S. Kumars Nationwide - Changing consumer preferences to drive growth - Angel Broking

S. Kumars Nationwide Ltd. (SKNL) is one of the leading textile and apparel companies in India catering to various segments ranging from economy to premium. The company has also extended its presence globally by acquiring Leggiuno in Italy and Hart Schaffner Marx (HMX) in the U.S. In addition, it has entered an 80:20 JV with Louis Vuitton (LVMH) in U.K., thereby creating a strong portfolio with 45 owned and licensed brands. SKNL has a 74.4% stake in its subsidiary, Reid & Taylor (valued at Rs.3,514cr in 2008 by GIC), whose IPO, if hits the market, may prove to be a re-rating trigger for the stock. We initiate coverage on SKNL with a Buy recommendation.

Investment rationale

Strong historical growth - Foundation for a stable future: Over the past five years (FY2008-12), SKNL (consolidated) reported a revenue CAGR of 38.1%, substantially higher than its peers. This was mainly on the back of changing consumer preferences from the unorganized market towards the branded market and from textile to ready-to-wear. Further, we expect the company's revenue to normalize and post a CAGR of 14.2% over FY2012-14E to Rs.8,290cr.

It's all about brand show: SKNL follows a strong brand ambassador-led strategy, as part of which its major domestic brands are endorsed by big celebrities such as Amitabh Bachchan (Reid & Taylor), Shahrukh Khan (Belmonte) and Sachin Tendulkar (World Player). In FY2011, the company spent Rs.110cr on advertisement (including conferences, publicity and business promotion activities). This rigorous spending has helped the company in positioning itself as a strong brand. We expect the company's advertising spend to increase to Rs.176cr by FY2014E.

International acquisitions - Long-term growth drivers: With overseas acquisitions (Leggiuno and HM) and an 80:20 JV between its wholly owned U.K. subsidiary, SKNL (U.K.) Ltd., and LVMH group, SKNL has expanded its presence across the globe, thus creating a strong portfolio of 45 owned and licensed brands. We expect revenue from the international business to post a CAGR of 14.5% over FY2012-14E to Rs.1,747cr.

Outlook and valuation

We expect SKNL's consolidated revenue to post a 14.2% CAGR to Rs.8,290cr and profit to post a 15.2% CAGR to Rs.524cr over FY2012-14E. We initiate coverage on SKNL with a Buy rating and an SOTP target price of Rs.45.

Source : Equity Bulls

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