Khadim India Limited (KHADIM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Khadim India Limited Q3 FY '20 Earnings Conference Call hosted by IDFC Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mehul Desai from IDFC Securities. Thank you, and over to you, sir.

Good evening, everyone. On behalf of IDFC Securities, I'd like to welcome you all for Q3 FY '20 Earnings Call of Khadim India. From the management team, we have Mr. Siddhartha Burman, the Chairman and Managing Director; Ms. Namrata Chotrani, the CEO; and Mr. Indrajit Chaudhuri, the CFO of the company. I'll hand over the call for opening remarks to the management, and then we can open the lines for Q&A session. Over to you, sir.

Good evening, everyone. On behalf of the Board of Directors and management of the company, we extend a warm welcome to all of you to the conference call of Khadim India Limited to discuss the financial results for the past quarter ended on December 31, 2019. The discussion today may include some forward-looking statements, and the same must be reviewed and considered on conjunction with the industry risk in general and our business, in particular. There is a certain slowdown in the economy, which has affected discretionary spending. We have felt direct headwind of the phenomenon, which has impacted footfall and is reflected in muted growth in sales. Further, during third quarter, our key catchment areas in East and Northeast India faced challenge way into political disturbance, further impacting footfalls. On store expansion front, we have calibrated our expansion strategy and added 31 new retail stores and 39 distributors over the last 6 months. As our brand outreach continues to grow, our total count as on December 31, 2019, stands at 830 retail outlets and 583 distributors. As mentioned earlier, we are on track with our plan to implement TOC across our stores. Currently, our TOC initiative covered 166 COCO stores and 100 franchisee stores. In Q3, our sales were flat, and pressure on margin continued due to increased spend on promotion. Hope you had the opportunity to check our investor presentation uploaded on the exchanges. I am conscious of the fact that this has been a tough year, and I would like to thank you for your patience and supporting with -- us through this phase. The team headed by our new CEO is working relentlessly on correcting the inefficiencies and developing a robust strategy on the way forward, which she will share with you during the course of this call. Thank, once again, for your support and appreciate your patience. I now open the floor for questions from your end. Thank you.

[Operator Instructions] The first question is from the line of Raghav Malik from Axis Capital.

My first question was regarding the fact you said that promotional spends have increased and that's why our EBITDA margin took a hit. So I just wanted to know the absolute number if you could share or as a percentage of sales. What is ad spends as a percentage or -- as well as absolute number?

The total ad spend this year for the 9 months is around INR 32 crores.

INR 42 crores.

INR 32 crores.

INR 32 crores.

3-2.

Yes. Yes. And sir, my follow-up question was vis-à-vis the Theory of Constraints that you applied on the franchisee stores. So what is the impact so far? Are we seeing some benefit of curtailed inventory norms? Or is there any change in that? Has it helped us already? Or will we see it in the future, the benefit?

We have introduced the TOC in 100 franchisees. So -- where the stock was high. So the TOC is impact is -- TOC is impacting the secondary sale. Whatever secondary sales they are doing, the order is coming to our system. But they -- the stocks that they have 1-year old, we are trying to liquidate their stocks by selling it through melas and other USO scheme. So once these stocks -- old stocks are corrected, the TOC will automatic takes its course, and our sales would be on pull-based rather than push-based.

Okay, sir. And -- yes, sorry, please.

So in our COCO stores, we have seen that TOC has implemented in 166 COCO stores, where we have seen that the inventory pullbacks are there because the signals are there that the inventory kind of pullback and the same sales can be done with a lesser inventory. So in future, we'll be working with lesser inventory and having the -- more sales.

Okay, sir. That's good for you. And just one last question, if I could sneak in. Is -- just on your distribution side, are there any -- like what is the extent of liquidity issues that we're still facing? And is this expected to come down going forward anytime soon? Or what is the picture if you could tell us?

Distribution, the impact is there in relation to political disturbances. We have not seen the growth that we have seen in the previous year. But however, the distribution, we have seen some growth in the margin because of the raw material price becoming stable. Liquidity issues are there. We are trying to restrict our trade norms wherever possible and does not increase the debtor days in distribution.

The next question is from the line of Nirav Savai from JM Financial.

My question is regarding the recent hike in custom duty, and also the challenges what we are seeing in China, particularly post this coronavirus. Now how do we see the competition intensity when we compete with a lot of imported footwear? So do you see anything changing on ground or maybe eventually in the next couple of quarters? How do you see the changes?

The increase in custom duty from 25% to 35% will hit our -- I mean the footwear that are finished footwear purchased from China. It will impact the margin. So generally, we import around 10% of our product from China. So that would be impacted, the margin would be impacted. We have to take a MRP increase for that rise in custom duty. However, in the raw material front, there is no increase in the custom duty. So there, there is no challenge. But however, there is a supply challenge that will come by this coronavirus, that we have not faced till now, but because everyone is holding stock for 1, 1.5 months. But in the month of March, there will be definitely a supply impact coming from -- in the raw material front.

Okay. But do you see Indian manufacturers benefiting out of this or maybe Indian exporters vis-à-vis competing countries like China?

Yes. There would be some benefit because some of the -- I mean sports shoe that are developed in China, we have to develop now in India to have a better MRP, and some raw materials are not available in India. For that, we have to be dependent on China.

Okay. Sir, in our case, our leather portfolio would be what overall size?

Leather portfolio, around 5% to 7%.

Okay. It's only 5% to 7%, which is leather. Okay. And our imports will be mainly what, nonleather or...

No. It's nonleather; it's sports shoe and flip-flops.

[Operator Instructions] The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund.

Sir, I wanted to check in terms of the working capital cycle in the distribution business. So how much different will be the inventory and the debtor days in your distribution business vis-à-vis your normal retail business?

The debtor days in distribution business is more or less the same that our franchisee business, and the stock days are also around same level that we have stock in retail.

Sir, because in the last 6 years, as your distribution business has expanded, what we see is that your receivable days have also been expanding. So...

Like, what you have seen is the receivable days for the total company that has increased because of institutional business that has come in in the last 2, 3 years where the debtor cycle is high. But the distribution debtor days has remained in the range of 55 to 60 days.

So what you're saying is that irrespective of retail or distribution, the working capital cycle remains the same?

More or less the same.

And in terms of return on capital employed in both the business, is that also more or less the same? Or...

No. No. Retail business is more -- the return in retail business is more compared to distribution because the sales value is less compared to retail, and the investment in distribution for the capital investment in factory is higher compared to the investment in retail. But if the -- if we achieve more sales, obviously, the ROC will be in the range of 15%, 16%.

So sir, what could be the ROC difference in the retail and the distribution business, if you can just help us?

Retail in FY '19 was around 17%, whereas distribution, the ROC is around 9%.

So the distribution ROC is half [ to what we have in ] retail?

Yes. As I -- it has a potential to be in 16%, 17% range. If you see the ROC of Relaxo, it is around 19% to 20%.

But sir, I didn't understand, if working capital is the same in both the businesses, [Foreign Language] your margins are...

Margin are less and the sales in distribution is around INR 200 crores compared to the retail sales of around INR 525 crores.

The next question is from the line of Kunal from Vijay Wealth. Sir, the line dropped for the current participant. We'll move to the next question. The next question is from the line of Raghav Malik from Axis Capital.

So my question is regarding the retail business. You said that the ad spends have -- you've given a number for the ad spends. And we can see that the ad spends have really tracked up, and also you're saying the Theory of Constraints is starting to benefit. So would there be any maybe a rough estimate of increase in footfalls that you could tell us that you've seen in the current quarter or any change in footfalls, any improvement?

There is no improvement in footfall. Footfall has gone down compared to last year.

Okay. So -- but you expect them -- you expect footfalls to come back a bit, at least with this duo of ad spends increase and TOC?

We are trying to constrain the footfall at the present level. And in spite, thinking of growth in footfall, we are happy if the footfall remains at the level that is there.

Okay, sir. Very well. And sir, one more question. It's just a follow-up on the ad spends. So last time, I can see that you had said around INR 36 crores to INR 37 crores would be the ad spend for the year. But right now, we've increased that number. So would you like to revise that guidance, if you could give us?

No. We are at the INR 36 crores, INR 37 crores level for the full year.

The next question is from the line of Deepan Shankar from Trustline PMS.

Just wanted to understand the sense whether the current quarter has bottomed out in terms of sales slowdown and then volume slowdown? And are we seeing any kind of improvement in the current month and last month? So how are we seeing the next quarter in terms of improvement?

In the current -- I mean if we compare the January month, the distribution business has grown. Retail, more or less remains at the same level. But in fourth quarter, since the advertisement pressure would not be there, to that extent, what we have seen Q2 and Q3, we expect better results compared to quarter 3.

Okay. Okay. So when do we expect this footfall improvement happening coming from this ad spend investment what we are doing? So when are we expecting football -- footfall turns to improve?

So I think, Shankar, to answer your question, I think, footfall is a concern for majority of the retail industry, and it's a function of -- economy can be a function of e-commerce. This is the new function of the quantum of disposable income people have today. The endeavor of most of the companies today is to be able to be -- have a more direct and impactful marketing strategy to be able to impact footfalls. But I think that seems to be a concern. We also, on our end, are trying to figure out how to have more direct marketing, performance-driven marketing approach to have a better numbers in terms of footfalls, which help us secure our volume growth. So I think, hopefully, in the next year, with our strategy that we are adopting, we should be able to see, as Indrajit said, a mechanism to control the reduction in footfalls.

Okay. But just wanted to understand our competitors like Relaxo, Bata are still seeing kind of improvement. So where are we lacking in those angles?

Sir, Bata, if you see the numbers, they are -- they have -- so just in a 2% SLG in their system with a 4% ASP growth. That justice -- that explains the reduction in volume and the reduction of -- in volume is only a function of reduction in footfalls. So I'm not sure if Bata also has an increase in footfalls at their end. Relaxo, on the other hand, is more distribution-driven. It's not a footfall-driven exercise. It's more driven by increasing your wallet share in the hands of the distributors who are providing more products and improving -- increasing our ASP by providing premium products. So volume and also increases in number of distributors, they all kind of penetrated very well in the West and the South. So that results into volume growth. They're also providing new products, which are increasing the volume growth therein as well. So there is a distinguishing -- but Relaxo is not a footfall-driven business as much as Bata and us are.

Relaxo is a push-driven distribution business. So the main thing is that volume growth in both -- in distributors and also taking share from the distributors' sale. So we are trying to introduce new product in our [ view ] line to increase the distributors' share and also increase the number of distributors.

Okay. Okay. And also, is there any constraint for us for increasing ASP, like what Bata has done. And even for retail, is there a [indiscernible]?

Yes. So I think, you rightly put, ASP is a very strong lever for growth. And I think we are working on our entire range of architecture to provide a better value proposition and improvising our sub-brands so as to give a premium experience within the gamut of the value fashion brand. So we are working on increasing ASPs with price increases and premiumization, which hopefully we should be able to see in the next financial year.

The next question is from the line of [ Ritesh Parikh ] from Sundaram Mutual Fund.

This is Ratish here. I had 3 questions. First, regarding this ad spend what you have done for this year, can you help us which brands we would have focused on this advertising spend and the sub-brands? Second going ahead within the sub-brands, where do we see recovery coming in? Third, my final question will be, this ad spend what we have done for this year, what is your thought process on the ad spend for the next year in terms of what will be the proportion we've been looking at? And what kind of ad program we'll have?

Thanks for your question. So I think on the first question, in this financial year, our focus has been predominantly on our mother brand, Khadim's, which houses all the sub-brands. So I think the intention was to drive footfalls into our store, which is why the focus has been predominantly on the mother brand. In terms of focus for growth, I think, after Khadim's, Pro is the largest contributor in terms of sales. And I think we intend to continue to focus on that brand. Alongside that, we are -- what we are doing is we are focusing -- we are really working on our entire range of architecture to streamline every sub-brand to focus on the merchandise category it is supposed to be building on. For example, British Walkers is our brand, which is focusing on a premium leather formal footwear. So I think we're building our range over there, and just we're ensuring that there's no clash of the similar product in any other sub-brand. Lazard is for the younger man, which can be applicable during the day and the event you have, loafers, moccasins, formal shoes, which are relevant to the younger man in the age group of around 20 to 35, 40. Cleo is a sub-brand, which is focusing on the younger girls. So we are creating -- or curating a new range within Cleo, which is more relevant to the younger audience and which will be liked by that audience ranging from 15 years to like 30 years. Sharon, which is our brand for working women, we are curating on new range, which will be relevant from a price ranging from around INR 600 to [ INR 1,000 ], and we're ensuring that there is no clash in the kind of products that are there. So I think the focus areas, in terms of brand is Pro, British Walkers, Lazar, Cleo, Sharon. And in terms of marketing, branding activity, I think, we're still in the process of finalizing our strategy and our budget. But I think in the next financial year, one thing is extremely clear from our end is it has to be a P&L-focused cap in a footfall driving campaign. I think -- and with regard to focusing on the brand versus sub-brand, I think, on the traditional media front, I think, we will be focusing on Khadim's. But on the digital media, I think we'll be starting to build the sub-brands in terms of more awareness that -- there are some loyal customers of us who come asking for these sub-brands, but I think we want to increase that base by creating an awareness of the kind of products and the prices that are available in the sub-brands that may be relevant to the younger and the current audience.

Just in terms of some numbers, in these sub-brands, can you give us -- share us with what will be the size of each sub-brands, especially in the kids and the women category?

The sub-brands catch-up to around 60% of the total sales. Hello?

Yes. But within that, Sharon will be contributing, for example, or Lazard would be contributing how much share, any...

Sharon would be contributing around 5% to 6% of the total price. Main contributor is Pro, which is around 20%.

The next question is from the line of [ Bharat ] from VJB Securities.

I have 2 questions. One, with regard to other expenses. So this quarter, there has been an increase of INR 14 crores in other expenses. And for the 9 months, there has been an increase of approximately INR 30 crores, that is after adjusting for the change in accounting policy on account of AS 116 accounting for leases. So what component of this increase in other expenses is due to ad spend? And what is the other component of other expenses that's pushing up -- that's pushing the needle into a difficult territory? That's my first part of my question. And with regard to -- the second question is regarding the sales. So with regard to online sales, what percentage of our sales is online? And how do you see it going ahead? I know it must be a small percentage, but what kind of growth are you likely to see? And what is our focus with regard to online sales?

In relation to your first question, for the 9 months, INR 20 crores has been for increase in advertisement and other sales promotion expenses and balance is a combination of increase in freight, consultancy charges for the implementation of TOC, power and fuel and for opening new stores of around 19 new stores, that additional expense has come. And for the quarter, it is around INR 10 crores is for the advertisement and balance is for freight, labor charges and consultant.

So it's INR 10 crores out of the -- incremental INR 14 crores is ad spend, the incremental INR 14 crores as compared to the corresponding quarter of the previous year?

Yes. Yes.