Equity Reserach/Financial Modelling - KPR Mills Ltd. (Textile Sector)

Equity Reserach/Financial Modelling - KPR Mills Ltd. (Textile Sector)

1. Moolyankan - An Equity Research Competition Team Name - EquityMasters Sanskar Vyas B011 Ashwini Kesharwani B055 Archana Sunil B025

2. India’s $ 44 bn Textile industry is anticipated to reach $ 190 bn by 2026 against the global textile industry value of $1.4 trn by 2032 growing at a CAGR of 3.7% Cotton & Fibers are the two major segments in this industry Rise in middle-class income & young population are considered important growth variables Contribution to India's GDP stands at 2.3 % & manufacturing GDP at 13 % as a result of a strong market in domestic demand and exports ( 23.1 bn million) as of FY23 Textile Industry has around 45 mn of workers employed including 3.5 mn handloom workers Low cost substitute products from countries like Vietnam & Bangladesh Major clothing brands have better bargaining power over textile manufacturers Significant presence of small suppliers has reduced the bargaining power Industry is highly fragmented with organised sector contributing only 31% in 2023 A few large suppliers are focusing on forward integration Market Outlook Industry Drivers Competitive Landscape Govt. Policies & Initiatives Recent Trends Threat of New Entrants Threat of Substitutes Rivalry among existing firms Bargaining power of buyers Bargaining power of sellers A-TUFS : Govt. allocated funds worth $2.3 bn between FY16 & FY22 PLI Scheme : Govt. approved $1.4 bn for man-made fibre & technical textiles MITRA Parks : 7 PM Mega Integrated Textile Region & Apparel Parks by FY28 SAATHI : Technology upgradation scheme for reviving power loom sector SCBTS : Skilling programme to create jobs in the organised textile sector FDI : Up to 100% is allowed in textile sector through the automatic route Policy support: National Textile Policy 2000 ; increased incentives, emerging e-marketplaces Industry Overview – Textile Industry

3. Company Profile Business Model Value Proposition Financials KPR is leading business conglomerate in India Engaged in textiles, sugar, ethanol & power Considered as one of the top 5 listed Textile company of India Largest exporter of knitted garments from India with a capacity of 115mn pcs/annum Has 12 technology-oriented manufacturing units Recently forayed into retail segment with FASO Exports to over 60 countries including US & EU Extending employment to over 30,000 people ( 90% are women) Garments Yarn & Fabric Sugar Others Segment-wise Revenue Share FY23 Share (%) 47 39 11 3 Over the years, it has consistently maintained 18-20% margins with average RoCE - 20% & D/E Ratio of 0.4x Key Financials: FY22-23 EPS: 23.81 P/B : 5.31 MCap(cr.): 28,370 BVPS: 93.23 D/E : 0.36 ROE: 21.96 1. Core Business : Manufacturing textiles & sugar 2. Product Portfolio: Diverse range for different customer segments 3. Distribution Network: Wide reach through wholesalers & retailers 4. Brand Image: Known for supreme quality products 5. I nnovation and R&D : Developing new technologies, enhancing performance 7. Sustainability Initiatives: Focus on eco-friendly manufacturing practices 8. Partnerships : Collaborations with suppliers & partners “Ma nufacturing an impressive product range of textile varieties such as Readymade Knitted Apparel; Fabrics; Compact, Melange, Carded, Polyester and Combed Yarn, KPR Mill reaches out to global customers with diligence, superior quality and delivery excellence” Past Performance Why KPR-Key Strengths: Close to 4 Decades of Rock-Solid Experience & Location advantage - Tirupur(Asia’s largest knitwear cluster) Impressive Product Range - Yarn, Fabrics, Garments & White Crystal Sugar Quality Assurance - stringent norms & regulations Multitude of Infrastructural advantages – vertically integrated operations Company Overview – KPR Mills Ltd. Value Proposition Business Model Company Profile Share Price Performance P/E: 34.97 Sector P/E: 25.13

4. Textiles Competitive Scenario- Key Players: Arvind -   one of India’s largest integrated textile and apparel companies with a strong retail presence and a pioneer of denim in India. Gokaldas Exports - The company produces blazers and pants (formal and casuals), shorts, shirts, blouses, denim wear, swim wear, active and sports wear. SP Apparels - one of the leading manufacturers and exporter of knitted and children in India. Page Industries - a value driven, fully integrated manufacturing, marketing, distribution and retail company dedicated to building world class brands. Others - Raymond, Welspun India, Trident etc. The Indian textile industry faces competition from other textile-producing countries like China, Bangladesh, Vietnam, and Turkey. Companies Revenues (Crs) EBITDA (%) RoCE (%) RoA (%) Adj. PAT (Crs) EPS(Rs) P/E(x) EV/EBITDA(x) Arvind 8382 9.5 8.1 5.85 357 13.8 9.7 5.8 KPR Mills Ltd. 6248 20.6 24.3 14.54 814 23.7 26.8 18 Page Industries 4788 16.69 53.32 21.21 571 512.15 74.01 48.49 Gokaldas Exports 2222 11.9 22.5 12.88 168 27.8 17.2 10.2 SP Apparels 1078 13.2 13.5 7.51 83 32.2 13 8.1 ADVANTAGE – KPR MILLS: B enefit of economies of scale and quality control at each stage of manufacturing process A bility to procure all of its raw materials at the lowest price facilitates the company to produce homogeneous, high quality yarn and fabrics O perates at high productivity and efficiency levels with highly automated production facility Strong financial position helping to expand and explore possibilities Substantially self sufficient in generating power through windmills which lowers the energy cost Competitive Positioning & Advantage

5. Investment Rationale Consolidated Net Revenue stood at 1610.73 Crore in June 2023, up 1.63% from 1584.82 Crore in June 2023 Quarterly net profit at Rs. 202.84 Crore in June 2023 was down 10.52% from 226.69 Crore In June 2023 EBITDA stands at 337.33 Crore in June 2023, down 13.11% from Rs 388.22 Crore in June 2022 EPS decreased to 5.93 in June 2023 from 6.62 In June 2022. K.P.R. Mill is one of the largest vertically integrated apparel manufacturing Companies in India. The company produces a wide range of products viz. yarn, fabric, readymade garments, sugar, molasses, ethanol. It uses 29% of its yarn and 61% of its fabric for captive production. Presently, yarns & fabric account for 43% of revenues, followed by garments (40%), sugar (13%), and others (4%). Industry CMP Target Price Recommendation Time Horizon Textile 825 1074 Buy at CMP & add more at 756 10-12 Months KPR Mills Limited Scrip Code KPRMILL BSE Code 532889 CMP Oct 20, 2023 831.50 Market Cap (Rs Crs) 28,421 52 Week High 838.25 52 Week Low 479.45 Book Value 108 ROE 21.96 ROCE 27.37 Shareholding Pattern In % Sep’23 June’23 Promoters 73.80% 74.80% FII 4.20% 3.00% DII 15.10% 14.70% Public 7.00% 7.50% Others 0.00% 0.00% Revenue from sale of garments grew by 37% y-o-y to 2308 Crore in FY 23 Revenue from sale of Yarn grew 3.1% y-o-y to 1874 Crore in FY 23 Revenue from Fabric segment was flat at 282 Crore in FY 23 Sugar segment registered a revenue growth of 68% y-o-y to 666 crore in FY 23 from 396 crore in FY 2022 Despite the quarter's revenue remaining stable, there was a significant decline in net profit, primarily attributed to margin compression. Specifically, the operating margin for the quarter contracted from 23% in June 2022 to 20% in June 2023, largely influenced by elevated raw material costs . Geographically Diverse Operations In FY23, the company earned 58% of its revenues from domestic sales and the rest 42% from international sales. The company exports to over 60 countries, its major export destinations are UK, China, Australia, and the USA . Diversified Customer Base The company has a strong customer base with 1,200 regular domestic clients for yarn and fabric and 60 leading international brands for garments. Top 10 export customers accounts for 72% of total exports and top 10 domestic customer account for 9.3% of domestic revenues Expansion into Retail Segment (FASO) In 2019, the company started a new brand 'FASO' under which it sells innerwear and athleisure garments. The product categories include Brief, trunk, boxer shorts, vest, gym vest, muscle tee and athleisure. It aims to manufacture 100% of the brand's products in-house. Faso Products are sold through more than 3000 retail stores Q1 FY 23 Result Review Segment Wise Revenue About The stock

6. We initiate coverage on KPR Mills Limited with a BUY rating and price target of ₹ 1074 implying an upside of 30.17 % from the current price level. The stock currently trades at a P/E valuation of 36x. We expect revenues to grow at a CAGR of 32.50% from FY24-FY28E on the back of high demand for cotton & yarn products and continued expansion in Garments, Sugar & ethanol segments. KPR can be viewed as a compelling long-term prospect in the apparel export sector. We anticipate the company to capitalize on several strengths, including its robust financial position & well-established relationships with prominent Indian and global clients, seamless integration across the yarn-to-garment production spectrum, and strategic investments in captive power facilities KPR's entry into the B2C branded innerwear segment, recent inauguration of its ethanol facility, and the substantial expansion of its garmenting capacity by 42 million pieces per annum enhance its growth prospects significantly. Completion and commissioning of a "Roof top" Solar Power Plant valued at ₹50 Crores. Ongoing modernization plans in the Textile segment with an investment of ₹100 Crores, anticipated to be finalized in the current fiscal year. The establishment of an exclusive Vortex Spinning mill with a budget of ₹100 Crores, set to be accomplished in the current fiscal year. Commencement of an Ethanol Capacity expansion, with an investment of ₹150 Crores, scheduled to begin before the upcoming Sugar Season 2024 Valuation & Recommendation The US market presents robust opportunities that offer a clear path to sustained export growth, a particularly notable development as Europe currently serves as the primary market for garment exports. Additionally, the recent Free Trade Agreement (FTA) with Australia is poised to be advantageous for KPR, given that this region currently contributes 15% to the company's sales. Large Scale Capex Plans - Rising Exports & expansion in US market - Target Price valuation We value KPR Mills at ₹ 1074 i.e. 25x FY24 E EPS ) Stock is Currently trading above its 200 day EMA Stock has been under consolidation since Jan 22. However, it rebounded from a low of 480 levels & recovered sharply It has given a breakout recently in Oct 2022 closing above 780 which was a strong resistance. It is now poised for an up move Retail Business- FASO In addition to the stylish Men’s wear, company has also introduced Women’s wear during the year which are getting good response both through online & offline store What should investors do? Key Triggers for future price performance Technical Analysis Financial Summary

7. Key Financial Summary Amount in Crs Particulars 2021A 2022A 2023A 2024E 2025E 2026E 2027E 2028E Revenue From Operations 3,427 4,675 5,960 7,864 10,377 13,693 18,068 23,841 Other Operating Revenues 103 148 226 334 495 733 1,086 1,608 Total Operating Revenues 3,530 4,822 6,186 8,199 10,872 14,426 19,153 25,448 Other Income 39 87 62 72 82 92 102 112 Total Revenue 3,569 4,910 6,248 8,271 10,955 14,518 19,256 25,561 EXPENSES                 Cost Of Materials Consumed 1,732 2,941 3,897 4,812 6,373 8,447 11,203 14,871 Purchase Of Stock-In Trade 30 41 221 164 217 287 381 506 Other Operating Expenses 939 622 794 1,051 1,392 1,845 2,447 3,249 Depreciation And Amortisation Expenses 147 141 174 232 275 324 379 438 Total Operating Expense 2,847 3,745 5,085 6,258 8,257 10,903 14,410 19,064 Operating Profit (EBIT) 722 1,165 1,163 2,013 2,697 3,615 4,846 6,497 Finance Costs 33 23 79 64 68 73 77 81 Profit/Loss Before Exceptional, ExtraOrdinary Items And Tax 689 1,142 1,084 1,949 2,629 3,543 4,769 6,416 Profit/Loss Before Tax (PBT) 689 1,142 1,084 1,949 2,629 3,543 4,769 6,416 Tax Expenses-Continued Operations           Current Tax 174 297 253 481 631 862 1,152 1,555 Less: MAT Credit Entitlement Deferred Tax -3 3 27 3 3 3 3 3 Tax For Earlier Years 3 -1 -10 -1 -1 -1 -1 -1 Total Tax Expenses 174 300 270 483 633 864 1,155 1,558 Profit/Loss After Tax And Before ExtraOrdinary Items 515 842 814 1,466 1,996 2,678 3,614 4,858 Profit/Loss From Continuing Operations 515 842 814 1,466 1,996 2,678 3,614 4,858 Profit/Loss For The Period 515 842 814 1,466 1,996 2,678 3,614 4,858 INCOME STATEMENT Forecasted Income statement:

8. Key Financial Summary Working Capital Schedule OPERATING CURRENT ASSETS (Rs Crore) Fiscal Year 2021A 2022A 2023A 2024E 2025E 2026E 2027E 2028E Revenue 3,569 4,910 6,248 8,271 10,955 14,518 19,256 25,561           COGS (excluding dep & other exp) 2,215 2,932 3,753 5,119 6,783 8,977 11,877 15,720           Total Inventories 913 1,289 1,898 2,244 2,973 3,935 5,206 6,891 As days of COGS 151 160 185 160 160 160 160 160           Trade Recievables 321 480 625 770 1,020 1,352 1,794 2,381 As days of Revenue 33 36 37 34 34 34 34 34           Other Current Assets 209 268 214 214 214 214 214 214                   Total Operating Current Assets (excl cash & investments) 1,444 2,037 2,738 3,228 4,208 5,501 7,214 9,486       OPERATING CURRENT LIABILITIES (Rs Crore)       Fiscal Year 2021A 2022A 2023A 2024E 2025E 2026E 2027E 2028E Cost Of Materials Consumed 1,732 2,941 3,897 4,812 6,373 8,447 11,203 14,871           Trade Paybles 122.16 282.07 336.05 405 537 711 944 1253 As days materials 26 35 31 31 31 31 31 31           Other Current Liabilities 134.93 138.24 89.47 118.44 156.86 207.89 275.73 366.01 As a % of Revenue 3.78% 2.82% 1.43% 1.4% 1.4% 1.4% 1.4% 1.4%                   Total Operating Current Liabilities (excl. borrowings & financial liabilites ) 257 420 426 524 694 919 1219 1619       Working capital 1,187 1,616 2,313 2,704 3,514 4,582 5,995 7,867 Change in Working Capital   430 696 392 810 1,068 1,413 1,873 Working Capital Schedule:

9. Valuation   2024E 2025E 2026E 2027E 2028E Freecash Flows to the Firm (FCFF) 656 716 1092 1641 2388 PV of the Free cashflows 4853   Terminal Value @ perperual growth rate of 3.5%   Terminal Growth rate 3.50%   Terminal Value as on 31 Mar '2028 (Gordon Growth Model) 50,301   NPV of Terminal value 33,587       Cash & equivalents 112.66   Total Debt 1848.09   Net Debt 1735.43       Enterprise value (NPV of Terminal Value + PV of future cashflows) 38,440   Equity Value (Enterprise Value- Net Debt) 36,705       No of Shares Outstanding (in Crs) 34.18   Intrinsic Value per Share 1,074   Current Market Price as on 19 October 2023 825.00   Potential Upside 30.17%         Cost of Equity Calcuation using CAPM   Risk free rate 7.39% Equity Beta 1.186 Market risk premium 8.33% http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html   Cost of equity (Ke) 17.27% Cost of Debt Calculation   Interest Expense 1465.53 Total Debt 0.25 Pre tax Cost of Debt (Interest Expense/Total Debt) 4.40% Tax Rate 24.24%     Post-tax Cost of Debt ( Kd ) (1-t) 3.33% Cost of Capital   Weight of Equity in Target Capital Structure 36% Weight of Debt in Target Capital Structure 64% Weighted Average Cost of Capital (WACC) 8.41% Tax Rate has been taken as the average tax rate of last 2 years Depreciation & amortization expense has been taken as % of Total Gross Block Finance Cost has been taken as a % of Total Debt Total Inventory has been considered as days of COGS Trade Receivables has been considered as days of Revenues 10 year G-sec yield has been taken as the Rf while calculating Cost of Equity using CAPM Equity Beta for KPR Mills has been calculated using Peer average beta Terminal Growth rate has been assumed to be 3.5 % Key Assumptions: WACC Calculation Fiscal Year 2021A 2022A 2023A 2024E 2025E 2026E 2027E 2028E     EBITDA 868 1306 1337 2244 2972 3939 5225 6935 Depreciation And Amortisation Expenses 147 141 174 232 275 324 379 438 EBIT 722 1165 1163 2013 2697 3615 4846 6497 Tax Rate 25% 26% 23% 25% 24% 24% 24% 24% NOPAT 539 862 892 1516 2050 2736 3675 4922     Adjust:   Depreciation 147 141 174 232 275 324 379 438 Capex -913 -511 -700 -800 -900 -1000 -1100 Change in Working Capital -430 -696 -392 -810 -1068 -1413 -1873   -1,201 -1,034 -860 -1,335 -1,644 -2,034 -2,534 Freecash Flows to the Firm (FCFF)       656 716 1092 1641 2388

10. Ratio Analysis Financial Ratios: Mar-21 Mar-22 Mar-23 Margin Ratios Gross Profit Margin(%) 48.60 36.21 30.92 Operating Margin(%) 21.06 24.92 19.51 Net Profit Margin(%) 15.03 18.1 13.66 Return Ratios Return on Equity(%) 21.92 26.42 21.96 Return on Capital Employed(%) 27.18 31.63 27.37 Return on Assets(%) 15.78 17.29 14.54 Liquidity Ratios Current Ratio(X) 2.55 2.53 2.25 Quick Ratio(X) 1.22 1.21 0.81 Leverage Ratios Debt to Equity(X) 0.26 0.37 0.36 Interest Coverage Ratios(X) 21.98 50.01 14.75 Turnover Ratios Asset Turnover Ratio 1.05 0.96 1.06 Inventory Turnover Ratio 1.93 2.31 2.17 Decreasing GP YoY owing to a reduction in demand owing to inflation and currency risk , decreased revenue growth , pricing pressures & increased cost of raw materials (especially cotton ). Total costs increased by 133.7% from FY 21-23 while revenue increased by 74% during the same period. COGS/Revenue (in percentages) increased by 24 % and 8 % respectively owing to cooling down of cotton prices (expected to last till end of next year but prices still higher than pre-COVID 19) Decrease in OP Margin primarily because of increase in COGS, while other operating expenses haven’t caused much of an impact Fall in Net Profit Margin from FY 22-23 due to increased finance costs by a whopping 233% indicating increased debt burden on the company Return on Equity holding stable, slight reduction in ROE from FY 22-23 resulting in decreased profitability While the high prices of raw materials have cut returns, the financial leverage has also risen by 94% and 14% respectively over these two years, the fall in ROCE indicates that the increased leverage didn’t derive efficient returns The falling ROA is a result of again declining profits fueled even further by debt and secondly the increasing depreciation seeps into the book value of the assets, lowering the ROA even further Current ratio might look stable but doesn’t give a healthy picture, this stability has been caused by the excess inventory, an increase of 47% over that of last year Current investments have halved while cash and cash equivalents are still lower than that of last year, thus though the current ratio might look ideal but doesn’t ensure seamless liquidity Quick Ratio has dropped significantly- increased current liabilities & exclusion of excess inventory Shareholders fund increased by 36% and 16% over the last two financial periods while total debt has increased by 94% and 14%. Increased D/E is a result of increased leverage and stable shareholders funds Interest Coverage Ratio impacted due to fall in EBITDA, high finance costs (233% increase over that of last year) FY21-22 indicates ineffective asset utilization and efficient inventory management, while the pick up in FY 22-23 inspite of falling revenues and excess inventory indicates the company may have implemented effective cost-cutting measures and inventory management strategies Even with excess inventory, the company improved its inventory turnover ratio by selling inventory more quickly or reducing stockouts (might have resorted to effective pricing strategies for the same)

11. Financial Analysis E1: Revenue from Operations growing at a CAGR of 24.80% for the period FY21-25E E2: EBITDA margins expected to increase owing to price stability, expansion plans, increased support from the government E3: Gross Profit, PAT, EBIT Margin Comparison from 2021-2025E E4: Distribution of Earnings of KPR Mills (FY2023)

12. RISK ANALYSIS RAW MATERIAL PROCUREMENT TECHNOLOGY OBSOLESCENCE MARKET/ INDUSTRY RISKS LOGISTICS RISKS POLITICAL ENVIRONMENT FINANCIAL RISKS LABOUR SHORTAGE CYBERSECURITY India's cotton-dependent textile (51%) industry faces elevated costs and price fluctuations , impacting margins Increased cotton crop area and yields may mitigate risks, but prices remain higher than pre-COVI D MITIGATION MEASURES: KPR's efficient cotton procurement and monito ring ensure cost-effective quality In the evolving Indian textile industry, competition is rising , pushing manufacturers to rely on technology for quality and efficiency MITIGATION MEASURES: MITIGATION MEASURES: MITIGATION MEASURES: MITIGATION MEASURES: MITIGATION MEASURES: MITIGATION MEASURES: MITIGATION MEASURES: KPR prioritizes advanced machinery, ensures regular tech updates , and introduces automation for high-quality production and supply Ukraine war and the pandemic slow global growth, squeezing fashion retailers' margins Basic segments, like ours, anticipate a milder impact due to reduced off-take from supplying countries Inadequate infrastructure , especially in ports and roadways, hinders the logistics sector's efficiency Rising fuel costs and policy changes directly disrupt supply chains by increasing transportation expenses The industry associations have also brought before the Government all major issues faced by the industry then and there They have currency exposure in exports and imports, primarily in USD and Euro . To mitigate foreign exchange risk , they use forward contracts and hedging strategies Scarcity of skilled labor is a pressing issue in India's labor-intensive textile industry Government initiatives, such as PMKVY , aim to bridge the skills gap in the textile sector In the modern world, cyber threats are a significant concern, making cybersecurity essential. It protects systems, data, and networks from attacks Unstinted support from all the Stakeholders KPR with its strategic Logistic team is able to source and supply products as per plans Favourable government policies Hedging, competent team consisting of qualified and experienced Personnel KPR's unique HR practices result in low absenteeism, attrition, higher productivity, and a skilled workforce The company follows cybersecurity best practices recommended by a knowledgeable team. Regular monitoring strengthens security

13. Environmental, Social and Governance Policy of KPR Mills ENVIRONMENTAL SOCIAL GOVERNANCE Sustainable raw material procurement from Cotton Shankar-6, BCI, Organic, CMIA Enhanced water management with automated control, recycling, and green zones to replenish groundwater levels Optimized energy use with 5-star equipment, renewables, meters, cutoffs , and purchase audits Global chemical procurement with RSL & MRSL adherence for cost-effective, high-quality sourcing Converts human waste to bio-gas , reducing LPG use Recycles plant wastewater for productivity Features a massive zero-discharge Effluent Treatment Plant Plants trees at units and in nearby village Clothes the world organically, promoting eco-friendly practices Female-Centric Workforce : Empowering women, especially from rural areas, for societal growth Education and Empowerment: Provides education and placements, fostering female empowerment Community Development : U nique HR practices reduce skill shortages, aiding society Stable Workforce : Low absenteeism and attrition through strategic HR practices Economic Empowerment: Empowering women, contributing to economic and social growth Societal Contribution : Aligning with societal needs for participation and development Vigil Mechanism and Whistleblower Policy ensure employee protection and access Compliance with sexual harassment prevention and redressal act; no complaints filed Directors are certified non-disqualified; no non-compliances in the last three years. Transfer of unpaid dividends to the Investor Education and Protection Fund. Detailed transparency in Statutory Auditors' fees, promoting financial integrity. Efforts for email collection from shareholders and periodic financial result sharing . Compliance with Listing Regulation's discretionary requirements, including Code of Conduct Adoption and affirmation of a Code of Conduct by Board Members

14. Thank You Team Name - EquityMasters