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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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