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Sustained recovery with buoyant demand outlook

Kewal Kiran Clothing’s (KEKC) Q2FY23 revenues increased 29% YoY to Rs2.3bn, implying a 3-year revenue CAGR of 11%. Gross margin expanded 46bps YoY to 41.4% led by improved realisation (up ~9% YoY), while EBITDA margin increased 365bps YoY to 22% aided by better operating leverage. Management guided to achieve EBITDA margin of 17-18% in FY23 coupled with 20-22% YoY revenue growth in FY23 which we believe to be a conservative guidance given 43% YoY revenue growth in H1FY23 along with EBITDA margin of 21%. We re-initiate coverage on KEKC with a BUY rating, valuing it at Rs600/sh based on 22x (5 year mean at 22x) Sep’24E P/E. KEKC reported high double-digit return ratios in FY22/1HFY23 and we expect it to report similar profitability going ahead, given strong demand revival post-covid, healthy order book for next six months and improving margin profile. Key risks: Lower discretionary spends.

* Revenues increased 29% YoY to Rs2.3bn, implying a much-improved 3-year revenue CAGR of 11% led by improved consumer sentiment, festivity/wedding purchases and pent-up demand. Volumes stood at 2.42mn units, up 18% YoY, and realisation increased 9% YoY to Rs935/unit in Q2FY23.

* EBITDA stood at Rs500mn (up 55% YoY) with margins improving 365bps YoY to 22% (slightly down {60bps} from Q2FY20 {pre-covid levels}). Gross margins expanded by 46bps YoY to ~41%; however, they are ~10 pps lower than pre-covid levels, likely due to a sharp rise in cotton prices. Administrative expenses shrunk 15% YoY to Rs102mn, and selling and distribution expenses were up ~12% YoY to Rs93mn. Other income was flat YoY to Rs59mn. PAT increased 45% YoY to Rs391mn.

* Net cash decreased by Rs820mn in Sep’22 to Rs1.5bn (5% of market cap). KEKC expects to achieve 110-120 working capital days in FY23 vs 138 days YoY. KEKC opened 38 new stores in Q2FY23, taking the total store count to 419 as of end-Sep’22 and aims to add 40 stores in H2FY23. Further, management guided to double the EBO stores by FY25 in the ratio of 9: 1::FOFO:COCO model stores. With an established brand franchise in Menswear segment, KEKC intends to explore new avenues of growth with focus on new range of products viz. topwear, jackets and winter wear segment.

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