CRISIL maintains fair value of Rs 672 to Kewal Kiran

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CRISIL maintains fair value of Rs 672 to Kewal Kiran

CRISIL Research has come out with its report on Kewal Kiran Clothing. The research firm has maintained the fundamental grade of 4/5 to the company, in its February 1, 2012 report.

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CRISIL Research has come out with its report on Kewal Kiran Clothing . The research firm has maintained the fundamental grade of 4/5 to the company, in its February 1, 2012 report.

Kewal Kiran Clothing Ltd's (Kewal Kiran's) Q3FY12 revenues and profitability were below CRISIL Research's expectations. Revenues remained flat y-o-y owing to an early Diwali festival in 2011 (sales factored in Q2FY12), management's conscious decision to go slow on sales growth to keep the rising receivables in check (receivable days reduced to 47 days as at Q3FY12 from 51 days as at Q2FY12) and an overall slowdown in consumer spending. EBITDA margin dipped 850 bps y-o-y to 18.6% on account of slower sales growth and higher outsourcing expenses. We have lowered our FY12 and FY13 estimates to factor in the cautious economic environment and the slowdown in discretionary spending. However, we maintain our fundamental grade of 4/5, as we derive confidence from its strong balance sheet and established brand profile which will help the company tide over the short term slowdown in consumer spending.

Q3FY12 result analysis
• Revenues remained almost flat y-o-y at Rs 646 mn (36% de-growth q-oq). Apparel sales volume dropped 9.2% y-o-y, while realisations increased 10.6%. The drop in sales volumes can be attributed to a) an early Diwali season with most of the festive sales occurring in September 2011 (Q2FY12); b) the company deliberately slowing down volume off-take to bring down the receivable days - its receivable days had increased to 51 days as at September 2011 from an average 45-47 days; however, it came down to 47 as at December 2011; and c) slowdown in consumer spending. The accessories segment clocked revenues of Rs 36.8 mn in Q3FY12 as compared to Rs 65 mn in Q2FY12.

• EBITDA margin declined by 850 bps y-o-y to 18.6% on account of lower sales growth and higher raw material expenses (which increased to 46% of revenues from 38% in Q3FY11). In spite of cotton yarn prices reducing by 15% y-o-y in Q3FY12, the benefit of price reduction in denim fabric is likely to seep in from Q4FY12. Besides, outsourcing expenses for winter wear also increase during 3Q, which also increases the raw material expenses.

• The company reported PAT of Rs 88 mn against Rs 113 mn in Q3FY11. Higher other income of Rs 30 mn (Kewal Kiran has surplus cash balance of Rs 1 bn as of Q3FY12) helped the company restrict its PAT margin dip at 420 bps to 13.5%.

Valuation: Current market price is aligned
We continue to use the discounted cash flow method to value Kewal Kiran. We maintain our fair value of Rs 672 per share. We are positive on its strong business model and believe that it will tide over the short-term growth concerns.

To read the full report click on the attachment

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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