Revenue growth revival holds key… • Kewal Kiran Clothing’s (KKCL) Q3FY15 results :: ICICI Securities

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Revenue growth revival holds key… • Kewal Kiran Clothing’s (KKCL) Q3FY15 revenues were lower than our expectations. However, the operating margin came in higher than our expectation resulting in a flat performance at the net profit level • Revenues increased 1.7% YoY to | 87.7 crore (I-direct estimate: | 93.2 crore). Volumes and realisation remained flat YoY with a 0.5% and 0.2% increase to 8.7 lakh pieces and | 964/ piece, respectively • Operating margins slipped for the fifth consecutive quarter to 18.6% (down 114 bps YoY) resulting in EBITDA declining 4% YoY to | 16.5 crore. However, owing to lower depreciation and higher other income, PAT remained flat at | 10.4 crore (I-direct estimate: | 10.4 crore) Branded apparel market to grow at 9.0% by 2022E… The Indian 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 9% CAGR over the next decade. The menswear 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 8.5% CAGR while the women’s wear segment is likely to grow at 9.0% over the next five years. Revenue growth trajectory to pick up in FY16E … Though KKCL possesses a strong brand portfolio, its revenue growth has slowed down in FY15E due to the impact of high discounting by ecommerce players. Also, the management has indicated they are not pushing revenue growth owing to a delay in receiving earlier payments from dealers. We believe the revenue growth should recover from FY16 driven by an improved product mix and retail expansion. We expect revenues to grow at a CAGR of 15.2% over FY14-17E (10% volume and 3.9% value led growth). …driven by strong asset light distribution model and retail expansion KKCL has a presence across a variety of distribution models. Of KKCL’s Q3FY15 revenues, 54% came through multi brand outlets (MBOs), 21% came through its retail channels (both franchisee as well as company owned). The modern retail channels accounted for ~11% of sales while exports and factory outlets accounted for 6% and 4% of sales, respectively. KKCL has an extensive network of 317 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) so as to maintain its financial health. Strong financial health provides comfort; maintain HOLD KKCL is virtually debt-free. The company 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 15.2% and 15.7%, respectively, in FY14-17E. We maintain our HOLD rating with a revised target price of | 1,685 (20.0x FY17E EPS of | 84.3).

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