Not The Right Fit

[INSERT_1]
An announcement on the BSE dated May 22, 2009 read, ‘Kewal Kiran Clothing Ltd has informed the BSE that the company has raised Rs 80.60 crore by issuing 31,00,037 equity shares of Rs 10 each at a premium of Rs 250 per share. The proceeds from the said issue would be utilised for capital expenditure in setting up new manufacturing facilities, expansion of the distribution network by opening additional exclusive outlets, building a corporate office and to meet general corporate needs.’ Quite perplexing, isn’t it? This is because hasn’t this company raised a similar amount in its IPO in March 2006? Secondly, how come a company has raised new funds when it hasn’t utilised the earlier IPO funds? And last but not the least, how was this company successful in raising Rs 80.60 crore and who was investing in this company at a premium of Rs 260 per share when the Kewal Kiran Clothing (KKCL) scrip was then trading at Rs 129?

With all these questions we decided to probe this company further. But our very first step of analysing the BSE announcement turned out to be a total anti-climax as this announcement dated May 22, 2009 was nothing more than an update about the utilisation of IPO funds. However, the reason it was quite misleading is the way it was drafted by the company secretary wherein the letter started by stating the above-mentioned quote with no reference to the IPO of the company or even utilisation of funds. This also lead to the BSE picking up the same first paragraph as it was and posting it as an ‘update’ rather than stating ‘utilisation of funds’ as is seen in the prior announcements or the announcement post May 22, 2009.

It is this misleading announcement about KKCL raising funds at Rs 260 per share that might have set the scrip into a rally. The KKCL counter appreciated by almost 29 per cent in just ten trading sessions. Had the investors clicked on the link below the BSE announcement they could have actually understood what the news was all about. Having come this far we decided to go ahead and to our amazement the announcement showed that KKCL as on FY09 could only spend about 56 per cent or Rs 45 crore in the last three years (refer table), while the balance funds have been kept in fixed deposits with banks. We contacted the KKCL’s Chairman  and Managing Director, Kewalchand Jain, to understand the reason behind the same. With the management unavailable for comment we had to dig into the information of the last three years including its IPO prospectus to understand what had transpired.
[PAGE BREAK]
[INSERT_2]
Making Promises And Not Keeping Them

Though KKCL showed a lot of promise when it came out with an IPO, it has failed to keep its word and a project that should have been implemented in two years is now taking a full four years for implementation. And with the information we analysed there is a huge gap between what the company promised and what it has delivered. Clearly the company lacked big time in terms of execution and this raises questions about the management’s capabilities. In the IPO issue objectives KKCL had promised setting up 143 K-Lounge by 2008 of which 34 stores would be in FY06, 63 in FY07 and 46 in FY08. However, apart from FY08 wherein it opened two stores more than the estimated number, it fell short of its projected number by five stores and 37 stores respectively in both FY06 and FY07 (refer table).

In all of the total 143 stores that KKCL was to set up, it was only able to set up 103 stores by FY08 (the project deadline), thus falling short by 40 stores. KKCL claims that this was due to the delay in getting possession of premises. This comes as a bit of a surprise as we feel that KKCL hasn’t made most of the head-start it already had in 2006 when it had entered into MOUs with 42 stores (17 stores for FY07 and 23 stores for FY08). Besides, KKCL has also claimed that delay was due to the non-availability of quality retail space at affordable rates.

If that was not enough, KKCL not only took its own sweet time for setting up the stores but also in the setting up of its manufacturing units at Daman and Vapi as well. The manufacturing units, which were supposed to commence production by November 2006, will now be completed by December 2009. Thus, what should have taken nine months to commence has already taken three fiscals to start. Though KKCL claims that this was because of the delay in getting possession of the manufacturing premises, it should be noted that KKCL had acquired 53,000 sq feet land and 40,000 sq feet of building space at Daman in FY07 itself. So if that is so then how can the company justify its excuse of a delay in getting possession for the Daman site?

That apart, the construction of the Vapi factory too is still in process and expected to be completed only by December 2009. In fact the management could only acquire land measuring 3,610 sq meters at Vapi in FY08. Had this expansion been on time, KKCL could have seen a more secular growth in the last three years.

[PAGE BREAK]

Today KKCL has four brands of which ‘Killer’ contributes almost 49 per cent, ‘Integriti’ contributes 26 per cent, ‘Lawman’ 20 per cent, and ‘Easies’ 5 per cent to sales. Since the FY09 rev-enue break-up was not available, the assumption is based on FY08’s revenue break-up.

Through these brands KKCL caters to not only the premium but also the mid and economy as also the mass segment. KKCL is not only trying to push its brands through K-Lounge outlets, but also create individual brand identity through exclusive branded outlets. But we feel that this strategy will clash with the K-Lounge concept, which sells all these brands at one place. Secondly, it would also confuse customers, who might have a better brand recall with K-Lounge rather than individual brands. Besides, it also makes sense to allocate resources on K-Lounge where its brands get more visibility rather than dividing the same. With well-known international brands available in this range too, not to forget the aggressive selling strategies adopted by some domestic brands, it’s difficult to see brand loyalty for KKCL products. This may affect its revenues going forward.

On trailing 12 months, KKCL looks cheap at 12x, but on an EV/EBIDTA basis the valuations looked stretched at 6.15x. Though there is a possibility it might move up in the current rally we don’t see it sustaining higher levels and hence it is better to stay away from this scrip.