Shares of KPR Mill, one of India’s largest vertically integrated textile players, have corrected nearly 9% from their recent November high of ₹928.15. According to domestic brokerage firm Sharekhan, this correction provides a good opportunity for investors to enter the quality textile market with a sturdy balance sheet and strong growth prospects with efficient management.
The brokerage said the exports of textile companies have dented over the past few quarters due to a rise in inflation, rising interest rates, and geopolitical disturbances. However, with an improvement in export demand, textile companies are likely to see a gradual recovery.
Looking at the long term, the brokerage expects the Indian textile industry to grow strong, driven by capacity augmentation with value-added products, the 'China + 1' strategy, government trade agreements, incremental benefits from the PLI scheme, and market share gains in export markets.
Sharekhan projects a healthy improvement in KPR Mill operating performance in H2FY2024, citing factors such as the correction in Indian cotton prices, robust garment volumes, and strong performance in the sugar business.
Yarn and fabric business to benefit from softening cotton prices: According to Sharekhan, Indian cotton prices have corrected sharply from ₹62,000–63,000 per candy in April–23 to ₹55,000 per candy currently. A recovery in demand in the coming quarters, coupled with stability in cotton prices, will help improve the demand for yarn and fabric products.
Volumes are likely to pick up from Q4FY2024 and would see good pick-up from Q1FY2025. Realisations are expected to remain lower in FY2024 (down by 30% in H1FY2024). EBITDA margins in the yarn and fabric business stood at 7-8% in H1FY2024 which is likely to improve to the mid-teens by the end of FY2024, the brokerage underscored.
Garment business likely to clock a 10-12% CAGR in three years: KPR Mill garment business reported 70 million pieces of sales volume in H1FY2024 and is targeting 80 million pieces of volume in H2FY2024 taking the total to close to 150 million pieces in FY2024E. Despite weak demand in international markets, the brokerage stated that the company maintains a stable order book.
KPR currently has 55 clients, and 35–40% of revenues come from the top 5 clients. Walmart and US GAP are some of KPR’s top clients, providing long-term scale opportunities to the company. Hence, KPR might consider strategic capacity expansion, which will help the garment business post a 10-12% CAGR over the next three years.
EBITDA margins are expected to be better in H2FY2024; and will consistently improve in the coming years: With garment margins expected to be at 22-25%, sugar EBIDTA margins at 25%, and a strong recovery in the profitability of the yarn and fabric business, the brokerage expects the overall EBITDA margin to consistently improve in the coming years. It projects EBITDA margins to inch closer to 23% by FY2026.
Near-term outlook is weak; long-term prospects are intact: Sharekhan expects the company to reap the benefits of expanded garment capacity with a recovery in export demand (likely in H2FY2024). The decline in cotton and yarn prices will provide some relief to margins. It anticipates revenue and PAT to clock a CAGR of 17% and 23%, respectively, over FY2023-2026E.
Retains ‘Buy’: In light of these growth factors, the brokerage maintains its 'buy' rating on the stock with a target price of ₹962 apiece, which reflects an upside of 13.85% from the stock's latest closing price of ₹845 apiece.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decision.
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