Kewal Kiran Clothing Limited - ICRA

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ICRA Equity Research Service Kewal Kiran Clothing Limited As shown in the exhibit above, the company currently has 1:8 ratio of company-owned: franchise owned K-Lounge stores and exclusive brand outlets (EBOs). Going forward, we expect the company to maintain such ratio and add over 50 exclusive stores in each of the next three years. Besides, the company currently outsources ~55% of production to unorganized third party garment manufactures to reduce capital expenditure, labour costs and concentrate on its core areas of designing and brand building. Overall, we expect the management to continue to focus on profitable growth along with a careful store expansion, which will ensure strong return indicators (over 40% returns on capital employed) and financial profile (below 0.1x debt to equity) for the company going forward. Premium valuations justified considering the strong market positioning and balance sheet strengths KKCL’s current valuation multiple (~12.9x times FY13 earnings) is at a premium to broader market indices like Nifty Index, CNX 500 index or CNX Midcap index. However, KKCL continues to be one of the most reasonably valued domestic consumption plays with strong established brand, wide distribution reach and strong balance sheet. Overall, we expect the company to report a healthy 27% CAGR revenue growth and 19% CAGR EPS growth over the FY11a- FY14e period, aided by rapid expansions in Tier – II and Tier – III cities. Hence, we assign a valuation grade of “C” to KKCL on a grading scale of ‘A’ to ‘E’, which indicates that the company is “Fairly Valued” on a relative basis. Exhibit 2: KKCL’S Relative Valuations ICRA Estimates KEWAL KIRAN CLOTHING NIFTY INDEX CNX 500 INDEX CNX MIDCAP INDEX FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E Price/Earnings 15.85 12.93 13.19 11.29 12.38 10.31 10.63 8.79 EV/EBITDA 9.45 7.53 9.25 8.11 9.13 7.69 9.39 7.44 Price /Sales 2.73 2.16 1.45 1.33 1.15 1.04 0.67 0.61 Price /Book Value 3.79 3.26 2.03 1.78 1.78 1.56 1.21 1.09 Price/Cash Flow 14.06 11.46 9.46 8.15 8.93 7.42 8.17 6.34 ICRA Estimates KEWAL KIRAN CLOTHING PANTALOON RETAIL SHOPPERS STOP TRENT ARVIND PROVOGUE (INDIA) FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 FY12 FY13 Price/Earnings 15.85 12.93 13.72 10.25 36.49 23.53 n.m. 35.29 6.75 5.27 6.37 5.20 EV/EBITDA 9.45 7.53 9.66 8.26 17.01 12.14 146.01 14.70 6.14 5.54 9.42 8.14 Price /Sales 2.73 2.16 0.21 0.18 0.73 0.59 0.89 0.63 0.38 0.34 0.37 0.34 Price /Book Value 3.79 3.26 0.84 0.78 3.82 3.40 1.99 2.24 0.75 0.66 0.43 0.40 Price/Cash Flow 14.06 11.46 6.30 5.13 19.92 14.35 57.93 19.81 3.45 2.90 5.34 4.59 Source: Bloomberg, ICRA Equity Research Service * Bloomberg Consensus Estimates as on 30 th December, 2011 6
ICRA Equity Research Service Kewal Kiran Clothing Limited OPERATING PROFILE Strong brands built over the years through product designing / innovations rather than competing on price points; presence in mid-premium / value segments have paid rich dividends due to down-trading by customers Over the years, the company has built and nourished strong brands through focus on the product innovations and designs to create a brand identity, rather competing on price points. For example, it has always positioned “Killer” as an upmarket/international brand by associating with foreign models for the advertisement campaigns. The exclusive brand outlets (EBOs) are aesthetically designed to maintain consistency with the advertising campaigns and resonate with the brand appeal. The company has stayed away from advertising on price points, thereby helping it to absorb cost escalation and report margins better than the competition. Also, KKCL’s brands are predominantly targeted towards mid-premium and value segments, which has paid rich dividends due to the down-trading of customers from the premium / ultra-premium catergories due to the twin impacts of high inflation and slower economic / per-capita income growth rates over the last few years. Exhibit 3: KKCL’s Brand Portfolio Brand Launch Year Positioning Average MRP in Rs Average Denim MRP in Rs Competition FY11 Revenues (Rs. Cr.) Revenues % Share Killer 1989 Mid-Premium to Premium ~1,650 1,800 Lee, Levi’s, Wrangler, UCB, Pepe Jeans 120.6 51% Lawman Pg3 1998 Mid Premium ~1,500 1,500 Mufti, Trigger, Spykar, Flying Machine, Bare 49.2 21% Integriti 2002 Easies 1989 Value to mid-premium Value to mid-premium Source: Company, ICRA Equity Research Service ~1,150 1,200 ~1,550 Not Applicable Denizen, Indigo Nation, John Players, Peter England John Players, Austin Reed, Indian Terrain 32.4 25% 5.9 2% Killer: It was launched in 1989 and is KKCL’s flagship brand positioned as a global Indian brand conveying the trendy, vibrant and youthful look with an attitude. With average MRP at around Rs, 1,800 per piece, it is focused towards the mid-premium to premium denim segment for 16-30 years age group. Throughout its brand history, it has focused on continuous innovation in style, design and product supported by adequate advertising campaign conveying the above features and creating imagery in sync with an international brand. This has enabled it to compete well with the large number of international denim players that have entered Indian markets. It is distributed through MBOs, EBOs, both “K-Lounge” as well as exclusive “Killer” stores and national chain stores like ‘Shoppers Stop’ and ‘Lifestyle’. Product portfolio: It includes ready-to-wear jeans, trousers, cargos, capris, shirts, jackets, t-shirts, innerwear (vests and briefs), footwear (shoes, socks). It also has eye-wear and other accessories (belts, bracelets etc) in its portfolio. To target the growing women-wear denim segment, the 'Killer for her' range was launched in 2007. Lawman Pg3: The brand was launched in 1998 and targets the 18-30 years age group in the mid-premium segment with average MRP for denim jeans at around Rs. 1,500. For Lawman, the company has focused on creating a theme each season under which the designers add different textures, cuts, drapes, washes and feel to the product. The company holds three patents under the “Lawman” brand - for introducing the ‘Yi-Fi’ stitch, Vertebrae collection (where it has patented the ‘wash and stitch’) and “Emboss” (which was another stitch related improvement). It is distributed through MBOs, EBOs, both “K-Lounge” as well as exclusive “Killer” stores and national chain stores like ‘Westside’ and ‘Central’. 7
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Kewal Kiran Clothing Limited - ICRA

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