Kewal Kiran Clothing Limited (KKCL) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Kewal Kiran Clothing's Limited Q3 and 9 Months FY '25 Earnings Conference Call. Before we begin, a brief disclaimer. This presentation which Kewal Kiran Clothing's Limited has uploaded on the Stock Exchange and their website, including the decisions during this call, contains or may contain certain forward-looking statements concerning Kewal Kiran Clothing Limited business prospects and profitability which are subject to several risks and uncertainties, and the actual results contain materially different from those in such forward-looking statements. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Pankaj Jain, President, Retail. Thank you, and over to you, sir.

Good morning, everyone. It's a pleasure to welcome all the participants to the earnings conference call for Q3 and 9 Monthly FY '25. Joining me on this call is Mr. Hemant Jain, Joint Managing Director; and Marathon Capital, Investor Relationship Advisor. I hope everyone had an opportunity to go through our investor presentation and results released that we have uploaded on the Exchange and our company's website. I am happy to report a nearly 28% growth year-on-year on our consolidated sales of INR 255 crores. Our growth momentum driven by robust volume growth in the Apparel segment and consolidation of Kraus demonstrate the effectiveness of our strategic initiatives and increasing demand for our apparel products. We have seen healthy volume growth in apparel category on a stand-alone as well as consolidated basis. As discussed in our previous call, we had reduced inventory in FY '24 as compared to FY '23 for changing our production process in line with just-in-time or near-to-the-season strategy. But let us admit that the lead time to produce garments is still a 3 to 4 months cycle and we have realized that our ecosystem is not geared up to produce the desired output in such short period. Despite having strong order book, we were not able to supply the products in Q1 and Q2 of FY '25. Starting from Q2 FY '25 onwards, we have restored our earlier production time line. But as you know, understand it, it will take at least 6 to 9 month period to reach the optimal level of inventory. Now our production schedules have been streamlined and believe that from Q4 FY '25, we should see a double-digit growth going forward. Some part of our revenue was lost due to discontinuation of Lawman brand in the MBO channel as part of our brand repositioning strategy as fast fashion brand focusing on youth through our own EBO only. We have opened 61 EBOs of Lawman up to Q3 FY '25. Our total EBO count as on Q3 FY '25 was 591, which includes 404 stores of Killer EBO, 61 of Lawman, 10 Kraus brand and 116 K-Lounges and Other brand EBOs. As a result, we have seen a marked increase in sales contribution from the EBO channel driving positive momentum in the overall sales performance. Furthermore, we will like -- we will continue to unlock the potential of the Kraus brand by leveraging the group's extensive distribution network to drive growth through the MBO channel and the export markets, while simultaneously fortifying its retailing presence through strategic expansion of Kraus EBO and targeted counter space acquisition across LFS. At KKCL, we are working on a lot of [ pivots ], including product category expansions as well as segment expansion and are in the process of making detailed roadmaps for growth. We shall present our new growth strategy as well as our vision in the next annual result interaction. The government proactive measures to stimulate consumer demand, including direct tax cut, is expected to yield positive outcome. As consumer sentiment continues to recover, companies that have prioritized building robust brand equity, fostering strong customer relationship and establishing a solid market presence, are poised to reap disproportionate benefits. With this, I would like to conclude and open the forum for questions.

[Operator Instructions] The first question is from the line of [ Bhavesh Shah ] from 3A Financial Services.

So my question is, what are our planning for CapEx? Or are there any future CapEx planning? Or if that, then how will it will be of internal accruals or what is the planning?

Other than the requirement for our office development, there will be a CapEx requirement of around INR 30 crores to INR 35 crores for next 2 years, which will be primarily enhanced our manufacturing capability as well as expansion of our retail business, including some EBOs.

Okay. And can you please -- what...

The next question is from the line of Surya Narayan Nayak from Sunidhi Securities.

So just to understand, again, just a follow-up question to you. So what exactly is the current capacity of ours? And in terms of manufacturing to outsourcing, I believe some of the knitted and other shirting items we could be outsourcing. So as a percentage, what is the ballpark percentage [ from ] manufacturing to outsourcing, a? Number 2, as you said, around INR 32 crores will be allocated towards the manufacturing CapEx over the next 2 years, so what will be the ramp up capacity from the current level? I'll come next.

Generally, our manufacturing is built in-house for our core categories, which is jeans, shirt, T-shirt, trousers. Winter wear and T-shirt and other accessories categories are 3 categories which we actually trade in. So to give you a percentage, close to around 80% of the total quantity as we do is in-house production and 20% is around outsourced.

Okay. And what about the current INR 32 crores of CapEx that will go towards the manufacturing? What is the current capacity? And what will be the new capacity?

[ Current ] capacity we have almost utilized at 100% scenario, okay? We are building capacities on a year-on-year basis. So -- and the INR 35 crore requirement is for manufacturing as well as the retail.

Sir, does that answer your question? Due to no response from the current participant, we will move on to the next participant. [Operator Instructions] The next question is from the line of [indiscernible] from Geojit PMS.

Sir, what's the strategy for Lawman? So we have discontinued in the MBOs. So going ahead, what will be our strategy? What will be the price point and what will be the store size?

Okay. We have distribution -- we have discontinued Lawman from MBO channel, okay? And the major focus would be retail friendly. We have already opened 61-odd stores in the current -- okay, during this period for Lawman, okay? And we have got a satisfactory response for the particular brand. The price [ bracket ] would be in line with the youth-centric brands. We have already hired Ankur Srivastava as a Brand Head for Lawman. He has around 13 years of experience in retail industry and he is a Postgraduate in marketing and finance. He has earlier worked with Max. And we are planning to open close to around 40, 50 stores in the next year itself. And the strategy for retail stores would be more COCO driven for Lawman.

Okay. And sir, coming to store openings, what will be our target for next year?

So [Audio Gap] So we feel that okay, close to around 50 to 60 stores of Killer EBOs and 40 to 50 stores of Lawman EBOs. That would be our planning for the next year.

The next question is from the line of [ Aparna Rathod ] from MCA PCAP Advisory.

Yes. This is Arpan [ Rathod ], not [ Arpana ]. Congratulations on decent numbers. I have couple of questions on the strategic initiatives, including the Kraus acquisition which was done. So just wanted to understand how much was Kraus sale in FY '24? And also how much have we done in Q3 FY '25? So obviously, FY '24 wouldn't have been consolidated, but just to understand that whether the growth is coming from Kraus on a stand-alone basis also?

Okay. So if you go through the last year's numbers, okay, [ we have ] -- FY '24 number of Kraus brand was around INR 175-odd crores, okay? The consolidation happened from the month of July. So you'll see only 3 quarters for the current year where a consolidation is happening. The quarter 1 number was around INR 55 crores -- the quarter 2 numbers was around INR 55 crores. This year's number is -- quarter 3 number is around INR 53 crores, which has a double-digit growth.

Okay. So we are seeing growth in Kraus on an overall basis. If I extrapolate it to a full year basis, then we should see a 15%, 20% growth in Kraus sales vis-a-vis FY '25, though not consolidated?

Yes, yes. The EBITDA numbers have also increased and it's around 20% for Q3 of FY '25 for the Kraus particular brand. On a sustainable basis, EBITDA margin should be in the range of around 18% to 20%.

And just wanted to further understand on Kraus, how far has the integration happened? Are we also displaying Kraus product in our EBOs? Are we planning to open up more EBOs on Kraus? So broadly, what is the strategy -- overall strategy around Kraus growth?

Okay. So when it was acquired, okay, majority of the sales from -- was from the LFS channel, okay? We -- after the consolidation, we have explored and started with exports, okay? Retail has also found real attraction, okay, close to around 10 stores have already been opened up. Numbers are good and exciting for the same. And going forward, retail -- and opening up other channels of the sale -- other channel of sales for Kraus would be the particular strategy for us.

Okay. So in terms of EBO, what would be the target, say, for FY '26 for only Kraus and also the family stores which we typically open up?

No, no. So it operates on a separate entity perspective. So there will be Killer as a brand EBOs, Lawman as a brand EBOs, Kraus as individual brand EBOs.

Okay. So also on the other income, the other income has decreased substantially, which was INR 9-point-some-odd crores in last quarter, and it has come down to INR 1 crores, INR 1.5 crores. Sir any specific reason?

It's just mark-to-market.

Mark-to-market as in -- sorry.

So most of the investments have been done in [Foreign Language] debt funds and that has been mark-to-market the...

The next question is from the line of Rajesh Sharma from Insight Advisory.

Sir, I had a couple of questions.

Sorry to interrupt, sir. I would request you to please use your handset.

Yes. So I have 2 questions. So first is regarding -- in this current quarter, what is the proportion of fresh sales and -- versus the discounted sales?

So we don't map on a quarter-to-quarter basis. But overall over annualized period, we see that, okay, 60% is a fresh sell-through over 2 seasons period and our discounted -- discount period -- discount sales is around 40%.

Okay. And sir, the next question is, how do we see the current demand outlook for the Q4? How is it turning up?

We feel we have now streamlined our production process. So we believe that in Q4 '25, we should see a double-digit growth.

Okay. Okay. And last question, what is regarding our [Technical Difficulty] strategy, the...?

Sorry to interrupt, Mr. Rajesh, we can't hear you clearly. Can you repeat your question again?

My question was the strategy regarding our Kids segment which we have started?

Yes. So it's just been, okay, [Foreign Language] one season for it. We have seen a decent response. And we feel that, okay, it's too early to comment on that category, but okay, attraction has been good.

The next question is from the line of Anurag from Sunidhi Securities.

Sir, I wanted to ask regarding your retail channel. Among the retail channels, how much does the Tier 1 city, Tier 2 city, Tier 3 [ cities ] contribute to your sales?

Okay. So different -- if I evaluate that, okay, different channel or maybe different brands would have different Tier city specifics. So we don't generally evaluate on how Metro centric [ then ] Tier 1, Tier 3 cities do. Overall percentage should be around 40%-60% -- 60%-40% -- 40%-60%.

40%-60%, like Tier 1 is 40%?

Yes.

And rest is 60%?

Yes.

Okay. And sir, regarding your CapEx, you said that you are doing around INR 32 crores of CapEx. So what will be your new capacity after the CapEx?

So we built in our capacity based on our estimation for -- on a year-on-year basis, okay? CapEx, I said is around INR 35 crores, which we said it will be for the manufacturing as well as retail capability. Bifurcation should be around [ 50-50 ].

The next question is from the line of Shrinjana Mittal from RatnaTraya Capital.

I just wanted to understand on your earlier comment of the production time line not being restored. So can you just help me understand like how many days of sales did we lose because of that? And like what were the kind of inventory buildup which was required, which we could not get to? Yes.

So if you look at -- the first -- the inventory level March '25 to current -- March '24 to the current period, it has drastically increased. This was the inventory levels which we were generally carrying over a period. And the -- we feel that we have already reached the current levels and this level should allow us to have a double-digit growth for the going quarters.

So in March '23, our inventory level was INR 164 crores and which was reduced to INR 82 crores in March '24. So now currently, our inventory on a stand-alone basis is around INR 153 crores, okay? So I think generally, we used to keep inventory of around INR 180 crores to INR 200 crores for a decent growth for the company.

And -- so what is our internal estimate that because of this lower inventory, how many days of sales would we have lost, because you are saying that we expect a double-digit growth next quarter, right?

So if you see in the first quarter, Q1 FY '25, I think our sales was decreased by 15%.

Right.

Yes. So I think we are hopeful, very hopeful. We have also seen a good traction in our SSG in the Q3 as well. So we are seeing a good traction, and we will be able to do a double-digit growth going forward.

Understood. Just one more question. On the Kraus sales, like what are the product categories? Is it largely bottoms? Or is there some top wear also?

It's largely bottoms, okay, where denim contributes the biggest there.

The next question is from the line of Aashish from InvesQ PMS.

So half of our sales, as I see from the presentation, almost come from EBOs and NCS and the other is non-retail. So would it be possible to give some insights on how the economics of different EBOs work for us, because now we have so many brands and different EBOs for them? So just some kind of insights would help.

So retail as a channel, okay, it's growing for us, and it's a composition of LFS and exclusive own stores. Different brands works on different format scenarios. Killer works on more FOFO as compared to COCO scenarios, okay. Going forward, we feel the proportion of FOFO to [ COFO ] should be around 85% to 15%. Lawman is largely operated on a COCO channel and Kraus is pretty new, okay, and the base is still low. So it's too early to comment on Kraus EBOs right now.

Okay. So my -- actually, the point was to understand what kind of ROIs or IRRs do different brands in this EBO channel work for us? I mean, you would have certain brands which are really established and the others where we are trying. So, [ certain ]...

Since it's a composite channel -- a composite mix of EBO [ and ] LFS and non-retail is MBO, exports and e-commerce, on a composite level, EBITDA margins are similar on a retail as compared to a non-retail.

No, no. I'm not talking about EBITDA margins. It's mostly to do with the return on investments that we make on these stores, because different models are being followed, COFO, COCO and then...

We invest, okay, we prepare a business plan. We say that, okay, the first year return should be around 18% and going forward should be around 22%.

Okay. I think we'll have to probably take it offline some time to understand it in detail. Yes. So -- and someone asked also this other income, you said that there's a mark-to-market loss that probably has come in the debt funds. Is it right?

That's right.

So how was the positioning of the debt fund? Because typically, that should ideally not happen if the treasury management is kind of pretty active.

There is also one of the investment which was done where the company got listed.

Okay.

So that has also impacted the other income.

Okay. So this is not entirely to do with the MTM loss, some part of it would be?

Yes, yes.

How much would that be? Because I'm just trying to figure out how much the normalized [ other ] income would look from maybe the next quarter?

INR 3.5 crores...

[indiscernible] INR 3.91 crores...

Mr. Ashish, does that answer your question?

No -- just a moment. Okay. So the loss for the listed entity would -- brought on books is around INR 3 crores.

Okay. So normalized other income, any idea you can give us, the amount of investments that we have on the balance sheet? And then what can we expect the yields to be at kind of [ roughly ]...?

INR 8 crores to INR 9 crores is what we actually get as a realized gain on the other income.

Okay. Okay. So that should normalize from Q4? Hello?

Yes. I feel so.

[Operator Instructions] The next question is from the line of Deepak Lalwani from Unifi Capital.

Sir, firstly, on the production-related sales loss, if you can quantify the number and which channel was affected because of this?

Deepak, it was majorly related to all the channels. You see, we work on a 2-season cycle, okay? So we could not [ carry ] forward the inventory because we could not produce.

Okay. And in the INR 200 crore inventory that we have as of December, if you can quantify what would be the mix between finished goods, fabric, roughly? And in terms of your growth aspiration for the fourth quarter of double-digit, so if you can indicate how has January been for us?

Deepak [Foreign Language]

Deepak, again, [indiscernible] the finished good inventory last year on a standalone basis was INR 54 crores. And this year, we have increased to INR 80 crores.

Okay. Okay. I wanted to understand if the growth has started from January or you expect it to be back ended in this quarter?

I would say on a tertiary level, okay, on our retail EBO, SSG for the current quarter was close to around 14%.

Okay. Okay. Got it. Okay. And sir, secondly, on the gross margin, there has been some dip in the stand-alone gross margins. So if you can indicate, is there some level of discounting2 which has happened in this quarter and or some pricing-related -- competition-related pricing discount that you've given this quarter?

[ We will ] not -- definitely able to get the price increment in terms of realization. And the discounting has also increased because this current quarter is related to winter wear and winter was not as expected.

I see. Okay. Any sort of discounting that we should expect for Q4 and for any old inventory that is left, whether it be in winter wear or any other categories where -- which is probably not selling?

We have able to liquidate the winter wear as a category over this sales period. So there will not be much of carried forward inventory.

Okay. Got it. And sir, I wanted to understand your thoughts on marketing? Like how do we plan to differentiate? If you can indicate thoughts on that? And any sort of extra spend that we require for the Killer franchise and the other franchises put together?

For that marketing activity, Deepak, we have not yet pipelined it, okay? But we estimate that on the overall number, it should be around 5% to 7%.

Okay. Got it. And how has the spend been for this -- for the last 9 months?