Kewal Kiran's Q2FY13 revenues were lower while earnings were higher than CRISIL Research's expectations. Revenues declined 9% y-o-y to Rs 917 mn owing to 12% de-growth in apparel volumes. EBITDA margin increased by 164 bps y-o-y to 27.7% due to increase in realisation, and decline in selling and distribution expense due to deferment of Diwali sales. Adjusted PAT margin improved in line with operating profitability, up by 100 bps (y-o-y) to 19.2%. We believe that Kewal Kiran with its well-established brands, entrenched distribution network in the non-metro cities and a healthy balance sheet is likely to tide over the short term slowdown. We expect volumes to pick up as festive season shopping begins in the middle of Q3 for which the company built inventory in October 2012 and is likely to incur higher advertisement cost. We maintain the fundamental grade of 4/5.
Revenues down due to delay in festive season shopping
Kewal Kiran sold 11.1 lakh garments in Q2FY13 compared to 12.6 lakh garments in Q2FY12. Persistent inflation, higher interest rates and weak consumer sentiment have translated to lower spending, and coupled with delays in shopping for the festive (Diwali was in mid November compared to October last year) and wedding seasons, volumes declined y-o-y. We believe that as majority of sales must have happened in first half of October, Q2 and Q3 combined is likely to post moderate growth y-o-y.
Apart from premium brand Killer, others de-grew; major channel partners hit
Of Kewal Kiran's premium brands, Killer's revenues grew by a moderate 3% (to Rs 473 mn) while Lawman's de-grew by 25% y-o-y (to Rs 153 mn). Integriti, the mass brand, de-grew by 6% y-o-y to Rs 237 mn. With rising share of Killer brand, realisation was up by 6% y-o-y. Revenues from multi brand outlets (MBOs) dipped 11% to Rs 567 mn in Q2FY13. Retail store sales dipped 12% y-o-y to Rs 225 mn.
Earnings estimates increased, fair value revised to Rs 590 per share
We increase our earnings estimates for FY13 and FY14 because of higher-than-expected operating profitability in the current quarter; however, we maintain our revenue estimate. We maintain our revenue estimates for FY14; there is limited downside to our estimate as we have factored in the impact from lower consumer spending, however if demand picks up in the short to medium term, the company is likely to benefit from operating leverage. We continue to use the discounted cash flow method to value Kewal Kiran and revise our fair value to Rs 590 per share. At the current market price of Rs 746, the valuation grade is 2/5.
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