower USD is generally not good for export heavy Asian indices/markets.


Today China trade data for July flashed disappointed and may have raised 
some question mark over the narratives of global reflation trade based 
on China; on YOY basis, export grew by 7.2% against estimate of 10.9% 
(prior: 11.3%); similarly import grew by 11% against estimate of 16.6% 
(prior: 17.2%), leaving the headline trade balance at $46.74 bln vs 
estimate of 46.08 (prior: 42.77).


Overall, global market may have great faith on the Chinese reflation, 
being the manufacturing power house & growth engine of the world, but a 
tepid export & import figure for July may be also a big disappointment, 
although a strong Yuan over the last few months may be also responsible 
for the subdued export data to some extent.


Overnight US market (DJ-30) closed almost flat, but at another record 
high around 22118 (+0.12%) supported by techs/semi conductor stocks & 
consumer staples and some M buzz; but energy related shares dragged 
the market to some extent in a relatively light day of trading amid 
ongoing summer holiday season.


Overall, US market may be quite complacent 

[www.niftyviews.com:26557] CLSA-Is It Different This Time?

[Rajiv Handa]

Is it different this time? Market and economy doesn’t appear overheated
This week, India’s benchmark Nifty touched five digits for the first time
ever. Are markets overheated? In USD terms, the Nifty is about 3% below the
previous peak and 8% shy of peak valuations reached a decade ago. The
market cap/GDP ratio is close to the average and lower bond yields
partially explain the high PE. Several other parameters such as credit
growth, earnings growth, inflation and foreign flows appear to be at
cyclical lows so the economy is far from overheating. Several
reforms/actions such as GST and financial inclusion are in place which
argues for higher growth for longer. Housing affordability is the best in
decades and a housing boom appears imminent. Sticky domestic flows should
sustain multiples and market returns should follow earnings growth.
External shock (viz potential shrinkage in the Fed balance sheet) appears
to be the key market risk. A potential populist turn by the government, a
surge in equity supply and delay in NPL resolution are the risks on the
horizon from an India perspective.
Nifty at a high but several market parameters sober q The Nifty is up 17%
in the past 12 month but has underperformed the MSCI AxJ by 2ppt and is
in-line with MSCI EM, in USD terms. Foreign flows are quite moderate as
compared to 2005-07. q The current high PE is based on low cycle corporate
earnings. q MSCI India PE premium to MSCI EM is 40%, within 5% of the
long-term average. q Market cap/GDP ratio is reasonable at 90% as against
150% at the Jan-08 peak. q High-quality (ROE) stocks have outperformed, so
no irrational exuberance seen as yet. The earnings yield–bond yield gap at
0.9ppt is still close to the 10yr average.
Economic parameters do not show any sign of overheating q Inflation was at
a low of 1.5% in June ’17 (4.5% in FY17) vs 6.2% in FY08. The RBI is still
in a rate-cut cycle. In 2007, the RBI was already in tightening mode. q
Corporate earnings growth averaged only 2% over FY15-17 against 24% over
FY06-08. Corporate ROEs are also down by c.12ppt from the FY06-08 average
to 13% now. The corporate earnings recovery cycle has yet to play out. q
The capex cycle remains subdued. GFCF as a percentage of GDP is down 7ppt
from its peak to 27% in FY17.
Launchpad for growth revival in place q Political stability gives high
visibility to policy continuity well beyond 2019. q The GST reform
implemented on 1 July significantly improves the ease of doing business in
India as multiple taxes reduce and inter-state business improves. q
Financial inclusion has been a key gov’t priority and, with c.300m
no-frills accounts opened in three years, formalisation of a greater part
of the economy is happening. q Housing affordability is at a two-decade
best and a multi-year housing boom appears imminent (link), helped by gov’t
policies.
What could go wrong? q We believe that the potential doubling of equity
paper supply to US$15bn-17bn in FY18 would still be manageable given sticky
domestic inflows. A surge in equity paper supply towards US$20bn is a risk.
q Possible populist measures (viz the spread of farm loan waivers,
stringent anticorruption measures) ahead of the May ’19 elections could
impact business sentiment. This risk is low as Mr Modi strengthens his
political position. q Delay in NPL resolution. q Mid-cap valuations have
crept up and trade at an 8% PE premium to large caps. Any sharp correction
here would be negative, particularly from the perspective of a domestic
investor who has a mid-cap bias. q Escalation of the geopolitical situation
at the India-China border.

-- 
Kindly email stock reports at 

STOCKRESEARCHER@googlegroups.com 

For sharing knowledge

-- NIFTYVIEWS.COM NOW A FREE OPEN SOURCE WEBSITE.

http://www.niftyviews.com/ 


Disclaimer :-
"The opinions expressed by the members on this board are based on
their individual experience and perceptions and to share information
with other members with the best of intentions to help fellow members
in investment decisions as equity investment is a risky venture.The 
administrator of www.Niftyviews.com just provide a platform for the authors to 
express their opinion and take no guarantee for the genuineness of the 
same."ANY member of this forum doesnt prepare or publish any research report; 
or ii. provide research report; or iii. make 'buy/sell/hold' recommendation; or 
iv. give price target;
--- 
You received this message because you are subscribed to the Google Groups 
"Niftyviews.com" group.
To unsubscribe from this group and stop receiving emails from it, send an email 
to stockresearcher+unsubscr...@googlegroups.com.
For more options, visit https://groups.google.com/d/optout.