Margin continues to disappoint… • Kewal Kiran Clothing :: ICICI Securities, PDF link

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Margin continues to disappoint…
• Kewal Kiran Clothing’s (KKCL) Q2FY15 revenues were marginally
lower than our expectations. However, pressure on operating margin
for the fourth consecutive quarter was disappointing
• Revenues increased 11.5% YoY to | 129.1 crore (I-direct estimate:
| 132 crore) led by 5.1% YoY growth in volumes to 13.6 lakh pieces
and 4.7% YoY increase in realisation to | 914/ piece
• Operating margins slipped for the fourth consecutive quarter to
27.5% (down 320 bps YoY) resulting in the EBITDA remaining flattish
at | 35.8 crore. However, owing to lower depreciation and higher
other income, PAT showed miniscule growth of 3% YoY to | 24.3
crore (I-direct estimate: | 27.1 crore)
Branded apparel market to grow at 9.0% by 2022E…
The domestic apparel market has demonstrated resilience and growth in
an environment characterised by slow economic growth. The domestic
apparel market, which was worth | 2,07,400 crore (~$38 billion) as of
2012, is expected to grow at a CAGR of 9% over the next decade. The
men’s wear segment accounts for ~42% of the overall market as
compared to the women’s segment, which accounts for ~38%. The
menswear market is likely to grow at a CAGR of 8.5% while the women’s
wear segment is likely to grow at 9.0% over the next five years.
Portfolio of strong brands…
KKCL has created and nurtured various brands like Killer, Lawman,
Integriti, Easies and been able to establish a connect with customers
belonging to both mass and premium categories. The Killer brand
contributes ~50% of KKCL revenues. We expect KKCL’s revenues to
grow at a CAGR of 21.1% (14.2% volume and 4.9% value led growth)
during FY14-16E on the back of a strong brand portfolio and a well
established and growing distribution channel.
…and healthy distribution model to aid growth
KKCL has a presence across a variety of distribution models. While it
derives 53% of sales through multi brand outlets (MBOs), 25% sales
come through its retail channels (both franchisee as well as company
owned). The modern retail channels account for ~11% of sales while
exports and factory outlets account for 2% and 9% of sales, respectively.
KKCL has an extensive network of 312 stores of which ~95% are
franchisee owned and franchisee operated stores. While the management
believes there is sufficient room to grow the distribution network,
especially in Tier II/Tier III cities, it intends to do the same on an asset light
model (franchisee route) to maintain its financial health.
Long-term story intact; maintain HOLD
KKCL is also known for the strong financial health maintained by the
company. Apart from being virtually debt-free, it boasts of stable
operating margins (25-30%), healthy return ratios (23-30%) and a
consistent dividend payout (~40%). Barring the quarterly lumpiness,
KKCL has grown consistently over the last several years. We continue to
like the company for (a) stable growth and operational performance; (b)
healthy return ratios; (c) virtually debt-free status and (d) consistent
dividend payout. KKCL is a good bet on the growing middle-class
category in India. We expect revenues and PAT to grow at a CAGR of
21.1% and 22.2% in FY14-16E and maintain HOLD rating with a revised
target price of | 1,625 (20.0x FY16E EPS of | 81.1).

LINK
http://content.icicidirect.com/mailimages/IDirect_KewalKiran_Q2FY15.pdf