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KPR Mill Ltd, one of India’s biggest textile manufacturers, is poised for an uptrend as the China-plus-one strategy brilliantly unravels for Indian cloth producers.
The Tamil Nadu-headquartered company is a vertically integrated apparel brand. KPR is one of India’s fastest-growing and most attractive companies for three of its most exciting products — ready-made knitted apparel, cotton-knitted fabric and cotton yarn.
The China-plus-one strategy refers to a business strategy adopted by companies, especially multinational corporations, to diversify their production and supply chain activities by adding an alternative manufacturing or sourcing location to China.
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While all textile companies are set to benefit from the China-plus-one theme, KPR Mill’s main feature — vertical integration– makes it the leader of the pack.
Under such an arrangement, the business tries to control different stages along the supply chain. Instead of relying on external suppliers, the company strives to bring processes in-house to have better control over the production process.
Today, KPR Mills has 12 technology-oriented manufacturing units, with a capacity to produce 1,04,000 MT of yarn per annum; 25,000 MT of fabric per annum and 157 million ready-made knitted apparel per annum and a 15,000 MT fabric printing capacity. The company has also recently forayed into the retail segment with FASO, a 100 percent organic innerwear, sportswear, and athleisure brand.
What is aiding growth?
Brokerage firm Sharekhan has said that in the medium- to long-term, the China-plus-one factor, a likely sign of free trade agreement (FTA) with the UK and increasing opportunities in the US market provides scope for consistent growth for its high-margin garment business, accounting for 40 percent of the total revenue. Further, an integrated business model, along with strong capacity expansion plan in the sugar and textile businesses would aid faster recovery for KPR, once demand improves.
China-plus-one coming in handy
Furthermore, analysts suggest that China-plus-one is a blessing in disguise for the company. “The company is functioning at 85-90 percent capacity and we believe it is in an excellent position to reap the benefits, given its position in the market,” an analyst, who did not want to be named, said.
Despite uncertainties in the textile export space due to the Russia-Ukraine war and global recessionary fears, KPR continues to have an excellent order book worth Rs 1,000 crore. “This is largely fuelled by the China-plus-one theme,” Awanish Chandra, an analyst at SMIFS, told Moneycontrol.
“Its presence from yarn to fabric, given its backward integration, is unparalleled in the country and proves to be a very strong factor in the growth of the company”, the analyst added.
While India strives to sign an FTA with Europe, KPR already has a cemented position in the region. Given the uncertainties and volatility in the margins, owing to the nature of the business, KPR’s EBITDA margins have never fallen below the 18-19 percent mark.
In 2021, the United States blacklisted 87 percent of China’s cotton crop, approximately one-fifth of the world’s supply, citing human rights violations against Muslim Uighurs in China’s northwest Xinjiang region.
As for major competitors, such as Vietnam and Bangladesh, analysts tracking the sector are of the view that increased power costs and instability in the two countries are helping India become the most lucrative destination. He also added that Bangladesh and Vietnam don’t have the same government backing India has.
According to Sharekhan’s August 4 note on the company, the stock trades at 22x/17x its FY2024E/FY2025E EPS and 14x/11x its FY2024E/FY2025E EV/EBITDA.
Lastly, the company also has a sugar business, with a production capacity of 20,000 TCD, ethanol capacity of 360 KLPD, and a power generation capacity of 90 MW. In FY2022, 62 percent of the total revenue came from the domestic market, whereas exports contributed 38 percent to revenue. The company exports to over 60 countries, including Europe, Australia, and the US.
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