KPR Mills, formerly KPR Cotton Mills, was originally incorporated on 19 March 2003. To further rationalise operations and better leverage capacities, KPR Cotton Mills purchased on 1 April 2005 KPR Knits as a going concern. Subsequently KPR Mills and K P R Spinning Mill were consolidated into KPR Cotton Mills through merger approved by the Madras High Court. On 5 October 2006, KPR Cotton Mills was renamed KPR Mills.
KPR Mills is now a vertically integrated apparel company. Operations span various aspects of apparel production chain: from producing carded and combed cotton yarn and knitted fabric to managing the design, delivery and quality assurance processes involved in producing readymade knitted apparel. The company exported 99.86% of its readymade knitted apparel directly to international clients in the year ended March 2007 (FY 2007). It has 1,000 regular domestic clients for yarn and fabric. Production facilities are located in Coimbatore, Sathyamangalam and Tirupur in the southern state of Tamil Nadu in India.
Current capacity
KPR Mills produced 10.16 million and 11.55 million pieces of readymade knitted apparel in FY 2006 and FY 2007, respectively. The company has a cumulative capacity of 128,064 spindles in four mills and manufactured approximately 26,232 and 28,346 tonnes of yarn in FY 2006 and FY 2007, respectively. This represented capacity utilisation of approximately 98% and 98.2% in these periods. Fabric produced was 6,147 and 6,734 tonnes in FY 2006 and FY 2007, respectively, representing capacity utilisation of about 90% and 80% in these years.
Expansion plans
To further expand its production capabilities, KPR Mills will spend Rs 472 crore. Of this, Rs 349 crore will be raised through term loans and Rs 52.5 crore through private equity. To fund the remaining expansion cost, the company has come out with an issue of 5912100 shares of Rs 10 each at a price band of Rs 225 - Rs 265 per share. The issue proceeds will be Rs 133 crore at the lower band and Rs 156 crore at the upper band.
The expansion plans of KPR are as follows:
* Expansion of existing garment facility at Arasur, near Coimbatore: Rs 10.59 crore.
* Setting up a design studio at Arasur: Rs .56 crore.
* Construction of an additional hostel facility: Rs 7.13 crore.
* Expansion of the processing facility at SIPCOT, Perundurai: Rs 39.70 crore.
* Investment in knitting facility at Arasur: Rs 25.96 crore.
* Addition of balancing equipments for existing facility at Sathyamangalam: Rs 13.81 crore.
In addition, KPR Mills has installed printing and embroidery machines at the Arasur facility. This became fully operational in March 2007. It will enable the company to meet most of its printing and embroidery requirements in-house.
Has advantage of lower power cost
To become self-sufficient, and reduce dependence on the state electrical grid, windmill facilities were installed at the Tirunelveli, Thenkasi and Coimbatore facilities. Through these facilities, KPR Mills has the capacity to produce 39.07 mega watts (MW) of power, required to met the company’s entire energy needs end April 2007. Going forward, it is expected to support approximately 75% of the energy needs once the Arasur mill is fully operational. As a result, the power cost per unit was Rs.0.53 in FY 2007, which was approximately 84.9% lower than the per unit cost charged by the Tamil Nadu Electricity Board.
Strengths
*KPR Mills is a vertically integrated player and well placed to realise efficiencies of scale and quality control at each stage of the manufacturing process.
*On account of the 38-MW installed capacity of its windmills, power cost is one of the lowest in the industry at Rs 0.53 per unit. This is 85% cheaper compared with the cost of power from the state grid. Power cost as a percentage to sales stands at 3% against the industry average of 7.8%.
*Labour cost is one of the lowest at 2.75% (as a percentage of sales) as against the industry average of 7.9%.
*Operating profit margin was quite healthy at 25% in FY 2007, and has been increasing in the past two years.
*Subsequent to the expansions in capacities, there are plans to gradually increase apparel operations, where margin is higher.
*Net interest rate of existing term loans after considering the benefits available on loans covered under the Textile Upgradation Fund (TUF) scheme is around 3.5%.
*Has a diversified customer base. The largest customer contributes only 4% to the revenue, indicating that the dependence on a single customer is minimal.
Weakness
*Does not own intellectual property rights on the KPR trademark, logo and slogan. Has to share the use of the KPR name with other promoter group entities.
*The principal activities of certain entities that are part of the promoter group include, among others, manufacturing cotton yarn, dyeing fabrics and generation of power. As a result, there may be conflicts of interest between KPR Mills and the members of the promoter group in addressing business opportunities and strategies.
*Exports of the Indian apparel industry are currently facing pricing pressures on account of removal of restrictions on the quantity of textile and apparel imports in accordance with the Agreement on Textiles and Clothing (ATC) signed by certain member countries of the World Trade Organisation. Moreover, restrictions on imports from China imposed by the US and the European Union in various apparel categories may be revoked after December 2008. This may result in a further decline in prices in the apparel industry. Besides this, India is not presently part of any free trade agreement. Those that are part of such agreements with major importing countries enjoy lower import tariff. Therefore, KPR Mills may have to lower its prices at regular intervals to sustain in such challenging business scenario. If such price reductions are not supported by corresponding fall in cost of production, profitability may be adversely affected.
*Apparel sales are highly dependent on customers located in Europe and other countries outside India. Moreover, the post-expansion target is the US market. As a result, economic slowdown or factors that affect the economic health of these countries could adversely affect business.
*Rupee appreciation is a negative for the industry as well as the company.
Valuation
KPR Mills reported a 14% rise in net sales to Rs 481.62 crore but a 7% fall in (restated) net profit to Rs 58.42 crore in FY 2007. Fall in other income by 27% to Rs 17.21 crore and absence of extraordinary (EO) income, which was Rs 12.41 crore in FY 2007, impacted net profit. The fall in other income was primarily due to the scrapping of the export incentive under target plus scheme (Rs 8 crore) from 1 April 2007.
EPS was 15.5 in FY 2007 (on post-issue equity). This is discounted 14.5 times by the lower price band of Rs 225 and 17.1 times by the upper price band of Rs 265. The sector is out of market fancy for a long time and there are no signs of the market taking a second look at it positively in the foreseeable future. Hence, many well-established and reasonably good performing companies are trading around or even less than P/E of 10 times.