KKCL earnings below CRISIL estimates but stocks buoyant

Kewal Kiran Clothing's (Kewal Kiran's) second quarter revenues in FY15 were in line but earnings were below CRISIL Research's estimates. Driven by a 5.2 percent year-on-year growth in apparel volumes, revenues grew 11.4 percent to Rs 1,298 million. Owing to an increase in raw material cost as a percentage of sales, EBITDA margin contracted for the fourth consecutive quarter by 320 bps to 27.5 percent.

Higher other income with a rise of 61 percent helped adjusted PAT to increase to Rs 243 million. Although the company has been facing margin pressure in the recent past, CRISIL expects operating margin to improve in the second half of FY15 owing to calibrated price increases planned over the next couple of quarters and the company's endeavour to increase the share of high-value products. Margin improvement is expected to percolate down to better earnings as well. So the rating agency maintained its fundamental grade of 4/5.

In the second quarter, sales through ecommerce platforms grew ten-fold to Rs 21 million. As per CRISIL, although this opens up new growth opportunities for organised apparel players including Kewal Kiran, heavy discounts offered by e-retailers also pose a threat to the brand equity of these players. Because the earnings were below estimates in the first half of FY15, the agency has lowered FY15 earnings estimate by 4 percent. However, it remains positive on the long-term prospects of the company and therefore has maintained its earnings estimate for FY16 with fair value of Rs 1,554 for the company. At the current market price of Rs 1,731, the valuation grade given is 2/5.