Stock Update

Kewal Kiran Clothing

Margins to remain stressed, Book out

Kewal Kiran Clothing Limited’s (KKCL’s) performance has been muted

Sector: Consumer Discretionary
since the past few years. Revenue and operating profit grew at a CAGR
Result Update of just 3.2% and 2.6% over FY2016-19. Volume growth has consistently
been subdued over the years. The overall market for denims has been
weak in the past few years, which has impacted revenue growth. Lawman
Change
and Integriti have also been reporting a decline in sales volumes in the
Reco: Book Out last few quarters. KKCL has a vast presence in the East, which has also
CMP: Rs. 989 been underperforming. KKCL had recently changed its strategy and
started offering higher discounts and margins to trade channels to gain
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volumes, which dragged down realisations, affecting the company’s
margins. Overall discretionary demand environment remains weak and
would take a few quarters to revive, which would impact KKCL’s revenue
Company details growth in the near term. Higher discounts and selling & advertisement
expenses will continue to put pressure on the margins. The management
Market cap: Rs. 1,219 cr has lowered its margin guidance to ~18% from ~20% earlier, which will
affect the overall profitability of the company in the near term.
52-week high/low: Rs. 1400/921

NSE volume: Subdued profitability in 9MFY2020

491 lakh
(No of shares)
Revenue grew by 9% y-o-y to Rs. 403 crore in 9MFY2020 but operating
BSE code: 532732 profit declined by 13.3%. Gross margins declined by 210 bps to 59.6%,
whereas OPM plunged by 471 bps to 18.3% due to higher discounts/
NSE code: KKCL trade margins and other selling expenditure. Lower other income and a
significant rise in interest costs and depreciation caused profit before tax
Sharekhan code: KKCL (PBT) to decline by 17.4% y-o-y to Rs. 73.8 crore. Reported PAT declined by
5% y-o-y to Rs. 57.3 crore.
Free float:
0.3 cr
(No of shares)
No earnings visibility, Book Out: KKCL’s performance has consistently
been subdued with sales volumes in key brands remaining volatile and
Shareholding (%)
realisations declining. The company has been offering higher discounts
Promoters 74.3 to grab volumes, which has taken a toll on its margins. With discretionary
demand expected to take another few quarters to recover, we do not
FII 9.5 expect any recovery in KKCL’s revenue growth trajectory in the near term.
Margins are also expected to remain stressed. Return ratios have been
DII 11.8 deteriorating with RoE and RoCE declining to 19.3% and 16.9%, respectively
in FY2019 from 22% and 21.7%, respectively in FY2016. In view of near-
Others 4.5 term headwinds, we advise the investors to book out of the stock.

Price chart Key triggers:

1400
1300
Uptick in volumes and improvement in the company’s profitability will be a
1200
key re-rating trigger for the stock.
1100
1000
Valuations (Standalone) Rs cr
900
Particulars FY17 FY18 FY19 FY20E FY21E
Feb-19

Feb-20
Jun-19

Oct-19

Revenues 477 460 502 545 613

OPM (%) 20.7 21.3 22.4 18.1 18.8
Adjusted PAT 75 73 80 75 87
Price performance
% YoY growth 9.8 - 9.7 - 16.4
(%) 1m 3m 6m 12m Adjusted EPS (Rs.) 60.5 59.4 65.1 60.9 70.9
P/E (x) 16.3 16.6 15.2 16.2 13.9
Absolute 1.3 1.4 7.7 -13.6 P/B (x) 3.3 3.1 2.8 2.7 2.5
EV/EBIDTA (x) 10.0 9.9 9.1 10.0 8.6
Relative to
1.4 -1.6 -2.8 -25.7 RoNW (%) 22.2 18.9 19.3 17.0 18.6
Sensex
RoCE (%) 19.3 17.3 16.9 13.4 14.6
Sharekhan Research,
Sharekhan Research, Bloomberg
Bloomberg
Source: Company; Sharekhan estimates

February 13, 2020 15

 Stock Update
Volumes drive up revenue; higher selling expenses hurt margins: Revenue grew by 13.2% y-o-y to Rs. 126.2
crore, led by a ~16% growth in sales volumes. A change in the revenue mix pulled down realisations by
~5%. Apparel sales stood at 13.45 lakh units in Q3FY2020, as against 11.56 lakh units in Q3FY2019, but
realisations declined to Rs. 855 a unit from Rs. 900 a unit in the same period. Gross margins declined by 68
bps to 58.7%, mainly owing to additional trade discounts given to intermediary channel partners and lower
realisations. These, along with higher selling & advertisement expenses dragged down OPM by 336 bps to
10.6%. Operating profit decreased by 14% y-o-y to Rs. 13.3 crore. Q3FY2020 was the fifth consecutive quarter
where selling expenditure as a percentage of sales remained high at 22.8%, versus 19.5% in Q3FY2019 and
17% in Q2FY2020. Lower other income dragged down profit before tax (PBT) by 18.4%, which came in at Rs.
14.7 crore. However, a lower effective tax rate limited the decline in reported PAT to 9% y-o-y, which stood
at Rs. 11.5 crore. The effect of the shift to accounting standard Ind AS-116 stood at Rs. 9.7 lakh as most of the
company’s stores are franchisee stores.

Result Snapshot (Standalone) Rs cr

Particulars Q3FY20 Q3FY19 y-o-y (%) Q2FY20 q-o-q (%)
Net revenue 126.2 111.5 13.2 166.7 -24.3
Cost of goods sold 52.2 45.3 15.1 69.5 -25.0
Gross profit 74.0 66.2 11.9 97.1 -23.8
Staff cost 18.9 18.1 4.5 19.1 -1.1
Selling & Administrative Expenses 28.7 21.7 32.6 28.3 1.7
Other expenses 13.0 10.8 20.3 11.9 9.2
Operating profit 13.3 15.5 -14.1 37.8 -64.7
Other income 5.5 7.1 -23.0 6.4 -15.4
Interest 2.3 2.1 8.5 2.3 -2.1
Depreciation 1.8 2.4 -27.6 2.4 -27.0
Profit before tax 14.7 18.1 -18.4 39.5 -62.7
Tax 3.2 5.4 -40.6 7.9 -59.5
Reported PAT 11.5 12.7 -9.0 31.6 -63.4
EPS (Rs.) 9.4 10.3 -9.0 25.6 -63.4
bps bps
GPM (%) 58.7 59.4 -68 58.3 40
OPM (%) 10.6 13.9 -336 22.7 -
Source: Company; Sharekhan Research

Brand-wise revenue (Standalone) Rs cr

Particulars Q3FY20 Q3FY19 Y-o-Y (%)
Killer 72.5 59.2 22.5
Integriti 19.8 24.9 -20.5
Page 3 Lawman 18.2 15.1 20.7
Easies 4.7 5.1 -8.1
Others 11.1 7.3 52.1
Total 126.2 111.5 13.2
Source: Company; Sharekhan Research

February 13, 2020 16

 Stock Update
About company
Kewal Kiran Clothing Limited (KKCL) is one of India’s largest branded apparel manufacturers, engaged in
designing, manufacturing and marketing of branded jeans and a wide range of western wear, since 1992.
With in-house fashion brands Killer, Integriti, Lawman, Easies, K-Lounge and Addictions, it has created a
niche segment for apparel and accessory lovers across India. Jeans constitute around 60% of overall sales
followed by shirts and t-shirts. The company has a pan-India presence with close to 341 stores. It operates
through both brick-and-mortar retail stores and an e-commerce platform.

Investment theme
Performance of KKCL has been subdued over the past few years with volatile volumes and consistent decline
in realisations coupled with overall slowdown in the denim industry. The company has changed its strategy
to offer higher discounts/trade margins to channel partners to grab volumes, which will put stress on the
company’s profitability in the near term. The discretionary demand environment would take another few
quarters to revive which would impact KKCL’s revenue growth in the near term. Thus, we do not expect
improvement in earnings visibility in the near term.

Key Risks
ŠŠ Slowdown in consumption and heightened competition would affect sales in the near term.
ŠŠ Surge in working capital requirements would affect cash flows in the backdrop of muted operating
performance.

Additional Data
Key management personnel
Kewalchand P. Jain Chairman and Managing Director
Bhavin D. Sheth Chief Financial Officer
Abhijit B. Warange Company Secretary
Source: Bloomberg

Top shareholders
Sr. No. Holder Name Holding (%)
1 Nalanda India Fund Ltd 7.1
2 SBI Funds Management Pvt Ltd 5.6
3 Kotak Mahindra Asset Management Co 3.9
4 Aditya Birla Sun Life Trustee Co P 2.0
5 Ambit Capital Pvt Ltd 1.0
6 DSP Investment Managers Pvt Ltd 0.4
7 Dimensional Fund Advisors 0.0
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 13, 2020 17

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