Kewal Kiran Clothing Limited - ICRA

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ICRA Equity Research Service Kewal Kiran Clothing Limited INVESTMENT SUMMARY Strong domestic consumption play with Pan-India presence and negligible dependence on exports East 29% South 24% Export 3% Source: Company, ICRA Equity Research Service North 15% West 29% Rising disposable incomes, rapid urbanisation, increasing organized retail penetration and changing spending trends are expected to result in branded apparels market reach ~Rs. 700 billion by 2015 (implying 28% CAGR). KKCL is strongly positioned to benefit from the domestic consumption boom due to its pan-India franchise and distribution through a wide network of multi-brand outlets across the country. Besides, KKCL enjoys the firstmover’s advantage in the Tier-II / Tier-III cities and under-penetrated eastern states, which are expected to remain the growth engines over the medium term. Diversified brand portfolio, Strong homegrown brands nurtured over decades; presence across product spectrum and price points KKCL has a mature portfolio of well-established fashion brands like ‘Killer’, ‘Lawman Pg3’ and ‘Integriti’ that have survived across economic cycles and successfully evolved with changing customer preferences over last two decades. KKCL’s flagship ‘Killer’ brand enjoys strong brand equity and is amongst the few homegrown denim brands that have survived the competitive pressures emanating from the entry of leading global brands. As per recent IMRB research report, Killer brand has been slotted amongst the Top 5 denim brands in the country. Shirts 20% Trousers 15% T-Shirts 4% Others 4% Jeans 57% Easies 2% Integriti 25% Lawman 21% Others 1% Source: Company, ICRA Equity Research Service Killer is positioned mainly to cater to premium and designer wear (mainly denim jeans category), Lawman Pg3 is positioned as trendy fashion for mid-premium clubwear (across products like jeans, trousers, shirts, t-shirts, jackets), Source: Company, ICRA Equity Research Service Killer 51% Integriti is positioned as value or mass market brand (across product range) for the price conscious consumer, Easies is positioned as formal and semi-formal wear (mainly trousers and shirts) and ADDICTIONS is positioned as a dedicated lifestyle accessories brand (across products like shoes, belts, watches, bracelets, wallets, caps, bags, sunglasses and deodorants). Overall, KKCL’s brands are positioned across product spectrum and price points to garner mind-wallet share of aspiring young population and burgeoning middle and uppermiddle class in India. 2
Kewal Kiran Zodiac Clothing Provogue Arvind Lifestyle Brands Arvind Retail Raymond Apparel Colorplus Fashions Kewal Kiran Zodiac Clothing Provogue Arvind Lifestyle Brands Arvind Retail Raymond Apparel Colorplus Fashions ICRA Equity Research Service Kewal Kiran Clothing Limited Industry leading profitability indicators due to careful expansion and efficient working capital management Unlike some domestic brand apparel manufacturers and large retailers, KKCL has restrained from acquiring market shares by sacrificing near term profitability. Also, KKCL has maintained a relatively modest presence in intensely competitive metro markets as high lease rentals and operating expenses could constrain profitability of its franchisees. The company has also limited its dependence on national chain stores that enjoy higher bargaining power and squeeze profit margins from the apparel manufacturers. Besides, the company has maintained low focus on the exports market, since it may not command the same premium and margins as the domestic markets. All these factors have combined to contribute a healthy profitability for KKCL. KKCL’s brands are predominantly targeted towards mid-premium and value segments; the strategy has paid rich dividends on account of down-trading by customers from the premium / ultra-premium catergories due to the twin impact of high inflation and slower economic / per-capita income growth rates over the last few years. The company has also demonstrated adequate flexibility in passing on the input cost escalations (cotton prices, fuel prices & labour costs) relative to its peers in the value / economy segments. KKCL derives majority of its revenues from denim jeans category that normally enjoy better margins due to higher scope for designing and value-addition relative to casuals, shirts & trousers categories. The company has introduced its own brands and nurtured them over the years to save royalty payments, which range around 3 to 5% for some foreign brands leased by of its domestic competitors. Besides, KKCL’s brands are well established and focused only on mid-premium to value segments, thereby resulting in relatively moderate advertising requirements (~4-5% of revenues). 35% 30% 25% 20% 15% 10% 5% 0% Branded Apparel Industry: EBITDA Margins 29% 12% 11% 9% 10% 5% 12% 40% 35% 30% 25% 20% 15% 10% 5% 0% Branded Apparel Industry : RoCE (%) 37% 20% 13% 12% 9% 7% 17% Source: Company Filings, ICRA Equity Research Service KKCL has made continuous investments in advertising/innovations to increase brand recall and create a ‘customer pull effect’ rather than pushing its products aggressively through the distribution channel. Since the company follows an outright sale model instead of consignment model; it has been able to efficiently manage its inventory levels, avoid major markdowns / write-offs in case of obsolete inventories and hence optimizes operating margins for the company. Besides, the company has low cost assets (estimated market value of manufacturing facilities, corporate office and company owned stores significantly exceeds book value of ~Rs. 43 crore) and strong balance sheet (~Rs. 115 crore net cash and investments); resulting in low depreciation / interest costs and high non-operating incomes. The working capital intensity too is favourable compared to its peers with strict control on receivables, while inventory risk is partly mitigated by production against confirmed orders from its franchisees. Moreover, the company mainly outsources production (> 55% outsourced) and distribution (~90% exclusive brand outlets are franchisee owned) to reduce the fixed capital investments and uses outright sale model to reduce the working capital requirements; thereby ensuring industry leading return indicators for the company. 3
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Kewal Kiran Clothing Limited - ICRA

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