Sector : Textiles - Readymade Apparel. (In %) Total Equity Share in Issue. Pre-Issue Post-Issue Employee Reservation Portion

Transcription

1 (KPR) NEUTRAL Issue Open: Issue Close: August 07,2007 Sector : Textiles - Readymade Apparel Price Band Rs Rs. 265 Issue Summary (Shares in million) Shareholding Pattern (In %) Total Equity Share in Issue 5.91 Pre-Issue Post-Issue Employee Reservation Portion 0.00 Promoters & PAC Net Issue To The Public 5.91 Brandot Investments Limited Of Which Reserved for:- Arogant Ventures QIB Non - Institutional Ares Investments Public Retail 1.77 Total Equity Share Outstanding Total no. of shares 31,770,792 37,682,892 Prior to the issue After the issue Company Valuation Multiple KPR Industry Avg. Financial Snapshot (Rs. In Million) Sales (Rs. in million) 4, , Operating Profit (Rs. in million) 1, , FY 2007 FY 2006 FY 2005 FY 2004 RONW (%) Sales 4, , OPM (%) Total Income 4, , NPM (%) Optg Profit 1, P/E (225 & 265) & Net Profit Price to Book Value (225 & 265) 2.55 & 3.00 EPS* Objects of the issue: Share capital Expansion of the existing facility, setting up of a studio, Res&Surplus 3, , investment in knitting facility & construction of an additional Networth 3, , hostel at Arasur. Total Debt 4, , , Expansion of the processing facility at SIPCOT. Book Value* Addition of balancing equipments for spinning facility at *The no. of shares are of the post issue equity i.e mn shares. Sathyamangalam. Company Snapshot 4. General corporate purpose. - KPR has shown rapid growth in the last two years of it's four years since inception at a CAGR of over 185% in the topline, EBITDA & bottomline. - Strengths are: Integrated producers of readymade knitted apparel & cotton knitted fabric; Low cost of production; Operateing in a high productivity & efficient level; Strong & diversified customer base; Experienced management team; Strong financials; Strategic location which helps in catering both the domestic & the international market. - Weakness are: Lack of experience in the market; There are certain cases pending against KPR; High cost of raw materials. - Opportunities are: KPR is planing to export it's products to US market to cater to the growing demand; KPR plans to complete the expansion plan within this year which will double it's current capacity. - Threats are: Rapid growth seen in the last two years; No prior experience in US market; Cases worth Rs mn are pending against KPR; Huge capacity will be undertaken post expansion for which there are no fixed orders from any of it's current customers. - The stock is available at a P/E of 15x & 17x at the lower & upper band of the issue price respectively. Industry Scenario - Textiles acoount for 16.24% of India's overall exports. The industry accounts for nearly 4% of India's GDP & provides 35 mn jobs, making it the second largest employment provider in India after agriculture. - Domestic apparel sales are expected to grow at a CAGR of 10 11% to nearly US bn in The largest segment in the export market is the readymade garments made from cotton accounting nearly 75% of the apparel export from India. It's set to grow at a CAGR of 20%. - The demand for cotton yarn is expected to grow at a CAGR of 7.3% from around 2,2420 mn kg in to 3,446 mn kgs in Key demand drivers for Indian textile industry are: Abolition of quotas; Imposition of restrictions on imports from China by the US & the EU; Global concentration; Strong domestic demand & Outsourcing from major international players. - Government initiatives: The union budget announced on February 28, 2007 has extended the TUF scheme to March 31, 2012; The Export Promotion Capital Goods scheme facilitates the import of capital goods at a concessional duty of 5%, with appropriate export obligations; Advance Authorization Scheme allows duty free import of raw materials.

2 Company Background:- The company was incorporated on March 19, KPR is an integrated apparel company in India. KPR manufactures readymade knitted apparel by spanning various aspects of the apparel production chain, from producing carded & combed cotton yarn & knitted fabric to managing the design, delivery & quality assurance processes involved in producing readymade knitted apparel. KPR's operations are located in Coimbatore, Sathyamangalam & Tirupur in the southern state of Tamil Nadu in India. For the FY 2007, KPR produced mn pieces of readymade knitted apparel; KPR has cumulative capacity of 128,064 spindles in four mills & manufactured approximately28,346 metric tons of yarn which represented capacity utilization of approximately 98.2%; Produced 6,734 metric tons of fabric which represented capacity utilization of approximately 80.0%. The promoters are: Mr. K P Ramasamy; Mr. K P D Sigamani & Mr. P Nataraj. Company Snapshot:- - KPR has grown at a CAGR of 185% in the topline, 215% in the EBITDA & 5305% in PAT over the last three years. On a Y-o-Y basis, KPR has grown by 14% in the topline, 22% in the EBITDA & (-)7% in PAT. - During the year ended March 31, 2007, KPR exported 99.86% of the readymade knitted apparel directly to international clients, including among others, Carrefour, Penneys (Primark), Pom-tex, C&A, Ethel Austin, Kiabi, Bandos AG, Mother Care, Innovations Club, & Grouppo Industry Moda SPA & has more than 1,000 regular domestic clients for yarn & fabric. - Strengths are: KPR is vertically integrated manufacturer with the capability to produce readymade knitted apparel, knitted fabric & carded & combed cotton yarn; KPR operates 39 windmills with an aggregate capacity of mega watts. As a result of this captive energy source, as of March 31, 2007, the power cost per unit was Rs.0.53, which was approximately 84.9% lower than the per unit cost charged by the Tamil Nadu Electricity Board. Also the manpower cost of KPR is less than 3% on sales where as the industry standards is above 7%; KPR employs production processes that enable them to operate at high levels of productivity & efficiency. They also provide on-going training to their manufacturing workforce & utilize innovative methods to increase efficiency; KPR has developed a strong & diversified base of more than 35 international retail apparel customers, including wellknown participants in the industry such as Carrefour, Penneys (Primark), Pom-tex, C&A, Ethel Austin, Kiabi, Bandos AG, Mother Care, Innovations Club & Grouppo Industry Moda SPA. KPR has continuously received repeat orders from many of their customers & are not substantially dependent on any one or a few of our customers; Management team has experience of more than 35 years; Strategic location which helps in catering both the domestic & the international market. - Weakness are: No doubt KPR has shown great results & good growth on a CAGR basis, but it's new in the market i.e. it's been only four years since it's inception & thus lacks experience enough to sustain the growth post expansion; There are certain cases pending against KPR worth Rs mn; Raw materials cost nearly around 69% of the sales for the FY Opportunities are: KPR is planing to scale up by exporting it's products to US market to cater to the growing demand. Currently KPR exports to European countries where it enjoys 2-3% premium on sales than it's competitors; KPR plans to complete the expansion plan within this year which will double it's overall current capacity. - Threats are: Rapid growth seen in the last two years. KPR has shown rapid growth rate in the last three years which it might or might not be able to show in the future; As KPR is planning to enter into US markets, they have no prior experience regarding the market conditions in US; Huge capacity will be undertaken post expansion for which there are no fixed orders from any of it's existing customers. - The business strategies are: To capitalize on the increased demand in the international apparel industry & associated demand for their products, KPR intend to utilize their expanded capacity to grow their apparel manufacturing business through value retail customers in Europe & the United States; KPR intends to explore design & product development initiatives. Currently, their customers provide them with their design specifications & KPR manufactures readymade knitted apparel based on their designs. KPR thus intends to develop a design studio equipped with the latest design software, including CAD/CAM, that would focus on product development and design with a view to expanding their product offerings & enhancing their market perception among the existing & potential apparel customers; Expand capacity - In order to take advantage of the opportunities provided by the GOI, KPR commenced construction of a new manufacturing facility at Arasur, near Coimbatore, in August 2005, which is expected to be fully operational by the end of fiscal This will increase their manufacturing capacity to approximately 37.9 mn pieces of readymade knitted apparel, 17,200 metric tons of knitted fabric & 54,000 metric tons of yarn per year, with spinning capacity of 212,064 spindles. This represents an increase in apparel, fabric & yarn production capacity by approximately 100% in each category. By 2009, KPR expects to operate double shifts at their apparel operations at Arasur, which will increase their total apparel capacity to 63.8 million pieces p.a.; Further integrate their operations so that they will be able to provide additional valueadded services & integrated manufacturing capabilities which are required by US & european value retail customers; Invest further in windmills as a low cost & sustainable source of energy.

3 Industry Scenario:- + The size of the domestic textile market is estimated at US$25 bn, with imports forming about 5% of the market size. Textile exports contribute substantially to India s export earnings. Textiles account for 16.24% of India s overall exports. The textile industry accounts for nearly 4% of India s gross domestic product and provides 35 mn jobs, making it the second largest employment provider in India, after agriculture. + Domestic apparel sales are expected to grow at a CAGR of 10-11% to nearly US bn in The largest segment in the export market is the readymade garments made from cotton accounting nearly 75% of the apparel export from India. It's set to grow at a CAGR of 20%. The export market can also be subdivided on the basis of geographical area into the US, the EU & other countries. RMG exports were largely sent to the US and the EU, which together accounted for nearly 80% of the total RMG exports from India. The demand for cotton yarn is expected to grow at a CAGR of 7.3% from around 2,2420 mn kg in to 3,446 mn kgs in Key demand drivers for Indian textile industry are: 1. Abolition of quotas - Under the World Trade Organization (the WTO ) agreements, quota restrictions and tariff barriers, including those for Indian textile companies, were removed in January 2005 & were reduced & will be fully removed by 2008 for Chinese textile companies, giving these companies increased access to the global market. Following the removal of quotas, India s textile & apparel exports are projected to increase from nearly US$13 bn in 2005 to over US$50 bn by 2010, representing a compound annual growth rate ( CAGR ) of 31% & a market share of 8% of global textile trade by 2010; 2. Imposition of restrictions on imports from China by the US & the EU: The Agreement on Textiles and Clothing (the ATC ) provided for complete abolition of textile quotas from However, China voluntarily agreed to allow such restrictions until 2008 under the terms of its entry into the WTO. Under such circumstances, the EU imposed restrictions on the imports of certain garment categories from China. The restrictions imposed by the EU restricted the growth of imports from China to 10% p.a. until The US also imposed similar restrictions on Chinese imports to restrict the growth in certain garment categories. The restrictions imposed by the US restrict the growth of imports from China to % until 2008; 3. Global concentration - The apparel manufacturing industry has, on a global scale, shifted its base several times over the last 50 years & has been concentrated in those countries which offer the most competitive labor costs. In 2005, 58.4% of the U.S. textile imports & 18.6% of the EU textile imports came from Asia. According to WTO projections, India is expected to be the second most favored sourcing destination of global retailers; 4. Strong domestic demand - The major factor for determining expenditure on clothing is the income level of households. The higher the income level, the higher the expenditure on clothing. According to CRIS INFAC the consumption pattern of Indian households demonstrated that out of the total household expenditure, around 4-4.5% was spent on clothing. The average level of income of the Indian household is expected to rise over the next 5 years & the average income per household is expected to increase at a CAGR of nearly 10% from to , which would be a major demand driver for the clothing industry in India; 5. Outsourcing from major international players - The abolition of quotas has also boosted outsourcing opportunities for India. Large international players like Walmart, JC Penny, Banana Republic, Marks & Spencer, Nike, Lee, DKNY, etc. have identified India as an outsourcing destination so as to take advantage of the low costs associated with the industry in India. Further, these players have significant volumes, something which would increase the RMG exports from India. + Government initiatives: The union budget announced on February 28, 2007 has extended the TUF scheme to March 31, 2012; The Export Promotion Capital Goods scheme facilitates the import of capital goods at a concessional duty of 5%, with appropriate export obligations; Advance Authorization Scheme allows duty free import of raw materials; The Government has liberalized the textile sector by allowing foreign direct investment ( FDI ) up to 100%; In order to achieve the objectives of NTP-2000, the reservation in the garment industry which led to fragmentation & thereby poor economies of scale, was done away with. Initially, in 2000, only the woven segment was de-reserved from the small-scale industry ( SSI ) sector. Later, in 2005, the knitwear segment was also de-reserved from the SSI sector. Company* Multiple (Times) EPS Share Price Dividend/ Share EV/EBITDA P/E MCAP/SALES MTBV (Rs.) (Rs.) (Rs.) KPR at Rs.225 L BAND KPR at Rs.265 U BAND Arvind Mills Limited Alok Industries Raymond Limited Bombay Rayon *Source : Based on annualised figure of FY07 from RHP & Capitaline.

4 Income Statement Rs, mn Net Sales Inc/Dec in stocks Raw Materials Employment Costs Manufacturing Expenses Administrative Expenses Selling & Distribution Expenses Operating Expenditure Operating Income Other Income Gross Profits Finance & Interest Depreciation Profit Before Tax Tax Profit After Tax Extraordinary Items Net Profit Cash Flow Statement Rs, mn FY 2007 FY 2006 FY 2005 FY FY 2007 FY 2006 FY 2005 FY 2004 Cash flow from operations Cash for working capital Taxes Paid Net Operating Cash Flow - A Net purchase of fixed assets Net purchase of investments Interest / Dividend Receipts Net Cash Flow From Investing - B 1, , , , , , , , Proceeds from equity Proceeds / Repayment from borrowings Dividend & Interest payments Surplus on account of amalgamation Net Cash Flow From Financing - C Net Cash Flow (A+B+C) Opening Cash Closing Cash , , , , , , ,

5 Balance Sheet Rs, mn Sources of Funds FY 2007 FY 2006 FY 2005 FY 2004 Equity Share Capital Reserves & Surplus Miscellaneous expenditure (written off) Networth Secured Loan Unsecured Loan Loan Funds Deferred Tax Liability, net , , , , , , , , , , Total Liability 7, , , Application of Funds Gross Block Less: Depreciation Net Block Capital work in progress Net Fixed Assets Investments Current Assets Inventories Sundry Debtors Cash & Bank Loans & Advances Less: Current Liabilities & Porvisions Net Current Assets Total Assets 6, , , , , , , , , , , , , , , , ,

6 Objects of The Issue:- Amount (INR,mn) Sr. No. Expenditure Items Total cost to be Estimated net proceeds financed from the utilization as on March 31, net proceeds of IPO Expansion of the garment facility at Arasur Nil 2. Setting up of a design studio at Arasur Nil 3. Construction of an existing hostel facility at Arasur Expansion of the processing facility at SIPCOT, Perundurai Nil Investment in knitting facility at Arasur Nil 6. Addition of balancing equipments for the existing spinning Nil facility at Sathyamangalam. 7. General corporate purpose. [ ] [ ] [ ] Total [ ] [ ] [ ] The objects of the issue has not been appraised by any bank or any financial institution or an independent organization. Abhishek Kothari Research Associate abhishek.kothari@spasecurities.com SPA CAPITAL SERVICES LIMITED SPA MERCHANT BANKERS LTD. SPA SECURITIES LTD. SPA COMTRADE PRIVATE LIMITED SPA INSURANCE SERVICES LTD. Investment Advisory services, AMFI Reg. No. ARN-0007 SEBI registered Category-1 Merchant Bankers SEBI Regn. No. INM Member NSE-Capital Market & Wholesale Debt Markets,SEBI Regn.no. INB ,F&O Market,SEBI Regn.no. INF Member BSE-Capital Market,SEBI Regn.no.INB Member of NCDEX & MCX. NCDEX TMID-00729, NCDEX FMC no.ncdex/tcm/corp/0714 Direct Broker for Life and General Insurance broking IRDA Lic. Code No. DB053/03 NEW DELHI 25, C-Block Community Centre, Janak Puri, New Delhi Tel: (011) , , Fax: (011) B- 1A- 132, Sector-51, Noida Ph: Fax: , Qutab Plaza, DLF City, Phase- I, Gurgaon Ph: Fax: MUMBAI 101, 10th Floor, Mittal Court - 'A' Wing, Nariman Point, Mumbai Tel: (022) / Fax: (022) / KOLKATA Diamond Chambers, Room no. 8-O, 8th Floor, 4 Chowringhee Lane, Kolkata Tel: (033) Fax: (033) BANGALORE 703 & 704, 7th Floor, Brigade Tower, 135, Brigade Road, Corporation Division no. 61, Bangalore Ph: JAIPUR UL-15, Amber Tower, Sansar Chand Road, Jaipur Tel: (0141) / Fax: CHENNAI 3H, 3rd floor, East Coast Chambers, 92/34, G.N.Chetty, T. Nagar, Chennai Tel: (044) Fax: AHMEDABAD 407, Anand Mangal Complex - I, Behind Omkar House, C.G.Road, Navrangpura, Ahmedabad Tel: (079) Disclaimer: This information is for general purpose only, without regard to any specific objectives, financial situations and needs of any particular person. The information contained herein does not constitute an offer or an invitation for an offer to invest. These materials summarise certain points relating to the Offer and are not a comprehensive summary. Please note that this information is based on the disclosures made in the Red Herring Prospectus. Investors are requested to refer to the Red Herring Prospectus for risk factors, details about the issue and issuer company before taking any investment decision. SPA and/or its representatives do not accept any liability whatsoever direct or indirect that may arise from the use of the information contained herein. Inst. Dealing Desk : 101, 10th Floor, Mittal Court-'A' Wing, Nariman Point, Mumbai T e l. No. : , Fax No / E m a i l : cms@spacapital.com