Until 2016, Kerala-based Kitex Garments was an investor darling and a success story from God’s own country. The textiles company which currently has a market cap of Rs 8.28 billion once enjoyed a market cap 6x higher. Between FY06 and FY16, the company’s standalone net profit grew from Rs.40 million to Rs.1.12 billion. Gross sales also soared from Rs.1.05 billion to Rs 4.99 billion. Adding to investors’ delight, in 2016, the company claimed ROCE of 41% and Ebidta margin of 38%. On the back of strong revenue and profit, the company’s stock scaled new heights, zooming 40x between FY11 and FY16.
However, post-2016 the company’s growth story turned sour. While the stock was hitting new highs, Amit Mantri, a partner at 2Point2 Capital, a portfolio management services firm, raised red flags over the company’s high margins, cash and debt. In his blog, Mantri pointed out to the company’s unbelievably profitable commodity business despite just accounting for less than 1% supplies of its top five customers. He also raised questions over the company’s high-cost debt and zero-interest earnings cash. He wrote, “It is not clear why a company would continue to pay high-interest cost when it has cash available to repay the complete debt”.
From its record high of Rs.755 in July 2015, the stock hit Rs.100 in July 2018. While the stock was getting hammered for three years, the company’s promoter Sabu Jacob finally intervened in Q4FY18 buying 372,807 shares between February 2018 and March 2018 worth Rs 90 million as it hit a four-year low. The promoters continue to buy the dips and in FY19 so far, Sabu and Boby Jacob have bought 44,850 shares worth Rs.6.1 million. However, deviating from his consistent buying, Sabu Jacob sold 16,800 shares on August 31. Strangely, he bought back the exact amount of shares on September 5 for Rs.2.23 million, increasing his stake to 32.81%.
In the June quarter, the company reported 5.61% drop in standalone net sales, but its net profit grew by 3.44% year-on-year. The company’s total expenditure rose by 1% due to 6% rise in employee cost. After the sudden jump of 39% in net sales in the September quarter of FY18, net sales grew 3.47% in the next quarter. In Q4FY18, sales dropped 26% sending the stock into a downward spiral.
Following the Q3FY18 result, Sabu Jacob had commented that Q4 numbers would be better than Q3. But the company failed to deliver on the guidance. The company has been guilty of overpromising and underperforming, according to Mantri. “Every quarter, he (Sabu Jacob) claims that the next quarter will be better as compared to the previous quarter,” says Mantri. “Either you give don’t give guidance and if you give it should be at least in the ballpark range. You can’t be so off the mark. You can’t say it will be a great quarter and then it turns out to be terrible,” he adds.
Over the past two years, the company’s profit has shrunk, and sales have plunged owing to the loss of two of its biggest customers. “One of its biggest customers has filed for bankruptcy, and earlier Jockey was also their customer, but it has stopped buying. If you lose two of your biggest customers, then you will suffer. However, the bigger question is why Kitex has not diversified its customer base if it claims it’s so cost-efficient and customers love them,” asks Mantri.
His scepticism seems justified as last of the mutual funds bolted in March 2017. ValueQuest India Moat Fund, India Capital Growth Fund and Acumen Capital continue to hold more than 1% and overall promoter holding has gone up marginally from 54.24% in June 2017 to 54.81% in June 2018.