Published on 10/09/2020 10:56:26 AM | Source: ICICI Direct

Hold Kewal Kiran Clothing Ltd For Target Rs.755 - ICICI Direct

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Maintaining b/s strength amid low demand scenario

Store closures owing to Covid-19 disruptions and nearly non-existent demand for jeans as a category (~60% of sales) led revenues to decline significantly by 94% YoY to | 7.0 crore in Q1FY21. Gross margins declined sharply to 41.7% vs. 55.6% in Q1FY20. Cost control measures restricted EBITDA losses, to a certain extent. Employee expenses declined 30% YoY to | 10.7 crore while the company significantly curtailed selling & distribution expenses (| 1.1 crore vs. | 16.9 crore in Q1FY20). Subsequently, KKCL reported EBITDA loss of | 16.2 crore vs. EBITDA profit of | 22.5 crore. Other income grew 2.1x YoY to | 5.7 crore (up 47% QoQ). Net loss was at | 8.8 crore vs. 14.1 crore in Q1FY20. On the balance sheet front, trade receivables declined 24% YoY to | 130.3 crore leading to release in cashflows. The company continues to be net cash positive, with cash and investments worth | 227.5 crore as on Q1FY21.


Uptick in discretionary spending, festive season critical for recovery in revenue growth

With minimal social gatherings and people preferring to work from home, discretionary spending on categories such as jeans and shirts were significantly hit during the quarter. While the company has over the years gradually diversified its product portfolio from jeans towards other categories (share of jeans down from ~70% in Q1FY17 to 60% currently), still majority of revenues are derived from the jeans category. We expect the near term pain to sustain and the recovery to be elongated given the challenging scenario. We note that in the previous quarter (Q4FY20), revenues from MBO channels (~46% of sales) had increased significantly by 19.2% YoY, leading to excess inventory in trade channels. Hence, primary sales are expected to pick up only when the cash cycle starts to improve for retailers. We expect the product mix in FY21E to shift more towards t-shirts category resulting into decline in blended realisations and gross margins. Demand revival during the festive season (Q3FY21) will be a key monitorable to watch.


Valuation and Outlook

KKCL has been conservative in its approach and has always given more prominence to balance sheet strength. The company has virtually debt free status (D/E: 0.2x) with cash and investments worth | 227.5 crore. Factoring in the performance of Q1FY21 and weak consumer sentiments, we revise our earnings estimates downwards for FY21 and FY22E by ~39% and 7%, respectively. We anticipate RoCE will revert back to its FY20 levels (~16.5%) by FY22E. Given the unprecedented and challenging scenario, we downgrade the stock from BUY to HOLD with a revised target price of | 755 (13.0x FY22E EPS, previous target price: | 820).


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