Attractive Valuations Far Outweigh Margin
Call Concerns
Margin Call on Pledged Equity — Overhang on the Stock:
There has been a rise in pledged shares over the last two quarters—the
pledged shares have already reached 99.8% in Q1FY13 from 83.6% in Q4FY12
(see Risks & Concerns). We believe since there is no buffer left for more shares
to be offered, there are possibilities for margin call going forward.
Accordingly, a margin call could have an adverse impact on the stock
However, the management clearly denied the possibility of a pledged share
sale in the market as there was no margin price discussed; they feel that any
possibility for margin calls does not exist. Moreover, management stated that
they have been in talks with the banks to release the pledged equity. We
prefer waiting for the release of the pledged equity even though the
management has been reiterating its position with similar explanations.
Renowned Brands & Extensive Distribution Network: The Company offers
45 brands across domestic and global markets i.e. ‘Reid & Taylor’,
‘Belmonte’, ‘Stephen Brothers’, ‘Austin Reed’, ‘DKNY’, ‘S. Kumars’ amongst
others catering to all socio‐economic segments of the domestic market and
super‐premium and luxury segments overseas. SKNL has well‐connected
distribution network of 300 dealers and 30,000 retailers across India. The
Company enjoys high quality products, great brand equity, wider
distribution network and aggressive brand promotions.
Good Revenue Growth & Margins: We expect revenue to grow at a CAGR
of 16% with stable operating margins. However, net income is expected to
grow at a CAGR of 21% over FY12‐FY14E due to lower interest costs owing
to better working capital management. This will also help the Company to
strengthen its Balance Sheet. Moreover, we expect the Company to be in
better shape to generate operating cash FY14E onwards and possibility of rerating
with release of pledged shares.
Outlook & Valuations
We expect revenue and net income to grow at a CAGR of 15.6% and 20.9%,
respectively over FY12‐14E period. At CMP of Rs. 18.8, the stock is
attractively valued at 2.6x FY14E EV/EBITDA and 1.0x FY14E earnings. We
initiate coverage on the Company with “BUY” recommendation with a target
price of Rs. 44 per share, representing an upside potential of 133%.
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