Buy Kewal Kiran Clothing; target of Rs 2050: ICICI Direct

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ICICI Direct's research report on Kewal Kiran Clothing

Kewal Kiran Clothing’s (KKCL) Q3FY18 performance was below our expectations on all parameters with revenue, EBITDA margin and net profit lower than our expectations Q3FY18 revenues remained flattish at Rs 94.4 crore against our estimate of Rs 108.9 crore. Volume growth remained flattish with 1% YoY growth to 9.49 lakh pieces while realisation per piece declined 0.7% to Rs 995 per piece Lower raw material cost enabled KKCL to report 690 bps YoY improvement in gross margins to 59.3%. However, negative operating leverage (employee, administration & selling expenses up 40 bps, 140 bps and 190 bps YoY, respectively) curtailed EBITDA margin expansion to 520 bps YoY to 16.7% (I-direct estimate: 18.2%) Higher fixed expenses further stymied profitability with interest and depreciation being higher by 65% and 21% YoY, respectively, to Rs 1.5 crore each. Hence, PAT growth was restricted to 25% YoY to  Rs 10.4 crore (I-direct estimate: Rs 15.2 crore) In terms of operating metrics, net working capital cycle (calculated on net sales) increased from 76 days in Q3FY17 to 88 days in Q3FY18. Subsequently, short-term borrowings rose 39% YoY to Rs 59.7 crore as on December 31, 2017. The resultant pressure on working capital can be mainly attributed to higher credit period given to distributors, from an average of 70 to 90 days.

Outlook

KKCL has a lean balance sheet with debt/equity ratio comfortably placed at 0.1x and generating healthy return ratios (20%+ RoCE). Incorporating the muted 9MFY18 performance, we revise our estimates downwards for FY18-20E. We expect KKCL to clock sales, PAT CAGR of 7%, 12%, respectively, in FY17-20E. Revival of revenue growth remains critical, going forward. Given the strong brand legacy and a healthy balance sheet, we continue to maintain our BUY recommendation with a revised target price of Rs 2050 (21.0x FY20 EPS of Rs 97.4).

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