Kewal Kiran Clothing Ltd (KKCL) - Multibagger Stock Pick

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Stock Recommendation for the month of July’12Stock Recommendation for the month of July’12

Kewal Kiran Clothing Ltd (KKCL)
- A Bet on Increasing Middle-Class Spending

Content Index
• Kewal Kiran – Investment Snapshot :- Slide #4
• Industry Opportunity – An Overview :- Slide #6
• Kewal Kiran – Business Overview :- Slide #11
• Investment Rationale :- Slide #19Investment Rationale :- Slide #19
• Kewal Kiran – Financials :- Slide #26
• Concerns & Reasoning :- Slide #28
• Conclusion :- Slide #31
“ Specialists in discovering Multibagger stocks “

Kewal Kiran Clothing Ltd – Investment Snapshot
(as on July 20, 2012)
Recommendation :- BUY
Accumulation Range :- 450-550
• Invest 35% of Investment allocation at the
current Price.
• Have enough Cash to average down over the
next 6 Months Time-frame.
Current Market Price – Rs. 538
Bloomberg / Reuters Code – KEKC IN/ KKCL.NS
Kewal Kiran was established as a Partnership firm in 1980
by four brothers. KKCL is promoted by Mr. Kewalchand Jain
and supported by his brothers Mr. Hemant Jain, Mr. Dinesh
Jain and Mr. Vikas Jain.
Kewal Kiran Clothing Limited (KKCL) is a leading
manufacturer, retailer of branded apparels and fashion-
wear in India. KKCL is widely known for its Flagship, “Killer”
brand of Jeans.
KKCL has over two decades of experience in the domestic
BSE / NSE Code – 532732 / KKCL
Mkt Cap (INR BN / USD Mn) – 6.49 / 116.7
[1 USD – Rs. 55.60]
Total Equity Shares [Mn]– 12
Face Value – Rs. 10
52 Week High / Low – Rs. 875 / Rs. 525
Promoter’s Holding – 51.58 %
Institutional Holding – 35.82 %
KKCL has over two decades of experience in the domestic
readymade garments industry with some leading brands
like ‘Killer’, ‘Lawman Pg3’, ‘Integriti’, ‘Easies’ and
‘ADDICTIONS’ across various product segments.
KKCL has a very strong positioning in the Indian Jeans
market. It also has a formidable presence in Trousers,
Shirts, T-shirts & Jackets segments and an emerging
presence in lifestyle accessories.
Company raised around 72 Cr Rs through its IPO in 2006
which was well received by the Market. The issue got
oversubscribed by over 12 times.

Key Investment Highlights
Structural Growth Opportunities – Kewal Kiran has a lot of Macro positives going in favor of it in the Long
term. It is present in a country which is undergoing a major economic expansion, huge Youth Population,
Value Conscious society and Increasing spending on Apparels. Kewal Kiran with a strong operational
presence is well positioned to reap the benefits of these Structural Growth opportunities.
Strong Business Model – Kewal Kiran has an Asset light Business model which gives it tremendous
advantage over most of its peers. KKCL’s retail stores are mostly Franchisee owned and operated, which has
reduced the Capital requirements of KKCL. Kewal Kiran also outsources the basic Manufacturing process
which helps it to control costs without increasing Fixed costs. Company’s designing, manufacturing,
marketing to retailing helps it to have a Vertically integrated model which gives a lot of Operational levers.
Robust Financials – Kewal Kiran is a Zero Debt company with a robust balance sheet. Company has one of
the best Working Capital cycles in the Industry which has helped it to perform far better than all its
competitors in the present tough scenario. The company also has a strong control on its costs which can becompetitors in the present tough scenario. The company also has a strong control on its costs which can be
seen from the superior margins which the company generates.
Experienced and Rational Management – Killer is one of the Few Home grown brands which have tackled
Global brands well. It has been able to create a separate positioning for itself and distinguish itself amongst
several other brands in the market. Company’s management has shown the ability to create and nurture
new brands which is a Huge asset for the company. Management has also been rational in their expansion
plans unlike several other companies which went overboard and are feeling the heat now.
Decent Valuations – KKCL in spite of its Healthy fundamentals, Relatively resilient Business model and
superior growth opportunities, is available at decent valuations. KKCL at the current price is quoting at less
than 10X its FY-14 earnings. Present prices provides a good opportunity for Long term investors to
accumulate the Stock at attractive prices.

Industry Opportunity & Potential
- An Overview- An Overview

Strong Structural Trends
• Anyone who is observing the transformation India is undergoing will be able to point these 4 Structural
trends which are gaining strength.trends which are gaining strength.
1.) Great Middle Class boom. (A Middle Class population greater than population of many Countries)
2.) Rising Youth Spending. ( Huge Youth population with higher discretionary spending )
3.) Value Conscious Indian Market. ( Consumers who are most demanding and looking for bargains )
4.) Increasing aspirations of Tier-2 and 3 towns of India. ( Improved exposure and affluence in Indian towns )
• The biggest transformation is happening at the bottom of the pyramid with a massive inflow of new
consumer’s spending on discretionary items like Branded Apparels, QSF spends, Entertainment, Electronic
products etc. This can be seen from the inflow of several Global brands wanting to target this segment.
• Indian Youth population is bulging and this demographic advantage is in the backdrop of a Ageing World,
which is making India one of the Hot Bed of consumerism. Social changes are also driving consumption.

Indian Fashion Apparel Market
• The Social change is happening in India, with Increasing fashion conscious people especially amongst the
Indian Youth on an average
spend 40% of their Income on
Apparel, compared with 15% by
the previous generation.
• The Social change is happening in India, with Increasing fashion conscious people especially amongst the
Country’s youth population. The younger generation spend a lot more on Apparels compared with their
previous generation. In fact over 40% of their discretionary spending is being done on Clothes and
Accessories which is making India attractive for many of the Global Brands to set up their own shop here.
• Per Capital expenditure on clothing is also raising in tandem with the increase in Per Capital Income, which
is a clear sign of good times ahead for the Fashion Apparel market. Indian Fashion market is still pretty much
under developed when compared with the Western countries which provides huge potential. There is a huge
potential for the growth of niche and new segments within the Apparel space.
• The growth has been spread across segments of the Apparel Market. Jeans, T-Shirts, Shirts and other
Accessories continue to grow at a good rate. The growth is actually expected to accelerate over the next 5
Years compared with the previous 5-Year period.

Huge Growth Opportunities
• Indian retail sector is still largely unorganized with the
organized players contributing to less than 13% of the
overall market. Both the organized and un-organized trade
has been growing at a healthy pace.
• Organized retail industry is expected to grow faster than
the unorganized players and the shift will accelerate in the
next few years. The composition is expected to change to
60:40 for Unorganized: Organized retail.
• Indian Apparel market is expected to grow at over 11%
CAGR over the next 10 years which is very healthy andCAGR over the next 10 years which is very healthy and
Organized retailers can be expected to grow at over 16%
CAGR in the same period.
• This growth comprises of an equal amount of Volume and
Value growth which in turn helps strong brands to maintain
their margins and grow profitably.
• The Opportunity for different stakeholders like Fashion
retailers, Apparel Manufacturers and Brands are present
and companies with strong competitive advantages will be
able to capitalize on these opportunities.

Industry Scenario
• Indian Apparel retailers have been going through a phase of significant pain. There has been several
troubled retailers over the past 3 years. The major reasons being,
Troubled
Retailers
• Koutons Retail
• Lilliput Kids
• Vishal Retail
• Giny & Jony
• Spykar Retail
1.) Reckless expansion during the Boom time.
2.) Huge Debt burdened balance sheets.
3.) Cash Flow problems erupting out of longer Working Capital cycles.
4.) High Rental costs coupled with significant CAPEX for new stores.
5.) Inventory losses (or) Poor Management.
6.) Lower margins due to competition and escalating costs.
• Even the Apparel manufacturers have seen some testing times with huge volatility in Cotton raw material
prices and Currency movements. This has led to depressed earnings. Most of the apparel companies have a
very low PAT margin and Return ratios. Their business model continues to rely on several Macro variables
which are not under the control of Management leading to regular earning volatility and poor cash flow.

Kewal Kiran – Business Overview

Key Highlights
KKCL has been expanding its retail
presence in a calculated manner with
regular closing down of non-performing
stores. This has enabled it to have
profitable stores and be aggressive in its
expansion plans.
Pragmatic Retail Expansion
KKCL has a good portfolio of
brands straddling across the mid-
end of the fashion pyramid. Its
brands are well established and
are “Value for Money”.
Attractive Brands
KKCL has zero debt on its balance
sheet boosted by its strong Working
Capital management.
Kewal Kiran has been able to
maintain its raw material days at 26
which is great compared with over
Healthy Capital
Structure
Kewal Kiran
(KKCL) are “Value for Money”.
KKCL has a very strong distribution
network with over 3000+ MBO’s and 100+
distributors. It has a very significant first
mover advantage in Tier-2 and 3 towns.
KKCL also has other distribution channels
like exclusive outlets, Franchise stores and
Organized retailers.
Strong Distribution
KKCL has aggressive growth targets with
an aim to reach 1000 Cr revenue by 2015-
16 which is >3X growth from FY-12.
Considering KKCL’s business model, this
growth will be without Equity dilution or
Huge Debt raising which will immensely
help higher Shareholder returns.
Aggressive Growth
which is great compared with over
50 days of its peers.
(KKCL)

KKCL – In-House Brands
• KKCL’s management has a good history of creating and nurturing new Brands at regular intervals. The
company currently has 5 different brands all of which are in-house with a clear positioning to cater to
different segments of customers.
• Killer continues to be the company’s largest brand and commands a good brand recall amongst its
customer set. Killer used to dominate KKCL’s earnings a few years back. But with the growth of new brands,
KKCL has been able to moderately de-risk itself from a single brand.
• Company’s latest brand “Addictions” focuses on new growing accessory segments like footwear, belts etc.
This brand is similar to the Hugely successful “Fast Track” brand from Titan Industries. KKCL has been able to
scale up its revenues in this segment to 7% of its overall revenues in a very short period of time. The
management expects this is grow faster and reach over 10% of its overall revenues.

Product Positioning
• Kewal Kiran has continued
to position its products as,
“Value for Money” which is
hugely attractive for Indian
Middle class buyers.
• Company’s products aim to
provide the same quality and
design of jeans as compared
to the Global brands but at a
cheaper price.
• The Mass market is highly
fragmented with numerousfragmented with numerous
brands and Killer has been
able to position itself well.
• Though the Volume growth of Mass market is high, the value growth is pretty much lower and Brand
affinity is low when compared with the premium segment. So with increasing affluence, Customers tend to
move up the value chain to new Brands.
• Most of KKCL’s customers are people who aspire to wear Branded goods and Killer has been able to cater
to this segment of clients with its innovative brand building and continuous marketing efforts.
• This Mass market segment has started to attract the biggies and Levi’s has come out with its “dENIZEN”
brand targeting this segment. One can expect more such initiatives as it’s the Mass market that helps a
company to build manufacturing scale, higher volumes and Distribution strength across India.

Strong Growth
KKCLBrand Growth
• Kewal Kiran has been able to grow all its brands at above market growth rates with the exception of its
“Easies” brand. There has been a decline in the growth of Easies brand which is mainly due to the
Management’s non-focus on it.
• KKCL’s 23-year old Flagship brand, “Killer” has been able to grow at a healthy 20% in spite of its higher
base. Lawman Pg3 has been the fastest growing and Integriti has maintained a healthy CAGR of 21%. With
the addition of Addictions, we expect it to become the fastest growing brand.
• KKCL has been constantly leveraging its brands to come out with new set of extensions. Its Killer brand was
extended to Women wear through “Killer for Her” range in 2007. Similarly the company has been
consistently coming out with new ranges like “Integriti Galz”, “Yi-Fi”, “Emboss” etc.

Healthy Margins
• KKCL enjoys lower raw
material costs which stems
from established relationship
with suppliers of denim fabric
for over two decades and the
bargaining power it enjoys
owing to brand strength.
• KKCL has been able to
maintain its Selling, General
and Administration costs in a
narrow band of 10-15% over
the past 7 years leading to
• Kewal Kiran has seen tremendous pressure on its Margins because of increasing Raw material prices over
the past year and increased Excise duty in 2012. The company was able to pass only a partial increase in
costs and had to improve efficiencies in order to reduce its margin erosion.
• Company’s relatively higher EBIDTA margins also directly co-relates with its Higher Gross Margins
compared with its peers. This is mainly due to KKCL’s superior business model which allows it to enjoy the
benefits of Integration without the Overheads associated with it.
• Company’s margin will continue to be under pressure because of the completion of Sales tax exemptions of
(VAT – 4%/ CST – 2%) by 2013. This increase can’t be passed onto consumers considering the weak demand
and also scope for improving further efficiencies seem to be limited, unless there are reforms like GST.
the past 7 years leading to
stable margins overall.

Strong Distribution Channel
• Kewal Kiran’s biggest strength has been its Strong Distribution network across the country. KKCL has
various forms of distribution like Multi-Brand Outlets, Exclusive Retail Stores (K-Longue, Killer Stores) and
National Chain stores like Shoppers Stop and Pantaloons.
• KKCL’s distribution, product and Geographical mix is pretty much diversified and hence there is no huge
concentration risk on any of these. KKCL uses its MBO’s to reach its target customers in Tier-2 & 3 towns,
Retail stores for Exclusivity & better Margins and National Chain for Visibility & Branding.
• It is KKCL’s huge MBO strength that helps in reaching its Target customers and build the “Value for Money”
brand. Company has over 3000 retailers and 100+ distributors which helps it penetrate across India. In most
of these markets, KKCL has a significant First Mover advantage and established brand which will help it to
fend off competition from new brands like “dENIZEN”.

Strong Retail Expansion
• KKCL has been increasing its own Retail stores under
various formats (K-Longue, EBO’s) aggressively over the
past few years. This helps the company to stay in touch
Retail StoresRevenues
past few years. This helps the company to stay in touch
with its customers and manage its production well.
• We expect the company to grow its Store count at over
15-20% range which will help it to grow its revenues,
Customer Reach and Brand value consistently.
• The company is focusing on expanding its retail outlets
and has appointed master stockist for specific regions.
The master stockist is responsible for the supply of stock
to the franchisees operating in the region, along with
additional responsibilities of advertising and promotion
of the company’s products.

Investment Rationale

Differentiated Business Model
• KKCL has a differentiated Business model when compared with its peers which is leading to superior
financial performance. KKCL has a flexible and asset light business model in spite of being an integrated
player. Two major differences are its Higher Outsourced Manufacturing and Strong Retail Franchisee.
• KKCL has over the years consistently increased the outsourcing of commoditized hand jobs in Apparel
Manufacturing which has helped it to have a variable cost structure and scale up faster. This has helped KKCL
to have a steady margins compared with the High Cost and Volatile margins of its peers.

Asset Light Business Expansion
• KKCL unlike other Retailers have been closing its
loss making stores regularly which has helped it to
have a tight control over its profits. Management
has been highly rational in their store expansion
plans and grown it steadily.
• Most of KKCL’s retail expansion has been through its FOFO (Franchisee Owned and Franchisee Operated)
stores. Thus the company doesn’t need any capital to grow its network and there is a virtuous cycle
between the growth of the brand and expansion of new stores. Each positively affects the other.
• KKCL will continue to open most of its stores through Franchisee route. These retail stores not only provide
additional sales points but also boost revenues through inventory build-up. Since the company supplies its
products on an outright sale basis, it has minimal risk in case of unsold inventory.
• KKCL works on a “Outright Sales model” compared to its peers which work on “Consignment Model”. In
the consignment model, apparel manufacturer needs to take back the unsold inventory which leads to
higher working capital and inventory losses. But in Outright sales model, manufacturer doesn’t take unsold
goods – but shares a part of the value loss with the retailer.

Long Term Positives
• Owing to these superior business model of higher
outsourcing, increased retail presence and Outright sales
outsourcing, increased retail presence and Outright sales
model – KKCL has been able to work with zero debt and the
best working capital cycle in the Industry.
• KKCL has been able to plan its manufacturing and retailing
which helps it to have a shorter production cycle and better
cost structure. All these lead to higher margins, lower debts,
better debtor days and large profits compared with peers.
• KKCL having its in-house brands doesn’t have any royalty costs and whatever it spends on Advertisements
is actually a future Investment in the business. Understanding the value of a stronger brand and the need for
investing in it, KKCL has been amongst the top Ad spenders in its peer group. More importantly, the
company has been able to come out very innovative ads which serves the purpose of brand building.

Strong Financial Management
• KKCL has been consistently having a strong growth rate and finances which can be seen from its 5-Year
Financial history. Except for 2008-09 when the world economy went into a tailspin and there were lot of
domestic headwinds, company has been able to improve its revenues and profitability consistently.
• Company with its asset light business model, generates over 6.5X revenues on its fixed assets which is a
very positive number. This helps the company to have a high return on capital employed and high ROE.
Company will continue to grow without dilution or excessive debts and hence there is very little balance
sheet risk in Kewal Kiran.
• Management has been very rational and pragmatic in their business operations. All 4 brothers have a clear
demarcation in their roles and responsibilities in the organization. This entrepreneurial and hands on
management is a very big positive for Kewal Kiran.

Future Growth Plans
• With the demand slowing down due to inflationary concerns and lower discretionary income, the revenue
and volume growth will taper off for the next 2 years. But this is a temporary blip in the high growth
trajectory which the company is expected to witness over the next decade.
• Positives with GST Implementation :- Proposed goods and services tax (GST) can provide further fillip to
organized retail growth by reducing complexities of doing business, improving efficiencies across the supply
chain and optimizing the taxation system of the country. Currently organized retailers pay value added tax
(VAT: 5% to 12.5%), Service tax (10.3%), Central Sales tax (2%) and local octroi taxes which is generally
evaded by the unorganized players.
GST will help the organized players have a level playing field and improve the Logistics costs enabling, the
Organized chains and manufacturers to scale up quickly.

Huge Relative Outperformance
• All the above mentioned positives can be easily verified by the superior performance of KKCL with respect
to all its peer companies. This gives us much more confidence on the Business model of the company and
to all its peer companies. This gives us much more confidence on the Business model of the company and
the future shareholders potential.
• Textile manufacturers or Fashion retailers always have a demand for their products, but most of these
companies have problems in their cost structure and margins. With a currency which swings heavily, raw
material prices which are unpredictable, policies which are uncertain and demand which can’t be gauged –
most of these companies have a lot of problems in the P&L statement due to elongated working capital cycle
and inflexible production cycles.
• KKCL has been able to establish itself as a bottom-line driven company with its differentiated business
model which has hugely benefited its P&L statement and provides a lot of certainty. In spite of these
positives, we don’t we feel that the company is receiving the premium it deserves to be traded over and
above its peer companies.

Financials

Earnings Projection
Income Statement (INR Cr) FY 11 FY 12 FY 13E FY 14E
Operating Income 236.5 301.9 355.4 424
EBIDTA 68.9 73.4 80 96
Depreciation 5.9 6.2 7.5 9.0
EBIT 63 67.1 72.5 87
Interest Expenses 2.1 2.6 3.0 3.0
Other Income 8.3 11.8 12.6 15.2
PBT 69.3 76.3 82.1 99.2
• Our assumptions in this
Projections will improve a lot, if
we signs of the economy
reviving in the second half of
this Fiscal or early next year.
• We expect Margin
compression to continue this
year on account of the
challenging Macro environment
and cost pressures.
PBT 69.3 76.3 82.1 99.2
Tax 22.86 25.17 26.27 31.74
PAT 46.2 52.1 55.83 67.46
EPS 37.5 42.3 45.23 54.72
Dividend per Share 16.5 17 17.1 17.8
ROE 24.6% 24.7% 22% 24%
ROIC 55.3% 52% 43% 51%
• We expect the return ratios to
rebound significantly in FY-14.
ROE’s and ROIC’s will continue to
be much higher than its peers.
• KKCL’s return ratios, margins
and high capital asset turnover
combines to make a clear case
for a strong re-rating in its
valuation over a period of time.
Specialists in discovering Multibagger stocks “

Concerns & Reasoning
1.) Cost Pressures :
Kewal Kiran doesn’t have enough Pricing power to pass on all its cost increases. This is easily visible in the
decreased Margins during, periods of high Cotton Prices. Also other costs like Excise duty increase takes a
toll on the Company’s profitability. While this is a valid concern, we think KKCL with its Robust Business
model is positioned far better than its peers to manage such difficult environments.
2.) Increased Competition from Foreign Brands :
With the Opening of 100% FDI in Single brand retail, Indian Fashion Apparel market is expected to see an
inflow of several Global brands and thereby increasing the Competitive intensity. But, KKCL being a Value
Brand will be able to manage this onslaught of Foreign Brands. KKCL creating a niche for itself among strong
Brands like Arrow, Lee, Levi’s and Wrangler gives us the confidence.
3.) Changing Fashion Trends :
Fashion trends keep on changing and get obsolete in a short span of time. This is a real risk in Fashion
retailers and Investors need to keep a watch on the new trends. With lot of experience in this Industry,
KKCL’s management will be able to mould the company according to the latest trends. The company has a
strong ear to the ground and flexible enough to change itself accordingly.
4.) Margin Compression Continues :
KKCL’s product mix has been shifting to low margin products. Also higher rental costs have taken a toll on its
Margins. Until demand is robust, KKCL will find tough to improve on its Margins. But the company has
enough Operational levers to maintain the existing Margins. Even though Margins may contract in the
future, we expect the company’s High ROE to maintained.

Conclusion

Price Chart
KKCL’s share price has recovered strongly from the 2009• KKCL’s share price has recovered strongly from the 2009
crash and is currently quoting at much higher levels. The
rebound was very strong.
• Share has been on a correction mode for the past 10
months which is providing attractive opportunities. If the
share corrects more than 20% from the current levels, it
will attract several long term investors.
• KKCL’s promoters holding has been high at 74% and has
been maintained there consistently. There is a decent
Institutional holding leaving no more than 10% float in the
hands of retail investors.
Share
Holding %
Mar
2012
Dec
2011
Sep
2011
June
2011
Promoters 74.06 74.06 74.06 74.06
FII 12.08 12.11 12.39 12.08
DII 4.99 5.01 4.07 3.88

Conclusion
There has been a Huge Polarization in Indian markets over the past 2 years. Domestic Consumption
based shares at trading at very high P/E multiples (25-30X Earnings), whereas Infrastructure, Investments or
Manufacturing related companies have been beaten down severely and quoting at very low P/E Multiples.
Everyone accepts that Indian Secular growth story is still strong and the opportunity for well run consumer
focused companies in India is very high. But, its difficult to earn strong returns – If you are buying an already
fairly valued share. Any appreciation is possible only on the basis of earnings growth and the risk of de-rating
erases the Margin of Safety in the stock.
But here we have a company which is highly efficient with a Robust business model, Domestic
consumption stock, Strong Return parameters, Good Management and still Quoting at attractive Valuations.
KKCL in no way can be classified as a Tier-2 Consumption stock, as its Financials are comparable with the
Marquee names. The stock has the double booster of Strong Earnings growth in the coming years combined
with a Potential P/E re-rating, which makes it a strong candidate for generating Multi-bagger returns.with a Potential P/E re-rating, which makes it a strong candidate for generating Multi-bagger returns.
Kewal Kiran with its strong Base built over 20 years, is well positioned to reach its ambitious Revenue
target of 1000 Cr by 2015-16. Even if the company’s management is able to achieve 70% of its growth
targets, the Share will be at much higher levels when compared with the current prices. Moreover, we feel
that the Quality of Kewal Kiran’s growth with sustainable margins is highly attractive.
Kewal Kiran at the Present price quotes around 11X its one-year forward earnings, which is attractive
for a company which generates greater than 24% ROE and 30% ROCE. More importantly, KKCL has a lot of
factors to maintain such high Return ratios and also improve on it during Good Environment. This provides
a strong case of Re-rating of the stock. Investors are advised to take a small exposure to the stock at
current levels and accumulate it over the next few months, to generate strong compounded returns over
the next 3-5 Year time frame.

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Kewal Kiran Clothing Ltd (KKCL) - Multibagger Stock Pick

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