Hold Kewal Kiran Clothing; target of Rs 1950: Sharekhan

Sharekhan's research report on Kewal Kiran Clothing

For Q3FY2018, Kewal Kiran Clothing Limited (KKCL) reported marginal decline of ~2% in its reported revenue to Rs.94.4 crore. However, on a comparable basis, (net of GST) sales came in flat on a YoY basis during Q3FY2018.  This was mainly due to a flat volume and a decline in realisation by ~3% YoY. Gross margin for the quarter increased significantly by 816BPS YoY to 59.3% as cotton prices remained stable during Q3FY2018.  Further, the company benefited from a lag effect of lower cotton prices during Q2FY2018. This, along with lower manufacturing and operating expenses (down 18.2% YoY) resulted in a rise of operating margins by ~550 BPS YoY at 16.7%. Operating profit came in at Rs 15.7 crore. With higher interest cost (up 65% YoY) and higher tax rate (36.2% in Q3FY2018 vs 32.6% in Q3FY2017) profit after tax came in at Rs 10.4 crore, up ~25% YoY.

Outlook
In order to increase sales, the company had revised its strategy last quarter, which we believe will put some pressure on the working capital in near term and would result in an increase in short term debt.  Thus, citing the near term head winds in terms of lower bargaining power, we maintain our Hold recommendation with a revised price target of Rs. 1,950 (in line with reduction in earnings estimates).

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