Buy KPR Mill Ltd For Target Rs.2310 - ICICI Direct
Margins to sustain amid strong demand About the stock:
KPR Mill is among select vertically integrated textile players in India (from yarn to garments) that has displayed a consistent revenue growth and positive operating margin trajectory with strong return ratios.
* It is one of India’s largest knitted garment manufacturer with total capacity of 157 million pieces (post expansion)
* Consistently, over the years, it has maintained ~18%+ margins with average RoCE of ~20% and D/E ratio of 0.3x.
Q1FY22 Results:
Despite pandemic related challenges, KPR Mills has reported yet another solid operational performance in Q1FY22.
* Revenue grew 67% YoY (down 19% QoQ) to | 903.7 crore. Textile segment (87% of revenue) grew 85% YoY while sugar division (12% of revenues) degrew 1.9% YoY
* Gross margins improved 458 bps QoQ to 46.9% and continue to remain higher than its average level of 42-43% owing to enhanced yarn spreads
* EBITDA margins expanded 90 bps QoQ to 24.9%. This is the fifth consecutive quarter wherein KPR has maintained 20%+ EBITDA margins
* Announced stock split of one equity share of | 5 into five equity shares of | 1 each.
What should investors do?
Since our initiation report, the stock price has appreciated by ~3.2x (from | 597 in September 2020 to | 1941 in July 2021).
* We like KPR as a structural long term story to play the apparel export space. We maintain BUY recommendation on the stock
Target Price and Valuation: We value KPR at | 2310 i.e. 21x FY23E EPS
Key triggers for future price performance:
* KPR has two major capex projects in the pipeline worth | 750 crore towards garmenting facility (| 250 crore) and ethanol facility (| 500 crore)
* Capital deployment towards value accretive projects (targeted RoCE: garmenting: 30%, ethanol: 22%) augurs well for KPR
* Robust opportunities in US market gives strong visibility for sustained growth in exports (currently Europe is the key market for garment exports)
* We model revenue, earnings CAGR of 18%, 21%, respectively, in FY21-23E with higher RoCE of 26%.
Alternate Stock Idea:
Apart from KPR, in our textile coverage we also like Filatex
* FIL has maintained a capital efficient business model with stringent working capital policy (NWC days:17) and high asset turn (2.0x), generating healthy RoCE of more than 22%
* BUY with a target price of | 125.
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