Initiating Coverage | KPR Mills Ltd.
Taking advantage of complete integration….
CMP: Rs.370 | Rating: BUY | Target: Rs.570
KPR Mills is amongst the largest companies in the knitted garment segment. Completely vertically integrated unit from yarn to garments, the company would be in a sweet spot to benefit from lower cotton prices. We expect EPS of the company to grow at CAGR of 30.5% over FY14-FY16E driven by higher EBITDA margin, lower debt and focus on value added products. We opine that KPR Mills would be in a strong position to leverage the improving global economic condition including India. We recommend BUY rating on the stock with target price of Rs 570 per share.
We had recommended the stock in our monthly report on 1st October 2014 at Rs 312 with target price of Rs 352, which has been achieved.
Investment Rationale
Indian textile industry poised for growth: Indian textile and apparel industry is estimated to reach USD 221 bn in 2021 from USD 89 bn in 2011, signifying CAGR of 9.5% over the period. This includes domestic as well as exports segment. Domestic industry growth can be attributed to higher economic growth, rising consumer purchasing power and favourable demographic profile. Exports growth is likely to be on account of increasing competitiveness against other exporting countries. Rising Chinese domestic consumption, labour issues in China and Bangladesh, increasing power cost and depreciating Rupee vis-a-vis other exporting countries are turning favourable for Indian exports.
Self – sufficiency in power – key advantage: Spinning, weaving and processing are highly power intensive processes. The company has been focussing on green energy to reduce its dependence on grid power. It set up wind mills with a capacity of 61.9MW & Co-gen power plant of 30MW to achieve self sufficiency in green power requirement throughout the year. We believe power cost is a key advantage for KPR Mills as other players have relatively high power cost, which provides better margins and price competitiveness to the company.
Focus on value added products to help maintain EBITDA margins: EBITDA margin is likely to improve 51 bps to 16.2% in FY16E from 15.7% in FY14 due to higher share of value added products in the revenue mix and relatively lower cotton prices. EBITDA is likely to grow at a CAGR of 17.8% over FY14-FY16E to reach Rs 5020 mn in FY16E.
EPS likely to grow at 30.5% CAGR over FY14-16E: We expect the debt equity of the company to reach 0.6x in FY16E from 1.2x in FY14. Net profit margin is likely to reach 8.1% in FY16E from 6.1% in FY14. Accordingly, EPS is likely to reach Rs 64.1 per share in FY16E from Rs 37.6 per share in FY14, signifying 30.5% CAGR. We expect the company to attain ROE of 19.8% and 23.2% in FY15E and FY16E from 18.6% in FY14.
Valuation
At CMP of Rs 370, the stock trades at PE of 8x and 5.8x its FY15E and FY16E earnings of Rs 46.1 and Rs 64.1 per share respectively. We value the stock on SOTP basis taking into consideration its presence in unrelated business of textile and sugar. We value textile business at EV/EBITDA multiple of 4.7x its FY16E EBITDA and sugar business at EV/EBITDA multiple of 7.4x its FY16E EBITDA to arrive at target price of Rs 570 per share.
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