A Killer Puzzle

A few minutes ago, I asked my BFBV students to start work on a killer puzzle.”

You are invited to participate and, if you want, help my students do a good job.


73 thoughts on “A Killer Puzzle

  1. Gaurav Kumar says:

    Excellent case sir! I guess I’m going to remain occupied in this for next couple of days at least!

  2. Hello Sir,

    In the file you have shown OCF before and after WC, what does this signify, what are you trying to check before and after.
    Also can you pls suggest a good book for understanding and interpreting cash flows.

    Chetan Chhabria

  3. Dear Professor,

    One thing I often wonder is why in India brands have foreign fashion models (all for Louis Philippe) and names? The ones immediately come to mind are Loius Phiippe (Aditya Birla), Frank Jefferson (Ashima) even Lawman here.


  4. Dear Sanjay Sir,

    gross margins ebit margins
    KKC 63% 21%
    Page 53% 18%
    Lovable 75% 16%

    Although gross margins of KKC are higher than Page but lower than lovable its Ebit margins are higher than both .
    This shows coupled with brand strength management is very efficient in managing capital. It prefers to invest more in creation of intangible asset than investing in working capital ( receivables and inventories are minimal) and fixed assets .
    and that has resulted in a very liquid balance sheet. Also by operating through FOFO model ( franchisee owned and franchisee operated ) it has eliminated much capex resulting in very good pre-tax free cash flow margin ( operating cash flow-capex/sales) of around ~20%( 5 year average)
    Higher free cash flow margin + extremely good ROCE indicates a presence of economic moat in KKC.

  5. kumardiwesh says:

    Hi Sir

    Fantastic case once again!!! BFBV version 10 seems to be attaining greater heights.
    I went through the financial statements of KKCL and here are my observations:

    • The company’s pre-tax return on average operating assets (for FY13 & FY12) is close to 65%, which is phenomenal. However, the company’s pre-tax return on average equity (for FY13 & FY12) is 32%; good but not great. Here are the calculations for your reference:

    All figures in Rs cr FY13 FY12
    1 Net Worth 253.9 225.5
    2 Current Investments 118.1 28.1
    3 Cash & Bank Balances 60.8 101.3
    4 Short-Term Borrowings 14.1 14.9
    5 = (1 – 2 – 3 + 4) Net Operating Assets 89.0 111.0

    6 Average Net Operating Assets 100.0
    7 Average Current Investments 73.1
    8 Average Cash & Bank Balances 81.0
    9 = (7 + 8) Average Current Investments / Cash & Bank Balances 154.1
    10 Average Net Worth 239.7

    All figures in Rs cr FY13
    11 Net Profit Before Tax 77.3
    12 Other Income 12.2
    13 Net Profit Before Tax (excluding Other Income) 65.1

    14 = (11 / 5) Pre-tax Return on Net Operating Assets 65%
    15 = (12 / 9) Pre-tax Return on Cash & Bank Balances & Current Investments 8%
    16 = (11 / 10) Pre-Tax Return on Equity 32%

    The company is earning less than 8% per annum on its current investments & cash and bank balances, which is significantly pulling down its pre-tax return on equity.

    • The company has average operating cash flows (after changes in working capital & maintenance capex) of Rs 68 cr. Dividend payment in last financial year was Rs 21.6 cr. If we include dividend distribution tax of 16.2225%, total dividend payout would be approx. Rs 25.1 cr. Why is the company hoarding so much of non-operating assets (in the form of Cash & Bank Balances & Current Investments) on its Balance Sheet? Isn’t it pulling down its pre-tax RoE from 65% on average operating assets) to 32% (on average net worth)? Shouldn’t the company just distribute excess cash in the form of dividends or make share purchases, whichever is more tax-efficient and makes more sense (I am incompetent to comment on tax matters).

    • The company post-tax RoE is close 22%, which is good but not great. I am extremely sorry not to have commented on the business of the company as it take some time for me to understand the same.


  6. Ujjwal Bruta says:

    “There was a criminal case that is against one of the Promoters and whole-time directors. This case was filed by an ex-employee of our Company in counter to a criminal complaint filed by the Company against the employee.” Source RED HERRING PROSPECTUS 2006

    • Ujjwal,

      Thanks for bringing this up. But you did not provide the full information about this in the prospectus. Here it is:

      From Page 14 of 274:

      “There was a criminal case that is pending against one of our Promoters and whole-time directors, as described below. This case was filed by an ex-employee of our Company in counter to a criminal complaint filed by our Company against the employee. This case has been settled on 25th February 2006.”

      From page 207 of 274:
      Criminal Case No. 429/P/2002 CR 217/2002: Mr. Vikas P. Jain & Others V/s. Y.B. Reddy & Others.

      “A criminal case was filed by Mr. Vikas Jain in 2002 against Mr. Y. B. Reddy & others vide FIR No. 217/02 on 7th June 2002 for stopping other workers of Keval Kiran & Co. from carrying on their work and inciting them to join a trade union. Simultaneously Mr. Y.B. Reddy & others filed a criminal complaint against Vikas Jain & others vide FIR No. 218/02 on 7th June 2002. Both these cases have been clubbed by the Additional Chief Metropolitan Magistrate and are pending hearing.

      Status: The parties have entered into a compromises, and the Lok Nyalaya by his order dated 25th February 2006 acquitted Mr. Vikas Jain and others, and the case has been dismissed.”

      • murthymutyala says:

        While the case and counter case filed appears to have been settled by a compromise this shows some weakness in the IR and HRD areas of the company.Due importance should be given to this aspect by persons who analyse this company. However as of now HR relations appears to be cordial as reflected In the present financial performance of the company. Why this is of relevance is that , there were earlier instances of bad industrial relations played havoc in otherwise excellently run businesses.

  7. Hi

    It looks like the franchise business model is the heart and soul behind the extraordinarily high ROE’s and ROCE’s. Out of 279 stores as per the Q1FY14 presentation 265 were franchise owned and operated. No capex/opex for me, some training / operating costs and expansion of my distribution network.

    Wouldn’t a look at a standard franchise agreements be crucial in order to understand who (franchisor/franchisee) is responsible for each aspect of the arrangement? Just playing devil’s advocate but there may be clauses that might not show up in the financial statements today but might be very important from a long term business perspective. Does 48 stores being closed as per the FY13 annual report (roughly 1/4th of the opening number of stores) mean something?

  8. murthymutyala says:

    A simplistic and down to earth observation by me : return on capital employed (ROC) for the years 2009,2010,2011,and 2013 is 15 ,26 , 35 , 32 ,and 30 respectively . That is for every 100 rupees deployed by way of owned funds and borrowed monies the company has been able to generate a return of around 30 rupees.Historically companies which are able to generate a ROC of over 25% have been giving a CARG of 20% in share price plus dividends .

  9. abmahendru says:


    Thank you very much for sharing this puzzle. Really enjoyed going through it. Thought provoking!!

    I think the key strengths of KKCL are as under:

    1. Superior Distribution model: As per their latest annual report, 58% of their sales comes from MBOs. This is a major strength of the company as its products can reach in smaller tier-2 and tier-3 towns where having own outlets might not be viable. 29% of sales comes from EBOs, majority of which are franchised. National chain stores, which are relatively expensive distribution channel, contribute only about 6% of total sales. Thus, the company has a robust and deep distribution model which is quite economical. This has taken years to build which acts as a durable moat.

    2. Shareholding: The promoters own 74% of the company. This gives them a freedom to implement business strategies which would make the company a strong player for years to come. On the contrary, players like Spykar are backed by private equity. PE typically has a 5-7 year horizon in mind and at times forces the management to take actions which would have a short-term impact, result in attractive valuation for their easy exit etc. which might harm the business in the long-term.

    3. Manufacturing: Thought it is not very clear from the annual report, I would feel that the company does outsource quite a bit of manufacturing. They basically purchase fabric (making which is not that attractive from investment perspective), semi-finished, and accessory products. Thus, in a way they are focused on doing only the things that are profitable.

    5. Brand ownership: They own all the brands. Thus, they don’t need to pay any royalty to any foreign partners.

    6. Investing in marketing: They have kept their cost structures quite low and rather investing heavily in marketing and strengthening their brands which gives them a durable moat.

    7. Regularly closing non-productive outlets: The management has the courage to take tough decisions and cut out the weeds on a regular basis which would put a drag on the profitability.

    8. Vertically integrated business model: The Company has a vertically integrated business model right from designing, manufacturing, to selling which gives it the benefit of integration.

    9. Strong financials: On account of superior, asset-light business model, the company is debt-free. This gives quite a bit of freedom to do things which are good for business in the long term and not be bogged down by high interest payments when things slow down.

    10. Positioning: Products are positioned in the mid-segment / value for money segment in India. Like Relaxo, this offers a huge business potential which only a player with a large scale can effectively manage due to economies of scale.

    Aditya Bob Mahendru

  10. kumardiwesh says:

    Most of the company’s stores are in Tier-II & Tier-III. Its products are in the mid-market category where there is not much competition in the organized space. The company is mostly competing against the unorganized and can continue to gain market share. Most of the branded players are in premium segments. The company has been moving up the value chain as sales of “Killer”, its flagship brand have gone up from 48% of total revenue in Q1 FY2013 to 56% of total revenue in Q1 FY2014. One of the entry barriers could be the working capital intensive nature of the business, which means such a business can generate reasonable returns only if it operates on a franchise model. The cash conversion cycle for the company as of Q1 FY2014 was 59 days, i.e., approx. 2 months (debtors, 52 days; inventory, 49 days; creditors, 42 days).

  11. Tiru says:

    Regarding brands and pricing power, I’ve always made it a point to think like: Do people wake up on a Sunday afternoon and say, man… I need to buy me some Killer Jeans? Or do they think of Levis, Pepe first? Do they much rather pay up for a cheaper pair of Levis or settle for a Killer Jeans?
    And after one buys a Killer, does one go back to the same brand or is one indifferent in general?
    People who bought See’s Candies went back for See’s candies. People who buy Arrow shirts in India, keep going back for Arrow shirts.
    Is small town India the real target market for Killer and Lawman?

    Furthermore, has the promoter shown his worth with capital allocation decisions; are the dividends sufficient relative to the crazy cash on the b/s? Why has he kept so much cash on the books for so many years now?

    And with India opening up to potentially many new jeans brands, will the brands’ supposed franchise value go away?

    And may be, it has something to do with my disdain for jeans😛 (why do people wear it in humid countries?)

    • I’m with you on the so much cash on the balance sheet. If it cannot be invested should the company keep it? I specially worry when the majority owners of the company are also its directors for it can signify they are unwilling to divide the profit with other owners.

  12. Few points which come in mind (some points might be repetitive)
    • Focusing on franchisee model (Asset light: low capex requirement, low running overheads, low rentals etc)
    -Instead of company owning or leasing the outlet, franchisee leases or own the outlet so franchisee bears the cost (out of 279 store 265 are franchisee owned and franshisee operated
    • Company focuses on brand building and designing of products
    – Manufacturing of raw material is done outside, Company just cut s the cloth and puts on the desing (in Relaxo it was discussed as a possible future state just like Nike etc outsourcing manufacturing and focusing on branding and product designing)
    -A virtuous circle can take shape: focusing more on branding resulting in more demand resulting more franchisee resulting in more branding (focusing on tier 2 & tier 3)
    -Presence in metros is limited; expanding in tier 2 & tier 3
    • Range of brands selling through exclusive brand outlets, Multi brand outlets (like shopper shop etc)
    • Why Profitable: Branding combined with asset light model resulting in profitable business model
    • Scalability: Tier 2 and tier 3 will provide growth and scale, no need to invest in capex , they only need more franchisee applications, which will be result of branding
    • Competition: Un-organized (taking hint from Relaxo case people move to branded from unbranded), small local brands ( don’t have that level of mind share), Bigger brands (Wrangles, Levis, Lee in the branded customer will move to higher end brand, but that will come in picture years after… just like Raelaxo, Killer seems to have huge market potential but with low capex requirement). Growth requires less capital as its franchisee based model
    • Value Chain: Different brands for different price points, wide presence, focusing on designing and branding
    • Entry Barrieres: Strong brand and strong presence with low capital investment can act as entry barriers (how strong they are I have no idea). A New entrant has to spend huge amount of money and time to achieve that level.
    • Like Dislike: Since its invention Denim is the something everybody (male female) wears. Age or earning levels no bar. Dislike: a jeans is a jeans, how strong the brand is that will define whether I will go for Killer or any John Player or any other brand. At tier 2-3 price point points and earning levels are also come in picture.

  13. Dear Sir

    One of your rigorous follower
    I have few queries /dilemmas which I always face many times so your directions will be very helpfull

    In align with little principle paying 15 pe for a stock is little much which on the other hand can be offset by cash on balance sheet , growth prospects , roe and other good numbers -so my dilemma is how you a value investor should play this trade (assuming he is not from momemtum camp-bhaw bhagwan haien) assuming there is no pe epansion scope and 5 yrs down the line co sales double , pat double so it should be a 15% compounder

    Q1- should he be content with same and take unknown risk(competition , brand losing its sheen) -for 15% compounding
    Q2- should he wait for price to come to 10pe and than take a position so to paddy up the returns -In this case he run the risk of market never giving him opprtunity which is compounded by suddenly 15 pe expanded to 25 pe

    I have lost many opportunity like these which in hindsight looks more foolish on my part

  14. Saurav Jalan says:

    Hello Sir,

    I would like to present some of my observations about the company :

    1. After reading the FY 13 Annual Report and watching the production video, it seems that the company is not into denim manufacturing but cutting, shaping, styling,designing, coloring,fine tuning texture, sand blasting, branding and distribution of denims. It is trying to be a fashion creator not cloth manufacturer. This also leads to very low investment in the fixed assets.

    2. Due to the finance background of the Chairman, the company is very efficiently managing the working capital and expanding through franchise model with cautious optimism.

    3. Their positioning looks good of targeting the middle and upper middle class youth of the country. Moreover, they want to build a contemporary Indian brand of denim which is more affordable than Levis but is not perceived as cheap.The company advertisements look fresh, innovative and intelligent. The company is very active in social media also.

    4. The company is trying to move up in the value chain as the value growth has been better than the volume growth since last 2 years as per AR.

    Due to these factors, the company is generating very high ROIC of around 84.06% based on the formula EBIT/(Total Assets – Cash) – Non-interest bearing current liabilities. (I have calculated for FY 13 only but the average amount would also be somewhere close).

    If we add the security deposits and advance from customers of both long-term and current nature, then the total amount comes out to be :

    FY 13 = Rs. 10,61,28,751
    FY 12 = Rs. 7,34,55,581
    Change = +44.5 %

    This is the interest free money which the company have access to and I think that if they continue to expand through franchise owned and operated model this amount would increase in tandem.

    Points of Concern :

    1.Average Current Investments + Cash = 154 crs approx
    Total Other Income = 12.5 crs
    Return on treasury = 8% approx.

    Total WC loan = 14 crs approx
    Interest on WC loan = 1.33 cr
    Other finance expenses = 1.29 crs

    Are these other finance expenses would be considered as cost of debt ? If so, then the :
    Total cost of debt for FY 13 = 18.60%
    FY 12 = 17.43%

    This doesn’t looks prudent as the company is borrowing at 18.5 % and earning 8% on treasury. If we only consider the interest on WC loan as debt cost and ignore all other finance expenses then why the cost of debt increased from 6.17% in FY 12 to 9.45% in FY 13 (Reference: Page 89 of AR).

    2. The rent paid by the company to all the Jain family members was Rs. 39 lakhs approx in FY 13. Since, the company is sitting on surplus cash and the business doesn’t need much capital for growth, then wouldn’t it be wise to buy the property and get relief from the annual rent expense. The property would also appreciate in value over a period of time. We have seen that in bad times the liquidation or alternate use of real estate assets saves many companies.

    3. In FY 13, Rs. 1.5 Cr was donated by the company to a charitable trust named Lord Gautam Charitable Foundation chaired by Mr. Kewalchand P. Jain. Although doing charity is a pious deed as per our religious scriptures but how do you view a company’s cash being diverted to a trust controlled by it’s chairman. None of the charitable work done by the trust have been talked about in the annual report. Shouldn’t the shareholders have the right to chose a charity of their choice for charitable donation ?

    These were some of my views about the company. I wish to learn many more from you and other followers of this blog.

    Thanks and Regards,
    Saurav Jalan

    • Regarding this rent to the Jain family issue. What exactly is it? I cannot believe it is what I think it is.

    • The other point about the fund for charity. That is completely unethical. We have a company who (1) holds cash like crazy; (2) pays the rent for the family members and (3) has a charitable fund chaired by the main owner of the company. That has enough red flags for me for not meriting my money. I am also from an emerging market and we have the same kinds of issues happening here. If the market does not discount the value of company for these kind of issues they are actually being rewarded for doing “possible” unethical acts.

  15. Dear Sir
    I am not an MBA. I have an engineering background. I am very interested in value investing and learned about your from Mr. Vishal Kandelwal. i am happy to give my inputs for the KILLER puzzle based on my little homework and understanding🙂

    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:

    (a) Efficient and own sales and distribution network – in one of the videos Kewal’s CEO/Chairman mentions that they directly deal with retailers. So, distribution margins to large extent lies in Kewal’s hands.
    (b) Franchise model of running the business – opex and capex light, shared risks, while cash flows returns are good
    (c) Any special tax incentives for this company ? Low excise or sales tax? Any of their units in special economic zones? I guess this may also contribute to high net margins
    (d) They seem to have (from videos) a good mix of skilled and well-trained workers and mechanisation. Their factory can be said as semi-automatic – wherever value addition is high they go for capex and install advanced machineries – like laser designers/burners, for less value addition skilled laborers equipped with required basic tools are doing the job. So this also saves costs.

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

    This is a highly scalable business. Land, labour & capital required for any business and I see that Kewal has capital (cash) in hands to scale when the time is good.

    As urbanisation continues to grow, more people will embrace fashion…I myself have seen so many rural youths moving to “hot”cities first starting to wear tight blue jeans to “say aloud” that they are now part of the city and youth culture. Also, india is a young country with a big majority is still under 40 years in which majority of them would love to spend money for “affordable fashion” where Kewal rocks!

    3. Who does Kewal Kiran compete with?
    To most part your puzzle answers this question. They compete with affordable and cost-effective fashion clothing producers. I do not know their names but little research may reveal them. Clearly Kewal’s market is the huge and rising middle class of India.

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

    Laser burning processes for producing designs on the jeans trousers
    In house fashion design and creators
    Own branded stores being established across India
    They still have room to grow their exports to emerging nations

    (5) What is Kewal Kiran’s competitive strategy?
    Affordable fashion, good quality, customer satisfaction

    (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
    Brand name – KILLER
    already established player – raw material sourcing, manufacturing, distribution

    (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: As of today denim jeans is a fashion well accepted by the youth of India and the world. For at least next 10 years, i guess, this business will be good

    Dislike: We do not know after 10 or 20 years if this will still be the case – may be Indian youth would prefer Dhothi’s and Sarees instead of jeans!

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


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

    I did not do the homework to answer this question 8 & 9. Main similarities: affordable products, franchisee model.

    (10) How would you value the shares of Kewal Kiran?

    I assume 20% YoY growth in net profit for the next 2-3 years is easily possible. FY2015 E = Rs. 60 EPS. FY2016 E = Rs. 72 EPS. Being in a growth business with huge market size, I would consider P/E of 15 minimum. So, FY2015 target price will be 900. If one can enter this stock at sub-Rs. 700 levels it will be good. If purchased at sub-650 levels, then its clearly a value buy!

    • Dear Venkataragavalu Sivagnanam,
      Like you I am not an MBA, but an engineer. I too was led to Prof Bakshi’s blog through Safal Niveshak. I found your analysis interesting. Tell me, did you go through the annual report in detail or did you just stick with the youtube videos? I find reading balance sheets and income statements bvery difficult. Do you have a good book or resource on that?
      Anand V P Gurumoorthy

  16. vryadav says:

    Dear Prof.,

    Relaxo’s business model is better compared to KKCL because it is based on economies of scale and operating at low margins which cannot be challenged by a irrational competitor. KKCL model is based on franchisee model and operating at high margins and can be challenged by an irrational competitor.

    Another point beside this discussions, at current MCap, to earn 15% pretax for the next ten years, KKCL has to grow its revenues and earnings at @ 50% p.a for the next ten years.

    Your valuable comments.

  17. vryadav says:

    Corrections in above statement. It is 17% compounded every year and not 50%. Mistake in calculations.

  18. kumardiwesh says:

    Hi Sir

    I have a question. In the formula for calculating net operating assets, you have used net worth minus net cash, whereas in some of your earlier posts on floats and moats, you have used total assets minus net cash. Was the earlier formula to calculate gross operating assets (total assets minus net cash)?

  19. 1. The company can be seen basically as a FMCG company, as it has its profits not from cost cutting, but through pricing, branding, distribution etc. It is not a B2B business/supplier, but a consumer company.

    2. Like all consumer companies, the critical points to be checked are branding, distribution network – extent, strength, and pricing.

    3. As for the excellent financial performance, it can be attributed to the academic financial background of the promoters, who seem to have consciously taken great care to have cash on hand, low debt, asset light model, good turnaround times, less inventories. Overall, a conservative approach.

    4. Future growth lies in 2 ways. It can survive as 1) the 2nd preferred brand after Levis, Lee, Pepe Jeans etc. with its strength in an established deep distribution networks, further build on it, and grow in Tier-2/3 cities along with the India growth story, like Maruti/ITC/Airtel. Here, at present it doesn’t need expensive marketing campaigns like the current Levis Revel ads on TV, or 2) try competing with the big boys.

    In both cases, it would need to continue holding on to its distribution “moat”, PLUS build the brand as an “aspiration brand”, as sooner or later, the big boys will move into its current markets in Tier 2/3 areas, with consumer purchasing power increasing & the international players deepening their knowledge/experience of the Indian market.

    Its better if the company starts building such a strong aspirational brand, like Micromax for eg., to compete with the Samsung/Nokia of the branded jeans business.

    5. From an investing point of view, the risks are heavy. 1)Heavily dependent on promoters, management bandwidth/bench strength very limited. 2)If push comes to a shove, company will face difficulties in countering international players in marketing, where its limited finances are a handicap. 3) For the next 5 years, if nothing changes (big partners coming in etc.), the company will be mostly confined as the 2nd player, after Levis/Lee/Pepe/Spykar plus the multitude of stronger brands like Zara etc. Currently, its best play is Tier 2/3 markets, which currently has 85% market share but the threat is of these too be gobbled up, if the international players keep their pricing right, and improve distribution.
    Upside – fair to good chance of being dominant in unbranded market, Tier 2/3 cities
    Downside – may face competition in its areas if others play right, little to fair chance of attacking bigger players in metros, major handicap being little financial strength for product R&D & marketing.

  20. Many things are already answered by above bloggers. Only weak link i see is that when i asked my 13 yr old son about Killer brand then he looked at me questioningly!

    It looks either brand is still weak or its limited to lower middle class segment.It seems to be a poor man’s Lee. So its a kind of makeshift brand for this segment and unfortunately it would be abandoned later because this segment aspires to migrate to higher middle class segment by buying Lee/Pepe etc. I am unable to see any solid analogy for any brand which has prospered on lower middle class so far. Such market segment is devoid of strong profit margin due to lack of pricing power. Plus trouble is that Jean business is all about branding when it comes to upper strata. So in near future if KILLER aspires to make out a place for itself in the league of LEE, PEPE, WRANGLER etc then a huge expense is required on marketing and that’s a indeed tough task.

  21. On pages 43- 44 of Security analysis(1940) Graham gives an example of two companies -First national stores and Studebaker . He writes:

    But the analyst must penetrate beyond the mere figures and consider
    the inherent character of the two businesses. The chain-store grocery
    trade contained within itself many elements of relative stability, such as
    stable demand, diversified locations, and rapid inventory turnover. A typical
    large unit in this field, provided only it abstained from reckless expansion
    policies, was not likely to suffer tremendous fluctuations in its
    earnings. But the situation of the typical automobile manufacturer was
    quite different. Despite fair stability in the industry as a whole, the individual
    units were subject to extraordinary variations, due chiefly to the
    vagaries of popular preference. The stability of Studebaker’s earnings
    could not be held by any convincing logic to demonstrate that this company
    enjoyed a special and permanent immunity from the vicissitudes to which most of its competitors had shown themselves subject. The soundness
    of Studebaker Preferred rested, therefore, largely upon a stable statistical
    showing which was at variance with the general character of the
    industry, so far as its individual units were concerned. On the other hand,
    the satisfactory exhibit of First National Stores Preferred was in thorough
    accord with what was generally thought to be the inherent character of
    the business. The later consideration should have carried great weight
    with the analyst and should have made First National Stores Preferred
    appear intrinsically sounder as a fixed-value investment than Studebaker
    Preferred, despite the more impressive statistical showing of the automobile

    This line from the above is worth reflecting :The stability of Studebaker’s earnings
    could not be held by any convincing logic to demonstrate that this company
    enjoyed a special and permanent immunity from the vicissitudes to which most of its competitors had shown themselves subject.

    My question is despite the numbers of KKC being wonderful ( killer ) NOW .
    Do we have any CONVINCING LOGIC to demonstrate that this brand will enjoy a special and permanent immunity down the line say 5- 6 years in this ‘jeans ‘ space..

    I think this is the question worth pondering .

  22. Ayush Mittal says:

    Dear Sir,

    Thanks a lot for bringing up these case studies. Its been a great learning experience.

    Have tried answering the questions:


    Thanks & Regards,

    • in time says:

      Hi Ayush,
      Can u please explain this in layman’s term:
      “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”

      • Ayush Mittal says:


        I feel one of the key factor affecting the success/failure of a fashion business is the inventory management. If one is keeping high inventory, there is always a risk of slow movement or obsolescence of the same. At times cos may have to sell garments at cost or below cost to get rid of the same.

        If we look at the inventory days (as of FY13) of the three cos – Zodiac – 82 days, PAGE – 98 days and KKCL – 40 days. KKCL has the lowest inventory days.

  23. I tried to post this earlier but its not showing up so trying again:

    I found this online while looking for KKCL franchise agreements. No idea how accurate (or outdated) this may be but for a moment lets assume that its not some kind of practical joke.

    Extracts reproduced below:

    Franchisor prerequisites:

    The total investment required from the franchisee will be approximately between 38 to 40 lacs.
    A Onetime franchisee fee of Rs.1, 00,000/-for the entire concept and administration cost.
    The interior cost will be approx 18lacs in a carpet area of 1000 to 1200sq.ft. (Includes cost of mannequin, signage, software, hardware, accessories etc)
    The minimum stock would be of 2500 to 3000pcs amounting to approx Rs.20lacs (Inclusive of all four brands, Killer, Easies, lawman & Integriti)
    The premises should have minimum frontage of 25ft and minimum height of 10ft.
    Franchisee also has to pay architect fees of Rs.1,15,000/-
    The cost of carry bags will be charged to Franchisee.

    Desired Franchisee Profile:

    Franchisee should be mentally inclined to do a business of 1crore per annum
    Should be passionate about customer service in the apparel for lifestyle area

    Franchisee Benefits:

    Franchisee can get penning invitation cards approx between 800 to 1000 cards depending upon the requirement. (Rs.20000/-)
    Profitable markdown is provided to franchisee
    The creative for POS i.e. posters and visuals will be provided by the company, the cost of printing and installation will be shared equally between the franchisee and company


    265 stores (March 31, 2013 closing store count) x 40 lakhs per store is 106 crores. Correspondingly, the operating assets of the business as per the note prepared is only 101 crores! Although the franchisee would also be taking in part of the return, I think the real beneficiary of this would be KKCL. Gaining economic benefits off capital that other people have deployed (and not even having to show it on your balance sheet) is quite amazing.

    If we consider the fact that in the past many stores would have closed as well (1/4th the opening number of stores were closed in FY13 alone), the actual capital that has over time been deployed by the franchisees (with the ultimate beneficiary being KKCL) might be several times the 106 crores based just on the closing stores.

    Also 1 lakh that I earn as one time franchise fee doesn’t hurt either!

    On a slightly unrelated note, I would like to know what your thoughts on how the franchise model for this business will be able to deal with the arrival of e-commerce/online shopping. In a world where I can sit at home and browse all possible brands (and even try them on at home for some websites) does the concept of a physical storefront (for the apparel industry) retain its relevance?

    • Those are some good eye-popping facts Tata.
      Shopping apparel items that too a JEANS, i do not think online would pose threat to physical stores. But the question remains is if the agreement between franchisees and KKCL is biased towards KKCL and till now many franchisees have burnt fingers and closed outlets, sooner or later this will haunt KKCL too. Either they need to evaluate franchisees well, or provide more support, regardless this will put brakes to their speed of expansion and growth.

  24. Lots of excellent comments. Here is some additional information sent to me by a couple of ex-students on a company called Mc jeans in Thailand – a local thai brand.


    Please learn more about this company and compare it with KKCL. Also use the data about Mc Jeans, its addressable market and the aggregate population of that market to get some idea about the long-term scalability of KKCL’s business.

  25. Nitin Mukhi says:

    Would like to check with you one off the track question.

    I have been been trying to understand the general insurance business and the retail funding business of Bajaj FinServ. I was skimming through the annual report of the holding company Bajaj Investment Holding and found that it owns ~30% of bajaj Auto and ~40% of Bajaj Finserv. It is selling for only ~8500 crore. Instead if someone independently purchases ~30% of bajaj Auto and ~40% of Bajaj Finserv, he will have to shell out ~21000 crore. Apart from these two mammoth ownership, Bajaj Investment Holding also owns several other investments and the company is debt free.

    Why this valuation disparity?

  26. Deepak Shenoy says:

    Interesting company, but would you really pay 20x P/E after cash for what has been stagnating earnings? PAT grew only marginally in the last year. But Q1 has been decent, and sales have come mostly from growth in Killer Sales + Exports.

    Red flags: They seems to have a joint venture (33% owned by KKCL) in White Knitwears, which seems to be rest-owned by the promoters themselves. This is a classic red flag, why is the company joint-owning a garment company, which is in the same business, along with promoters? Siphoning mechanism. Already have provisioned for 49 lakh loss.

    Another red flag is the price. Killer is not cheap – at 1000+ a pop, it is about 2x more than most others.. Wholesale prices are about Rs. 600-800, as evinced from their K-lounge franchisee requirements (2500 to 3000 pieces of stock worth Rs. 20 lakh required)

    Also that they close so many stores is scary. From my calcs they closed 7 k-lounges, 1 K-Lounge for her, 2 killer EBOs, 3 Integriti EBO and 1 LawmanPg3 EBO for a total of 14 (this is subtracting what they had stated from their annual report from current report at http://www.kewalkiran.com/PDF's/Analyst%20Presentation%20Q1%20FY2013-14.pdf for Q1 2014). A k-lounge – the biggest beast – has a massive 40 lakh investment. This is not something you close just like that; and most of these are franchisee owned. Even last year, 47 out of 250 stores were closed – nearly 20%. It’s a red flag for sure.

    In comparison, EBO (Exclusive Business Outlet) numbers for Page Industries show 71 stores in 2012 and 100 in 2013, for a net addition of 29 stores, and Relaxo added 19 to go to 168. They don’t give you closure information though.

    But yeah, theres the fact that nearly 85% is locked out of themarkets – nalanda’s 10% and promoter 75%. So you will get some scarcity premium and if the company cuts prices to the sub 800 rupee level MRP it will do really well. Charts look interesting if it crosses 900 convincingly.

    • Thanks for writing in here Deepak. I haven’t yet focussed on valuation of this company so will duck your question on paying 20x for now.🙂

      As for your other, very pertinent points, here are my responses:

      1. Joint venture. Why did they do it? Good question. I don’t have an answer. We do know, though, that investment is largely in the form of debt (preference shares) and management is confident (overconfident?) that they will recover the money though sale of real estate in the JV. We also know there have been no other dealings with that company (at least none have been disclosed) so using this company as a siphoning mechanism looks doubtful to me. But even if there was siphoning, we get to look at the profits after the siphoning which are very impressive.🙂. Rs 49 lac provision for losses is immaterial in relation to the company’s current market value of 1,034 cr.

      Two additional thoughts on management:

      A. Dividend policy. Here is the track record of dividends:

      Year End Dividend per Share(Rs)
      Mar-2013 17.50
      Mar-2012 17.00
      Mar-2011 16.50
      Mar-2010 6.00
      Mar-2009 3.00
      Mar-2008 4.00
      Mar-2007 2.50
      Mar-2006 1.50

      Seems to me, this management believes in sharing. Also, it’s not just the quantum of dividends (notice the hike in FY11 and the current dividend payout ratio of 40%) but also the frequency of dividend payouts thats impressive as the company pays several interim dividends every year.

      B. Quality of corporate disclosures. This company discloses its balance sheet and cash flow statement every quarter. Outside of the IT industry, this is quite rare. In addition, every quarter the company discloses sales of each of its brands, type of garment, sales breakup through each channel, and sales for each region in the country. Again, this quality of disclosures is very rare.

      2. “Killer is not cheap”. Yes, that’s true. The company does not consider itself as inferior to the global brands out there and is trying to create a positive image in the minds of its customers too. Indeed, the presence of larger players, who spend a lots more than KKCL on advertising, ”
      “condition the consumer with newer and higher price points that fashion can command for a high-quality product. What is perceived as a potential threat also provides an opportunity for the Company with its well established brands to deliver world class products to its consumers with a compelling proposition.” (FY13 annual report). I think there is some element of truth in that as witnesses by rapid rise in the company’s average realization per garment. See below:

      FY14 (1st Quarter): Rs 875
      FY13: Rs 805
      FY12: Rs 742
      FY11: Rs 685
      FY10: Rs 639
      FY09: Rs 608
      FY08: Rs 564
      FY07: Rs 547

      On Flipkart, you can see Killer jeans listed along with the global brands where prices of Killer jeans are only marginally below those charged by the global brands. It will be interesting to see how this situation evolves over the next few years…

      3. Closing down so many stores in a year is also a reflection of the company’s willingness to experiment and kill those experiments which don’t work out. Contrast that with the rapid expansion of other players in the retail space (often backed by private equity money- KKCL does not believe in taking relatively short-term focussed private equity money) where huge amounts was not just spent on expansion, but more good money was thrown after bad resulting in disastrous consequences. In the case of of KKCL, its their own money on the line, there is no pressure from private equity to expand just for the sake of expansion. While I know that you see this as a red flag, I see it as a reflection of a company which is managed for profitability, not size, and which is not dictated by Charlier Munger’s “bias from commitment and consistency” model in psychology. This company makes several little bets and willing to kill those that won’t work out.

      4. The illiquidity of the stock does not bother me as the mental frame I use is that of a private owner of a business.


      • Deepak Shenoy says:

        Thank you Professor for your detailed remarks.

        a) Agreed, and I should have said “potential” siphoning mechanism. After Sintex, I am a little wary of such situations. Not that I have any evidence of siphoning, but this is how a promoter would set up an entity to siphon out money at a later date (not right now). Eventually you move a good bulk of the business to stuff that sits in the JV rather than the main business, and then…you know the drift. The provision was a note, and it’s not something I relate to market cap (maybe profit, maybe reserves, but I agree, it’s small).

        b) Thanks for the note on quality of disclosures. I could find the Balance sheet but not the cash flow statement, but it is better than many others. Dividends are good as is the fact that none of the shares are pledged.

        c) Killer isn’t cheap isn’t a problem – something

        d) The closing down of stores would be fine if they didn’t require a large down investment per store from a franchisee. Putting up 40 lakhs and then shutting down a store (K-lounges cost that much, minimum) and shutting them down fast doesn’t go down very well with the franchiser? Don’t know how this has panned out…

        • Thanks Deepak. The summary cash flow statement is available on page 10 of this presentation:


          About c), take a look at MC Jeans (http://mc.listedcompany.com/misc/AR/20130614-MC-AR2012-EN.pdf) in Thailand. That company makes more than twice what KKCL makes despite operating in a country with a population less than 6% of India’s population. It’s been taking market share from levis and lee in last 10 years, sells affordable jeans (priced above unbranded ones and below the global branded ones) and other apparel just like KKCL does and earns core ROE similar to that earned by KKCL.

          Agreed on d) although we don’t know how fast they are shutting them down as we only have data on openings and closures during a quarter, so a store that’s closed in any given quarter may have been opened quite a while ago. We also don’t know who is the decision maker in the closure— KKCL or the franchisee? It could be either of them. For example KKCL may give targets and deadlines to franchisee, which, if not met, will result in closure. The franchisee may decide to close down because of better opportunities e.g. disappointing sales of apparel compared to just letting out his premises to someone who will pay nice rent. So the decision to close is not always a reflection of how the business is doing, but also a reflection of opportunity costs of the franchisee. And rent always enter into the picture in retail – directly or indirectly. One needs more data on this subject to form any definitive view on closures…

  27. hardik501 says:

    Sir, I would like to ask if an investment such as KKCL can also be looked from the point of view that Martin Whitman uses such as a strong balance sheet in an industry with generally weak balance sheets and thus the limited firepower of its competitors to out-market the KKCL brands?

  28. Hi,

    First of all a big thanks to Sanjay Bakshi to taking the BF BV discussions to the online forum and educating a lot of novices like us.

    Just my few thoughts

    Although in the above case fundamentally everything looks sound and can continue to remain sound forever.

    But in this case one needs to realize will you buy this company if it was not listed in the markets and the promoter comes to you with this valuations with no exit clause in it ? ( Another such company from Nalanda is Triveni Turbines with a similar case in point )

    Why is the company listed in the first place is difficult for me to understand.

    Looking at the annual report there is one area which I generally look at no fundamental analyst cares about it. Maybe everyone likes to follow the Buffet adage -I buy on the assumption that they could close the market the next day and not reopen it for five years

    The area is Distribution of Shareholding.

    94.93% of the shareholding is with 46 shareholders who hold more than 1 lakh shares.
    1.49% of the shareholding is with 26 shareholders who hold more than 50k shares.

    1.46% of the shareholding is with 4000 shareholders who hold 1-5000 shares. ( Retail Shareholders )

    So basically that gives me an average of 40-50 shares per shareholder in the retail segment. This implies whatever the holding is left is staggered and some might be the same from IPO times.

    Over the last 5-7 years many funds, FIIs have changed hands in the counter. The last change of hands happened when the stock fell from 850 to 600 odd rs and some holders like finquest, emerging india focus and dsp black rock sold the stake which was added by malabar and kotak i suppose. ( This was a nice correction before the deal happened )

    Apart from the 96.5% there might be few more shareholders who would be value investors or insiders. This basically leaves me with 3% of equity left for trading.

    So for a 1000 cr market cap company the floating stock which can be traded is around 3.5-4 lakh shares and a total value of 30 crores on a ball park figure can be a little more or less. The daily traded quantity on both exchanges is generally a couple of thousand shares.

    So which investors will get interested into this stock ? Fundoo Professor, Warren Buffet who can keep it for 10 years.

    How does one valuate an unlisted company without an exit clause is a case which we need to look for in this scenario.

    So how will the price of the company rise when it is dependent on 4000 people with 40 odd shares with them.

    Does the promoter want to scale up the business by growing huge no of franchisees ? or buyout other brands? Will he raise more capital ? Monetize his stake and give it to some operators to jack up the price ? Is he happy with the dividends and salary coming to his pockets?

    ( Were these questions the same in 2009/2010 was at 100-200 rs. This is what every new investor needs to ask)

    So how do you value a company which is essentially not listed and you donot know the promoters on a personal basis ?

    How to value an unlisted company ?

    My only answer in such a case is dividends and nothing else. Minority shareholders have generally no right on how cash is used but dividends is one way the promoter feeds himself every year.

    So the question here is not how good Kewal Kiran will do but its just two questions.

    ->Are you Warrent Buffet ?

    I buy on the assumption that they could close the market the next day and not reopen it for five years

    – Will the dividends grow up so fast that the yield will make a lot of yield investors lap up the stock.

    P.S – I have not seen the fundamentals of the company and neither am i interested in this one till the day promoter decides – to raise more equity or a fund sells the stock in open market or the dividend policy increases in a big way or plans to delist from the exchanges. But am going to definitely track this one along with triveni turbines, elgi equipments.




  29. Here is a link to some thoughts on KKCL:


    I will soon post my views on some of the comments posted by people here. Thanks for your patience!

    • f0084ri says:

      Great write up! Buying commodities and selling brands is a great business. Especially when its pretty much guaranteed that it wont go out of fashion

      However, on a lighter note, the real problem with jeans however is the replacement cycle. Anecdotal, my case is probably extreme, my 10+ year old jeans are so comfortable that in-spite it is falling apart at its seams, I continue to wear it much too often, to the dismay of my family and friends. Having a few more holes in your jeans only makes it cooler, me thinks.

  30. Someone I know, and who has been tracking KKCL for the last three years sent this to me:

    “I have been following this company for last 3 years now and have developed immense respect for promoter’s ‘conservative cum clever’ strategy of doing business…

    KKCL is the best example of THINK INVERT philosophy in practice. KKCL has actively learnt from the mistakes made by its peer in the sector and has consciously tried not to repeat the same. KKCL’s philosophy of ‘SURVIVAL is CRUCIAL, GROWTH WILL BE INCIDENTAL” ensured that it stands tall in the otherwise ‘dangerous’ Indian Readymade Garment market where to remain in ‘fashion’, companies start playing to the galleries (public or private investors) and end up doing stupid mistakes (detrimental terms of trade, mindless retail expansion, reckless inventory management, etc.). ‘Risk Mitigation’ is the core mantra of KKCL and is visible across its business layers – retail expansion (franchisee led), production (chunk is outsourced), logistics (factories at 4 different locations), merchandise (smartly spread between basics, fashions and seasonal), brands (4 home grown brands).

    Looking at the plethora of instances (Jinny Jony, Spykar, Liliput, etc.) in Indian RMG, how good strong fashion brands got KILLED while failing to manage operating and financial leverage together, our respect for KKCL increases manifold. To Finish first, first you need to finish – KKCL is surely playing reach the FINISH line and hence for all we know, could end up finish first as well.”

    • Read both ur pdf analysis & the above comparison. With due respect, I can firmly say that there is a strong bias you have for KKCL, which may be very logical and well-grounded, considering ur long experience in this field. At the same time, the reasons u give for favoring KKCL, don’t cut ice with me, for the following reasons :

      1) Nobody is contesting KKCL appears to be a well-managed, small consumer company. With all respect to, it doesn’t take too much to know that promoters have managed well financially, keeping costs low, and profitability intact. But that’s about it !

      2) A small, promoter-driven consumer company, with not a very well-established brand has obvious risks. The show is management driven, specifically the chairman. Reminds me more of Jobs’ Apple. There is little professional management bandwidth to show for next 10 years. Red Flag.

      3) KKCL is in a hyper-competitive industry with a nascent brand. Red Flag.

      4) Financial strength is limited to take on the biggies to make a meaningful impact, specifically marketing. MNCs have low margins, and they can afford to be so. They can incentivise distributors, retailers & have well-established brands. Red Flag.

      5) Tomorrow, if a similar well managed, well-driven company crops up, which does not seem very difficult if one has enough money, what happens to KKCL’s dream India story. Its not beyond imagination to see Reliance Retail, Big Bazaar etc. introducing similar brands. Red Flag.

      There are better stories around to commit long term money here. I may be wrong and lose out on a 20X, but its better than losing even the definite 10X.

      • Rahul, those are very good points. Thanks. My response to your points:

        1) Nothing to add

        2) KKCL is not small. It’s one of India’s largest denim apparel players. It’s larger than Lee and Wrangler put together. Second, there is nothing wrong in being “promoter-driven.”. Indeed, they have their own money on the line. Instead of Steve Jobs comparison, I would compare this family run company to Nebraska Furniture Mart (acquired by Berkshire hathaway) – which used to be run by an extremely competitive Rose Blumkin (a school dropout) who had her family members help to manage the company. If you haven’t read about Buffett’s discussion on that company, I highly recommend it. I don’t think you need MBA’s to fill up the management team to make it look “professional” and I am writing this as a professor who teaches MBA students. I think instead of looking at “professional qualifications” one should focus on the track record.

        3) Hyper-competitive industry, yes. Nascent brands, no. The flagship Killer brand was launched in 1989. They have been around for more than two decades, though they went public only in 2006. So it’s an old company. One more point here. Most readers of this blog don’t see very many killer jeans. That’s because they visit malls in big cities in north and west india not smaller cities in East India (KKCL gets 34% of its revenues from East India). The real action in this business is in the smaller cities and towns. The company gets only 17% of its revenue from north India and I live in Delhi and I don’t get to see very many killer jeans. That doesn’t mean they don’t exist.

        4) I don’t know of any company in the apparel space with better quality balance sheet, but I think you’re referring to financial strength with reference to KKCL’s small size as compared to that of the global denim giants. Nevertheless, with a Rs 180 cr war chest, KKCL can afford to hire any number of brand ambassadors which could easily create a much bigger demand for their products. But they don’t. Why? Because they run the company for profitability, not just size. But, if pushed by competition, they probably will spend that money. Keep in mind that one MNC recently withdrew a brand (denizen) which was meant for lower-priced segments. But, yes, your fears could transpire and if they did, it will affect KKCL’s per-share intrinsic business value adversely.

        5) Reliance Retail, Big Bazaar etc all sell jeans under their own labels. The malls are full of labels but labels are not brands.

        As for your last point, as you have mentioned, you have better opportunities to invest in. How can I argue with that?🙂

        Your avoidance of investing in a hyper-competitive industry is well appreciated by me but monopolies and duopolies have enemies too (e.g. competition commission). Warren Buffett has made a lot of money by investing in highly efficient players in very competitive industries (e.g. NFM cited above and GEICO in insurance). But you don’t have to do it if you don’t like it.

        Regardless of what I wrote above, I agree with you that I am positively biased in favor of this company, as I disclosed earlier as well. These are just case studies for my class. I am just blogging about them here because I have many students outside my class as well…

        Thanks for your inputs. Everyone should read them carefully.

        • I think our Prof is well aware of these facts, he is trying to Play Devil’s advocate😉

        • Ur comments have soothed a lot of my nerves here ! The most important point is its market is focused on smaller cities and lighter wallets, not Delhi/Mumbai. Consequently, it is not in competition with the foreigners. The moot point is, what then drives its consumers to Killer, when other brands too are available at same prices ? Its definitely not marketing, bcoz Killer has no marketing as such. I think the answer is similar to all consumer brands : 1. Good distribution, specially in a country as big/diverse/remote as India 2.Consistent quality 3.Right Pricing

          Upsides : Promoters continue their rockstar performance, no similar domestic competition crops up, as the brand is not very strong yet, and branded jeans business needs a strong brand.

          Risks : Family feud, promoters lose grip on business, and competition sandwiches it between cheaper labels & foreign brands.

          P.S. I’m sorry Prof., I cant conclusively view the business 5-10 years ahead, without losing my piece of mind !😀

  31. Stumbled upon this post on the web. Great teaching method that attempts to clarify the canvas of a security analyst. Investing is a far cry from razmatz of business channels, news flashes and up to the minute analysis.
    Hope ‘value’ investing (or should I say ‘favourable odds’ investing) now does not become the ‘par’. The EMH skeletons are still in the closet :-))

  32. Vora Notes says:

    Prof. Bakshi,
    Thank you for an interesting case study. Outside of strong branding and distribution, one of the pro’s for the company’s business model is that they are operating a franchise model which allows them to deliver high returns on tangible capital. However, one of the potential pitfalls to this strategy in the longer term could be the sustainable profitability at the franchisee level. That is, if fees/royalties charged by the company in addition to the capex/opex costs disallows the franchisee to operate in sustainable manner in the longer term they will be forced to shut down. It would be interesting to understand the unit level economics per store by looking at the start up and running costs per store and the terms offered to the franchisees at initiation as well while scaling up. Thus, taking into consideration the capex+opex + royalty costs/fees franchisees have to pay, what is a sustainable level of sales & margins per store that these tier 2 & 3 city franchisees need to achieve to operate successfully and continue royalty payments? Are returns on capital, turnover and profitability appealing to franchisees? The number of stores closed per year could be a good indication of sustainability at the franchisee level. However, considering that stores are usually closed after a few years of being operational, comparing number of stores closed this year, to number of stores opened say 3 or 4 years ago might be a better way to look at the viability.

  33. Sir, since many people have already touched upon the franchisee model, better inventory management, emphasis on branding and outsourced distribution i will just add some incremental points on why KKCL has got a differentiated and more profitable model relative to big international brands and other local branded apparel companies like Page Industries and Zodiac:
    1. Unlike Levis and Wrangler who are only present at premium end of the market KKCL has a mix of brands across various price points and product categories, allowing it to use operational gearing better than others as sales is more stable and balanced and less impacted by consumer sentiments in any one category.
    2. KKCL is focussed on tier 2 and 3 centres (in east it has more than 30 stores each in Bihar and Orissa while having only 2 in WB. In north it has more than 30 in UP. In Maharashtra more than 30 are outside mumbai). Against that Levis has its stores concentrated in big cities like Delhi, Mumbai and Chandigarh.
    3. KKCL does not have to pay any royalty fees as its brands are owned. Compared to that Page Industries paid Rs 42 crores or close to 5% of sales as royalty in FY13. this explains most of the difference in margins with Page Industries.
    4. It does not have any low cost advantage as the gross margins of KKCL are not very different from Levis and VM Corp, who each have 47-48% gross margins in jeanswear segment globally but their overheads are very high. I could not get detailed break up of SGA but presumably it is employees and other admin costs which are very high for these companies. Advertising costs are only slightly higher at these companies at 6% of sales. Rent is also not very high as most of sales are through franchisees outside US.
    5. Zodiac suffers from higher rent costs and higher employee costs as all stores are company owned and operated. Their brand faces far higher competition in shirts segment compared to what KKCL faces in its main denimwear market.

    Few issues to note are:
    1. I calculated the sales per EBO/K-Lounge store by taking the sales from that segment and dividing it by average number of outlets for that year. The per unit sales was 41 lakhs in 2008 which declined to 31 lakhs in 2013. But for Q1’14 the sales in that channel has increased 37% so maybe stores are gaining some maturity now. Worth tracking the same to see how unit store performance is stacking up.
    2. Last 5 years, the trousers segment has seen consistent decline although Q1 shows increase this year. this dip has been made up through increase in Other sales which is not detailed. Not sure what this segment includes.
    3. Accesories is a growth area for company but showed a decline in FY13 from 19 cr to 11 cr.
    4. North region has been a bit of struggle in FY13 though picking up again in Q1’14.
    5. Brands like Pepe and Benetton are showing strong growth and expanding aggressively. As long as the foreign brands focus on bigger cities, KKCL will be protected but since price points are similar, if they also go to smaller cities then they may have a novelty factor and eat into the share of KKCL.

    Couple of decent articles on Levis:


  34. sir i was wondering if you are going to discuss the question on valuation analysis in KKCL case study on this blog. It will be very instructive for us to engage in a Q&A on that topic i have been eagerly waiting for.

    • Sandeep, I do plan to do this soon.

      Thanks for your patience!

      • Sir any plans still to restart the discussion on the valuation of KKCL. my keenness on this topic is less to do with valuation of KKCL in particular but do discuss the valuation of businesses like KKCL in general. You have mentioned few times recently that as long as you do not overpay for quality you are better off investing in such businesses than average businesses at discount. I was keen to get an insight into your thought process on what factors do you consider to determine whether a business is over valued or fairly valued. how do you think about the assumptions behind market price (i.e. market implied growth rates or market implied competitive advantage period). To the extent that you might be able to discuss these topics on this forum it would be of tremendous value to your students like myself.

  35. Dhaval Shah says:

    Dear Sir,

    As always learnt a great deal from your posts.

    Can you please tell us how exactly you calculate the inventory and creditor days. Though, theoretically the formula for Inventory days is (Avg. inventory/COGS)*360 and for Creditor days is (Avg. creditors/COGS)*360. But practically its little ambiguous when you actually see analysts from good brokerages calculating by using sales as the denominator in calculating both Inventory as well as creditor days, Which I feel is wrong.

    I feel for inventory days we should consider in denominator – inc/dec.in inventory+RM consumed+traded goods. And for Creditor days we should consider in denominator – All the operating expenses in Pnl except depreciation and interest cost.

    Thus in interest of all your students can you please put up the calculations of Inventory and creditor days for KKCL.

    • Dhaval, either of those methods, would provide similar clues about the working capital intensity of a business and its changes over time. Personally, I prefer to use amount of inventory and receivables in rupees and compare it with revenues in rupees. That’s because inflation matters.

      Take the case of receivables. Let’s say a company sells 120 units of a product in a year, spread out evenly. Let’s also assume that the company offers two months credit to its customers. So, at any given point of time, the receivables it carries would equal two months of unit sales or 60 units.

      Now, imagine that the company has pricing power. Its costs haven’t gone up but it increased its prices by 5% because it can, thanks to its dominant position in the market. Now, what will be the consequences of that decision on the P&L, the Balance Sheet, and the Cash Flow Statement?

      In the P&L, the earnings would naturally go up, as margins would improve because of higher prices, identical costs, and flat business volume.

      In the Balance Sheet, the receivables it carries will go up by 5% simply because the company hiked its prices and now its customers owe it more money at any given point of time.

      In the Cash Flow Statement, there will be two effects: (1) the cash flow from operations before working capital changes will go up, and (2) the working capital requirements to maintain the same business volume will also go up. So owner earnings will go up because of (1) and reduce because of (2). The net effect will be positive, however.

      Analysts often recognize (1) but ignore (2). That’s wrong in my view.

      Now, imagine that the company which hiked prices, did it because of cost increases. In such situations, the company’s reported earnings won’t go up as prices and costs will rise in equally (assuming same business volume) but economic earnings will fall because now the company will be carrying more receivables to support the same amount of business volume. This is not good news as economic earnings would fall as compared to the situation where inflation was absent.

      The third situation is the worst, which occurs in deeply competitive businesses in working capital intensive businesses. These businesses are unable to pass on fully the cost inflation they experience. When that happens they not only end up with lower reported earnings and cash flow from operations before working capital changes, they also end up with higher receivables to maintain the same unit volume which further lowers economic earnings.

      One awesome article on the subject written by Mr. Buffett, which helped me a lot, explains the above very well. Titled, “How Inflation Swindles The Equity Investor” you can get it from:


      You’ll notice that Mr. Buffett too thinks about dollar volume of business and dollar inventories and receivables.

      • Nitin Mukhi says:

        Sir, in terms of assessment of working capital…can we just focus on working capital loans…because such financing is taken to bridge the gap between current assets and current liabilities…we may check whether such average working capital loans are more or less than 25% of the revenue for the year (25% because a 90 days working capital cycle might be acceptable)

  36. […] On Sep 25th 13 Prof. Sanjay Bakshi wrote on Kewal Kiran Clothing (Killer Puzzle)  https://fundooprofessor.wordpress.com/2013/09/25/a-killer-puzzle/ […]

  37. There is no doubt about the beauty of their business model…and financials very well reflect that. However it was bothering to see many franchise close shops and no meaningful addition, so I have tried to dig deeper into the franchisee story and here are my findings:

    • Thanks Jatin. You put in a lot of effort on this. Two thoughts:

      1. Those closures were not all closures according to management. Many of them were relocations within the same locality which they earlier classified as closures and reopening. The latest company presentation mentions that; and
      2. The real growth is in Tier II and III and not in places like NCR. Those places have much lower rents and other operating costs, and hence lower break-even sales for franchisees.


  38. Sir, agree with you on both the points

  39. Thanks for sharing the links sir, these are indeed interesting.

  40. Dhaval Shah says:

    thanks you sir for sharing the technopak link.

  41. Dhaval Shah says:

    PePe Jeans – Growing its retail network

    Present in 182 EBOs, 1,000 plus MBOs and more than 100 large format stores, the brand now aims to expand its horizon by opening around 200 exclusive brand outlets by 2014. “We also plan to set up stores in cities with a population above 300,000. Currently, the brand has stores in 81 cities and aims to double the number of cities and increase its geographical footprint by opening stores in new locations within the next three years,” avers Shah.

    Shah says they realize that small towns are becoming increasingly brand conscious, and therefore a number of exclusive Pepe Jeans outlets were opened in smaller towns of coastal Andhra Pradesh like Ongole, Vijaywada, Kakinada, Warrangal. Some other smaller cities like Aizwal, Barielly, Dimapur also have Pepe stores now. “We feel, the Northeast market is fast growing and has a lot of potential,” she adds. The brand is also retailed through portals like Myntra, Flipkart and Jabong.

  42. […] growing dividends and capital gains. One example is that of Kewal Kiran Clothing which was a case in my class last […]

  43. […] On Sep 25th 13 Prof. Sanjay Bakshi wrote on Kewal Kiran Clothing (Killer Puzzle)  https://fundooprofessor.wordpress.com/2013/09/25/a-killer-puzzle/ […]

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