KPR Mills Limited – Introspeck

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What is common between exports of beef and cotton? These are not exports of the said commodities, but of the underlying natural resources, which is water in case of beef and arable land in case of cotton. Although true for almost all agri commodities, with cotton, the incentives work in a way that it makes sense to have raw cotton available to the domestic textile industry, with exports of value addition in the form of yarn, fabric and garments encouraged.

This is because textiles are labor intensive, with easy to acquire skills, which leads to significant improvement in livelihoods for millions. Consider this – After agriculture, textile is the largest employment generator in India with 45 million employed directly, and another 60 million indirectly, especially women from rural India and it contributes to 7% of industry output in value terms, 2% of India’s GDP and to 15% of the country’s export earnings.

However, it’s a playbook followed by almost all developing countries which can get their hands on raw materials – India, Vietnam, Bangladesh, Cambodia, Pakistan and of course, China. Export competitiveness is significantly determined by diplomatic relations (Most Favored Nation status, free trade zone), trade subsidies from governments, sourcing cost of raw materials and currency fluctuations. Which means that a textile mill can do everything in its power to churn out incredible yarn, but there still might be no buyers. Textile businesses are in the worst of both worlds with a largely commoditized offering and uncontrollable external environment.

Also Read on FinMedium:  Market Update for 02/09/2020: | Street-fluence

Despite the above, looking at the fundamentals of KPR Mills Limited, headquartered in Tirupur, a cluster that exports 90% of India’s cotton knitwear, makes one curious on whether adequate scale can bring economies to some businesses –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Sales 1,107 1,269 1,665 2,395 2,583 2,619 2,837 3,034 3,384 3,353
Increase by 15% 31% 44% 8% 1% 8% 7% 12% -1%
EBIT 126 76 237 289 301 336 434 444 481 485
Increase by -39% 211% 22% 4% 12% 29% 2% 8% 1%
EBIT Margin 11% 6% 14% 12% 12% 13% 15% 15% 14% 14%
PAT Margins 7% 3% 6% 6% 7% 8% 10% 10% 10% 11%
Asset Turns 0.7 0.7 0.8 1.1 1.2 1.1 1.2 1.2 1.1 1.2
Total Assets/NW 2.6 2.8 3.0 2.7 2.4 2.2 1.9 1.6 1.7 1.5
RoNW 12% 5% 15% 18% 19% 19% 22% 18% 19% 20%

These seem to be above cost of capital returns over last 10 years, with textile segment margins being similar to consol margins –

Particulars 2012 2013 2014 2015 2016 2017 2018 2019 2020
Textile Rev. 1269 1531 1984 2106 2174 2511 2667 3040 2921
increase by   21% 30% 6% 3% 16% 6% 14% -4%
                   
Garment 23% 17% 19% 24% 27% 28% 33% 38% 43%
Yarn 54% 63% 58% 49% 49% 48% 50% 48% 43%
Fabric 10% 14% 17% 22% 19% 17% 9% 5% 5%
Waste Cotton 5% 5% 4% 4% 3% 3% 3% 3% 3%
Others 8% 2% 2% 1% 2% 5% 6% 5% 5%
                   
Textile OP 76 222 250 271 306 401 403 466 419
Textile OPM 6% 15% 13% 13% 14% 16% 15% 15% 14%

Looking deeper into margins, it comes to notice that bulk of the company’s OP is contributed by export incentives. These incentives all come from export of garments only, since yarn and fabric are domestically sold, and as garments have been growing significantly, export incentives become even more important –

Particulars 2013 2014 2015 2016 2017 2018 2019 2020
Textile OP 236 266 283 317 413 434 481 484
of which  
Export Incentives 28 44 58 67 91 99 92 115
Investment Subsidy 24 16.8 17.7 20 9.5 0.8
   
Export Inc. % of Tex. OP 12% 17% 20% 21% 22% 23% 19% 24%
OPM 15% 13% 13% 14% 16% 15% 15% 14%
Garment OPM 16% 14% 14% 15% 17% 16% 16% 15%
Garment OP 39 52 71 89 118 140 190 193
Export Inc. % of Garment Exp. 71% 85% 82% 75% 77% 71% 48% 60%
Exp. % of Sales 23% 25% 33% 37% 38% 40% 43% 42%
(investment subsidy has not been considered since it’s a part of Other Income) 

One could argue that the export incentives are priced into the contract while accepting purchase orders at a specific quote. If that is the case, its very difficult to determine KPR Mills competitiveness to firms in Bangladesh and China, especially since despite the INR depreciating against the USD, KPRs realization per garment has reduced over the years, and has not yet crossed 2016 high –

Particulars 2016 2017 2018 2019 2020
Garment Prod. – mn garments 45.5 57.9 78.4 94.2 98.7
increase by   27% 35% 20% 5%
Realization / Garment 130 120 111 124 127
increase by   -8% -7% 11% 3%
USD INR Index 100 105 102 107 110
           
Value / MT (Yarn + Fabric) 187,712 203,275 207,816 223,901  
increase by   8% 2% 8%  

Yarn realizations continue to improve on back of upgradation to specialty yarn.

Further, KPR Mills has deployed capital in a sugar + ethanol plant, windmills and an Audi car dealership. Although the windmill and sugar investment was done for captive consumption of power in all 12 months of the year (since TN had significant power scarcity 5 years back, which continues to an extent in peak hours today), the rationale for auto dealership is questionable and returns on the sugar segment have not been spectacular –

Particulars 2014 2015 2016 2017 2018 2019 2020
Sugar Revenues 288 284 224 191 265 253 341
increase by   -1% -21% -15% 39% -5% 35%
Sugar OP 11 7 6 8 28 10 60
OPM 4% 2% 3% 4% 11% 4% 18%
Sugar RoCE 6% 9% 3% 4% 12% 4% 21%

While I was interested in KPR Mills on account of its incredible HR practices (from encouraging employees to pursue higher education through scholarships to teaching roller skating to navigate the shop floor faster), the cold hard numbers do not add up to strong future prospects. It was also impressive that Tirupur, and KPR Mills have thrived despite 2011 cotton shock, demonetization, GST, TNs predatory unions, power shortages and will even emerge out of Covid stronger (it took only 4 days to reach 90% after the unlock since most employees stayed on campus). Giving this idea a pass right now.

It would be wonderful to hear from you in case there is anything I’m missing, and you think this business has more merit. Happy investing, and do spread the love.



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Umang Shah
Through his writing, Umang shares his perspectives on how he thinks of investing, decision making, books and life in general.
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