Expanding EBOs, Lawman's Repositioning, And Kraus Integration Will Improve Future Market Presence

Key Takeaways

• Strategic expansion of the EBO network and repositioning of the Lawman brand as fast fashion aim to enhance sales and market presence.
  
• Kraus brand integration and export focus leverage distribution for revenue growth, targeting sustainable EBITDA margins.
  
• Supply chain issues, brand repositioning, and increased reliance on COCO stores add risk and investment needs, impacting revenue, margins, and profitability.

Catalysts

Kewal Kiran Clothing Limited manufacturing, marketing, and retailing of branded readymade garments and finished accessories in India and internationally.

• The company has seen nearly 28% year-on-year growth in consolidated sales driven by robust volume growth in the apparel segment and the consolidation of the Kraus brand. This growth momentum is expected to continue, impacting revenue positively.
  
• The company is working on streamlining production schedules after issues with just-in-time strategy, aiming for double-digit growth from Q4 FY '25 onward as inventory levels normalize, which could improve revenue and margins.
  
• The strategic focus on expanding the Exclusive Brand Outlet (EBO) network, with plans to increase the store count significantly, would likely drive increased sales and improve earnings through enhanced retail footprint and brand visibility.
  
• The ongoing strategic repositioning of the Lawman brand as a fast fashion brand aimed at youth, along with the aggressive expansion of EBOs, is expected to improve revenue and market presence.
  
• The integration and expansion of the Kraus brand through leveraging the group’s distribution network for exports and increasing retail presence could drive revenue growth and enhanced earnings, with targets of sustainable 18% to 20% EBITDA margins for the Kraus brand.

Kewal Kiran Clothing Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kewal Kiran Clothing's revenue will grow by 14.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.7% today to 12.2% in 3 years time.
• Analysts expect earnings to reach ₹1.7 billion (and earnings per share of ₹30.63) by about March 2028, up from ₹1.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 52.5x on those 2028 earnings, up from 18.7x today. This future PE is greater than the current PE for the IN Luxury industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 6.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.8%, as per the Simply Wall St company report.

Kewal Kiran Clothing Future Earnings Per Share Growth

Risks

• The company experienced supply chain challenges and production delays due to an attempted shift to a just-in-time production strategy. Despite strong demand, they were unable to fulfill orders in Q1 and Q2 FY '25, leading to lost revenue opportunities, potentially affecting future earnings growth.
  
• The decision to reposition the Lawman brand and discontinue its presence in Multi Brand Outlets (MBOs) may lead to a short-term decline in revenue from this channel, as they emphasize growth in Exclusive Brand Outlets (EBOs), which might take time to offset the loss, impacting net margins.
  
• The company is increasing its reliance on Company Owned and Company Operated (COCO) stores for the Lawman brand, which may require significant capital investment, potentially affecting cash flows and increasing operational risks due to higher fixed costs.
  
• A dip in gross margins was noted due to increased discounting and inability to capture the desired pricing power, which could signal competitive pressures or weakening demand, potentially impacting profitability and net earnings.
  
• The integration and growth strategy for the Kraus brand, acquired recently, may face execution risks as the company leverages new distribution channels and retail strategies, which could impact consolidated revenue growth and overall business profitability if not managed effectively.

Valuation

• The analysts have a consensus price target of ₹817.0 for Kewal Kiran Clothing based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹944.0, and the most bearish reporting a price target of just ₹690.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹14.1 billion, earnings will come to ₹1.7 billion, and it would be trading on a PE ratio of 52.5x, assuming you use a discount rate of 14.8%.
• Given the current share price of ₹473.55, the analyst price target of ₹817.0 is 42.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.