Kewal Kiran Clothing Limited - ICRA

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Zodiac Clothing Raymond Apparel Arvind Lifestyle Provogue Colorplus Fashions Kewal Kiran Arvind Retail Page Industries ICRA Equity Research Service Kewal Kiran Clothing Limited Product portfolio: The LawmanPg3 apparel range has shirts, blazers, jackets, denim and cotton trousers, tee-shirts, cargos, capris, drapes, jeggings, skirts and shorts. It accessories collection includes innerwear, socks, footwear, headwear, sunglasses, deodorants and trinkets. Integriti: The brand was launched in 2002 mainly to counter completion from unorganised players as well as other domestic players competing through low price points. Integriti is aimed at the price conscious value segment with average MRP at around Rs. 1,150 for its products. Being a value brand, majority (~70%) of its sales are in Tier-II and Tier-III cities mainly through the MBOs, balance through EBOs and a small proportion through national chain stores. Product portfolio: The product range under the brand includes casuals and formal shirts, T-shirts, Jeans and cotton trousers. A sub-brand “Integriti Galz” was also launched to cater to women-wear category. Thrust on enhancing brand equity, designing latest fashions and introducing innovative product; lower focus on in-house production to reduce fixed overheads and avoid labour issues Over the years the company has steadily reduced its focus on manufacturing. In FY10, the company produced 76% of the garments in-house and rest were outsourced to vendors located in Bangalore and Mumbai. In FY11, the in-house to outsourced manufacturing ratio was 53:47, which is further expected to tilt in favour of outsourcing in FY12. Garmenting is a labour intensive business – high labour costs coupled with the rigid labour laws has resulted in weak competitive positioning for Indian garment manufacturers. Overall, as the management plans to stay focused on higher value added activities like brand building and product design, significance of activities like manufacturing are expected to reduce. Continuous investments in advertising/marketing over the years to nurture brand image; however advertising costs remain moderate due to established brands and exposure to mid-premium / value segments 15.0% 12.8% 12.0% 9.0% 8.3% 7.0% 7.3% 6.6% 6.0% 3.0% 4.7% 4.1% 2.5% 0.0% Source: Annual Reports, ICRA Equity Research Service Since it takes decades to nurture superior brands (for example Levis, Diesel, Tommy Hilfiger, etc), KKCL has made continuous investments in advertising/marketing to increase brand recall and pull customers rather pushing its brand across various channels of distribution. In addition to print media, the company also attempts to reach out to target audiences through contemporary forms of advertising such as in-film placements and cricket sponsorships (like Pune Warriors in Indian Premium League, IPL). The company is currently running a television advertisement campaign for its “Killer” deodorant. However, since the company has well established brands focused on mid-premium to value segments, overall advertising spend for the company has remained near the industry average (~4-5% of revenues). Effective distribution strategy through exclusive franchisees and multi-brand outlets ensures wider penetration; outright sale model ensures efficient inventory management The company has carved out an effective distribution strategy wherein it has a mix of Exclusive Brand outlets – EBOs (own as well as franchisees), Multi-brand outlets - MBOs and sales through National Chain Stores (organized retailers) to maintain an optimum balance between growth rate / penetration levels and profitability margins. 8
FY09 FY10 FY11 FY12e FY13e FY14e FY09 FY10 FY11 FY12e FY13e FY14e ICRA Equity Research Service Kewal Kiran Clothing Limited The aesthetically designed EBOs for its “Killer”, “Lawman Pg3” and “Integriti” brands and complete brand portfolio under “K-Lounge” stores helps builds brand image and visibility for the company. The company also has considerable presence through national chain stores such as Shoppers’ Stop that have high footfalls and provide a vital channel for swiftly building up brand awareness. On the other hand, distribution through multi-brand outlets (MBOs) enables the company to expand its distribution network wide across the country and deep into Tier-III and Tier-IV towns. The management has cautiously limited its dependence on national chain stores that enjoy higher bargaining power and squeeze profit margins for the apparel manufacturers. Even for the exclusive brand outlets, the company mainly uses franchisee route to reduce capital investments (fixed assets as well as inventories) and concentrate on its core strengths of designing and brand building. However, careful screening of the franchisees owners in terms of relevant industry experience and business acumen has helped the company to maintain services standards and brand equity. Since the management follows an outright sale model instead of a consignment model, for its franchisees as well as distributors, the company has been able to efficiently manage its inventory levels and hence report better the operating margins. Again, the management has consciously maintained low focus on the exports market, since the company may not command the same premium as domestic markets where it has high brand equity. The lower exports dependence has also shielded the company from near term global economic uncertainties and currency fluctuations. 100% 80% 60% 40% 20% 0% KKCL : Distribution-wise revenue Break-up 5% 8% 9% 10% 12% 13% 58% 58% 60% 58% 56% 54% 28% 27% 25% 26% 27% 27% Exports Factory Outlet 100% 80% KKCL : Geographic revenue break-up 22% 25% 29% 31% 32% 33% National Chain 60% 26% 25% 24% 22% 22% 21% Stores 40% MBO 34% 32% 29% 27% 27% 26% 20% K Lounge 14% 15% 16% 16% 16% 17% 0% Export East South West North Source: Company, ICRA Equity Research Service Geographically well diversified sales mix; thrust on under-penetrated Eastern region likely to continue KKCL has a well diversified geographic sales mix, mainly owing to its wide distribution network spanning the length and breadth of the country. The company is based out of Mumbai and has traditionally had a strong presence in the Western region and Southern states of the country. However, the Eastern region has emerged as a strong growth driver for the company in recent periods due to increasing brand recognition, rapid distribution expansion and low penetration of branded apparels and fashion products in these markets. However, the company has relatively modest presence and market share in the otherwise lucrative Northern region due to intense competition, unfavourable credit terms demanded by the distributors and lack of winter-wear products in its portfolio. Nevertheless, the company has revamped its distribution set-up in the region to focus on growth through exclusive stores and introduced a wide range of winter-wear merchandises (like jackets and woollen wears) to cater to the northern region. The above strategies seem to have already started to pay off, as evident through ~43% revenue growth in the region in FY11. 9
Page 1 and 2: Fundamental Assessment ICRA EQUITY
Page 3 and 4: Kewal Kiran Zodiac Clothing Provogu
Page 5 and 6: FY11a FY12e FY13e FY14e Return indi
Page 7: ICRA Equity Research Service Kewal
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