ICRA assigns valuation grade of 'C' to Kewal Kiran Clothing

1235 Investors following Kewal Kiran. Share this News with them.

0

Like this story, share it with millions of investors on M3

ICRA assigns valuation grade of 'C' to Kewal Kiran Clothing

ICRA Equity Research Service has come out with its report on Kewal Kiran Clothing. The research firm has assigned a valuation grade of "C" to KKCL on a grading scale of 'A' to 'E', which indicates the company is "Fairly Valued" on a relative basis.

Post your opinion here

 

0

Tweet

Share on Tumblr

Kewal Kiran BSE | NSE 29/05/12 Are Mutual Funds betting on Kewal Kiran?

ICRA Equity Research Service has come out with its report on Kewal Kiran Clothing (KKCL) . The research firm has assigned a valuation grade of "C" to KKCL on a grading scale of 'A' to 'E', which indicates the company is "Fairly Valued" on a relative basis.

Kewal Kiran Clothing Limited (KKCL) has reported a muted quarterly performance with ~2% YoY net sales growth to Rs. 64.61 crore for the quarter ending December 2011 (Q3 FY12) due to the high base in the corresponding quarter previous year. The operating margins too declined ~850 bps YoY and ~750 bps sequentially to 18.6% during the quarter on account of high raw material and traded goods costs.

We have revised our projections marginally downward to reflect the weaker than expected quarterly performance. However, we expect the operating margins to improve sequentially from Q4 FY12 onwards as the benefit of steep cotton prices correction starts kicking in. Considering the established brands, wide distribution reach and strong balance sheet of the company, we maintain KKCL's Fundamental Grading of '4' indicating "Strong Fundamentals" and Valuation Grading of 'C' indicating "Fairly valued" on a relative basis.

Revenue growth impacted by high base effect; however moderation in consumer spending remains a concern

Despite ~11% YoY increase in net realizations to Rs. 801 per piece, net revenues remained relatively flattish during the quarter on account of ~9% YoY volume de-growth to 0.78 million pieces. The volume growth was partly impacted by the high base effect (festive sales were split between Q2 & Q3 due to early Diwali festival this year as compared to Q3 FY11). Besides, the revenue growth was also impacted by lower consumer spending during the festive season on account of economic slowdown, high inflation and significant price increases taken by the industry to pass-on cost escalations, higher cotton prices and excise duty hike during the current financial year.

Margins decline due to unfavorable product mix & higher than expected raw material costs; however expected to bounce back in coming quarters

Lower sales growth along with ~24% YoY increase in cost of goods sold (liquidation of high cost inventories and increased outsourcing due to unfavorable product mix) resulted in 850 bps YoY decline in EBITDA margins to 18.6% in Q3 FY12. The margins were impacted due to inadequate pass-through of the excise duty hike as well as higher sales contribution from winter-wears and lifestyle accessories whose manufacturing is mainly outsourced. However, we expect the operating margins to improve sequentially as the benefit of steep cotton prices correction starts kicking in

Asset light business model expected to ensure healthy profitability indicators and robust capital structure going forward

Instead of expanding through own retail stores, KKCL's management has focused on expanding through the franchisee and third party distribution route, thereby lowering operational overheads and capex requirements. Besides, the company has opted for an outright sales model instead of consignment model and maintains tight control on receivables as well as inventory levels. This strategy of positioning itself as a "fashion brand" rather than a "fashion retailer" is expected to continue to pay rich dividends and ensure healthy profitability indicators and robust capital structure going forward.

In assessing a company's valuation, various parameters are looked at including the company's earnings and growth prospects; its ability to generate free cash flows and its capacity to generate returns from the capital invested. The valuation is also benchmarked against an appropriate peer set or index. While assessing a company's relative valuation, the historical price volatility exhibited by the stock, besides its liquidity, is also taken into account. The extent of overvaluation or undervaluation is adjusted for the relative volatility displayed by the stock. Source: ICRA Online Research KKCL's current valuation multiple (~11.5x times FY13 earnings) is at a discount to valuations of broader market indices like Nifty Index and CNX 500 index. KKCL continues to be reasonably valued domestic consumption plays with strong established brand, wide distribution reach and strong balance sheet. Overall, we expect the company to report a healthy 26% CAGR revenue growth and 19% CAGR EPS growth over the FY11a-FY14e period, aided by rapid expansions in Tier - II and Tier - III cities. Hence, we assign a valuation grade of "C" to KKCL on a grading scale of 'A' to 'E', which indicates that the company is "Fairly Valued" on a relative basis.

Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

To read the full report click on the attachment