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Balancing growth and cash generation

Kewal Kiran Clothing’s (KEKC) Q4FY21 revenue declined 13% YoY to Rs1.1bn on account of resurgence in covid cases from mid-Mar’21 and likely lower MBO channel sales YoY. EBITDA margin stood at 9.2% (-780bps YoY) primarily due to lower gross margins (-714bps YoY) likely due to change in channel mix (higher contribution from online and LFS channels). KEKC’s net cash increased from Rs1.9bn to Rs2.5bn (23% of mcap) YoY as of Mar’21 aided by working capital release of Rs739mn during FY21.

Total dividend declared by the company in FY21 stood at Rs23/sh against Rs43/sh in FY20. Factoring in the impact of the recent lockdown owing to covid resurgence, we reduce our EBITDA estimate for FY22E though we maintain it for FY23E. Maintain ADD with an unchanged target price of Rs970/sh (13x FY23E P/E). Key risk: Slower recovery in discretionary spends.

* Revenue declined 13% YoY to Rs1.1bn on account of resurgence in covid cases from mid-Mar’21 and likely lower MBO channel sales. Volumes stood at 1.3mn units, down 13% YoY and realisation dropped 9% YoY to Rs822/unit in Q4FY21. Revenue from ‘Killer’, ‘Lawman’ and ‘Integriti’ dropped 19%/30%/29% YoY, respectively, whereas it increased 20% YoY from ‘Easies’ brand. Revenue from others (which includes womenswear brand Desi Belle) more than doubled YoY. In FY21, sales volume stood at 3.51mn units vs 5.3mn units in FY20. Jeans and shirts constituted 48% and 26% of quantity sold in FY21 vs 50% and 25% in FY20. Others category constituted 8% of volumes in FY21 vs 3% in FY20. Realisation in FY21 dropped to Rs756/unit from Rs917/unit in FY20.

* EBITDA was down 53% YoY at Rs102mn with margin declining 780bps YoY to 9.2%. Gross margin sharply contracted 714bps YoY to ~40% likely due to change in channel mix with higher contribution of sales from online and LFS channels. Employee costs declined 8% YoY to Rs165mn. Administrative expenses increased 24% YoY to Rs106mn which include Rs12.8mn (including interest) against EPCG scheme towards shortage of export obligation. Selling and distribution expenses fell sharply 39% YoY to Rs73mn (6.6% of sales). PAT declined 53% YoY to Rs75mn.

* KEKC’s net cash increased from Rs1.9bn to Rs2.5bn (23% of mcap) YoY as of Mar’21. OCF generation was strong at Rs900mn despite lower revenues aided by working capital release of Rs739mn during FY21. Mr. Hemant P. Jain, the Wholetime Director of the company has been designated as the Joint Managing Director w.e.f. 26th May, 2021. KEKC has 322 EBOs and +125 distributors covering ~4,500 MBOs spread across 217 cities / town.

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