Published on 8/02/2021 11:36:44 AM | Source: ICICI Direct

Hold Kewal Kiran Clothing Ltd For Target Rs.960 - ICICI Direct

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Revenue recovery driven by higher online sales…

From ~93% decline in revenue in Q1FY21, the company witnessed a sharp recovery in sales with de-growth being restricted to only 7% in Q3FY21. On a sequential basis, revenue grew 75% to | 118.0 crore in Q3FY21 on account of improved festive demand. Change in channel mix (sales mainly through online and LFS) and higher discounting translated in gross margins contracting significantly by 1160 bps YoY at 36.8%. However, significant curtailment of operating overheads (employee and selling expenses down by 26% YoY and 70% YoY, respectively) led to EBITDA margins improving marginally by 80 bps YoY to 11.4%, with EBITDA remaining constant YoY at | 13.5 crore. Lower other income (down 17% YoY) led PAT to decline 6% YoY to | 10.8 crore. The company continues to be net cash positive, with cash and investments worth | 257 crore as on Q3FY21 and has declared interim dividend of | 8/share (| 23/share in YTDFY21).


Volumes nearly back to pre-Covid levels

For Q3FY21, volumes were at 13.15 lakh units vs. 13.45 lakh units in Q3FY20. Higher discounting, unfavourable channel mix (e-commerce) led to average realisations declining 5% YoY to | 816/piece. Jeans continues to be an integral category with revenue contributing 45% of overall sales. Over the years KKCL has gradually diversified its product portfolio from jeans towards other categories (share of jeans down from ~70% in Q1FY17). During the quarter, casual shirts segment outperformed other categories, with positive sales growth and share in overall sales increasing 200 bps YoY to 28%. “Killer” brand continues to be the largest revenue contributor with ~ 57% contribution to overall sales, followed by “Integriti” (18% of sales). As on December 31, 2020, retail store count was at 321 stores (~95% franchise stores). Store addition pipeline appears to be healthy with 42 store opening in progress. Unfavourable channel mix may put near term pressure on operating margins. Hence, we expect gross margins to be in range of 45- 46% in FY22-23E (last five-year average: ~50%).


Valuation and Outlook

On the balance sheet front, the company utilised existing inventory and significantly reduced fresh buys leading to gross working capital release of ~| 80 crore as on YTDFY21. Subsequently, the company paid off creditors and reduced debt worth ~| 53 crore (borrowings as on December 31 was at | 35 crore). 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: 0.1x) with cash and investments worth | 257 crore. We roll our estimates to FY23E and bake in earnings CAGR of 5% in FY20-23E. We believe steady generation of operating cashflows and lower capex requirements would lead to consistent dividend payout ratio of ~65%+. We maintain HOLD rating on the stock with a revised target price of | 960 (14x FY23E EPS, previous target price: | 755).



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