Kewal Kiran Clothing Ltd - Slow Revenue Growth; Well-Thought of Strategy to Create Demand Pull Brand; Result Update Q3FY15 ::Edelweiss, report

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Kewal Kiran Clothing Ltd (KKCL) reported disappointing set of numbers for the third quarter of FY15. The company reported marginal growth in revenues to the tune of 1.8% i.e. INR 89 cr. The slump on growth was majorly due to sluggish consumer sentiments as well as due to a lackluster festive season. This festive season has been a dampener for most of the retail players and KKCl was no exception to the trend. Although the company has reported marginal growth in revenues, this is a part of a well thought of strategy to develop the company's brands as "demand pull" products rather than as "demand push" products in turn shunning inventory pile up at distributor's end. This is the third straight quarter where the company has reported a YoY EBITDA de-growth. EBITDA stood at INR 16.5 cr, declining by 4% YoY while EBITDA margins dropped by 113bps to 18.6% in this quarter. The decline in EBITDA margins was primarily due to expansion of Other Expenditure by 298bps. PAT for the quarter stood at INR 10.4 cr, reporting a decline 1.7% YoY in growth.  We believe in the present context, the company would grow at 15% in FY16E and FY17E. We have revised our numbers downwards for FY15E. Although in the long term we believe the KKCL growth story on back of strong brand portfolio is intact. We maintain 'Buy' on the stock at current levels.

Revenue growth muted  

KKCL's Q3FY15 recorded a 1.8% YoY expansion in topline at INR 89 cr. This quarter's apparel volume reported marginal growth of 0.55% whereas the apparel realization per unit stood at INR 964/- i.e. a marginal 0.2% growth.  A sluggish consumer sentiment and a lack luster festive season resulted in distributors holding inventories leading to overstocking at their end. As KKCL stuck to its strategy of "Demand pull" instead of "Push" towards its distributors; it resulted in muted sales growth this quarter. Also, a tame inorganic growth (only 7 new stores in comparison to 30 new stores in Q3FY14) further led to a subdued revenue growth. KKCL has been going slow on inorganic expansion for 9MFY15 with only 36 new store additions till Dec'15 in comparison to 66 new stores till Mar'14. Among the company's brands, the flagship brand 'Killer' grew by 10 % YoY increasing its contribution to overall sales from 52% in Q3FY14 to 57% in Q3FY15. Revenues LawmanPg3 brand declined by 20% YoY, while Integriti reported a decline in growth of 1% YoY. Among broad product categories Jeans displayed a strong demand in comparison to casual pants category as Jeans reported growth of 30% whereas pants/trousers de-grew by 25%. Shirts de-grew by 25% YoY and T-Shirts reported de-growth of 40% YoY. Among channels, MBOs grew by 5% YoY maintaining its leadership position amongst the various channel categories. MBOs contribution to overall revenues gained by 1% to 54% in Q3FY15. Retail declined by a 24% YoY, while National Chain Stores reported a decent growth of 25% YoY. E-Commerce sales for this quarter stood at INR 3.07 cr from INR 0.18 cr in Q3FY14 recording an impressive yoy growth, albeit on the back of a lower base. Exports growth declined by 13% YoY. Region-wise, decent growth of 17% was witnessed in the Eastern across regions. The Central and Western regions reported de-growth of 25% and 4% respectively. The other regions reported marginal growth.

EBITDA margins disappoint; PAT numbers not encouraging

EBITDA declined by 4% YoY to INR 16.5 cr in Q3FY15. EBITDA margins contracted by 113bps YoY and was recorded at 18.6% this quarter, primarily due to expansion in other expenses. Although, KKCL had witnessed a depressed Gross margin in the two previous quarters, gross margins have improved this quarter by 75 bps YoY. 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. Going ahead, Other Income for the next quarter and FY16E would be lower on back of increasing its FMP holding tenure from one year to three years in order to avail tax benefits. This change has been brought about post a union budget announcement on FMPs. We have factored in the change in our numbers.

LINK
https://www.edelweiss.in/research/Kewal-Kiran-Clothing-Ltd--Slow-Revenue-Growth;-Well-Thought-of-Strategy-to-Create-Demand-Pull-Brand;-Result-Update-Q3FY15/10005553.html