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Kewal Kiran Clothing Ltd - Excellent branded retail play

** KEWAL KIRAN a MAKING GROWTH FASHIONABLE**

a**Fashiona with “Quality” **is the cornerstone of each collection introduced by the company. The companyas strong fashion forecasting and trendsetting abilities have created brands which are vibrant, trendy and with an attitude. Each brand has been carefully crafted keeping in mind desires and attitudes of specific market segments. Each brand is an expression of its customer.

The trendiest collections are backed by a strong retail and distribution network. The companyas extensive reach has been built in a strategic and planned manner over the years.

****Killer, Easies, Lawman, Integriti ******a leading brands in menas wear in India.**The Company behind them all - Kewal Kiran Clothing Limited. Currently, these brands have an exciting range of western wear for women
Incorporated in 1981, Kewal Kiran Clothing Limited today is amongst the few large branded apparel manufacturers in India. The company has sales in Asia, Middle East and CIS. The company designs, manufactures and markets branded jeans, Semi-formal and casual wear for men and women.

50% of revenue is contributed by KILLER while 25% by Integrity, 20% Lawman and 5% others. Integrity was launched in 2002 and since then got good acknowledgement from customers which reflects in it’s growth. They are increasing franchisee retail stores across pan India and have around 175 stores. ADDICTION is another lifestyle retailing store launched recently to extend existing brands to range of accessories.

http://kkcladdictions.com/addictions/index.php

KKCL has 108 K-Lounge, 28 exclusive KILLER stores, 22 INTEGRITY, 4 LAWMAN, 7 FACTORY outlet and 4 ADDICTION retail stores/EBOs.

With huge business scalability and best management in place, this company is all set to become very big branded retailer.

Most imporantly, management shown great ability to grow business with very less capital. Hence it’s asset light business and in same context it can be directly compared to any good FMCG. Only few out of many retailser succeed and KKCL has many ingredients to make it HUGE successful. Hence we have to be very careful while investing in any retailers. Some of them with bad management fails and business detiorates like Koutons or Cantabil Retail…

Unlike other retailer, KKCL is outstanding in managing excellent inventory and debtors.

It’s debt free and cash rich company with cash and equivalent of 120+ crores. Again very hard to find this quality in their competitors.

Great return ratios of RoCE of 79% and improving RoE of 60% [after excluding idle cash on books]. Doubt if any of competitors can even come close to this ratio.

Excellent balance sheet with consistent improvement in Free Cash Flow. Again, no competitor can beat it.

I can’t think of anything that can go wrong with this business and don’t see any reason why it should discount only 11 times FY12 earnings while other similar business demands 25-30 times discount.

Company should at rate of minimum 25-30% CAGR for next few years.

DISCLOSURES a I hold KKCL.

Seems like a good story at first glance. We should investigate for sure. The numbers look too good. What’s unique to their business model?

Not sure if the business model has any advantages. The brands are also not big aspirational brands among youth, but rather a compromise to fit pockets/budgets!

Checkout following reports. With so much coverage, I doubt much value is left on the table. Please investigate

http://www.sebi.gov.in/dp/kewaldraft.pdf

http://www.moneycontrol.com/news_html_files/pdffiles/mar2007/kewalfin.pdf

http://breport.myiris.com/firstcall/KEWKIRCL_20110226.pdf

http://www.nseindia.com/content/corporate/KKCL_base.pdf

http://www.icicidirect.com/mailimages/ICICIdirect_KewalKiran_Q4FY10.pdf

http://www.microsec.in/Static/Pdf/634178414321576000_Kewal_Kiran.pdf

http://rmdhar.com/stock_research/wp-content/plugins/download-monitor/download.php?id=Kewal_Kiran_Clothing_Sharekhan_Research_Report.pdf

http://www.mehtagroup.in/upload/419_Msearch%20KKCL%20Flash%20Note%20July%202010.pdf

http://www.moneycontrol.com/news_html_files/news_attachment/2011/KewalKiranClothing_CRISIL_280511.pdf

http://content.icicidirect.com/mailimages/ICICIdirect_KewalKiran_Q3FY10.pdf

http://breport.myiris.com/ICICISL/KEWKIRCL_20110527.pdf

http://www.moneycontrol.com/news/recommendations/mehta-equities-positivekewal-kiran-clothing_554491.html

Thanks TCX for all reports.

They are conciously working on creating brand awareness of their products. Building brands takes lot of time and they keep working on it patiently. It’s like watering your plant and watching them grow slowly but surely. Most of their brands target middle class but they are also entering into niche premium market. KKCL is working with designer, Narendra kumar to launch “Killer Nari” to target premium fashion industry.

If you notice most of research reports, KKCL beat most of their estimates hands down in growth.I don’t see any reason on why it shouldn’tcontinue to beat estimates moving ahead,in that case it deserves re-rating too.

Appreciate more comments and if people do see any negatives.

If brands is not their strength, what is?

Why do they have such numbers? What is their competitive strengths/moat? We need to establish that first. If anyone tracking can educate us on this, will be great.

I will be able to have a detailed look in a couple of days time.

Vipul,

I have also been tracking the company for some time now. The numbers look really good in terms of return ratios.

When the IPO came I was skeptical since I thought the company was similar to Koutons. However the past 3 years have really made them stand apart.

The main issue is with the valuation for me. At the current market price, in terms of P/B and Price / Sales it does not look so cheap.

How fast do you anticipate the company to grow in the next 3 years and if you dont mind sharing, when and what rate did you buy it.

The news on KILLER NARI was new to me and this could be interesting.

Gaurav

growth.I shouldn’tcontinue

Sure, their brand is not as strong as Levis or others which exist in market since more than 15 decades but they definitely enjoy premium over other brands. Their return ratios and margins speak for itself.

Their competitive strengths is their brands and distribution channels. I do know many people who prefer KILLER and Integrity branded garments over others…

Have any of you used KKCL products and prefer to buy same brand again? I think we can analyse it this way to get feeling of customer satisfaction and brand recall.

I bought it at around CMP recently and keep on adding it. About valuation, when I compare other good FMCG companies with same return ratios, this one does appear cheap to me. I think companies with super high return ratios demand high P/E and P/B so we can’t use only P/E or P/B for valuation.

While I am not comparing here but just to give example. FMCG like Zydus, Hawkins and Titan always demanded high valuation because of super high return ratios. I think none of “experts” ever came up with good research report which develops conviction to people [or in that case analyst himself] as they missed magic of high return ratios. Yeah they do give buy target with 10% upside and later on upgrade with market price.

So we have to see if this company can deliver consistently with high returns ratios or not.

I shouldn’t grow atleast 30% CAGR ahead.

Narendra Kumar, the designer, is behind this Killer Nari theme. KKCL is also working with him to launch a Rs.4000-5000 line. Recently, Lawman pg3 was seen as a chief logo on Murder 2 promos. Integriti is doing road shows in 4 major Punjabi cities with a Punjabi movie.

I feel Promoting Integrity and Lawman through movies are really good effort by management. They also promoted Integrity brand in couple of movies : "Kismet Konnection(starring Shahid Khan, Vidya Balan)Kidnap(starring Imran Khan),Ek -the power of one(starring Bobby Deol),Heroes(starring Vatsal Seth),Aasma(starring Shubh). "

About Killer Nari, deal got stuck due to issues in revenue sharing… KKCL guys are very clear and surely will not let down their margins at “any” cost.

On a lighter note, all the above films mentioned where there was promotion by KKCL were miserable flops. Nobody noticed when they were launched and when they disappeared.

But the method of advertisement is certainly good. Regarding KKCL, I think most of the rerating that was to happen has happened and now onwards the price appreciation will be in tandem with the growth shown by the company.

Regarding brand strength it still has a long way to go if it has to compete with the likes of Levi’s or Spykar or Lee in jeans segment and the Louis Philip or van heusen or zodiac or parx etc in other categories. But it definitely has a market of its own catering to the funky kind of clothes loving college kids and teenagers.

Plus it is one of the few companies with excellent balance sheets.

The company to watch in this space would be the revamped Raymonds.

Nagabrahma had recently visited the company. Will request him for an update.

-Donald

**

About the PE re-rating, I was hoping for more on the upper side. The company is investing heavily into brands, has negligible debt, have decent margins, increasing its franchisee retail chains, ROCE of around 40%, reduced its Cash Conversion Cycle from 100 days to 50 days.

On

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Raymonds.

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We can see many branded successful retailers in developed countries. If that’s any indication, we’ll surely have many retailers giving great returns over time in India. I think KKCL has all qualities to make it big in supporting economy conditions.

Hi Amit

if you have studied KKCL, can you throw light on why they are able have such high returns and cut cash conversion cycles drastically, when most others with better brand recall too are not able to do so.

What is unique to their business model.

The data would suggest their business is 80% advance driven…but the brands do not seem to have that kind of stature…even bigger brand businesses don’t have these characteristics.

I haven’t looked at numbers myself, or done a comparative study, looks like that is essential to dissect, to understand why? Has anyone done that, please share.

-Donald

Kewal Kiran has Net Marign in high teens. Zodiac and Provogue have single digit EBIT and Net Margins.

Earlier i had an impression thatZodiac and Provogue were stronger brands than Killer. That might still be true. But what is the reason for this difference in margins. This can not be explained by operational efficiency only. Also 80 % Advance sales as earlier mentioned by Donald seems too good.

On the other hand a company which pays Rs 16.50 dividend on Rs 37.5 EPS is not easy to question. Unlike Koutons most of the profitmust becash profit.

Hello Donald jee,

About the Cash Conversion Cycle, they have reduced their Days Inventory Outstanding from 151 days to 101 days as on March 2010. Days Sales Outstanding is down to 46 days from 66 days. Days Payable outsanding is 91. March 2011 will also come on similar lines as eveident from quarterly statements Balance-Sheet. They have controlled both their Inventory & Debtors.

Also, during Mr. Naga Brahma’s visit, management stated that they don’t want to spend upon their manufacturing abilities, & that they’ll like to invest on their branding, meaning they’re going for the outsourcing model which’ll give them control over inventory as well as Days Payable Outstanding. Infact, for September 2010, CCC is coming out to be 40.50 days, which is the lowest.

Donald jee,

If there could be e-mail alerts for the new posts on different threads, it would have been convenient for us to be in touch with the forum.

Thanks…

I had been following this company since more than a year. Earlier I thought company would take advantage of its brands. They did so by introducing accessories stores - Addictions. However roll-out of Addictions stores seems to be slow.

IMHO, company can easily fill the gap between non-premium and premium (Jockey) inner wear.

Hi Guys,

Meeting with Kewal Kiran Senior Management - is a possibility, next week - tentatively.

Please fire away your questions and help us make the most of the opportunity.

Rgds

Donald

Donald,

Although your post was an old post, did you happen to meet the management. I wanted to understand the professionalism of the company compared to a family enterprise.

The company looks promising to me and I am willing to build a position over time.