ICICI Direct is bullish on Kewal Kiran Clothing has recommended buy rating on the stock with a target price of Rs 1775 in its research report dated April 26, 2018.
ICICI Direct's research report on Kewal Kiran Clothing
Revenues for the quarter declined marginally by 1.1% YoY to Rs 120.0 crore against our estimate of Rs 134.7 crore. The decline was mainly owing to a 3.1% drop in blended realisations to Rs 960/piece. Volumes for the quarter grew marginally by 2% YoY to 12.5 lakh pieces Tepid volume growth resulted in negative operating leverage, as employee, manufacturing and selling expenses as a percentage to sales increased 250 bps, 190 bps and 100 bps YoY, respectively. However, lower administration cost (down 22% YoY) restricted the EBITDA de-growth, to a certain extent. Hence, EBITDA declined 16% YoY to Rs 26.3 crore (I-direct estimate: Rs 30.6 crore), with margins contracting 374 bps YoY to 21.9% I-direct estimate: 22.7%) Higher fixed expenses further stemmed the profitability with interest and depreciation up 76% and 17% YoY to Rs 1.2 crore and Rs 1.5 crore, respectively. Subsequently, PAT de-grew 18% YoY to Rs 19.5 crore (I-direct estimate: Rs 24.6 crore) On the balance sheet front, the company witnessed a spike in its net working capital cycle, with debtor days rising by 25 days to 108 days as on FY18 (higher credit period given to distributors and dealers).
Outlook
KKCL has been one of the most profitable Indian brands, generating 20%+ EBITDA margins, having a lean balance sheet with debt/equity ratio comfortably placed at 0.1x and generating healthy return ratios (20%+ RoCE). FY18 revenue remained flattish owing to GST led disruption in trade channel. However, improved offtake from MBOs is expected to lead to a revival in revenue growth from FY19 onwards. We continue to like the company given its strong balance sheet and healthy margin profile. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs 1775 (21.0x FY20E EPS).
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