Rating Rationale

Strengths
* Established position in the domestic menswear segment, with recognised brands and diversified geographic presence
KKCL has an established presence in the domestic menswear segment, driven by its flagship brand, Killer, which is among the leading brands in the branded men's denim segment. The brand has shown steady performance through several economic cycles and changing customer preferences over the past two decades.

Established market position is evidenced by a very high proportion of sales at maximum retail price (MRP) to total sales, as opposed to heavy discounts offered by most foreign apparel brands throughout the year.

* Robust financial risk profile because of strong networth, comfortable gearing, robust liquidity, and healthy debt protection metrics
Financial risk profile is robust, supported by strong networth of over Rs 400 crore and comfortable gearing of 0.19 time as on September 30, 2017. Liquidity was healthy in the form of unencumbered cash and cash equivalents and marketable securities of over Rs 250 crore as on September 30, 2017. KKCL does not have any significant capital expenditure plans for the medium term.

Weaknesses
* Exposure to intense competition in the apparel segment, and to regulatory changes
The Indian market, with its burgeoning youth segment, has attracted prominent global brands in the apparel segment. These range from mass-appeal to premium brands, across age groups which pose significant competition to KKCL's brands. In addition, emergence of e-commerce has intensified competition.

KKCL is also exposed to regulatory changes. During fiscal 2018, rate of Goods and Services Tax for apparels has been specified based on the sale price. Increase in taxation duty will lead to higher retail prices on branded garments above Rs 1000, if the company chooses to pass on the additional duty to consumers. Additionally, the organised retail industry remains exposed to regulatory risks on account of stringent labour laws, multiple licences and clearances, high stamp duties, and extent of foreign direct investment in the multi-brand retail industry.

However, KKCL should be able to maintain healthy operating margin above 20% over the medium term due to strong market position and established brands.

* Brand concentration and vulnerability to changes in fashion trends in the domestic market
Killer remains the flagship brand, contributing to over 50% of KKCL's revenue. While its other brands such as Lawman Pg3, Integriti, and Ă''asies have also grown significantly over the past years, the company is highly dependent on 'Killer' leading to brand concentration. Consequently, jeans has been the major revenue contributor (60% of revenue). KKCL is focussing on increasing contribution from its other brands; nevertheless 'Killer' should be the significant revenue contributor over the medium term.

Business is driven by fashion trends and its target segment's aspirations are significantly influenced by peers, role models, and the media. Therefore, their association with brands may change based on their perception of the value offered by the brands. Thus, manufacturers of branded apparel need to constantly innovate and adapt to the changing preferences of the target segment. KKCL, with its team of in-house designers who work on the upcoming season's collections, is expected to have the ability to adapt to the changing market trends.