>KOUTONS RETAIL (LKP SHARES)

INVESTMENT RATIONALE
• Koutons Retail is the largest discount retailer of readymade apparels for men, women and children's in India with its own manufacturing facilities in North India. The company has a pan India presence through its network of over 1,400 Exclusive Brand Outlets (EBO's) in five different formats. With the management efforts to reduce inventory levels and with entry into higher margin children and female apparel retailing segments we expect higher traction in its revenues and profits going forward.

• The company has taken several measures to address the concern of high inventory on books, which included the inventories at manufacturing facilities, existing stores and buffer stock for new stores. The measures include key initiatives like outsourcing of production work, reducing SKU's (Stock Keeping Units) at stores and sharing idle capacities with other manufacturers. These initiatives are not only expected to bring down the inventory level on books but also to enhance profitability.

• 60% requirements coming from in-house manufacturing and absence of intermediaries has enabled the company to witness consistent expansion in margins and to report highest gross and EBITDA margin amongst its peers. Though the increase in outsourcing is expected to put pressure on margins, the entry into high margin children and women apparel retailing segments are expected to substantially compensate for this marginal decline.

• The company primarily operates its retail stores through the franchisee network and considering the macroeconomic condition has cautiously planned to expand the total number of stores to 1,670 by the end of FY12E. The company has also planned to convert some of its existing Koutons stores at premium locations to Koutons Family Stores (KFS), having an average store size of 3,000 sq ft., by acquiring more space within the same premise. This will help in increasing the per square feet revenue and in providing more variety to consumers within the same store.


INVESTMENT RISKS
• The company products include a mix of both formal and casual wear targeting the middle and upper middle class of the society. The company has been able to build 'KOUTONS' as a strong brand among the consumer class supported by its discount retailing model and product offerings for all (men, women and children) in the targeted consumer category that ensures consistent footfalls during trying times as well. Recently, it has also forayed into the footwear and accessories retailing, which is expected to auger well for the future growth of the company.

• The company operates ~95% of its stores on the franchisee model under the FOFO (Franchisee Owned Franchisee Operated) or COFO (Company Owned Franchisee Operated) model, which substantially reduces the capex requirements for store opening from the company side. In return the company assures its franchisee the minimum guarantee to cover for its store running costs, including rentals.

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