Strong balance sheet to cushion downside
Kewal Kiran Clothing’s (KEKC) Q1FY21 EBITDA loss stood at Rs162mn on sharp 94% YoY decline in revenues to Rs70mn owing to Covid lockdown. Gross margin fell 1,400bps YoY to 42% owing to higher share of low-margin trading business (accessories, etc.). Net cash declined by Rs104mn QoQ to Rs1.77bn (21% of MCap) as of Jun’20-end mainly on dividend payment as weak OCF and capex of Rs20mn was funded through working capital release in Q1FY21. Factoring-in the extended lockdown and muted consumer sentiment, we reduce our EBITDA and EPS by 33-36% for FY21E and 4-5% in FY22E. We reduce our target price to Rs750/share (earlier: Rs780) based on 13x FY22E P/E. Maintain ADD.
* Revenues sharply declined 94% YoY to Rs70mn owing to Covid lockdown. KEKC witnessed higher impact of the lockdown than its peers because of its greater dependence on MBO channels (>40%) and very low presence in e-commerce/ online channels. Festive season sales from Oct’20 will be the first indicator of any real change in consumer sentiment, which till then is likely to remain muted.
* EBITDA loss stood at Rs162mn owing to sharp decline in revenues. Gross margin sharply contracted by 1,400bps YoY to 42% on higher share of low-margin trading business (accessories, etc.). Employee costs declined 30% YoY to Rs107mn. Administrative expenses increased 11% YoY to Rs73mn as it includes an additional provision of Rs43mn towards recoveries. Other income increased 3.2x YoY to Rs57mn. Net loss stood at Rs88mn vs PAT of Rs141mn in Q1FY20.
* KEKC generated marginal FCF of Rs8mn as negative OCF of Rs71mn and capex of Rs20mn was funded through working capital release of Rs99mn. Receivables declined 24% QoQ to Rs1.3bn as of Jun’20-end. Net cash shrunk by Rs104mn QoQ to Rs1.77bn (21% of MCap) as of Jun’20-end mainly on dividend payment. Company may revisit its dividend policy post the change in tax laws in FY21 Budget, in our view.
* We have broadly modelled flat revenue, EBITDA and EPS CAGRs over FY20- FY22E after factoring-in 50% EBITDA drop in FY21E. To recap, FY20 revenues increased 5% YoY to Rs5.3bn led by similar growth in volumes. EBITDA declined 15% YoY to Rs951mn with the margin shrinking 440bps YoY to 18% owing to investments across channels (high discounts) to support revenue growth. Company’s net cash status, leadership margins and return ratios plus higher dividend yield cushion the downside
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