Kewal Kiran Clothing Limited - ICRA

Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
ICRA Equity Research Service
Kewal Kiran Clothing Limited
On the other side, merchandize obsolescence risks remain high in fashion industry; intense competition and
dependence on MBOs and National Chain Stores reduces margin for error
The company operates in rapidly evolving fashion industry, where it competes with large number of domestic as well
as global brands. Hence, failure to keep abreast with the latest fashion trends and changing customer preferences
Factory
Outlet
3%
National
Chain
Stores
9%
MBO
60%
Exports
3%
Source: Company, ICRA Equity Research Service
K-Lounge
25%
could result in obsolete inventories and affect the
competitiveness / brand equity of the company. Besides,
high dependence on MBOs and National Chain Stores
reduces the margin for error, as these third party retailers
stock products of all competing brands and are inclined
towards the latest fashion products providing higher
inventory turns and better margins. However, the
company has been able to demonstrate efficient inventory
management so far by regular monitoring of
inventory/products with its franchisses to take swift
corrective actions wherever necessary.
Profitability indicators remain vulnerable to cotton price fluctuations and regulatory changes
KKCL, being a garments manufacturer, remains vulnerable to
steep fluctuations in cotton prices. Raw cotton prices for the
Domestic Cotton Prices (Sankar 6;
Sankar-6 variety had increased from ~30,000 Rs/candy (1 70,000
Rs/Candy)
candy = 355 kg) in July 2010 to ~62,000 Rs/candy (1 candy = 60,000
355 kg) in March 2011 on account of demand revival in 50,000
developed economies and production disruptions due to 40,000
adverse agro-climatic conditions in China and Pakistan. The 30,000
steep rise in cotton prices had resulted in high cost inventories 20,000
and hence constrained volume growth as well as operating
10,000
margins across the value chain until the Q3, FY12. However, the
0
raw cotton prices have corrected significantly over the last 6-8
months to ~35,000 Rs/candy in Nov 2011 on account of
deterioration in global demand outlook and strong productions
Source: EmergingTextiles.com
estimates for the 2011-12 cotton season globally. As the high
cost inventory gets liquidated, the company is expected to benefit from lower cotton prices in the coming quarters.
The company also remains vulnerable to regulatory changes like the 10% excise duty levied on all branded apparel
during the last union budget, leading to a cascading effect across the value chain. After a representation from the
industry participants, the government agreed to a partial rollback, imposing the duty on 45% as against the earlier
60% of the MRP. The excise duty hike complicated matters at the time when the industry was already grappling with
severe cost inflation and higher raw material (cotton, polyester, etc) prices. Besides, the organized retail industry in
India continues to suffer due to stringent labour laws, multiple licences and clearances (40-45 approvals) required for
setting up and operating a retail stores, high stamp duties on property deals and exceptionally high property prices
and lease rentals in cities due to, among other things, urban land ceiling act and delays in new project approvals.
Although the proposed goods and services tax (GST) is expected to reduce complexities in doing business and
allowing foreign direct investments (FDI) in multi-brand retail is expected to improve efficiencies across the supply
chain and give a boost to KKCL’s MBO & national chain store sales, the timelines for their implementation continue to
remain uncertain.
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