Kamadgiri Fashion Ltd Rs 78: Poised for Surge

RATIONALE FOR RECOMMENDATION;

KFL, engaged in production of textile and garments, is supplier to all major brands in India. Current market cap is less than 40 crores which is just 15% of its FY15 sales. Finally, Mr Kishore Biyani who is known for his business acumen to pick equity stakes in various firms at early stage and then exit in few years with multibagger appreciation holds 27.84% equity stake in KFL through one of his unlisted privately held companies. This equity tie-up has led to better business opportunities with Future Group as KFL supplies large quantity of garments to

CENTRAL, FBB  and PANTALOON.

Promoted by Goenka family, KFL is engaged in production of textile fabrics and garments. KFL has 3 plants in Umergaon and Tarapur. KFL's business can be divided mainly in 4 segments:

1. WEAVING: At its Umergaon plant, KFL has most modern weaving machines including Sulzer, Somet, Tsudocama from Switzerland and Japan. Company has its own advanced version of warping machines. KFL is producing Poly/Cotton, 100% Cotton, Linen, Poly/Viscose fabrics. KFL supplies grey fabric to leading brands of India including Raymond KFL produces around 95 lac mtr fabric per annum

2. OTC Brands:  KFL has been selling fabric under its own brands namely  TRUE VALUE AND TRUE LINEN.  True Value is amongst leading brands in Poly/Viscose segment. Introduced recently, True Linen is Linen fabric range which is capturing market share rapidly. Margins in OTC Brands are quite high

3. Apparels:  Spread over 2 lac s f at 5 plants in Tarapur, KFL has capacity to produce approx 4.60 million pieces of garments which includes 2.40 million shirts, 1.20 million trousers and 1 million denim pieces.  Company has CAD CAM technology imported from Gerber Germany and machines imported from global firms like Beisler, Strobel, Brother, Juki etc.  KFL has been supplying garments to various major brands which include:

FUTURE GROUP (RIG, UMM, Lee Cooper, Bare Denim, John Miller etc)

Raymond

Park Avenue

Blackberry

Spykar

Parx

Monte Carlo

Killer

John Players

Indigo Nation etc

In international market, KFL is supplying garments to brands like Next, Debenhams, Burton, River Island etc

4. UNIFORM;  Here, KFL is catering to uniform requirements of corporates and has prestigious clients like Future Group, Lilavati Hospital, Mexus Education, BCCI etc

FINANCIAL PERFORMANCE:

                              2013-14       2014-15

                              Rs/Cr           Rs/Cr

Sales                     253                260

Depreciation             3.43              3.49

PBT                         4.38             3.56

PAT                          2.92             2.17

Equity                       5.06            5.06

Reserves                                     21

EPS Rs                     5.78           4.30

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KFL had performed extremely well for FY14 wherein its sales had grown by 25% to 253 crores and despite significantly higher provision for income tax, PAT  jumped 217% to 2.92 crores. EPS stood at Rs 5.78.

However, KFL suffered mild setback for FY15 wherein is PAT slipped to Rs 2.17 cores and Eps came down to Rs 4.29. However, KFL maintained dividend at Rs 1.50 per share and current market price is Cum-Dividend

Reason for lower nos in FY15 was bad Q3:

                        Q4/FY15         Q3/FY15

Sales                  75.38            51.10

Depreciation          0.82             0.86

PBT                    2.87            -2.03

PAT/Loss             1.95            -1.32

In Q3, KFL had done some inventory write-off (One time) which led to Loss of 2.03 crores. However, KFL reported very good nos in Q4 with PBT of 2.87 crores (turnaround of 4.90 crores at PBT level). Eps for Q4 alone stood at Rs 4. In fact PAT of Q4 ALONE IS JUST 10% LESS THAN PAT OF ENTIRE YEAR.

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FUTURE OUTLOOK:

                                   2016-17         2015-16

                                   Rs/Cr             Rs/Cr

Sales                            330               290

Profit after Tax                7.50             6.50

Equity                           5.06               5.06

EPS Rs                        15                     13

KFL is strongly recommended for buying as:

1. Scrip is cum-dividend Rs 1.50.

2. Scrip is trading at 6xFY16E Eps

3. Scrip is available at 5.20xFY17E Eps

4. Finally, a very little known fact that Mr Kishor Biyani (promoter of Future Group) holds 27.84% stake in KFL through one of his unlisted firms. His brother is also on the Board of KFL. Although listed as non-promoter, but actually/for all practical purpose, Mr Kishor Biyani as good as co-promoter of KFL. It is highly highly unlikely that Mr Biyani will sell his stake of KFL. Mr Kishor Biyani is known for his business acumen to pick equity stakes in various companies at an early stage and take exit in few years with multibagger appreciation (e.g. BIBA).

Current market cap of KFL is less than 40 crores. Daily trading volumes are very low due to low price. Floating stock is not large as persons in textile industry know future potential of KFL and continue to hold the scrip.

In current market scenario where companies without any track-record and/or with negative Book Value/no dividend/even loss making are quoting at ridiculously high prices and even companies with average track-record are quoting at multiples of 20-50, KFL is still available

at:

A)  6xFY16Eeps

B)  5.20XFY17Eeps

Even if KFL gets reasonable PE Ratio of 12, its share price should DOUBLE based upon FY16 estimates.