Investor's Eye: Stock Idea - KDDL (Time to dial KDDL)

Investor's Eye [December 22, 2014]  Sharekhan www.sharekhan.com

Summary of Contents STOCK IDEA           KDDL Recommendation: Buy Price target: Rs300 Current market price: Rs 216      Time to dial KDDL      Key points  Steady growth in manufacturing business and free cash to support retail growth ahead: KDDL (erstwhile Kamla Dials and Devices) is one of the largest manufacturers of watch dials and hands, serving both international and domestic clients. With a revival in growth, the demand for premium and luxury watches, and their components is expected to grow in double digits. The management expects the dial and hand vertical to grow at 10-15% over the next two to three years. The margins may be maintained at the current levels or may improve slightly over the next two years led by value addition and absorption of fixed costs while the capex may remain low at Rs10-12 crore per annum, thereby generating free cash. The free cash could be used to support the strong growth in the retail business. Ethos, luxury watch retailer, deploying both brick and click to drive sales: KDDL is also present in luxury watch retailing in India via its 75% subsidiary, Ethos. Ethos employs a very intelligent combination of brick and click models to serve its customers, drive sales and enhance profitability. The company retails over 60 high-end luxury watch brands through its 42 pan-India stores. It also generates leads through its online retail portal which enables it to improve its asset turnover and reduce its inventory cycle, thereby adding to the overall margin and profitability. We believe that aided by the online platform Ethos is very well placed to cash in on the strong growth opportunity in the high-growth luxury watch market. Unique business + strong growth potential available at undemanding valuation; initiate Buy with a price target of Rs300: We like Ethos' unique high-end watch retailing business, which is expected to grow manifold by cashing in on the growth in the luxury watch segment and the increasing trend towards online e-tailing. This unique high-growth potential business along with a steady manufacturing business that generates free cash is attractively priced at the current levels and offers significant returns over the medium to long term. We put a Buy rating on the stock, valuing KDDL using the SOTP method (the manufacturing vertical is valued at 6x its FY2016E earnings + the high-end watch retailing subsidiary Ethos is valued at 1x its FY2016E sales) to arrive at a price target of Rs300. Key risk: A lower than expected improvement in the overall discretionary demand would pose a risk to our revenue and earnings estimates. Click here to read report: Investor's Eye        Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Regards,  The Sharekhan Research Team

 

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