Rating Rationale
January 07, 2020 | Mumbai
Kewal Kiran Clothing Limited
 
Rating Action
Total Bank Loan Facilities Rated Rs.140 Crore
Long Term Rating CRISIL AA-/Stable
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's rating continue to reflect Kewal Kiran Clothing Limited (KKCL's) established brands in the menswear segment in India, and a strong financial risk profile. These strengths are partially offset by exposure to intense competition, and susceptibility to changes in regulations and in fashion trends in the domestic market.

Key Rating Drivers & Detailed Description
Strengths
* Established position in the domestic menswear segment, with recognised brands and diversified geographic presence
The company's flagship brand, Killer, 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.
 
* Strong financial risk profile
The networth was healthy at Rs 456 crore, the gearing comfortable at 0.20 time, and there was no long-term debt, as on September 30, 2019. The debt protection metrics are also healthy, with interest coverage and net cash accrual to total debt ratio at 13.27 times and 0.54 time, respectively, for the six months ended September 30, 2019. Liquidity is superior, supported by unencumbered cash and cash equivalents and marketable securities of around Rs 270 crore as on September 30, 2019. The company does not plan any significant capital expenditure (capex) over 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, and pose significant competition to KKCL's brands. Furthermore, the emergence of e-commerce has intensified competition.
 
* Additionally, the organised retail industry remains exposed to regulatory risks on account of stringent labour laws, multiple licences and clearances, and the extent of foreign direct investment allowed in the multi-brand retail industry.
 
However, the company should be able to maintain a healthy operating margin of above 20% over the medium term due to the 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 over 50% to revenue. Consequently, jeans has been the major revenue contributor (over 60%). While other brands such as Lawman Pg3, Integriti, and Ã'asies have also grown significantly over the years and the company is focussing on increasing contribution from these brands, Killer will remain the significant revenue contributor over the medium term.
 
Business is driven by fashion trends and the 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 likely to have the ability to adapt to changing trends.
Liquidity Superior

Cash accrual is expected to be healthy at over Rs 30 crore per fiscal over the medium term. The company had liquid investments (including cash and cash equivalents) of around Rs 270 crore as on September 30, 2019; these are expected to remain at a similar level over the medium term. Average utilisation of the fund-based bank limit of Rs 110 crore was 75% over the 10 months through October 2019. There is no long-term debt obligation or major capex plan over the medium term. Liquidity is likely to remain superior over the medium term.

Outlook: Stable

CRISIL believes KKCL will maintain its established market position and healthy financial risk profile over the medium term.
 
Rating Sensitivity Factors
Upward factors
* Sustained increase in revenue by over 10% per fiscal, while maintaining profitability and the financial risk profile
* Higher revenue contribution/earnings before interest, tax, depreciation, and amortisation (EBIDTA) margin from brands other than Killer
* Sustained strong working capital management
 
Downward factors:
* Substantial and sustained decline in revenue or the EBIDTA margin falling below 15%
* Considerable weakening of the capital structure because of large, debt-funded capex/acquisition or a stretch in the working capital cycle
* Decline in liquid surplus

About the Company

KKCL was set up by Mr Kewalchand P Jain and Mr Hemant P Jain in 1980 as a partnership firm, Kewal Kiran and Co, and was reconstituted as a public limited company with the present name in fiscal 2006. KKCL is a reputed branded apparel manufacturer in the menswear and women's western wear segments. It has two garment stitching units in Mumbai, a washing unit at Vapi in Gujarat, and a finishing and packaging facility at Daman. The company has 322 retail stores, of which, it owns 12 and the rest are owned and operated by franchisees.
 
For the six months ended September 30, 2019, net profit was Rs 46 crore and operating income Rs 277 crore, against Rs 47 crore and Rs 258 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
As on/for the period ended March 31 Units 2019 2018
Operating Income Rs crore 512 500
Profit after tax (PAT) Rs crore 80 73
PAT margin % 15.7 14.7
Adjusted debt/Adjusted networth Times 0.22 0.12
Interest coverage Times 16.57 20.02

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon rate (%) Maturity Date Issue size (Rs Cr) Rating Assigned with Outlook
NA Working Capital Demand Loan@@ NA NA NA 45 CRISIL AA-/Stable
NA Working Capital Demand Loan# NA NA NA 25 CRISIL AA-/Stable
NA Working Capital Demand Loan* NA NA NA 50 CRISIL AA-/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 20 CRISIL AA-/Stable
@@ Interchangeable with Rs 45 crore of bank overdraft facility, Rs 45 crore of export bill discounting, Rs 45 crore of export invoice financing, and Rs 45 crore of pre-shipment financing under export orders
# Interchangeable with Rs 25 crore of bank overdraft facility, Rs 5 crore of import letter of credit, Rs 5 crore of bonds and guarantees, Rs 5 crore of import invoice financing, Rs 25 crore of export bill discounting, Rs 25 crore of pre-shipment financing under export letter of credit, Rs 25 crore of export invoice financing, Rs 5 crore of import letter of credit, and Rs 25 crore of pre-shipment financing under export orders
*Interchangeable with Rs. 5 crore cash credit facility, Rs. 10 crore letter of credit and Rs. 10 crore of PCFC/PSFC (Pre and Post Shipment) credit.
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  140.00  CRISIL AA-/Stable      17-12-19  CRISIL AA-/Stable      28-12-17  CRISIL AA-/Stable  CRISIL AA-/Stable 
            26-02-19  CRISIL AA-/Stable      03-11-17  CRISIL AA-/Stable   
            25-01-19  CRISIL AA-/Stable      08-08-17  CRISIL AA-/Stable   
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Proposed Long Term Bank Loan Facility 20 CRISIL AA-/Stable Proposed Long Term Bank Loan Facility 30 CRISIL AA-/Stable
Working Capital Demand Loan@@ 45 CRISIL AA-/Stable Working Capital Demand Loan@@ 45 CRISIL AA-/Stable
Working Capital Demand Loan# 25 CRISIL AA-/Stable Working Capital Demand Loan# 25 CRISIL AA-/Stable
Working Capital Demand Loan* 50 CRISIL AA-/Stable Working Capital Demand Loan* 50 CRISIL AA-/Stable
Total 140 -- Total 140 --
@@ Interchangeable with Rs 45 crore of bank overdraft facility, Rs 45 crore of export bill discounting, Rs 45 crore of export invoice financing, and Rs 45 crore of pre-shipment financing under export orders
# Interchangeable with Rs 25 crore of bank overdraft facility, Rs 5 crore of import letter of credit, Rs 5 crore of bonds and guarantees, Rs 5 crore of import invoice financing, Rs 25 crore of export bill discounting, Rs 25 crore of pre-shipment financing under export letter of credit, Rs 25 crore of export invoice financing, Rs 5 crore of import letter of credit, and Rs 25 crore of pre-shipment financing under export orders
^ Interchangeable with Rs 40 crore of working capital demand loan, Rs 40 crore cash credit facility, Rs 40 crore export packing credit, Rs 40 crore foreign bills purchased, Rs 40 crore bill/invoice discounting, Rs 20 crore letter of credit usance/sight, Rs 20 crore letter of undertaking for buyers credit
*Interchangeable with Rs. 5 crore cash credit facility, Rs. 10 crore letter of credit and Rs. 10 crore of PCFC/PSFC (Pre and Post Shipment) credit.
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Retailing Industry

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