ICRA assigns valuation grade 'C' to Kewal Kiran Clothing
ICRA Equity Research Service has come out with its report on Kewal Kiran Clothing Limited (KKCL). The research firm has assigned a valuation grade of "C" to the company on a grading scale of 'A' to 'E', which indicates that the company is "Fairly Valued" on a relative basis.
July 26, 2012 / 19:22 IST
ICRA Equity Research Service has come out with its report on Kewal Kiran Clothing Limited (KKCL). The research firm has assigned a valuation grade of "C" to the company on a grading scale of 'A' to 'E', which indicates that the company is "Fairly Valued" on a relative basis.
Kewal Kiran Clothing Limited (KKCL) has reported ~18% YoY and ~15% QoQ revenue de-growth during the quarter ending June 2012 (Q1 FY13). Softness in consumer sentiments and reduction in footfalls have resulted in a steeper than anticipated ~17%YoY volume de-growth during the quarter. The EBITDA margins too declined sharply from ~25% in Q1FY12 and ~26% in Q4FY12 to ~17% in Q1FY13 due to marginal increase in fixed costs & selling expenses for the company coupled with steep revenue de-growth.We have revisited our projections to incorporate the weakness in near-term outlook for the branded apparels industry. However, 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". Since the recent stock price correction adequately factors in the near-term weakness, we maintain the Valuation Grading of 'C' indicating "Fairly valued" on a relative basis.Moderation in industry growth steeper than anticipated, demand outlook for the festive season remains uncertain
We had expected the revenue growth for the branded apparel industry to moderate as prolonged economic slowdown, persistent inflation and significant price increases taken by the industry impacted consumer confidence and spending. However, the moderation has been steeper than earlier anticipated, resulting in ~18%YoY and ~24% QoQ volume de-growth for the company in branded apparels segment to 0.685 million pieces during the quarter. The revenue de-growth was partly contributed by strong base (imposition of excise duty on branded apparels and resulting industry agitation had pushed sales from March '11 to April '11) and low raw material / finished goods inventory levels during the start of the quarter. The net realizations have increased modestly (~2.25% YoY) to ~774 Rs/unit. Going forward, we expect demand outlook for the festive seasons to remain uncertain, especially if the monsoons remain substantially below long period average (LPA).Margins decline sharply due to increase in fixed costs & selling expenses coupled with steep revenue de-growth; expected to remain under pressure in near termThe operating profitability has declined sharply on sequentially as well as YoY basis, due to marginal increase in fixed costs & selling expenses for the company coupled with steep revenue de-growth. We expect the margins to remain under pressure in the near-term due to weakening demand outlook, thrust on outsourced production (already increased from 26% in FY10 to 55% in FY12) and increasing contribution from value and mass market brands. However, the strategic positioning as a "fashion brand" rather than a "fashion retailer" with outsourced manufacturing / distribution is expected to ensure healthy profitability indicators and capital structure for the company over the longer term.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. At current valuations (~12.6x times FY13 earnings), KKCL continues to be reasonably valued domestic consumption play with strong established brand, wide distribution reach and strong balance sheet. 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 
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