Kewal Kiran Clothing

Investors with a medium-term perspective may buy the stock of value retailer Kewal Kiran Clothing (KKCL) given its brand strength, offerings across segments, balanced geographic presence and superior margins.



At Rs 400, the stock is trading 14 times the trailing four-quarter earnings and 12 times the estimated earnings for FY-11. Peers such as Provogue India trade at 26 times their trailing earnings.

‘Killer' is KKCL's flagship offering, commanding a good brand recall in the value segment, contributing a good 50 per cent to revenues. Other key brands are club-wear Lawman Pg3 and causal-wear Integriti, accounting for 45 per cent of sales. The last is formal wear brand, Easies.

KKCL thus covers the gamut of apparel segments and is fairly diversified with higher-margin accessories also on offer. Associations with prominent fashion shows and movies also help promote brand visibility. Except for Easies, the other brands cater to the sizeable youth segment for men and women. Though KKCL has a larger focus on menswear, the segment constitutes about half the apparel market.

Products are sold through Multi Brand Outlets (MBOs) and Exclusive Brand Outlets (EBO) for individual brands and K-Lounge, a format that offers all KKCL's brands. Using MBOs and EBOs allows for widening market reach while controlling investments in stores. Sales primarily stem from MBOs, which may serve it well till it is able to build its newer brands to draw footfalls to exclusive stores. EBOs contributed 27 per cent to sales in FY-10. Thirty-six new stores were opened in FY-10, while 20 underperforming stores were shut, bringing the total store count to 139. It plans to open 50 stores by end FY-11, especially in smaller cities and towns where it already has built a presence through MBOs.

Revenues are well-balanced geographically, mitigating risks of region concentration. For the year ended March 31, 2010, Sales grew at a compounded four-year annual rate of 20 per cent to Rs 175.3 crore, while net profits grew 29 per cent to Rs 32.6 crore. The June quarter saw a sales and net profit growth of 36 and 41 per cent. With the second and third quarters typically a period of good sales for retailers, the sales growth is likely to sustain.

A sedate pace of store expansion against the aggressive methods adopted by value retail peers and a franchise route of expansion allowed KKCL to keep debt to a minimum, with debt-equity at 0.1. Other value retailers that undertook a debt-fuelled expansion now face severe problems with sustaining operations. With backward integration through manufacture and captive wind power, margins are superior to most peers. Operating margins were 32 per cent for FY-10 up from 20 per cent in FY-09, on lower administration costs. Net margins were 19 per cent for FY-10, a shade above the 18 per cent in FY-09 despite a higher tax outgo.

via BL