KEWAL KIRAN CLOTHING LTD

Result Update: Q3 FY 11

C.M.P: Target Price: Date:

Rs.492.00 Rs.561.00 26th Feb 2011

BUY
SYNOPSIS

Stock Data: Sector: Face Value Rs. 52 wk. High/Low (Rs.) Volume (2 wk. Avg.) BSE Code Market Cap (Rs.In mn) Retail
Rs.10.00 649.00/231.45 921.00 532732 6066.36

KKCL is amongst the few large branded apparel manufacturers in India and with sales in Asia, Middle East and CIS, designs, manufactures and markets branded jeans, semi-formal and casual wear. The company has chalked out plans for growth in manufacturing capacities to meet the growing markets for its brands internationally. Net Sales and PAT of the company are expected to grow at a CAGR of 27% and 59% over 2009 to 2012E respectively. The Company is planning to add 50 new stores by the end of FY11, especially in smaller cities and towns where it already has built a presence through MBOs. The company has state of the art manufacturing facilities that ensure quality and timely deliveries. During the quarter, the company has reported Net Profit increased to Rs.112.70 million from Rs.63.60 million in previous year same quarter.

Share Holding Pattern

1 Year Comparative Graph

BSE SENSEX

Kewal Kiran Clothing Ltd

Years FY 10 FY 11E FY 12E

Net sales 1760.50 2543.61 3001.46

EBITDA 569.10 810.62 944.11

Net Profit 325.10 487.94 573.65

EPS 26.37 39.57 46.52

P/E 18.66 12.43 10.58

Peer Group Comparison

Name of the company Kewal Kiran Rajesh Exports Kitex Garments Liberty Shoes CMP(Rs.) 492.00 108.65 35.75 90.05 Market Cap.(Rs.Mn.) 6066.36 31480.2 1698.1 1534.5 EPS(Rs.) 26.37 10.21 2.77 7.08 P/E(x) 18.66 10.64 12.91 12.72 P/Bv(x) 3.46 2.75 3.08 1.17 Dividend (%) 60.00 100.00 30.00 0.00

Investment Highlights

Q3 FY11 Results Update Kewal Kiran Clothing Ltd disclosed results for the quarter ended December 2010. Net sales for the quarter moved up 63% to Rs.633.40million as compared to Rs.389.00million during the corresponding quarter last year. During the quarter, the company has reported Net Profit increased to Rs.112.70 million from Rs.63.60 million in previous year same quarter. The Basic EPS of the company stood at Rs.9.14 for the quarter ended December 2010.

Quarterly Results - Standalone (Rs in mn)

As At Net sales PAT Basic EPS

Dec-10
633.40

Dec-09
389.00

%change
63

112.70

63.60

77

9.14

5.16

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Basic EPS of the company stood at Rs. 9.14

Break up of Expenditure Expenditure for the quarter stood at Rs.461.70mn, which is around 55% higher than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 34% of the sales of the company and stood at Rs.215.60mn from Rs.139.70mn of the corresponding period of the previous year. Selling & Distribution Expenses cost increased 61%YoY to Rs.86.7mn from Rs.53.90mn and accounts for 14% of the revenue of the company for the quarter.

OPM and NPM for the quarter stood at 30% and 18% respectively from 29% and 16% respectively of the same period of the last year.

Segment Revenue

Company Profile

Incorporated in 1981, Kewal Kiran Clothing Limited today is amongst the few large branded apparel manufacturers in India. The company with sales in Asia, Middle East and CIS, designs, manufactures and markets branded jeans; semi-formal and casual wear for men. The company is exposed to global standards in quality, technology, marketing and branding. The companys 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 companys extensive reach has been built in a strategic and planned manner over the years. The success of Kewal Kiran Clothing Limited can be attributed to a great extent to its manufacturing capacity. The company has inherent core competency in manufacturing. From sourcing to finishing every aspect of the companys manufacturing has added to its success.

With 5 units, an annual capacity of 25 lakh pieces, over 800 employees, the latest technologies in jeans manufacturing, the companys ability to innovate in manufacturing enables it to quickly go from design to market. The company has chalked out plans for growth in manufacturing capacities to meet the growing markets for its brands internationally.

Awards/ Achievements 1996 Killer - Brand of the year - The Arvind Mills Limited 2001-02 (National Garment Fair) - CMAI AWARDS Golden Scale Trophy Advertising Campaign of the year Golden Scale Trophy Denim Brand of the year Silver Salver Most Innovative Display. 2003 (National Garment Fair) CMAI AWARDS Silver Salver Presented to 'Lawman' First Prize Most Innovative Display (Brand Wagon)IFA 1st Inside Fashion Award (IFA) Power Brand For Excellence in Retail performance Award Category Mens Wear Jeans - Killer. 2001 IFA HALL of FAME Jeans wear brand of the year - Killer IFA -3rd Inside Fashion Award Campaign of the year Killer. 2005 CNBC TV 18 ICICI Bank Award for best SME Company in Textile/ Apparel Sector Golden Trophy by CMAI for casual wear brand of the year (small & medium) INTEGRITI.

Milestones of the company:

1980- Kewal Kiran & Co. was incorporated. 1989- Launch of Killer 1994- Exporting of Killer brand to UAE 1998- Launch of Easies -Launch of Lawman

2000- Move towards corporate structure 2002- Launch of Integrity 2004- Launch of first K- Lounge 2005- Consolidation of business under one entity 2006- IPO of 31 lakh shares 2007- Killer Women wear launched -Killer & Integrity exclusive brand outlets launched 2008- Over 100 retail stores (Including EBOS).

Company Services Product range of the company includes: Jeans Cotton Shirts Jackets Denim Shirts Non-Cotton Shirts Knitted T-Shirts Cotton Trousers Non-Cotton Trousers Accessories like bags, belts, caps, etc.

Brand Variety

Brand Variety

1. Killer 2. Lawman 3. Easies

4. Integrity 5. K-Lounge

Killer- Launched in 1989, Killer is the flagship brand of the company. A power brand. A brand that is youthful, trendy, vibrant and with an attitude. The focus of the brand is 16-25 years segment. The power brand enjoys a leadership position in the premium menswear in this segment. Killer Jeans is the largest selling denim brand in India. The brand's product line includes jeans, shirts and jackets.

Lawman- The Clubwear range of Shirts, Denims, Cotton Trousers and Denim Jackets from the Kewal Kiran Clothing Limited stable is Lawman. The range targets the young age group between 18 to 28 years. A distribution network of 15 distributors and 750 retailers and a price range from Rs 695 to Rs 1,995, the brand is growing aggressively.

Easies- A brand for the young executives and for the new times- when being successful is also being cool. A Semi-formal range for men between the age group of 25 40 yrs the brand continues relation of Kewal Kiran Clothing Limited with its customers through the various phases of life and the various aspects of life.

Integriti- Launched in 2002, Integriti from the Kewal Kiran Clothing Limited. Portfolio is a brand for the masses. Unpretentious! Casuals and Formal shirts, T-shirts, Jeans, Cotton trousers. A brand that is positioned as a FMCG. It is aiming for a significant share of the Rs 5000 crore branded market. A brand that promises quality at an economical price and comes from Kewal Kiran Clothing Limited.

K-Lounge- K-Lounge is a trendsetting Fashion Retail Chain promoted by India's premiere Fashion House - Kewal Kiran Clothing Limited the Company boasts of revolutionizing Fashion India Inc. through their 4 brands Killer, Easies, Lawman and Integriti. All these brands have attained a cult status and are exclusively available through the K-Lounge Fashion Chain.

Financials Results
12 Months Ended Profit & Loss Account (Standalone)
Value(Rs.in million) FY09A 12m Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Reserves Face Value(Rs.) EPS *A=Actual, *E=Estimated 1450.90 78.40 1529.30 -1244.70 284.60 -27.10 257.50 -50.40 207.10 -64.60 142.50 123.30 1389.70 10.00 11.56 1760.50 102.50 1863.00 -1293.90 569.10 -23.30 545.80 -58.40 487.40 -162.30 325.10 123.30 1628.60 10.00 26.37 2543.61 75.18 2618.79 -1808.17 810.62 -22.29 788.33 -55.70 732.63 -244.69 487.94 123.30 2116.54 10.00 39.57 3001.46 79.69 3081.15 -2137.04 944.11 -22.99 921.12 -58.49 862.63 -288.98 573.65 123.30 2690.19 10.00 46.52 FY10A 12m FY11E 12m FY12E 12m

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Quarterly Ended Profit & Loss Account (Standalone)

Value(Rs.in million) 30-Jun-10 3m(A) Description Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Profit after Tax Equity Capital Face Value(Rs.) EPS *A=Actual, *E=Estimated 454.10 21.40 475.50 -324.40 151.10 -5.10 146.00 -13.30 132.70 -44.20 88.50 123.30 10.00 7.18 727.70 21.30 749.00 -504.90 244.10 -5.50 238.60 -13.70 224.90 -74.80 150.10 123.30 10.00 12.17 633.40 16.00 649.40 -461.70 187.70 -5.70 182.00 -14.00 168.00 -55.30 112.70 123.30 10.00 9.14 728.41 16.48 744.89 -517.17 227.72 -5.99 221.73 -14.70 207.03 -70.39 136.64 123.30 10.00 11.08 30-Sep-10 3m(A) 30-Dec-10 3m(A) 31-Mar-11 3m(E)

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Key Ratio
Particulars EPS (Rs.) EBITDA Margin (%) PAT Margin (%) P/E Ratio (x) ROE (%) ROCE (%) EV/EBITDA (x) Debt-Equity Ratio Book Value (Rs.) P/BV FY09 11.56 19.62% 9.82% 21.19 9.42% 13.39% 10.61 0.16 122.71 2.00 FY10 26.37 32.33% 18.47% 18.66 18.56% 26.74% 10.66 0.09 142.08 3.46 FY11E 39.57 31.87% 19.18% 12.43 21.78% 31.38% 7.48 0.07 181.66 2.71 FY12E 46.52 31.46% 19.11% 10.58 20.39% 29.64% 6.43 0.06 228.18 2.16

Charts:

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Outlook and Conclusion

At the current market price of Rs.492.00, the stock is trading at 12.43 x FY11E and 10.58 x FY12E respectively. Price to Book Value of the stock is expected to be at 2.71 x and 2.16 x respectively for FY11E and FY12E. Earning per share (EPS) of the company for the earnings for FY11E and FY12E is seen at Rs.39.57 and Rs.46.52 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 27% and 59% over 2009 to 2012E respectively. The company has chalked out plans for growth in manufacturing capacities to meet the growing markets for its brands internationally. The Company is planning to add 50 new stores by the end of FY11, especially in smaller cities and towns where it already has built a presence through MBOs.

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The company has state of the art manufacturing facilities that ensure quality and timely deliveries. During the quarter, the company has reported Net Profit increased to Rs.112.70 million from Rs.63.60 million in previous year same quarter. On the basis of EV/EBITDA, the stock trades at 7.48 x for FY11E and 6.43 x for FY12E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs.561.00 for Medium to Long term investment.

Industry Overview
The BMI India Retail Report for the third-quarter of 2010, forecasts that the total retail sales will grow from US$ 353 billion in 2010 to US$ 543.2 billion by 2014. With the expanding middle and upper class consumer base, there will also be opportunities in India's tier II and III cities. The greater availability of personal credit and a growing vehicle population to improve mobility also contribute to a trend towards annual retail sales growth of 11.4 per cent. Mass grocery retail (MGR) sales in India are forecast to undergo enormous growth over the forecast period. BMI further predicts that sales through MGR outlets will increase by 154 per cent to reach US$ 15.29 billion by 2014. This is a consequence of India's dramatic, rapid shift from small independent retailers to large, modern outlets. BMI forecasts consumer electronic sales at US$ 29.86 billion in 2010, with over the counter (OTC) pharmaceutical sales at US$ 3.28 billion. The latter is predicted to be the fastest growing retail sub-sector and BMI forecasts that sales will reach US$ 6.18 billion by 2014, an increase of 88.5 per cent. China and India are predicted to account for almost 91 per cent of regional retail sales in 2010 and by 2014 their share of the regional market is expected to be more than 92 per cent. Growth in regional retail sales for 2010-2014 is estimated by BMI at 72.2 per cent, an annual average of 14 per cent. India should experience the most rapid rate of

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growth in the region, followed by China. For India, its forecast market share of 13.9 per cent in 2010 is expected to increase to 14.3 per cent by 2014. Moreover, for the 4th time in five years, India has been ranked as the most attractive nation for retail investment among 30 emerging markets by the US-based global management consulting firm, A T Kearney in its 8th annual Global Retail Development Index (GRDI) 2009. India remains among the leaders in the 2010 GRDI and presents major retail opportunities. India's retail market is expected to be worth about US$ 410 billion, with 5 per cent of sales through organised retail, meaning that the opportunity in India remains immense. Retail should continue to grow rapidlyup to US$ 535 billion in 2013, with 10 per cent coming from organised retail, reflecting a fast-growing middle class, demanding higher quality shopping environments and stronger brands, the report added. Bharti Retail strengthened its position in northern India by opening 59 stores, Bharti Wal-Mart is expected to open 10 to 15 wholesale locations in the next three years, and Marks & Spencer is considering plans to open additional outlets in the next few years. Established retailers are tapping into the growing retail market by introducing innovative store formats. Spencer's Retail, More (owned by Aditya Birla Group) and Shoppers Stop (owned by K Raheja Group) already plan to expand. According to a McKinsey & Company report titled 'The Great Indian Bazaar: Organised Retail Comes of Age in India', organised retail in India is expected to increase from 5 per cent of the total market in 2008 to 14 - 18 per cent of the total retail market and reach US$ 450 billion by 2015. Furthermore, according to a report titled 'India Organised Retail Market 2010', published by Knight Frank India in May 2010 during 2010-12, around 55 million square feet (sq ft) of retail space will be ready in Mumbai, national capital region (NCR), Bengaluru, Kolkata, Chennai, Hyderabad and Pune. Besides, between 2010 and 2012, the organised retail real estate stock will grow from the existing 41 million sq ft to 95 million sq ft. India continues to be among the most attractive countries for global retailers. Foreign direct investment (FDI) inflows between April 2000 and April 2010, in single-brand

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retail trading, stood at US$ 194.69 million, according to the Department of Industrial Policy and Promotion (DIPP).

Leading watchmaker Titan Industries Limited plans to invest about US$ 21.83 million for opening 50 premiums watch outlets Helios in next five years to attain a sales target of US$ 87.31 million. "We are looking to open Helios outlets in Mumbai, Delhi, Hyderabad, Kolkata, Chennai, Pune, Ahmedabad etc in next 12 months," said Ajoy Chawla, Vice President (Retail), Titan. British high street retailer, Marks and Spencer (M&S) plans to significantly increase its retail presence in India, targetting 50 stores in the next three years. M&S currently operates 17 stores in India through a joint venture (JV) with Reliance Retail. Chinese retail major, Yishion has entered the Indian market and plans to have at least 125 points of sales, including exclusive stores and multi-brand outlets, across India by 2012. It will open its first exclusive store in New Delhi by September 2010. Spain's Inditex, Europe's largest clothing retailer opened the first store of its flagship Zara brand in India in June 2010. It further plans to open a total of five Zara outlets in India. Bharti Retail, owner of Easy Day storesupermarkets and hypermartsplans to invest about US$ 2.5 billion over the next five years to add about 10 million sq ft of retail space in the country by then, according to a company spokesperson Raymond Weil plans to invest US$ 883,665 in India during 2010, according to Olivier Bernheim, President and CEO, Raymond Weil.

Policy Initiatives FDI up to 51 per cent under the Government route is allowed in retail trade of Single Brand products, according to the Consolidated FDI Policy document.

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Road Ahead According to industry experts, the next phase of growth is expected to come from rural markets. According to a market research report published in June 2008 by RNCOS titled, 'Booming Retail Sector in India', organised retail market in India is expected to reach US$ 50 billion by 2011. The key findings of the report are:

Number of shopping malls is expected to increase at a CAGR of more than 18.9 per cent from 2007 to 2015 Rural market is projected to dominate the retail industry landscape in India by 2012 with total market share of above 50 per cent Driven by the expanding retail market, the third party logistics market is forecasted to reach US$ 20 billion by 2011 Apparel, along with food and grocery, will lead organised retailing in India

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Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of its affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision.

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