KPR Mill Ltd. (KPR) is one of the largest vertically-integrated player with presence across entire value chain i.e., form fibre to fashion. The company has 12 manufacturing units equipped with an annual capacity to produce 1,00,000 MT of yarn, 40,000 MT of fabrics and 115 million ready-made knitted apparels. In addition, the company also had set up garment unit with capacity of 10 million pieces per annum in Ethiopia. It also owns and operates a co-generation cum sugar plant with capacity of 40 MW & 10,000 TCD and ethanol plant capacity of 130 KLPD. KPR has also invested in captive power plants and has total green power capacity of 61.92 MW as of June 2021.
Integrated Nature of Operations Supports Operating Margin
The company is India’s largest integrated player with presence across textile value chain from yarn to apparels. The integrated structure and large-scale operations of the company has aided in maintaining the consistency in product quality and control over raw material prices. The operating margins are expected to improve due to on-going capacity expansion and benefits from RoSCTL scheme. The ten-year average EBITDA margins of the company stands at 19.2%, which is admirable, given the volatile nature of the textile industry. The control over its value chain has enabled the company to reduce the lead time and provide on-time delivery to domestic and international clients, which in turn has positioned the company as a preferred vendor.
Capacity Expansion to aid Revenue Growth and Profitability
The company has announced the capacity expansion of its garments segment. With the new capacity of 42 million pieces of garments per year, the total garment production capacity of the company will be increased to 157 million pieces per year. Further, the company has decided to set up a new plant with capacity to produce 10,000 TCD sugar, 220 KLPD ethanol, and 50 MW co-gen. With this, the overall sugar business capacity will increase to 20,000 of TCD of sugar, 90 MW of power, and 340 KLPD of ethanol and as per the management, the project will be commissioned by end of November 2021. Recent changes in sugar industry such as increase in ethanol blending in petrol and higher prices of sugar in international markets, etc. could help the company to improve its operating revenues and profitability. The management expects Rs. 1,100 – Rs. 1,200 crores of revenue from new sugar plant at full capacity.
China Plus One Strategy to Boost Exports
Due to the diversification of supply chain triggered by the Covid-19 induced disruptions and trade tensions between US and China, manufacturers are avoiding to rely on one geography and looking for replacements. In South-East Aisa region, India is emerging as the most preferred alternative as the country has abundant raw material, cheap labour, and manufacturing infrastructure. Indian cotton is less costly and labour is cheaper than China. Global manufacturers, therefore, no longer regard China as an affordable haven. Global brands show higher preference for vertically integrated players for their higher control on quality and timely deliveries. KPR Mill, being one of India’s largest vertically-integrated player, is expected to reap benefits from this shift.
On the back of huge growth opportunity in exports, capacity expansion, vertically integrated operations, strong balance sheet, ability to maintain cost of power through green power investments, strong client base in domestic and international market, the company is set to reap benefits. Further, change in strategy of the global brands to diversify their supply chains will open a new gate way for the company in international markets. The stock is trading at 10.9x of FY23E EV/EBITDA.
|Year End March (Rs. in Crores)||2019||2020||2021||2022E||2023E|
|Depreciation & Amortization||131.13||137.09||146.70||187.00||203.00|
|EBIT Margin %||14.20%||14.46%||19.34%||19.82%||20.35%|
|Interest & Finance Charges||48.94||49.65||32.84||48.44||51.44|
|Profit Before Tax - Before Exceptional||468.58||471.67||688.86||815.61||1005.90|
|Profit Before Tax||468.58||471.67||688.86||815.61||1005.90|
|Effective Tax rate||28.54%||20.14%||25.20%||25.17%||25.17%|
|Net Profit Margin||9.90%||11.24%||14.60%||14.63%||15.01%|
|Consolidated Net Profit||334.87||376.68||515.26||610.32||752.71|
|Net Profit Margin after MI||9.90%||11.24%||14.60%||14.63%||15.01%|