Kewal Kiran Clothing>>CRISIL assigns Fundamental grade ‘3/5’

21 Jan 2010, 1620 hrs IST, ET Bureau

MUMBAI: CRISIL (Independent Equity Research) has assigned Fundamental Grade ‘3/5’ to Kewal Kiran Clothing Ltd (KKCL), indicating the company’s fundamentals are ‘Good’. CRISIL Equities has assigned a valuation grade of ‘5/5’, indicating that the stock has a ‘Strong Upside’ to its Fundamental value of Rs 336 from the current market price of Rs 265. The grades are not a recommendation to buy/sell or hold, or a comment on the graded instrument’s future market price.

The assigned fundamental grading reflects the strong prospects of the branded readymade garment (RMG) industry in India and KKCL’s strong positioning in the sector. It also takes into account the company’s strong and experienced management, which has been instrumental in establishing brands such as ‘Killer’, ‘Lawman Pg3’ and ‘Integriti’ in the domestic market. The company also has a robust balance sheet characterised by low gearing and strong liquidity position. As of September 2009, KKCL’s gearing stood at 0.10x, with cash balance of Rs 0.99 billion. Additionally, the company’s ambitious plans in retail would enable it to tap the tremendous potential in the branded RMG market and would also enhance its brand visibility. However, the grading is tempered by high competition in the branded apparel industry, which is likely to impact KKCL’s product pricing. The company also faces the inherent industry risk of accurately predicting fashion trends and correctly timing the launch of new product variants.

From FY06 to FY09, KKCL’s revenues and PAT increased at CAGR of 19.0% and 7.0%, respectively. CRISIL Equities expects the company’s revenues to touch Rs 2.52 billion by FY12, registering a strong 3-year CAGR of 20.2% on the back of increasing volumes and realisations. KKCL’s PAT is expected to grow at a CAGR of 38.2% from FY09 to FY12, driven by revenue growth as well as higher margins due to lower selling expenses and increasing realisations. KKCL’s net margins are expected to improve from 9.8% in FY09 to 17.3% in FY10, before moderating to 15.0% by FY12. Due to rising profitability, CRISIL Equities expects the company’s earnings per share (EPS) to increase from Rs 11.6 in FY09 to Rs 30.7 in FY12. KKCL’s RoE is forecast to increase from 9.4% to 17.0% during the same period.