Kewal Kiran Clothing Ltd - Margins disappoint; Third Quarter to hold the key; Result Update Q2FY15 :: Edelweiss, PDF link

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Kewal Kiran Clothing Ltd (KKCL) reported decent set of numbers in revenue terms although it disappointed at the margin level. The increase in revenue was led by improved realisation which was up 4.6% and volume growth of 5.2%. EBITDA stood at INR 36 cr, declining marginally by 0.2% YoY while EBITDA margins dropped by 320bps to 27.5% in this quarter. The decline in EBITDA margins was primarily due to contraction of Gross Margins by 339bps on back of higher Raw material expenses. PAT for the quarter stood at INR 24.3 cr, reporting  3.1% YoY growth on back of higher other income.  We believe in the present context, the company would grow at 15% in FY15 with Q3FY15 numbers holding the key to achieving its end year growth estimates. The company’s inability to pass on the high raw material costs to end consumers would continue to put pressure on its margins. We have revised our numbers downwards factoring concerns over gross margin. Although in the long term we believe the KKCL growth story on back of strong brand portfolio is intact.

Revenue growth lifted by improved volumes, higher realizations

KKCL’s Q2FY15 recorded a 11% YoY expansion in topline at INR 130 cr. This quarter’s revenue increased on the back of improved volumes as well as higher realisations. Q2FY15 volumes grew by 5.2% YoY while realizations improved by 4.6% to INR 914. Among the company’s brands, the flagship brand ‘Killer’ grew by 13 % YoY, LawmanPg3 brand revenue grew by 24% YoY, while Integriti reported a decline in growth of 8% YoY. Among broad product categories Trousers reported an impressive growth of 115%, Jeans grew by 7% YoY while Shirts de-grew by 12% YoY. T-Shirts reported a marginal growth of 1% YoY.

Among channels, MBOs grew by 9% YoY maintaining its leadership position amongst the various channel categories. Retail declined by a marginal 1% YoY, while National Chain Stores reported an impressive growth of 62% YoY. E-Commerce sales were reported this quarter. E-Commerce registered a stellar 979% growth mainly on the back of a lower base. Exports growth declined by 13% YoY. Region-wise mix was stable, with growth witnessed across regions. The region-wise growth mix was dominated by Western and Central regions.

EBITDA margins disappoint; PAT numbers not encouraging

EBITDA declined marginally by 0.2% YoY to INR 35.7 cr in Q2FY15. EBITDA margins contracted by 320bps YoY to 27.5% this quarter primarily due to dip witnessed at the Gross margin level. Gross margins declined by 339bps to 57.4% this quarter on back of higher raw material expenses due to change in product sourcing mix in favour of stitched garments. PAT for the quarter grew by 3% YoY and stood at INR 24.3 cr in comparison to INR 23.5 cr reported in Q2FY14.

KKCL continues to report a stable working Capital Cycle

KKCL continued to report a stable working capital cycle. On the working capital front, the management has managed to keep a tight control on inventory. For the Quarter, inventory days for KKCL stood at 43 days increasing marginally YoY on back of a minor uptick in finished goods inventory days. KKCL has maintained a fairly stable credit system with debtors days at 63 days.

LINK
https://www.edelweiss.in/research/Kewal-Kiran-Clothing-Ltd--Margins-disappoint;-Third-Quarter-to-hold-the-key;-Result-Update-Q2FY15/10005092.html