Koutons Retail

 

At an EPS of Rs 22.9 for FY10, co's share price seen cheaper than those of other retailers

 

INVESTORS in Delhi-based Koutons Retail have not been able to rake in much moolah despite the overall market rally. The stock has been a laggard in the past year, posting a negative return of 31%. But it's gradually gaining ground having recorded its 52-week low of Rs 293 on January 11. 

   Koutons' performance on bourses, over a longer period, has been consistently bad. For instance, in the past three months, returns on the stock were a negative 5%. And over a six-month period, it was negative 11% whereas the Sensex reported a return in excess of 30% during this period. On an annual performance basis also, the stock under performed the benchmark index Sensex as well as the ET Retail index that gained 92% and 90%, respectively. 

   Koutons, which grossed Rs 1,155 crore in the past four quarters in revenue, manufactures semi-formal and casual wear under the brands Koutons, Charlie Outlaw, Les Femme and Koutons Kids. Each of these brands operates in a separate segment, ranging from the premium to value segment, with Koutons positioned as the higher-end brand. The company currently has 230 family stores and 1,388 exclusive brand outlets (EBOs). Most of these are on a franchisee basis, which keeps it an asset-light model for Koutons. Last year, the company also forayed into women and kids' wear, as these are high-margin segments, which will help improve the overall return on the capital employed. 

   The company has seen a subdued 15% growth in profits in the first half of FY10 despite a good 36% increase in operating margins. Improved inventory management, lesser markdowns and higher volumes were the key contributors to this. However, in the second half of FY10, the company is not be able to record a 25% growth in sales as seen in the first half, with the festive period over. The company reported Rs 347-crore sales in the quarter to September '09, a 23% year-on-year (YoY) growth. With an operating profit of Rs 61 crore and net profit of 24 crore, margins have improved on a YoY basis, but higher interest outflows still weigh heavy on quarterly growth in profits. This has impacted its interest coverage ratio which has come down from 2.36 times as on March '09 to 1.74 times as on September '09. Interest coverage is a measure of the ability of the company to pay interest out of its earnings. 

   Going forward, the company expects to grow the ladies and kids segment that will improve the overall margin. It also expects higher realisation and improved inventory management system that will reduce its working capital cycle. The management expects a 300-bp reduction in its interest cost that will further improve margins. At Rs 348 and an annualised EPS of Rs 22.9 for FY10, the stock is valued at 15.3 times its earnings, cheaper than some other retail players.