We are initiating coverage on KPR Mills, engaged in manufacturing of readymade knitted apparel, cotton knitted fabrics and yarns in India. KPR Mills is well poised for continuous growth driven by its positioning as a complete textile solutions provider. Sustained growth prospects of the company are supported by a unique procurement policy with a focus on premium products that offer higher margins. The company is planning to expand its export markets by leveraging its vertically integrated operations to strengthen the growth strategy.

Key Investment Rationale: Integrated Textile Player KPR Mills Ltd is well positioned as one of the largest vertically integrated textile players in India having an extensive gamut of products which consists of cotton yarn, knitted fabric and readymade knitted garments.

Moving up the ladder The company has initiated expansion into high value added 100% compact yarn manufacturing capacity which is expected to be completed by March
2011. This would enhance the total spindlage capacity to 3,15,744 from 2,12,064 on March 2010.

Captive Power Will Improve EBIDTA Margins KPR has Green power generation capacity of 40 windmills at Tirunellveli, Thenkasi, & Coimbatore that can generate power upto 40 MW which will cater about 75% of its power requirement through captive consumption.

Future Valuation: At the current price of Rs 221, the stock is trading at 7.75 times of our estimated FY11E earnings, while it is available at just 7.06x of FY12E. We thus recommend a `BUY' with a target price of Rs 290.

Company Profile K. P. R. Mills Limited is one of the largest vertically integrated textile players in India having presence across the entire value chain - from Fibre to Fashion, including production of yarn and fabric, designing, dyeing and manufacturing of readymade garments.

The company has state-of-the-art production facilities in Tamil Nadu at Sathyamangalam, Tirupur, Perundurai and Coimbatore. These facilities have a total manufacturing capacity of 2,12,064 spindles to produce 54,000 MT of yarn per annum, 205 circular knitting machines to produce 21,000 MT of fabrics per annum and 63 million pieces of readymade knitted apparel per annum along with dyeing facility to process 23 MT of fabric per day. It also has 40 wind mills with a total captive power generation capacity of 40 MW.

In December 2006, a consortium of private equity funds including Ares Investments, Brandot Investments and Argonaut invested Rs 105cr approx to acquire a combined stake of 11% in the company.

It further raised Rs 133cr through an IPO of 59.1 lakh equity shares of Rs 10 each in August 2007 for its expansion plans. The issue was priced at Rs 225 per share and was oversubscribed 1.19 times, receiving a good response from the investors.

Business Model Yarn: Yarn is the largest revenue contributing segment of the company with over 50% contribution to total revenues and average margins in the range of 17%-18%. KPR produces both carded and combed yarn. It consumes about 25% - 30% % of its yarn production in-house and the remaining 70% - 75% is sold in the domestic markets.

Fabric: Fabric contributes about 14% to the total revenues and has average margins of 15%-20%. KPR consumes about 25% - 30% of its fabric production for in-house garmenting and the remaining is sold in domestic markets.

Knitted Garment: Knitted Garments segment contributes 28.5% to the total revenues and enjoys highest margins of about 22% - 25%. Of the total garment capacity, 12mn pieces of the garment are outsourced through the Tirupur facility and the remaining is produced in-house.

Independent garmenting unit to facilitate branding - KPR formed a wholly owned subsidiary, Quantum Knits Pvt Ltd in June 2009, to provide independent and exclusive control of all operations, management and transactions of the Garment Unit at Arasur to this subsidiary.

Investmment Argumment

Inntegrated Textile Player The company is well positioned as a vertically inteegrated textile player in India, having an extensive gamut of products consisting of cotton yarn, knitted fabric and readymade knnitted garmen It is well poised for a sustainable growth driven by its positioning as an integrate textile play which als enables them to customize products as per client specifications. Its unique procurement polic with a focu on premium products helps it in realizing higher margins.

Moving up the ladder KPR Mills Ltd has initiated expansion into high value added 100% compact yarn manufacturing capacity which is expected to be completed by March 2011. This would increase the total spindlage capacity to 3,15,744. Thus the addittional capacity will add to the increase in earnings.

During the quarter ended Sept. 2010, net sales of the company reported an increment of 30.55% on y-o-y basis to Rs 243.47cr as against Rs 186.5cr during the corresponding quarter last year. On a sequential basis the company's performance was modest and net sales saw an expansion of mere 4.25% from Rs 233.55cr to Rs. 243.47 cr.

On the operating front, EBIDTA registered a growth of 118.29% to Rs 70.4cr from Rs 32.25cr as against corresponding period last year, while on sequential basis EBIDTA registered a growth of 14.01% from Rs 61.75cr. The company has been able to improve its operating margins, largely on account of higher capacity utilization and increased demand in the yarn segment.

The net profit of the company saw an increment of 336.05% YoY to Rs 32.05cr as against Rs 7.35cr during the corresponding quarter, while on Q-o-Q basis the net profit increased by 12.1% from Rs 28.59cr. The better-than-expected bottom-line performance of the company was mainly contributed by higher top line of the company coupled with a slight decrease in interest cost.

During FY10, the company reported a strong traction in revenues and profitability, driven by improved performance across all key product segments. The company posted a 9.79% rise in net sales at Rs 788.5 cr compared to Rs 718.18 cr in 2008-09, net profit increased 396.83% to Rs50.18 cr as against Rs 10.1 cr in FY09 on the back of higher operating profits and lower interest cost. The operating profit margins of the company improved 545 bps to 21.13% as against 15.58% in the fiscal FY09. The sharp improvement in profitability resulted from an improved product mix and increase in capacity utilization during the year.

The company's continued focus on premium products, expansion in export markets and internal efficiency enhancements collectively ensured robust performance during FY10. Large and high value export orders during FY10 led to an increase in contribution of exports to 29.2% of revenues from 25.1% in the previous fiscal. Exports grew 30% to reach Rs 234 cr from Rs180 cr in the previous year.

Textile Sector Contribution: According to the Annual Report 2009-10 of the Ministry of Textiles, the Indian textile industry contributes about 14 per cent to industrial production, 4 per cent to the country's gross domestic product (GDP) and 17 per cent to the country's export earnings. It provides direct employment to over 35 million people and is the second largest provider of employment after agriculture. According to the Ministry of Textiles, the cumulative production of cloth during April'09-March'10 increased by 8.3 per cent as compared to the corresponding period of the previous year. Total textile exports increased to US$ 18.6 billion during April'09- January'10, from US$ 17.7 billion during the corresponding period of the previous year, registering an increase of 4.95 per cent in rupee terms. Further, the share of textile exports in total exports has increased to 12.36 per cent during April'09-January'10, according to the Ministry of Textiles. As per the Index of Industrial Production (IIP) data released by the Central Statistical Organisation (CSO), cotton textiles have registered a growth of 5.5 per cent during April-March 2009-10, wool, silk and man-made fibre textiles have registered a growth of 8.2 per cent and textile products including wearing apparel have registered a growth of 8.5 per cent.

Technical Textile Segment: According to the Ministry of Textiles, technical textiles are an important part of the textile industry. The Working Group for the Eleventh Five Year Plan has estimated the market size of technical textiles to increase from US$ 5.29 billion in 2006-07 to US$ 10.6 billion in 2011-12, without any regulatory framework and to US$ 15.16 billion with regulatory framework. The Scheme for Growth and Development of Technical Textiles aims to promote indigenous manufacture of technical textile to leverage global opportunities and cater to the domestic demand.

Government Initiative for Textile Industry: According to the Ministry of Textiles, investment under the Technology Upgradation Fund Schemes (TUFS) has been increasing steadily. During the year 2009-10, 1896 applications have been sanctioned at a project cost of US$ 5.23 billion. The cumulative progress as on December 31, 2009, includes 27,477 applications sanctioned, which have triggered an investment of US$ 45.5 billion and amount sanctioned under TUFS is US$ 18.9 billion of which US$ 16.4 billion has been disbursed so far till the end of April, 2010. Future Prospects: In May 2010, the Ministry of Textiles informed a parliamentary panel that it proposes to allocate US$ 785.2 million for the modernization of the textile industry. The Scheme for Integrated Textile Park (SITP) was approved in July 2005 to facilitate setting up of textiles parks with world class infrastructure facilities. 40 textiles park projects have been sanctioned under the SITP. According to the Minister of State for Textiles, Panabaaka Lakshmi, under the SITP, a cumulative expenditure of US$ 204.3 million has been incurred against allocation of US$ 220.7 million in the last three years. The government's interest subsidy under TUF will modernize the industry, counter market challenges and enable it to stay competitive in quality and price. The Indian home furnishing industry is influenced by traditional designs, fused with some international styling (use of lace, minimalism, etc). Such designs appeal to customers attracted by fused concepts .