Kewal Kiran (The Killer Puzzle)

1. Why is Kewal Kiran so profitable as compared to any other listed apparel company in
India? Is it branding? Is it low cost advantage? Is there something else? Substantiate your
answer.

To do a comparison, I feel the closest/alike co would be with Zodiac. Both the cos are of almost
same turnover size, have similar expense on raw material yet their margins are widely different.
KKCL has almost 24% OPM vs 8% OPM of Zodiac. All other cos are into majorly different
products and strategy.

I feel the major reason for superior margins is the low cost advantage.

The biggest cost is the raw material cost. The percentage is almost similar for both the cos:

Kewal Kiran 2013 2012 2011 2010 2009

Sales 304.51 302.38 234.28 175.8 145.09
Raw Material Cost 127.82 131.39 87.79 64.94 64.84
RM % 41.98% 43.45% 37.47% 36.94% 44.69%

Zodiac 2013 2012 2011 2010 2009

Sales 307.63 305.27 290.67 276.91 277.24
Raw Material Cost 134.72 133.27 123.5 116.92 114.81
RM % 43.79% 43.66% 42.49% 42.22% 41.41%

KKCL is able to have very low costs due to the franchisee model it has undertaken vs the retail
outlets operated by Zodiac. Zodiac had almost spend 28 Cr on retail rental in 2013 vs just 2 Cr
expense by KKCL. This is almost 8% difference to the operating margins. Even Page operates
on franchisee model and has a very low rental cost.

Aveg spend for last two year for Zodiac on employees is 52 Cr vs 32 Cr for KKCL. This adds
another 7% to the OPM of KKCL.
KKCL has a much much better inventory and supply chain control as compared to others. And
controlling inventory is a key factor in this business.
I also did a comparison with Arvind (Lifestyle subsidiary). They had much higher raw material
cost at about 50% and rental cost at about 7%.

2. What’s the growth potential of the business of Kewal Kiran over the next decade or two?
How scalable is this business?

The business is pretty scalable especially in a country like India wherein the fashion needs and
aspirational needs are increasing by the day. The co’s current turnover of about 300 Cr is not
very big and hence they can maintain a growth of 15-20% over a longer term.

3. Who does Kewal Kiran compete with?

KKCL competes with cos like Levis and some similar premium brands by offering better prices
with comparable quality. In the similar price range the closest competitors are Flying Machine,
Spykar and new ones like Passport/Newport.

4. Has Kewal Kiran been moving up the value chain? Substantiate your answer with
evidence.

Particular 2006 2007 2008 2009 2010 2011 2012 2013

Per unit realization 548.70 551.92 564.12 608.34 638.56 684.81 742.44 805.28
Realization Gwth 0.59% 2.21% 7.84% 4.97% 7.24% 8.41% 8.46%

Yes, the company seems to be moving up the value chain as the realisations have improved
every year. Also the company seems to have widened the product basket and also created higher
value brands.

5. What is Kewal Kiran’s competitive strategy?

KKCL’s competitive strategy is offering a good product at a competitive cost. Also over the
years, they have done well by capturing the new trends early and adopting innovative selling
ideas - eg - idea to promoter worn out jeans, idea to promote water saving jeans.

They have also done well by giving the brand a foreign look and feel and not burning too much
money on high paid celebrities etc.

6. What are the entry barriers, if any, in Kewal Kiran’s business, which will protect its
margins and profitability over the next decade or two.
Building a low cost brand takes years and lot of consistent controlled expense and effort on
advertising. If someone wants to build a brand quickly, he will have to do a lot of advertising,
which will raise his cost of product.

A new player can enter this segment but having profitability like KKCL would be very tough. It
is the operating efficiency of KKCL which i very tough to do and hence the profitability is
higher.

7. As an investor, what’s there to like about the denim jeans business? What’s there to
dislike about the denim jeans business?

Like: The size of industry. Most of the population is the youth (average age is 25). The company
is very well positioned to take this advantage.

Dislike: Jeans are durable and can last years. There isn’t too much of a product differentiation
and there is too much of competition.

8. Compare Kewal Kiran’s balance sheet with that of Relaxo. Which one do you like more,
and why?

KKCL’s BS is much superior as it has no debt, superb free cash flow. The business is throwing
out money and the same it being distributed to shareholders yet they have a cash surplus of 180
Cr. Also, if one wants to scale up the business, the capital requirement is not very high and the
expansion can be quickly funded from internal accruals.

9. Compare Kewal Kiran’s business model with that of Relaxo’s business model. What are
the similarities? What are the differences?

Both are the into the business of fashion, need of human being and hence sustainable for
decades. Yet, Relaxo plays on the high volume and low margin game, while Kiran plays in a
higher margin game.

10. How would you value the shares of Kewal Kiran?