Kewal Kiran Clothing Company: Sharekhan Research Report

Sharekhan is bullish on Kewal Kiran Clothing Company and has recommended a BUY with the following investment rationale:

– Quality play in the fast-growing branded apparel segment: The organized apparel market, valued at around $6 billion today, is expected to grow 2.3 times (at 24% CAGR) to $14.1 billion by 2015, presenting a big opportunity for the branded apparel retailers. This tremendous growth in the industry—an interplay of a lucrative demographic profile and a rising income and wealth effect—presents an opportune time for Kewal Kiran Clothing Company to cash in on the strong demand momentum.

– Strong brand portfolio: Kewal Kiran Clothing Company is present in the high-growth fashion denim segment with four top-of-the-mind recall brands. Its flagship brand, Killer, had a gross retail turnover of around Rs145 crore in FY2010 (Killer contributes 53% to Kewal Kiran Clothing Company’s total revenues), features amongst the top three denim brands paralleling global brands like Levis, Lee and Pepe in the mind of the consumer. The other three brands (viz Integriti, Lawman and Easies), smartly positioned against the competitors, have created a niche for themselves in the consumer’s mind and have registered a consistent revenue CAGR of more than 20.5% over FY2006-10. With a successful brand portfolio, Kewal Kiran Clothing Company’s revenues are expected to grow at a CAGR of 24.7% over FY2010-12.

Healthy balance sheet: Kewal Kiran Clothing Company has the distinction of being one of the few branded apparel companies that have positive cash inflow and has a healthy balance sheet. Kewal Kiran Clothing Company is underleveraged with a debt-equity ratio of 0.1x and a highly efficient working capital cycle (inventory levels of about 40 days and working capital cycle of about 70 days) compared to its peers. Going forward, Kewal Kiran Clothing Company is looking at increasing the outsourcing of garment manufacturing. This should result in an improvement in not only its asset turnover ratio (1.5x average for the past few years) but also its return ratio.

– Risks—discretionary spend has strong co-relation with the economy: Kewal Kiran Clothing Company is a player in the fashionable branded apparel segment whose growth is strongly co-related to the growth of the economy. Any negative surprise in the general income and the overall economic growth momentum could have more than a disproportionate impact on Kewal Kiran Clothing Company.

– Valuation: A strong brand profile, a disciplined management and a consistent track record coupled with a robust balance sheet position (cash on books at Rs90 a share) and attractive valuation (11.2x FY2012) make us bullish on the stock of Kewal Kiran Clothing Company. We initiate coverage on the stock of Kewal Kiran Clothing Company with a Buy rating and a one-year price target of Rs574 (15x FY2012 earnings, which is around 50% discount to the current valuations of the large retail companies like Titan Industries).