Kewal Kiran Clothing - Cost-cutting measures arrest EBITDA fall - ICICI Securities

Kewal Kiran Clothing (KEKC) reported EBITDA of Rs112mn (down 70% YoY) with margin strong at 16.6% owing to strict control across all cost fronts. Revenues declined 60% YoY to Rs675mn. Gross margin contracted 330bps YoY to ~48% owing to change in product mix (higher contribution from shirts / t-shirts) and channel mix (increasing contribution from online and LFS channels). Company generated marginal FCF of Rs7mn in H1FY21 as operating loss and capex funding through working capital release. KEKC has net cash of Rs1.9bn (20% of MCap) as of Sep'20 and has declared an interim dividend of Rs15/sh. We broadly maintain our FY22E estimates and increase the target price to Rs810/sh (earlier: Rs750) based on 13x Sep'22E P/E on half yearly rollover. Maintain ADD.

- Revenues declined 60% YoY to Rs675mn owing to local lockdowns and weak consumer demand for discretionary categories. KEKC has higher dependence on MBO channels (>40%), which will see delayed recovery, in our view.

- EBITDA declined 70% YoY to Rs112mn with margin shrinking 608bps YoY to 16.6% (industry-leading) owing to decline in revenues. However, substantial cost-saving measures across all cost fronts arrested major EBITDA decline. Gross margin contracted by 330bps YoY to ~48% owing to: i) change in product mix with increasing contribution from shirts / t-shirts category, and ii) channel mix with higher contribution of sales from online and LFS channels. Employee costs have declined 40% YoY to Rs115mn. Administrative expenses were down 48% YoY to Rs49mn. Selling and distribution expenses declined by a sharp 75% YoY to Rs46mn (~7% of sales) while PAT fell 71% YoY to Rs91mn in Q2FY21.

- KEKC generated marginal FCF of Rs7mn as negative OCF of Rs42mn and capex of Rs12mn was funded through working capital release of Rs61mn. Company has net cash of Rs1.9bn (20% of MCap) as of Sep'20 and has declared an interim dividend of Rs15/sh.

- FY20 revenues increased 5% YoY to Rs5.3bn led by similar growth in volumes. EBITDA declined 15% YoY to Rs951mn with the margin shrinking 440bps YoY to 18% owing to investments across channels (high discounts) to support revenue growth. Company's net cash status, leadership margins and return ratios plus higher dividend yield cushion the downside.

Shares of KEWAL KIRAN CLOTHING LTD. was last trading in BSE at Rs.758.5 as compared to the previous close of Rs. 745.7. The total number of shares traded during the day was 1167 in over 185 trades.

The stock hit an intraday high of Rs. 762.9 and intraday low of 747. The net turnover during the day was Rs. 883314.

Source : Equity Bulls

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