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Higher yarn realisation continues to drive revenues…

About the stock: KPR Mill is among select vertically integrated textile players in India (from yarn to garments) that has displayed 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

Q3FY22 Results: On account of strong yarn spreads coupled with strong order book for the garmenting division, KPR Mill reported yet another steady quarter.

Revenue grew 36% YoY (30% QoQ) to | 1260.4 crore. Textile segment (82% of revenue) grew 30% YoY while sugar division (15% of revenues) grew 81% YoY

On a QoQ basis, gross margins declined 338 bps to 43.8% as KPR carried low cost cotton inventory in the previous quarter. Yarn spreads continue to remain sturdy as they have moved in tandem with a sharp rise in cotton

EBITDA margins declined 480 bps QoQ to 24.2% owing to higher other expenses (in line with the management’s target)

KPR, in Q3FY22, commissioned its garmenting facility (42 million pieces) and has robust order book of | 1000 crore (vs. | 750 crore in last quarter)

What should investors do? Since our initiation report, the stock price has appreciated ~5.4x (from | 120 in September 2020 to | 650 in February 2022).

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 | 820 i.e. 29x FY24E EPS

Key triggers for future price performance:

Two major capex projects worth | 750 crore towards garmenting (| 250 crore) and ethanol facility (| 500 crore) expected to be ramped up in FY23E

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 and earnings CAGR of 19%, 24%, respectively, in FY21- 24E with higher RoE of 24%

Alternate Stock Idea: Apart from KPR, we also like Gokaldas Exports (GEL)

GEL is one of India’s leading apparel exporter with an annual capacity of 30 million pieces, which focuses on manufacturing complex garmenting

BUY with target price of | 480

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