Wednesday, January 18, 2017

Kitex Garments - Interview with Sabu M Jacob, Chairman

A team from Seasonal Magazine recently visited Kitex Garments' factory at Kizhakkambalam, Kochi, Kerala, for this exclusive interview with Sabu M Jacob, its Chairman & Managing Director. The garments exporter has announced a board meeting on January 30th 2017 to to take on record the un-audited financial results of the Company for Q3. Kitex has also announced fresh investments for a design studio in USA. 

Our one-hour drive to Kitex Garments factory from the city was peppered with talks about how a few analysts and brokers were surprised at the scale and efficiency of this textile unit. One of them had even termed it as the “best garments factory” they have visited in India. But nothing prepared us for the real feeling we had when we obtained the security passes, and drove into the Kitex Garments campus.

But before that, a word or two about the actual 23 km drive itself. We took the shorter route via Kakkanad the IT hub of Kochi, and Pallikkara which is home to a prime asset of another listed company of Keralite origin – Wonderla Holidays Ltd. The drive to Kitex was nothing spectacular; where the roads are good the traffic was bad, and later when the traffic became better, the roads were in bad shape, and that explains why it takes nearly one hour to traverse just 23 kms.

But then this is India, and it is against such adverse conditions that entrepreneurs like Sabu M Jacob survive and thrive, that too with a 100% export oriented business. If you are new to the Kitex story, well, there is much more that Sabu has survived, but we will come back to that shortly.

Kitex Garments and its group concerns are arguably the best known industrial entities in these regions of Ernakulam District, but the company would do good if they can post some sign-posts along the last five kilometres. If you are planning a visit, don’t attempt without Google navigation, and even with navigation we had to pause and enquire more than a few times with local residents to be doubly sure.

Most of them seemed friendly with the company, giving us detailed directions, even though a politically sponsored poster at a neighbouring junction questioned the pollution from the factory, a point the company has hotly and successfully contested so far.  

While Kitex Garments is known for its cutting edge efficiency, the same can’t be said about the security team manning the main entrance. Nobody asked us for anything, nobody even bothered to halt us, and we parked in the visitors’ area deep inside the campus. But then somebody was sent to us, asking us to return to the gate, and take the security passes! But apart from this hitch, everything went smooth, and Chairman Sabu’s office was especially helpful.

As noted earlier, nothing really prepares you to assess the Kitex Garments campus other than a visit. While it is not the most sophisticated campus we have seen, the scale is simply stunning. It radiates the feeling of a small Special Economic Zone rather than an individual company, complete with more than a few imposing buildings and extensive green lawns to compensate.

But then, this very point is perhaps the most crucial one when it comes to assessing the performance of Kitex so far, as well as its future potential. Because, it comes across as a campus of not a Rs. 550 crore turnover company which Kitex Garments is, but a much bigger firm multi-times that size.

However, if by any wild chance you had been a long-term investor in Kitex Garments, you will understand why this campus is so huge. Because, 1 lakh investment you put in Kitex would have  transformed into 1 crore 33 lakhs  – yes, 133 times - within a specific six year period. And yes, this is the campus that did it.

Kitex grew at an astounding pace during this six year period, which was ironically one of the most difficult phases for most companies, especially export oriented textile firms that were hit badly by the world financial crisis and its lingering aftermath of drastically lower demand from developed markets. But at Kitex Garments, sales tripled and profit went over the roof, surging 11 times during this period!

The fundamental performance as well as the promise the campus held took expectations from the stock higher and higher, until it became too high as it usually happens with all fast growing companies.  When the stock hit its lifetime high around one and a half years back, it was trading at almost 14 times its book-value which was clearly unsustainable for any textile exporter operating at this scale.

Since then, owing to various factors, growth has moderated sharply at Kitex. The stock has followed suit, and is now available at around six times its book-value. While market reactions were that swift, Sabu M Jacob remain unfazed, and why that is so has been our prime exploration in this interview.

Dominating a niche is the latest success mantra, but Sabu had figured it out long back. The name Kitex Garments might even be a misnomer as the company doesn’t produce all kinds of garments; rather it is super-specialized in the domain of children’s wear, more specifically infant wear.

A question during our interview regarding any plans to extend the brand into any other garment segments was met with a point-blank no. Many other entrepreneurs would have played to the gallery of investors, by replying “May be in the future”, but not Sabu. Similar was the fate of a question aimed at knowing about any probable expansion plans into EU & UK. Apart from another quick no, he shot back a question at us, “What are the birth rates, over there?”

Yes, being an infant wear company, Kitex is not interested in such developed markets, where both marriage and birth rates have been falling steadily. “What I sell in US in one month would take one year to sell in EU,” he adds. He has figured it all out long back, and has no plans to waste either his energy or his company’s resources.

Instead, during the last couple of years, Sabu has done extensive homework to improve his company’s strategic edge in the infant wear business in USA. While until now Kitex was a one-trick pony of supplying garments to noted brands according to their designs, he has recently diversified into two more businesses – of exclusively supplying to a leading private label in USA on a licensing basis, and of having Kitex’s own brand there. 

Speaking about resources, that has been another uniqueness that has made investors look at Kitex Garments keenly, since the last few years. More specifically, it is the utilization of resources that has been the real attraction. Even after last year’s stock fall, Kitex is a Rs. 2000 crore company by market cap, and guess from where this value has been built up? From just a Rs. 4.75 crore equity. Speak about capital efficiency!

Neither has been this valuation or annual sales of Rs. 550 crore, built upon on massive debt. Kitex Garments has negligible debt compared with what it could have safely taken against its Networth, and even that negligible debt is being retired so as to be a zero debt company with just small working capital loans remaining.

Sabu comes across as a business leader who is years, if not decades, ahead of his time. There are numerous instances where it becomes evident, and one of the most striking is the labour advantage that Kitex enjoys. In an industry where he himself admits that labour is the biggest risk factor, Sabu had taken revolutionary steps almost a decade back to ensure that labour won’t be an issue for Kitex.

When he pioneered the concept of excellent hostels with good food and extra-clean bathrooms for workers, many in the industry laughed behind his back thinking that Sabu was making a waste of investments. But today there is no doubt on who is having the last laugh, as unattended labour problems have finally caught up with most textile units elsewhere in the country – even in metro cities like Bangalore – forcing managements to implement hostels and food on an emergency basis.

However, there is more to labour welfare at Kitex than good hostels and food. When we sought to interview him, we had suggested for a 5-to-6 PM slot, which on his suggestion was made to a 4-to-5 PM appointment. Why he did that became evident only after the interview started, and the question came upon labour relations.

Everyone stops work at 5 PM at Kitex Garments. By 5:05 PM the garment machines are programmed to stop via a sophisticated Siemens control panel. By 5:10 PM the buses leave, carrying all local workers back to their homes. By 5:15 PM all managers and Sabu himself leave, leaving the huge facility in the hands of the security team.

This work culture is something Sabu takes immense pride in, and having visited so many corporates in every industry we too couldn’t resist appreciating this. Sabu specifically contrasted this punctuality with the work culture in India’s textile hubs like Tiruppur and Bangalore, where late hours, overtimes, and overnight shifts are the norm.

If anyone thought these ‘restricted’ hours of work is hampering productivity at Kitex Garments, nothing could be more wrong. Despite this 9 to 5 schedule, Kitex produces 5.5 lakhs of finished garments and ships them daily in containers. Not only that, despite not squeezing the workers for more and more hours, Kitex is more profitable – at around 30% EBITDA level – while many of its peers are producing single digit profit percentages or none at all.

There are many factors that contribute to the company’s superior operational performance. Kitex is a heavy investor in updated machinery, and in a world where textile units aim to run their machines for 15 or 20 or even 25 years, Sabu has taken a boldly contrarian view, and changes his machines to the most modern versions, every five years. 

He has forged special contracts with European machinery suppliers, who take back his old machines every five years at reasonable prices. Sabu says that apart from financial benefits like depreciation, this has made Kitex workers super-efficient in producing an amazing number of infant wear daily.

Secondly, Sabu is a stickler for time both inside and outside the company. While keeping the 9 AM meeting times are sacrosanct, so are enforcing deadlines with clients. This one factor, Sabu says, is tough to master for most companies who deal with clients hundreds or thousand times their size.

But at Kitex, if a client delays a deadline, say a design deadline, by two days, Kitex extends its production deadline by two days, and there is no compromise. It takes courage to stand up to big firms, Sabu admits, but it comes naturally to him. While this has given rise to an image that Kitex is a tough company to do business with, Sabu says in the long run all genuine clients are satisfied with his approach, as deadlines are kept sacred.

This boldness extends to all facets of Kitex and it is perhaps most evident locally in a unique CSR program that the company has pioneered during the last couple of years. Despite being a compliance-led organization, some local political groups were opposed to Kitex citing alleged pollution norms violations, and how Kitex battled it would one day end up in management text books.

Sabu floated a social service organization Twenty20 as Kitex’s CSR arm. Twenty20 recruited thousands of paid workers as well as volunteers to do social service including running fair price shops across the neighbouring towns and villages, and made a name for themselves. The Twenty20 organization also fielded qualified candidates in local body elections, and succeeded in winning governance of the local panchayat – a first ever in India!

Today Sabu’s efforts in this domain are paying rich dividends as, many of Kitex’s large US based clients have been expressing their interest in part-funding these social programs in India. 

Seasonal Magazine interviews Sabu M Jacob, Chairman & Managing Director of Kitex Garments Ltd:

Kitex Board has approved additional investments into Kitex USA. What will this be used for?

We had opened our own office in the US earlier itself. There are companies which have offices, but these are only sales offices. Ours is a full-fledged office and our approach has been very different. Now, we are taking this to the next level by starting our own design studio. The proposed investment would be worth one million dollars. We are basically investing this for this new design studio. Normally, Indian companies are solely in the business of getting garment orders and then executing it. Now, our normal business is from brands like Gerber, Carters, Mothercare, Toys R Us, Jockey etc. They outsource their designs. Sometimes, they use freelancers in order to design their products. And their respective design departments would approve the designs. Then they place orders with companies like Kitex Garments. Here we will develop, while the other one is on the CAD. It’s like you can see the design. After placing the order, we print it into the fabric and we make the actual garments. When they see that, sometimes they may not like it fully. But there are not many options before them so they will have to proceed with that. Firstly the time-frame, and secondly the cost involved. If they reject that, we charge back the design cost (around 2000-3000 dollars). Another scenario is that, they might need a different design but there is a natural time constraint involved. So they are forced to accept that. That is what’s happening in this business. We want to change that model with this design studio in US.

How will it add more value to your offerings? 

What we have decided is that we would carry out the designs on our own since we know the pulse of this business. Since we develop for all the major players, we are fully aware of the trend. So, we will make creative designs and we will develop them. Finally, we produce the output too, which are the actual garments. Then we will go to the companies requiring our garments. Some of them may like, say 5 out of 10 designs. So they place orders for those designs. Some others would purchase another set of designs. So the balance designs will also find takers more often than not. The advantage here is that for them there is no risk and they are actually seeing the end product. If they like it, they can go ahead and place an order. If they don’t like it, no commitments and more importantly, they don’t incur any costs. They save a lot on time and they also have satisfactory products that they can sell. Therefore their sales may be much better. 

How all will Kitex Garments be benefited from this move?

As far as we are concerned, firstly, we’ll anyway have to develop for Lamaze brand as well as our own brand. When we are developing on our own, it would naturally involve increased time and effort. When we do this, what we can gauge from the customers is that, there is a lot of value addition done. When we submit the actual garment samples as designs, they aren’t bothered about a few cents more as we do all the work. So there is chance for getting better prices, better margin and yes, more business. 

USA is the key market for you, and can you explain the different strategies there like supplying to the best labels, tie-up with a private label, and promoting your own brand?

We have three types of businesses in US. One, our private label business which has been the ongoing business in the last 20 years or so. They place the order, we execute it and on that basis we get the prices. This is essentially Gerber, Carters, Mothercare, Toys R Us, Jockey etc. Last year when we started our office there we got a licensed brand called Lamaze. This is our licensed label business. We are the exclusive license holder of Lamaze brand. So, nobody else can manufacture that. Lamaze is essentially a company that advocates better parenting, breastfeeding etc. So, we see this as a mutually beneficial deal in a common area of business. They are basically into brand promotion while we deal with infant wear. Their headquarters is in Washington DC. They have been in the market for the past 7-8 years but Gerber was the licensee. However, since many years now, we are the ones who produced the Lamaze brand garments for Gerber. Now, we are doing it directly with Lamaze. Thirdly, we have our own label, Little Star. The first one is our primary business, while the licensed label and Little Star we are only accelerating now. 

Will having your own lower cost brand antagonize your prime client brands?

When we decided to enter into the US markets on our own, lots of people asked me whether this would affect our existing business relations with our customers. For the last 3 years, we’ve been working on that. We in fact have formally informed our existing customers. Actually, Lamaze which is the brand that we have licensed only promotes organic products and garments. None of our existing customers are having organic products. So in that itself we are different from all our existing customers. Therefore, we are not competing with them in the same category. Secondly, our own Little Star business is in a different sector altogether. We are not going to be at par with Carters or Gerber. The price levels and design levels are different. We are focusing only on small and midcap chain-stores and malls. Carters and similar brands are selling to Walmart and the likes. They own almost 4000 stores worldwide. Also, our business is mainly targeted at those stores with presence only in a single area or at most with 10 centres overall. There are also certain chains likes Roses Stores, which have only like 200 stores. Therefore, we aren’t encroaching the catchment area of our main customers like Gerber, Carters etc. 

What is your marketing arrangement with Sam’s Club?

Once we started our office and designed something, we designed for Lamaze and we wanted to sell Lamaze products with Sam’s Club. They are actually a subsidiary of Walmart. We therefore approached them to sell Lamaze. They said that they would try their own private label business with us. So we are selling non-organic versions of the same design to Sam’s Club. This has worked out to our advantage. So today, when we approach a customer, we offer them three options - either our private label business, or the Lamaze business, or the Little Star business. They may try out their private label business with our designs and we may also sell the Lamaze products through them, and therefore we are getting bigger orders from them. And we hope to leverage more in this fashion.

Kitex Garments has been long mulling for merging your listed arm with the Group’s unlisted firm Kitex Childrenswear. You even had a report by Ernst & Young on this. Where does this proposal stand now?

See, Kitex Childrenswear is too young in this space. It’s not even working in its full capacity. So, it is too early to merge or list together. The E&Y report talked about the different scenarios possible. One is the two companies merging together. The second proposal was to list Kitex Childrenswear separately. And the third option is to list that company now and merge it with this in the second phase. They gave us the advantages and disadvantages of all the options. But we think that the next 3 years would be very crucial for us on a growth perspective. Therefore we think calendar year 2019 is the time when a direct merger or a post-listing merger can be considered realistically. 

Kitex stock had a massive correction last year, when the company couldn’t keep up with the growth guidance or expectations. What all contributed to this?

The stock market crash had nothing to do with the performance actually. There are various reasons at play here. We had expected a 15% growth last year. However we could reach only 8%. But we had a good growth in profit. From 27% PBT, we had another 3% increase. Basically, this is what we think: we had invested considerably in our foundation work for example the design studio, the US office, Lamaze, and Little Star brand. The textile industry mainly works in seasons spanning a period of 6 months. When a new brand is launched, the initial buy won’t be in millions. But in that respect, we got like $50,000 orders from such new ventures. We are also pushing all conventional and new channels be it Toys R Us, Sam’s Club, Roses Stores etc. This week is the market week in New York where all the buyers would come. We would be participating in that. We are entering into deals with at least 10 new customers. 

But here, the stock market expectations were that you would have a 20% or 30% revenue and profit growth rate on a continuous basis..

See, that is impossible on a continuous basis. It does take time during some phases. We are however hopeful of achieving a similar growth period in the near future. Our goal is in fact to achieve double or triple of that. We are very confident about that. We still have to grow production-wise, capacity wise  - every level it has to be working. So unless we have a strong foundation, you can’t expand furthermore. We do strongly believe that we are moving in the right direction. Which is why, the next 4 years would be a golden period for us. US economy is going to be very strong. Indian economy is also getting strong. I think during the next 4 years both countries can work miracles in trade, and companies like Kitex would stand to benefit. 

Some investors had concerns that you were keeping the US deposits in dollars..

See, that is a misunderstanding. People think that US dollars means it is in US. According to RBI guidelines, after a shipment is made, within 180 days the money has to come in. Therefore we aren’t keeping the deposits in US. All our documents are available with SBI and all our receivables are routed through the accounts there. There is no point in hasty conversions as and when the collections come in. Sometimes, the rates are very low. Therefore instead of keeping in rupee, we maintain in US dollars, and we convert it at the right time. Wherever there is forward booking, there is much better rate. This is in fact good for the company. 

There was a plan to make Kitex Garments into a zero-debt company..

It is already zero-debt. Technically, there are about 5 crores in terms of long-term debt remaining. This is basically for the machinery and all that which had been procured initially. Within another six months, all the repayment would be over. The short-term debt or the working capital, which we cleared in Q2 itself. This Q3, it is actually zero. So the company debt is only 5 crore. 

Do you have any labour challenges in the factory area that is preventing you from scaling up?

See, the major threat in this industry is labour. Globally, every country faces this. Even the factories in Tirupur and Bangalore are also facing the same problem. When we invested here, we made it a point to have hostels for ladies. So in 1995 itself we were the first people to invest in dormitory. At that point of time, everybody was blaming me. Now everybody is constructing the same. The women workers come here as the dormitories are high class. Now, 60% of my labour is from outside state. For another 10 years, we don’t expect to see any kind of labour problems. 

Actually, my question was whether there is under-utilization of the capacity of the factory. Any plans to introduce shifts?

No, not at all. Every day we are adding capacity and we are utilizing that capacity too. Shifts are not possible here. That’s because the efficiency will drop, safety issues will come up, product safety will be questioned. In this business it is a very high risk if something goes wrong, the product being the sensitive infant wear. 

Kitex has earlier in the year been a major beneficiary of some new subsidy programs. Have they been effective as your expectations?

Yes, earlier it was 7%, now it is 10%. This is actually a draw back as now whatever you export they have increased from 7% to 10%. So 3% you are getting draw back. In addition to that, for additional labour you will get subsidy on PF for initial remit and reimbursement. So these subsidies have been beneficial to us.

What is your take on the business environment in the country and the recent global developments vis-à-vis business?

Indian economy is getting strong, and the new US President has underlined a very positive approach to business. I compare Modi and Trump on the same level and they have a similar wavelength. I am certain that it is going to be a strong partnership which will bring a lot of benefits to India. Trump has a certain disdain for China and scepticism for Pakistan. These are huge advantages to India’s business prospects. So, his realistic option would be to work with India and promote business relations. You know the recently held US election was a bit different from previous ones. Everyone was uncertain about how things would turn out. Most of the media and opinion polls predicted a Hillary Clinton Presidency, but they were proven wrong. However, I had a hunch that Trump would emerge victorious. In fact, on taking a quick poll in our own office in US, 7 out of 10 people felt Hillary would win but that  they will vote for Trump (laughs). Media created such a scene that Hillary seemed destined to win. But the Americans have given their verdict. I personally feel it is a very good thing for America. I think he can go on to become one of the best Presidents of USA. 

The last two quarter results have been flattish for Kitex, due to lower demand at customers like Jockey. Have they been back to normal?

That is honestly a story of the past. It doesn’t affect our current business. This has been converted to some other customers. 

Are you planning to enter new segments apart from kids wear?

No, we would like to remain in this business alone. 

Are there plans to develop currently smaller markets for you like UK and European Union?

No, and honestly UK and EU are very small markets. We don’t deem it necessary for our growth plans. We are into mass production. By 2018, we believe that we can produce close to 1.1 to 1.2 million pieces per day. If I want to sell this quantity to Europe, maybe I can sell it by taking a whole year (laughs). The issue is the birthrate is very low. Not many are getting married and even if they get married, they decide not to have children. The American market is quite different. These 1.1 million pieces I can sell to a single customer in the US. That’s the difference. We already have 5-6 customers and we are looking to add another 10 more. 

Some critics have alleged that when you got into politics, the business suffered. Is there any truth in these views?

I don’t think it is right to call it politics. We believe this is a kind of CSR activity. It is a kind of community governance model. Of course, politicians would oppose our initiatives. But when you do a lot of good activities within the village, it is a model to the world. Secondly, you get the support of the people for your business because they are also benefited. We offer concessional benefits in provisions, roadworks etc. There is also potential to get more business. We are currently in talks with a new customer who is willing to contribute 1% towards CSR activities. They are also thinking of the community. Globally many companies wants to do something for the community. These activities are beneficial to the company’s future growth. What we are doing is offering a sustainable model of community development. We ensure that every paisa is spent on the really deserving people. Most of the new customers we are adding are thrilled to see this and are quite eager to work with us. Even they feel that this is the right way of doing business. 

How can you juggle so many roles, especially in political governance?

See, our current PM, Shri Narendra Modi, was a tea-seller. And now he is ruling the country. Therefore, there is no capacity limitation for any individual. If you have the will, you can do it. For me, looking after a panchayat is not a big deal. Besides, there is an elected body managing affairs so I am not directly involved. 

Does your bold stand on local issues upset some of the leaders and politicians?

Since politics is their domain, they would naturally feel threatened when new players come into the picture. That’s quite understandable. However, the only resistance seems to be coming from the local leaders who may have felt intimidated by our involvement. Otherwise, the state and national level leaders have no issues whatsoever and have welcomed such initiatives on many occasions. They know very well that our business is solely to look after the development of this panchayat.

What are your plans for bettering investor returns in the foreseeable future?

It has only been in the last 4-5 years that big investors have been focusing on Kitex. But if you look back, from 1995 onward, Kitex has been a very stable company. From long back, every year it has offered a certain growth. Both profit and sales have gone up. It has never gone down. We are a company with 100% compliance, with very strong ethics, very strong policies, strong foundation. Even our customers think we are a little tough. Because we go with the Bible. Let’s say somebody wanted to place an order. There is a calendar we adhere to. They have to submit the CAD to us on a given date. By a subsequent date, we have to develop the requirements. And so, we have a detailed plan of action that is communicated with the customer. We have a calendar for every buyer. However, it may so happen that they may encounter some delays in their end and so they may request for a compromise on dates at our end. We however decline any such requests politely. In fact, we respond saying that we too would extend the delivery depending on the number of days delayed. Without such principles and diligence we can’t keep deadlines. And if we don’t keep deadlines, we have to airlift the products at the last moment and the profits suffer. It is by avoiding such pitfalls that we remain one of the most profitable textile companies in India.

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