Although KPR Mill Ltd is well-positioned to take advantage of the ready-made garments (RMG) growth opportunity in India, short-term demand headwinds in significant export markets and high valuations have prompted brokerage Equirus Securities Pvt Ltd to start coverage on the company with an 'add' rating.
With a target price of ₹651, the brokerage expects a 15% growth in value for the stock at the current market price of ₹564.
The company is one of the country's top exporters and makers of apparel. The business has successfully evolved over time from a pureplay yarn manufacturer to a value-added garment player, it said.
India's knitted garment exports have grown at an 8.2% compound annual growth rate (CAGR) over the past ten years (FY12-FY22); in contrast, the company's garment exports have seen a stellar 18% CAGR, guaranteeing consistent market share gains over that period.
The company's financial performance has been rock solid in a highly cyclical industry, supported by constant capacity growth over the years, and that too, without straining the balance sheet. This speaks volumes about its prudent management strategies and capital allocation methodologies, according to the brokerage.
Let's look at the top three reasons cited by the brokerage firm for investing in the stock:
Huge market up for grabs
India's market share in internationally RMG exports has been stagnant at 4-5% for many years despite having a completely integrated supply chain, from farm to shelf, compared to 7-9% for smaller nations like Bangladesh and Vietnam.
However, the renewed focus of the Government of India (GoI) on increasing India's RMG exports will open enormous development potential, putting the country on an even footing with peer countries in terms of export duties and efficiencies.
Near-term headwinds but long-term visibility strong
The two biggest RMG markets in the world, the US and Europe, are experiencing significant inflationary problems, which are causing a decrease in discretionary spending. Europe has been severely impacted by lower retail sales and higher clothing inflation, whereas US retail sales growth has been slowing down for the last few quarters (on a high basis).
Therefore, according to the brokerage, these factors will cause the company to experience short-term demand headwinds.
"The company has consistently gained market share (from around 1% in FY13 to 3.8% in 9MFY23) on steady capacity expansion and robust operating metrics. Possible trade agreements with UK, EU, Canada, and some other countries can provide the necessary impetus to India’s RMG exports of which KPR would emerge as a key beneficiary," said the brokerage.
Robust track record, new drivers added
The company has achieved a 13% revenue CAGR over the past ten years despite operating in a cyclical sector, driven by a 24% garment revenue CAGR and new segment additions (sugar, ethanol).
"We expect an around 11% revenue CAGR over FY23-FY25E led by nearly 17%/ 40% CAGR in garment/ethanol revenues on sweating of expanded capacities and further capacity addition. A greater proportion of high-margin garment/ethanol revenues along with operating efficiency should drive earnings before interest, taxes, depreciation, and amortisation (EBITDA) margin gains (+188bps to 24% in FY25E)," said the brokerage.
Views
The company has a well-established, vertically integrated business model, according to the brokerage, which has survived numerous cotton and currency cycles. Its advantageous geographic position (close to the Tirupur textile hub) gives it an edge up in terms of procuring labour and raw materials, and it also gives it access to a ready market for yarn and fabric.
Additionally, consistent growth in the ethanol sector balances out the performance volatility in its sugar segment, helping overall margins.
"We believe the company is in a sweet spot to capture the unfolding opportunity in India’s RMG exports which is poised to see robust growth led by (1) the country’s rising competitiveness in the global RMG landscape, (2) uncertain economic conditions in key competing countries and (3) advanced-stage trade agreements with UK, Europe, Canada, and some other countries. This apart, with GoI’s thrust on ethanol blending with fuel (under the EBP program), ethanol manufacturers will see strong growth.
For K.P.R., we expect a revenue/EBITDA/PAT CAGR of 11%/15%/19% over FY23-FY25E with nearly 188 bps/ 210 bps expansion (over FY23E) in EBITDA/PAT margins to 24.1%/16.2% in FY25E," said the brokerage.
