Kewal Kiran Clothing Limited: SELL. Not the best fit

Having low debt, clocking return ratios of above 25 per cent, and being a consumer company were the legs on which the stock of Kewal Kiran Clothing soared. The Killer jeans maker has climbed 60 per cent over the past year.

The stock’s price-earnings multiple has expanded sharply. At 39 times the trailing 12-month earnings now, it is at a stiff premium to the 24 times last April and the three-year average of 22 times. But both revenue and earnings growth have slowed in the past three quarters, due to tepid festive season sales and a high base. Though there is huge untapped potential in the apparel market, it is also choc-a-bloc with competing brands.

Consumer spending in the discretionary segment has not yet picked up much either. Given this and the stock’s expensive valuations, investors can book profits in their holdings.

Despite pushing its two other brands — Integriti and Lawman Pg3 — over the years, Kewal Kiran still relies on its flagship Killer brand.

Killer’s share of total revenue for the 2013-14 and the 2012-13 fiscals were at 52 and 53 per cent, up from 47 per cent in 2011-12. Kewal Kiran also depends heavily on the jeans category which makes up 55-60 per cent of sales.

Underperformance in this highly-competitive category can drag performance.

Kewal Kiran’s brands also don’t seem to have the strength of its competitors.

The company earns well over half its sales through national chain stores and multi-brand outlets despite having an extensive network of exclusive outlets for its own brands.

With both domestic and international brands jostling for the Indian consumer’s pockets, brand strength may be tested further. Discounts on big brands offered by e-commerce players can also eat into sales.

In fact, for Kewal Kiran, festive season sales in the July-December period were tepid. Under-stocking in comparison to demand also contributed to lower sales.

Further, 2013-14 was a year of stellar growth, having seen a recovery after a dismal 2011-12. With the low base effect petering out, sales growth in 2014-15 slowed down.

For the nine months to December 2014, the company’s sales grew 9.2 per cent while net profit shrank 3.2 per cent over the year ago period.

In comparison, sales and net profits grew 23 and 25.5 per cent in the April-December 2013 period. The company makes most of its own apparel, lending it better profit margins than other retailers.

But higher input costs and other expenses dragged operating margin down to 22.6 per cent in the nine months to December 2014 against the 25.5 per cent in the year before.

The raw material pressure can ease with both cotton and synthetic prices correcting.

But with a need to push its brands, this drop can be compensated by higher promotional and advertising spending. Profit margins may thus not improve.

With no near-term growth triggers, the prospects for Kewal Kiran appear to be priced in.

The company may find it hard to match growth to justify the high valuation.

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