Kewal Kiran Clothing (KEWKIR) 1800

Transcription

1 Result Update Rating matrix Rating : Hold Target : 1844 Target Period : 12 months Potential Upside : 2% What s changed? Target Unchanged EPS FY18E Changed from 63.4 to 65.9 EPS FY19E Unchanged Rating Unchanged Quarterly performance Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%) Revenue EBITDA (5.9) EBITDA (%) bps bps PAT Key financials ( Crore) FY16 FY17E FY18E FY19E Net Sales EBITDA Net Profit EPS ( ) Valuation summary FY16 FY17E FY18E FY19E P/E Target P/E EV to EBITDA Price to book RONW (%) ROCE (%) Stock data Particular Amount Market Capitalisation ( Crore) 2,218.5 Debt (FY16) ( Crore) 28.9 Cash (FY16) ( Crore) 24.7 EV ( Crore) 2, week H/L 1955 / 1700 Equity Capital ( Crore) 12.3 Face Value ( ) Price performance 1M 3M 6M 12M Kewal Kiran Clothing Page Industries Arvind Research Analysts Bharat Chhoda bharat.chhoda@icicisecurities.com Cheragh Sidhwa cheragh.sidhwa@icicisecurities.com April 27, 17 Kewal Kiran Clothing (KEWKIR) 1800 Volume decline impacts revenue growth Kewal Kiran Clothing s (KKCL) Q4FY17 revenues were marginally below our estimates. However, EBITDA and EBITDA margin were above our estimates. Higher other income on account of profit on redemption of fixed maturity plan bloated the overall net profit KKCL reported subdued revenue growth of 2.9% YoY to crore vs. I-direct estimate of crore. Total sales volume declined 4.7% YoY to 12.3 lakh pieces while blended realisations increased 8.4% YoY to 58 per piece (up 1.5% sequentially) Killer brand continued to be top contributor to sales with share of 51%, with YoY revenue growth of 9% to 66 crore in Q4FY17. Revenues from Lawman brand fell 18% YoY to.8 crore while Easies brand grew 35% YoY to 5.9 crore albeit on a lower base Jeans segment showed strong growth of 11% YoY to 83.9 crore and stayed the largest selling product with share increasing from 60% in Q4FY16 to 65% in Q4FY17. The shirts and trouser segment witnessed a decline in revenues by 11% and 14%, respectively Absolute EBITDA declined 5.9% YoY to 32.0 crore (I-direct estimate 28.2 crore). EBITDA margins contracted 230 bps YoY to 24.6% (Idirect estimate.6%) on account of an increase in employee expense and selling expense. However, a decline in manufacturing expenses aided margins to a certain extent Despite a decline at the EBITDA level, PAT grew 55.6% YoY to 33.9 crore (I-direct estimate 18.1 crore), on account of higher other income. Other income increased from 1.7 crore in Q4FY16 to 15.9 crore in Q4FY17 of which 11.1 crore was on account of profit on redemption of fixed maturity plan The company has announced an interim dividend of 70% i.e. 7 per share. Record date for dividend payment was fixed at May 8, 17 Higher PAT in FY17 despite single digit topline growth Revenues for FY17 registered single digit growth of 7.7% YoY to crore. H2FY17 was hit significantly as demonetisation weighed heavily on the performance of KKCL. In terms of volume offtake, KKCL reported flattish growth in FY17 to 46.6 lakh pieces vs in FY16. The company took a price hike this year as blended realisations improved 8.4% to 58. Poor volume offtake led to a negative operating leverage, since absolute EBITDA declined 4% YoY to 99.6 crore while margins declined 254 bps YoY to.4%. Gradual price hikes by the company aided margins, to a certain extent. Despite a subdued operational performance, PAT looks bloated (up 26% YoY) at 85.3 crore mainly on account of profit on redemption of fixed maturity plan to the tune of 21.6 crore. Recovery expected from FY18 onwards; maintain HOLD Going forward, as normalcy sets in post demonetisation, we expect the company to get back on track, and report revenue CAGR of 15% in FY17-19E. PAT is expected to increase from 81 crore in FY18E to 99 crore in FY19E. KKCL has nurtured a good brand portfolio with a strong brand recall across mass & premium categories. We continue to like the company for (a) stable growth and operational performance, (b) superior return ratios and (c) virtually debt-free status. We have a HOLD rating on the stock with a target price of 1844 (23.0x FY19E EPS of 80.2). ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q4FY17 Q4FY17E Q4FY16 YoY (%) Q3FY17 QoQ (%) Comments Revenue Revenues were marginally below our estimates. Sales volume declined 4.7% while realisations increased 8.4% Other Income Higher other income on account of profit on redemption of fixed maturity plan Raw Material Expense Employee Expense Selling Expenses Manufacturing & Other Expense EBITDA EBITDA Margin (%) bps bps Depreciation Interest Operating margins contracted YoY owing to increase in employee expense and selling expense PBT Tax Outgo PAT Inflated PAT on account of higher other income Key Metrics Apparel Volume (Lakh pcs) Volume de-grew 4.7% YoY Average Realisation ( ) 1, , Realisations improved 8.4% YoY Gross Margin (%) bps bps Expansion in gross margin on account of higher realisations Change in estimates FY18E FY19E ( Crore) Old New % Change Old New % Change Revenue EBITDA EBITDA Margin (%) bps bps PAT EPS ( ) Assumptions Current Earlier FY17E FY18E FY19E FY17E FY18E FY19E Apparel Volume (Lakh pcs) Average Realisation ( ) 1, , , , ,147.0 ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Volume offtake disappoints H2FY17 was a challenging year of the company as demonetisation impacted consumer discretionary spending, which was visible in the financials of the company. Pre-demonetisation, KKCL reported double digit revenue growth of 12.4% YoY. However, the momentum was halted in the second half of the fiscal, wherein KKCL registered revenue growth of mere 3%. Total sales volume for Q4FY17 declined 4.7% YoY to 12.3 lakh pieces while volumes for the full year remained flat at 46.6 lakh pieces. Blended realisation per unit improved 8.4% YoY to 58 in Q4FY17. Revenues for FY17 registered a single digit growth of 7.7% YoY to crore. Going forward, as normalcy sets in post demonetisation, we expect revenues to grow at 15% CAGR in FY17-19E. This is expected to come about largely on the back of increased volumes and realisations owing to the growing store count and higher contribution to revenues from national chain stores that have been growing at a fast clip for KKCL. Exhibit 1: Volume and realisation trend Lakh pieces Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Volume Realisation Exhibit 2: Topline trajectory crore FY07 FY08 FY09 FY FY11 FY12 FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 FY17E FY18E FY19E ICICI Securities Ltd Retail Equity Research Page 3

4 Revenue from national chain stores growing at fastest rate In Q4FY17, revenues from national chain stores (NCS) grew at the fastest rate by 46% YoY to 25.7 crore leading to a contribution of % towards total sales. Annually, sales from NCS grew 73% YoY to 85.5 crore; becoming the third largest distribution channel after multi branded outlets. The company follows an outright sales model wherein the inventory lies in the books of NCS. Retail channel sales grew marginally by 3% YoY in Q4FY17 (down 5% in FY17). MBO still remains the largest distribution channel with a share of 50% in revenues. Sales from e- commerce channel fell sharply by 81% in Q4FY17. Exhibit 3: Channel-wise contribution to sales 1 % Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 MBO Retail National Chain Stores Factory Outlet E-commerce Overseas KKCL has an extensive network of 331 stores of which ~97% are franchisee owned and franchisee operated stores. Geographically, in Q4FY17, eastern region sales have continued to remain dominant with largest share of 37%. They have grown 26% YoY. Exports declined 53% YoY to 3.4 crore. Exhibit 4: KKCL s strong distribution network FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 K-Lounge Killer EBO LawmanPg3 EBO Intergriti EBO Others ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 5: Brand-wise contribution to sales Killer, its flagship brand, continues to account for the largest share of revenues % Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Killer Intergriti LawmanPg3 Easies Others Exhibit 6: Product wise contribution to sales Jeans remained the largest selling product % Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY Jeans Shirts Trousers T-Shirts Others EBITDA margins expected to improve gradually going forward Poor offtake in volumes led to a negative operating leverage, as absolute EBITDA declined 4% YoY to 99.6 crore, while margins contracted 254 bps YoY to.4% in FY17. Gradual price hikes by the company aided the margins to a certain extent. Going forward, as normalcy sets in post demonetisation, we expect sales to get back on track on both volume & realisation fronts. Also KKCL operates in an asset light franchisee based model, which helps it to achieve both higher growth and healthy margins. We expect EBITDA to grow at a CAGR of 18% in FY17-19E. ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 7: EBITDA margin trend Higher PAT on account of profit on FMP Net profit for FY17 registered growth of 26% YoY to 85.3 crore mainly on account of profit on redemption of fixed maturity plan to the tune of 21.6 crore. We expect PAT to decline in FY18E owing to absence of profit on redemption of fixed maturity plan. PAT is expected to grow to 98.9 crore in FY19E from 81.3 crore in FY18E, driven by steady revenue growth and improvement in EBITDA margin. Exhibit 8: Net profit trend FY07 FY08 FY09 FY FY11 FY12 FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY14 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16P Q1FY17 Q2FY17 Q3FY17 Q4FY17 FY17E FY18E FY19E Q1FY14 Q2FY14 Q3FY14 Q4FY14 FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 FY17E FY18E FY19E % crore ICICI Securities Ltd Retail Equity Research Page 6

7 Return ratios to remain steady, going forward KKCL operates in a business model, which does not need to plough back profits into capacity expansions. Even its retail stores are on a franchisee model where the company does not require heavy capex. We believe it would continue to report strong return ratios, from FY18E onwards. Also, it has been able to maintain a dividend payout ratio of ~40% in the last few years. Unless the company plans any major capex, it is likely to maintain a similar ratio, going forward. Exhibit 9: Return ratios to recover from FY18E onwards 36 Exhibit : Consistent dividend payout % 18 9 % FY07 FY08 FY09 FY FY11 FY12 RoCE FY13 FY14 FY15 RoE FY16P FY17E FY18E FY19E - FY07 FY08 FY09 FY FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E FY19E ICICI Securities Ltd Retail Equity Research Page 7

8 Valuation Going forward, as normalcy sets in post demonetisation, we expect the company to get back on track, and report revenue CAGR of 15% during FY17-19E. PAT is expected to increase from 81 crore in FY18E to 99 crore in FY19E. KKCL has nurtured a good brand portfolio with a strong brand recall across mass & premium categories. We continue to like the company for a) stable growth and operational performance, b) superior return ratios and c) virtually debt-free status. We have a HOLD recommendation on the stock with a target price of 1844 (23.0x FY19E EPS of 80.2). Exhibit 11: Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY17E FY18E (4.7) FY19E ICICI Securities Ltd Retail Equity Research Page 8

9 Recommendation history vs. consensus estimate ( ) 2,750 2,250 1,750 1, Apr-15 Jun-15 Aug-15 Nov-15 Jan-16 Apr-16 Jun-16 Sep-16 Nov-16 Feb Apr-17 (%) Source: Bloomberg, Company, ICICIdirect.com Research Price Idirect target Consensus Target Mean % Consensus with BUY Key events Date Event Feb-11 After four consecutive quarters of healthy growth, revenue growth slipped to 18.4% ( 54.7 crore) Jun-11 Revenues grew at 52.7% YoY to 68.9 crore; apparel volumes increased 17% YoY to 8.2 lakh pieces Sep-11 Revenue growth continues; KKCL reported 38.5% YoY growth led by 19.3% volume growth in the apparel segment (12.6 lakh pieces) Dec-11 After strong growth in H1FY12, revenue growth flattish at 1.9% YoY ( 64.2 crore). Consequently, PAT de-grew 22.4% YoY to 8.8 crore Jul-12 The company witnesses 13% revenue dip in H1FY13 to crore Nov-12 After two quarters of de-growth, revenues increase 19.6% YoY to 76.8 crore Jun-13 After flattish FY13, Q1FY14 witnessed KKCL returning to the 30% growth trajectory with revenues increasing 30.6% YoY to 73.7 crore Sep-13 Revenues increase 28.6% YoY to crore in H1FY14 Dec-13 Despite weak Q3FY14 results, investors were optimistic about the longer term picture. Hence, the stock rallied The stock continues the upward move on the back of strong investor optimism. Despite relatively lower revenue growth, investors continue to believe in the growth Jun-14 potential of the company Mar-15 Posts increase in EBITDA margins after five consecutive quarters of de-growth Mar-16 Revenues for FY16 rose 12% YoY to 453 crore mainly driven by a volume growth of 11% Mar-17 Demonetisation weighed heavily on the performance of KKCL as it registered a flattish volume growth in FY17. Top Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Jain (Shantaben P) 31-Dec % Nalanda Capital Pte Ltd 31-Dec % Jain (Dinesh P) 31-Dec % Jain (Vikas P) 31-Dec % Jain (Hemant P) 31-Dec % Jain (Kewalchand P) 31-Dec % Matthews International Capital Management, L.L.C. 31-Dec % SBI Funds Management Pvt. Ltd. 31-Dec % Birla Sun Life Asset Management Company Ltd. 31-Mar % Malabar Investments, L.L.C. 31-Dec % Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Promoter FII DII Others Recent Activity BUYS SELLS Investor name Value (Mn) Shares (Mn) Investor name Value (Mn) Shares (Mn) Matthews International Capital Management, L.L.C Axis Asset Management Company Limited Birla Sun Life Asset Management Company Ltd Source: Reuters, ICICIdirect.com Research Investment Managers LOW ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary Profit and loss statement Crore (Year-end March) FY16 FY17E FY18E FY19E Total operating Income Growth (%) Raw Material Expenses Employee Expenses Manufacturing Expenses Selling Expenses Other expenses Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Others Total Tax PAT Growth (%) EPS ( ) Cash flow statement Crore (Year-end March) FY16 FY17E FY18E FY19E Profit before Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Taxes paid Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Inc/(dec) in loan funds Dividend paid & dividend tax Others CF from financing activities Net Cash flow Investment in liquid funds Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY16 FY17E FY18E FY19E Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Other long term liabilities Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Other current liabililites Provisions Total Current Liabilities Net Current Assets Others Non-current Assets Application of Funds Key ratios (Year-end March) FY16 FY17E FY18E FY19E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios EBITDA Margin (%) PBT Margin (%) PAT Margin (%) Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page

11 ICICIdirect.com coverage universe (Apparel) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E Kewal Kiran Clothing Hold Page Industries Sell Rupa & Company Buy Vardhman Textiles (MAHS Hold Arvind Ltd (ARVMIL) Buy ICICI Securities Ltd Retail Equity Research Page 11

12 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/% for large caps/midcaps, respectively, with high conviction; Buy: >%/15% for large caps/midcaps, respectively; Hold: Up to +/-%; Sell: -% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 12

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