“BUY” This Mid Cap Textile Stock For 27% Upside Recommends Sharekhan

KPR Mill Ltd's stock has surged by more than 200 percent in the last year, notably after the beginning of the Covid-19 epidemic. KPR Mill Ltd's share price has returned 236.66 percent to its shareholders on a year-to-date basis. Sharekhan, on the other hand, has seen a potential of 27% in the textile stock, rating it as a 'buy' and expecting it to rise to Rs. 755 from its current market price of Rs. 590.

The brokerage’s take on KPR Mill Ltd

In its research report, the brokerage has said that "KPR Mill Limited's (KPR's) integrated business model and expansion in the garment business will help it post sustainable strong revenue growth in the medium term. The company's revenue and PAT posted a CAGR of ~6% and ~16%, respectively, over FY2017-FY2021. Higher export demand from US/Europe markets and increased garmenting capacity would help revenues and PAT to grow at a CAGR of 16% and 32% (OPM to expand by 367 bps) over FY 2021-24. Cumulative free cash flow (FCF) between FY2017- FY2021 stood at over Rs. 800 crore. Cash flows are expected to improve further in the coming years with improved profitability and stable working capital management. Capital allocation in the high RoCE business (garment - 30%; ethanol - 22-23%) will help in improving RoCE to 31.9% in FY2024 from 25.2% in FY2021."

According to Sharekhan "KPR commissioned its new 42 million garment production capacity at Chengapally, Tamil Nadu, in November 2021. With this, the total garment manufacturing capacity will increase to 157 million garments per annum. Capacity expansion will drive the company's growth and help to meet growing market opportunities. With scale-up in garment capacity and increased utilisation, we expect revenue of the garment business to post a 22% CAGR over FY2021-FY2024."

The brokerage has claimed that "KPR holds cotton inventory that will last till October. In addition, the cost of inventory held by the company is at a lower price of Rs. 41,000 versus the current price of Rs. 61,000. The company will build up cotton inventory in the new season and, with prices currently trading higher, it will impact margins in H2FY2022. Hence, consolidated OPM in H2FY2022 is expected to settle down at 22-23%."

As per the research report of the brokerage house, Sharekhan "KPR has one of strongest balance sheets among textile players with debt-free status and strong cash-generation ability. Its cumulative FCF stood at Rs. 800 crore+ over FY2017-FY2021. Post the expansion of the garment facility and sugar (ethanol) capacity, there are no major CAPEX plans in the immediate terms. Return ratios of the company are expected to improve strongly, with RoE and RoCE at 26.3% and 31.9% in FY2024 from 24.5% and 25.2% in FY2021, respectively, once new garmenting capacity (expected RoCE of 30%) and ethanol capacity (expected RoCE of 25%) use maximum utilisation level along with sustained expansion in OPM."

Buy KPR Mill Ltd With A Target Price of Rs. 755

Sharekhan has noted in its research report that "KPR's stock price has delivered a strong return of 4.6x since our initiation of the idea in October 2020. Structural changes in the Indian textile industry with improving demand in the export market due to China +1 factor aided KPR to deliver strong financial performance in the past 1-year. Export demand remains strong in the US and Europe, while free trade agreement (FTA) with the European Union, retailers/large international players scouting for sustainable supply options in Asia, and the US likely to put sanctions on countries such as Bangladesh are potential growth drivers for the company in the medium term."

The brokerage has also claimed that "This along with expanded capacities in the garmenting/sugar division provides strong earnings visibility. Thus, we maintain KPR as one of our top picks in the textile space and maintain our Buy recommendation on the stock with a revised price target (PT) of Rs. 755 (rolling it over FY2024 earnings). The stock is currently trading at 22.8x/17.7x its FY2023/FY2024E EPS."

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.