Hold Kewal Kiran Clothing; target of Rs 1140: ICICI Direct

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ICICI Direct's research report on Kewal Kiran Clothing

KKCL reported topline de-growth of 9.1% YoY to Rs 152.3 crore (I-direct estimate: Rs 160.3 crore) with volumes declining 8.6% to 15.2 lakh pieces and flattish realisation growth at Rs 1000/ piece. KKCL has always refrained from giving heavy discounts. This, in turn, has impacted its volume offtake. Furthermore, sustained competition from e-commerce players (aggressive discounting) has severely impacted the revenue growth of the company Gross margins for the quarter (including manufacturing expense) improved 540 bps YoY to 54.1%. The significant margin expansion was on the back of better negations with raw material suppliers by making the payments upfront However, given the fixed cost nature of the business, decline in topline resulted in negative operating leverage. This restricted EBITDA margin expansion. Employee & selling expense (as percentage of sales) increased 197 bps & 79 bps YoY, respectively. Resultant EBITDA margins expanded 225 bps YoY to 31.4% (highest ever quarterly margin) vs. our estimate of 26.8%. Given the subdued performance, PAT for the quarter de-grew 4.6% YoY to Rs 33.6 crore (I-direct estimate: Rs 32.0 crore).

Outlook

KKCL has been one of the most profitable Indian brands, generating healthy EBITDA margins (21%+) and having a strong cash position. However, sluggish revenue growth has been a major concern for KKCL. Revenues over the last five years (FY13-18) have grown at a moderate pace of 8.9%. Going forward, the company has affirmed its stance that it will not chase aggressive topline growth at the cost of diluting its EBITDA margins. Hence, we expect revenue growth to remain under pressure in the near term. We would be closely monitoring the traction in volume growth, which remains critical for a re-rating of the stock. We revise our estimate downwards for FY19, FY20E and expect revenue and PAT to grow at a CAGR of 5.4% and 9.4%, respectively, in FY18-20E. We have a HOLD rating on the stock with a revised target price of Rs 1140 (16.0x FY20E EPS).

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