>KEWAL KIRAN (ICICI DIRECT)

Margins improve….

Kewal Kiran Clothing’s (KKCL) revenues were in line with our expectations but profitability was significantly higher than our expectations. Revenues increased by 21% to Rs 33.3 crore. A 4% volume growth from 5.43 lakh garments to 5.62 lakh garments and 15% increase in realisation from Rs 542 to Rs 624 drove this growth. KKCL has been able to report a YoY improvement in the EBITDA margin from 13.9% in Q1FY09 to 24.8% in Q1FY10. The sharp improvement in the EBITDA margin was on account of lower raw material cost to sales ratio of 36.4% in Q1FY10 compared to 43.9% in Q1FY09. Lower selling and administration expenses to sales ratio, which has declined from 28.4% to 18.0%, has also contributed to the improvement in EBITDA margin. Coupled with EBITDA growth of 324% and interest expenses declining by 43%, KKCL has been able to report a YoY growth of 137% in net profit to Rs 6.3 crore.

KKCL has reported margins in excess of 20% for the last two quarters on account of lower costs, while the revenue growth has been muted. We are maintaining our revenue estimates but have fine-tuned our estimates based on significantly lower costs. This has resulted in the EPS being revised upwards by 47.6% and 51.1% for FY10E and FY11E, respectively.

Valuations
The stock is trading at 8.8x FY11E earnings of Rs 19.6. It has run up significantly from its 52-week low of Rs 92 (May 14 2009). We believe the current price already factors the improved profitability. We believe KKCL is richly valued considering that larger peer like Koutons Retail, with return ratios of nearly 2x of KKCL, trades at 8x its FY11E earnings. We rate it as
UNDERPERORMER.

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