Kewal Kiran Clothing

Investors with a higher risk appetite and a long-term perspective can add the stock of retail player, Kewal Kiran Clothing (KKCL), based on its brand strength, superior margins, low valuations and a revival in retail spending. At Rs 207, it is at 10 times trailing four-quarter earnings and 8.9 times the estimated FY-10 earnings; valuations are at a discount to peers such as Zodiac Clothing.
Mid-price brands

KKCL’s flagship brand, Killer, contributes just about half the revenues. The next biggest contributor is Lawman, at a fifth of revenues. Both are mid-priced labels targeted at the 16-30 age group.

Killer is a casual wear brand, primarily known for its jeans, while Lawman covers club-wear. KKCL also has a foot in the formal wear market with Easies, priced in the mid-premium range. Its fourth brand, Integriti, is a formal and semi-formal brand, again in the mid-priced segment. All four brands cater to men, with only Killer and Integriti breaking into the women’s segment quite recently in 2007 and 2008 respectively.

While such a concentration may limit sales growth, menswear holds more than half the apparel market. All the same, women’s apparel is a fast-growing category and the company has begun tapping into it. However, it has used its existing brands, which have a masculine tone; establishing itself in the women’s segment may pose a challenge. KKCL is a value retailer; it is this segment that has recovered from the spending squeeze two quarters ago.

The company put up a better performance in the first half of 2009 compared with most retail peers, and KKCL is well-placed to capture renewed consumer spends. However, it also faces competition from value brands such as Trigger and Flying Machine besides in-house brands of players such as Pantaloon and Koutons.

The company has a presence in overseas markets, but exports contribute just 3-4 per cent of revenues and are not potential money-spinners. KKCL manufactures its own apparel, with five operational plants and will add one by end-December this year, bringing the total yearly production capacity to more than three million units.
Retail network

KKCL retails its brands through bigger retail chains such as Lifestyle or Globus besides banking on its own exclusive store chains — K-Lounge, Integriti, Lawman and Killer. The chains total 133 outlets with stronger presence in the West, though the North and East have an almost even split.

The company plans to increase store count to 180 by the end of this financial year, calling for an investment of about Rs 25 crore. Franchises, a mode which retailers began using actively last year due to the lower capital expenditure it entails, were already being used for expansion with 85 of its stores entirely owned by franchisees and a further 17 operated by them. New store expansion will also see the franchise mode being adopted. While it plans to tap smaller cities to expand customer base, it will still open stores in the bigger cities.

Rapid expansion has not been the norm thus far; the company has actually fallen short of store targets even during the high growth phases in the retail sector in 2006 and 2007. It has extended the timeline for meeting its IPO target of 143 K-Lounge outlets from March 2008 to March 2010. It had also planned on breaking into the promising branded kidswear segment, which it is yet to do.

Still, KKCL could be benefited by being set to expand at a time when rentals are lower and owners open to varied rental models which could not have been possible during the boom years. A low debt-equity ratio of 0.1 further supports expansion capabilities. A good many retailers who took on debt to step up store network are now looking at raising equity to balance massive debt and fund expansion.
Strong margins

Missed targets notwithstanding, KKCL has still posted a 19 per cent CAGR in sales over a three-year period. Net profits clocked a 7 per cent CAGR in the same period. Despite the tame net profit growth, margins have held strong, well above those of its retail peers.

In FY-09, operating profit margin stood at a healthy 20 per cent, far ahead of listed retail peers, even as it slipped almost five percentage points compared to the previous year. Margins then improved to 34 per cent in the first half of FY-10, riding on lower raw material and selling costs. Likewise, net profit margins suffered in FY-09, dropping to 9.8 per cent compared to the 13 per cent in the year before.

The first half of the current financial year saw doubling of net margins, from 8.9 per cent to 19.6 per cent. However, the company has among the lowest working capital turnover ratios at 1.5 times, although inventory turnover stands better, averaging at six times over the past three years.

via BL