ICICI Direct recommended hold rating on Kewal Kiran Clothing with a target price of Rs 1160 in its research report dated January 25, 2019.
ICICI Direct's research report on Kewal Kiran Clothing
KKCL reported healthy revenue growth 17.7% YoY to Rs 111.1 crore (I-direct estimate: Rs 107.0 crore). The topline was mainly driven by volume growth of 21.8% YoY to 11.6 lakh pieces. The strong volume offtake was largely attributed to higher discounts provided in the quarter. In the backdrop of the same, average realisations de-grew 3.4% YoY to Rs 961/piece. Higher discounting impacted gross margins negatively, which contracted 90 bps YoY to 49.5% (Q2FY19: 54.1%). Furthermore, higher cash discounts and rebates to dealers led to significant spike in selling & distribution expense (up 65% YoY to Rs 13.5 crore). Consequently, EBITDA margins contracted 270 bps YoY to 14.0%Depreciation & finance cost increased 62% and 41% YoY, respectively. Higher other income (up 102% YoY to Rs 7.2 crore) and lower taxation rate (30% vs. 36% in Q3FY18) aided PAT growth. Subsequently, PAT for the quarter grew 23% YoY to Rs 12.8 crore. On the balance sheet front, the company witnessed a spike in net working capital cycle, with debtor days increasing ~17 days to 125 days. Subsequently, short-term debt increased 77% YoY to Rs 86 crore (debt/equity: 0.2x).
Revenues over the last five years (FY13-18) have grown at a moderate pace of 8.9%. On a YTD basis, revenue growth was at 9% YoY to Rs 370 crore, with EBITDA margins expanding 190 bps to 23.0%. With the management now changing its stance towards offering higher discounts, we anticipate volume offtake will pick up pace, going forward. Factoring in the performance of 9MFY19, we revise our revenue estimate upwards for FY19, FY20E by ~2%, ~7%, respectively. However, margins could remain soft on account of higher proportion of discounted products. Hence, we trim our EBITDA margin estimate by ~60 bps and ~120 bps for FY19E and FY20E, respectively. KKCL has a strong balance sheet, with debt/equity ratio comfortably placed at 0.2x and having a strong cash position. The 9MFY19 balance sheet witnessed some deterioration in working capital as trade receivables increased 26% to Rs 171 crore. We model revenue and PAT CAGR of 9% and 10%, respectively, in FY18-20E. We would be closely monitoring the traction in volume growth, which remains critical for a re-rating of the stock. We have a HOLD rating on the stock with a revised target price of Rs 1160 (16.0x FY20E EPS).
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