Tuesday, November 30, 2010

Branded Apparel Sector - Part 1

The textile sector in India is one of the biggest employment generators. There are several different industries that are part of a chain of processes involved in creating the final product, an apparel. These include

There are very few players who are integrated across the complete chain of manufacturing and retail distribution. In this post, I will solely focus on companies who are involved in retailing of branded apparels. Following is a list of companies that I find fitting the criterion:
  1. Kewal Kiran Clothing Limited (Killer, Easies, Lawman and Integriti)
  2. Provogue
  3. Shopper's stop
  4. Trent
  5. Zodiac Clothing
  6. Page Industries (Jockey)
  7. Cantabil Retail
  8. Bombay Rayon Fashions Limited
  9. Siyaram Silk Mills (F2F - Fabric to Fashion)
  10. Gokaldas Exports
  11. Brandhouse Retail
  12. Aditya Birla Nuvo (Madura Garments - Allen Solly, Van Heusen)
  13. Celebrity Fashions
  14. Century Textlies and Industries (Cottons by Century)
  15. Raymond
  16. Koutons Retail
  17. Arvind (Newport, Ruf&Tuf, Flying Machine)

Some of the players have had losses (like Celebrity, Gokaldas, Arvind, Raymond), some are in big financial trouble (like Koutons) while for companies like Aditya Birla Nuvo or Century Textiles, this division contributes very less to the overall turnover and profitability of the company and so investment in these companies based on analysis done in this post is not correct. Thus I will cover research only up to Cantabil.

Kewal Kiran Clothing Limited

The company was incorporated in the year 1981 and its flagship brand Killer was launched in 1989. The company keeps introducing newer brands at regular intervals like easies, lawman and integriti.


Company's average ROCE was somewhere around 19% with average operating profit margins of over 21% over the last five years. The margin and ROCE both are improving over the years. Net profit margin averaged 13.26% over the last five years and was highest at 17.65% in FY10. This shows that the company is able to command high prices for its products. The company is virtually debt free with (net current assets + investments) worth INR 148.27 Crore and debt of just INR 15.8 Crore. Company's assets turnover ratio has decreased from 3.83 to 2.88 over the last five years due to investment in fixed assets recently to cater to growth in sales but compared to FY03-04, it is in line. The company's operating cash flow was negative in two out of the last five years but has been positive and in line with net profit for the last three years. This shows that the company is using proper depreciation and not over-reporting sales.

The company's average total income has risen from INR 45 Crore between FY01-FY03 to INR 170 Crore between FY08-FY10, i.e. 19% compounded annually. The profits have risen faster from INR 4.35 Crore between FY01-FY03 to INR 22.62 Crore in FY08-FY10, i.e. 26.56% compounded annually. Company had three down years in profits over the last ten years, FY02 down 23.55%, FY05 down 17.65% and FY09 with the largest drop of 32.5%. Over the last ten years, company's revenues declined only in FY09 with a drop of 9.14%. This shows that the company's products are not recession proof but the impact of recessions on the company is less. The company's cost structure is also more towards variable and the company is able to fast adjust with the demand by cutting down fixed costs and is able to remain profitable.


Company, just like many other companies in India, is a family owned business and promoters hold 74.06% stake in the company as of September 2010. The company's financials clearly shows that the promoters have managed the company very well. During the carnage of September 2008 to December 2009, the promoters increased their stake in the company from 71.32% to 74.06% at a share price between INR 100-200. The dividend payout ratio of the company is less but has increased from 18.09% of net profit in FY06 to 26.51% in FY10.

The company's share got listed only in 2006 when new shares were issued at a price of INR 275. The company has not generated exceptional returns to its shareholders but more than doubling of money excluding dividends in four years is not a bad return.

Mutual Fund Holding

As usual, since this is one of the best companies to invest in, very few Mutual fund houses have researched this stock. Some schemes of Birla, Can-Robeco and Sahara has a holding in this company. HDFC, SBI, Reliance, Tata and ICICI do not have any coverage on this company, since they are only interested in Vimta, Northgate and Madhucon of the world. I always consider this to be the biggest positive.


The last thing that comes is valuation. The company's book value is around INR 145 so at INR 585, it is trading at 4 times book. The trailing twelve months EPS is INR 31.8, so P/E comes at 18.6. The ten year average EPS is around INR 10.75 and five year average EPS is 15.92 which gives respective P/E of 54.4 and 36.75. A growth investor would surely say that a high quality company with great growth potential like KKCL would always trade at this price. But a value investor like me would wait for better prices even though the company is trading at a discount to its nearest peer Page Industries.


The company was incorporated in year 1997 and its flagship brand "Provogue" was launched in March 1998.


Company's average ROCE was 8.6% with average operating profit margin of 12.37% over the last five years. The margin and ROCE both are going down over the years. The net profit margin averaged 7.34% over the last five years and was lowest at 5.67% last year. Company has debt of INR 216.39 Crore and Interest cover of 3.4 is just near the border of 3 below which the company becomes leveraged. Company's net current assets has expanded from INR 112.97 Crore in FY06 to INR 537.43 Crore in FY10. The inventory / sales ratio (or working capital days) has gone up from 0.72 to 1.118, i.e. the company is over-reporting it sales. Company also has INR 289.86 Crore tied up in investments but only a closer look at annual report would provide information about it. Asset turnover ratio has remained at reasonable. The company's operating cash-flow is negative in all five years reiterating the fact that inventory is not clearing as fast as the sales are reported.

The company has grown many fold in the last ten years where total income rose from INR 25.5 Crore in FY01 to 519.5 Crore in FY10. There was no down year in terms of total income but profits tumbled by 65% in FY10.


The shareholding pattern of the company has changed dramatically over the last five years. Promoter holding declined from 51.37% in June 2007 to 41.49% in December 2008 and have again risen to 42.25% in September 2010. The dividend payout ratio of the company is quite less and has decreased from 18.14% of net profit in FY06 to 9.4% in FY10.

The company got listed only in 2005 with share price of INR 150. Since a 10 to 2 split in face value was announced in 2008, the current price of INR 58 is almost double that of split adjusted IPO price of INR 30.

Mutual Fund Holding

Some schemes of Sahara, Can Robeco and Axis are holding shares of this company.


The company's consolidated EPS of trailing twelve months is INR 2 so at INR 58 it is trading at 29 times earnings. Company bought back shares during August 2009 and February 2010 at an average price of INR 60.47. The book value of the company at the end of FY10 was INR 61.44 and so price is below book value right now. The company was under tremendous financial stress during October 2008 - March 2009 and some of the reduction in promoter shareholding might be due to liquidation of pledged shares. Even though the valuation based on P/B is not high, the other parameters of the company are not as good as those of KKCL or Page Industries.
The sale of securities is not a profession but a business. - Benjamin Graham
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1 comment:

Immortal said...

hello friend,

You must have a closer look at provogue numbers...ROCE,RONW is affected in last couple of years becoz of stock split as it lead to increase in its equity base...being cashflow negative is not a big deal in apparel industry as the holding of product is right frm production to sale requiring high wc...now coming to question as to why its operating n profit margin not expanded in line with its equity base n debt intake..as one would expect company to grow its business and generate better topline nos with improved margin as well....reason is it has invested most of its fund in PROZONE..retail mall infra development company where it has 75% stake....liberty international has the remaining stake...u can check the status of this business in detail and update it in your blog...Buy business and not stocks is my favorite quote

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