Khadim India Limited (KHADIM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '20 Earnings Conference Call of Khadim India hosted by IDFC Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mehul Desai of IDFC Securities. Thank you, and over to you, sir.

Thanks, Ayesha. Good morning, everyone. On behalf of IDFC Securities, I invite you all for Q4 FY '20 Earnings Call of Khadim India. From the management side, we have Mr. Siddhartha Roy Burman, Chairman and Managing Director; we have Ms. Namrata Chotrani, CEO; and Mr. Indrajit Chaudhuri, CFO of the company. I'll hand over the call to Mr. Siddhartha for the opening remarks, and then we can start the Q&A. Over to you, sir.

Okay. Thank you. Good morning, everyone. On behalf of Board of Directors and the 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 fourth quarter and year ended on March 31, 2020. We hope everybody is safe and taking utmost care. The discussion today may include some forward-looking statement and the same must be reviewed or considered in conjunction with the industry risk in general and our business in particular. We are facing an unprecedented pandemic and all of us have been confined to our home during the nationwide lockdown over the last few months. While efforts are undertaken to reopen the country and resume economic activities, overcoming the damage done by the pandemic and lockdown will be tough. We at Khadim India -- still we provide affordable fashion for all. We now have a retail store network of 795 stores pan-India and 572 distributors. In FY '20, we look -- we took a few measures to increase our brand outreach and awareness by trying -- by tying with a celebrity brand ambassador and those social media outreach. Furthermore, to strengthen our back-end infrastructure and optimal inventory management, we implemented TOC across our store network. Over the course of the year, we saw a slowdown in the economy with effective discretionary spending. The management took active steps in implementing new strategic and lined up a revamped product portfolio to increasingly target the youth segment with trendy footwear at attractive price tags. However, the slowdown was further amplified by the eventual COVID-19 pandemic and retail sector faced a direct impact as economic activities came to a standstill. Despite an encouraging trajectory in January and February 2020, as we had clocked cumulative sales growth for the 2 months, the nationwide lockdown in March derailed our momentum. Consequently, our sales and margin for the quarter have been affected with growth being muted. For the financial year 2020, the company recorded consolidated revenue of INR 771.2 crore, down by 3.4% year-on-year. Gross margin at 36.4% versus 37.9% in FY '19. EBITDA INR 30.4 crore and the corresponding figure for FY '19 was INR 56.9 crore. We hope you had the opportunity to check out investor presentation uploaded on the exchange. I would now like to open the call for question-and-answer session. Thank you very much.

[Operator Instructions] The first question is from the line of Deepan Shankar from Trustline PMS.

So over the past 2 years, we have seen this franchisee business has not been doing quite well. Their contribution has come down to 39%. So what are the corrective actions we have taken with regards to improving the same?

Deepan, thanks for your question. So I think the franchisee business is actually a very strong business because purely that we sell products to the franchisee and adds directly to our bottom line. And it also helps us spread our network to far-fetched areas where opening company and outlets may not be the most viable option. But I think in the last 1, 1.5 years, what we've tried to do is the -- we've tried to correct the kind of stock that has been there in the stores in the past couple of years, which were not doing extremely well. So we have enhanced our liquidation mechanisms at the franchisees by offering various kinds of schemes for secondary sales and also, we have promoted a lot of discount stores and melas in close-by areas to liquidate their stock. Secondly, what we have done is we have implemented the TOC to be ensuring that right stock is sold to them at the right price. What was the tendency of the franchisee was to buy the stock in bulk prior to the festive, irrespective of what was selling well, it was mainly based on their gut. What this has done is that this has reduced them buying 48 pairs and 64 pairs of a particular item and restricted them to buying around 24 pairs, maximum 24 pairs of products which are selling decently well. So we constantly -- there's a system which sends them updates as to what products are selling. And based on that, they are -- what product is selling in the secondary sales, based on that the primary sale is sold to them. Another thing that we had done in the last financial year was to improve our debtor days. So if you see by the FY '20, the debtor days for EBO was down to approximately INR 35 crores. That was also owing to the fact that we reduced selling excessively to them. We were only selling them what they exactly need -- cut sizes that they need and the items that will sell potentially well in that area and also that resulted in reducing our debtor days. So I think what we have tried to do in the last 1, 1.5 years and which we continue to do right now is to improve the health of the stores and automatically we'll -- and hopefully, we'll be starting to see the positive impact of it once things improve post COVID here.

Okay. Okay. Good to hear that. And also, do we foresee any threat for premiumization trend to deteriorate over medium term? We have also seen sub-brand contribution flat at 57%.

No. In fact, sub-brands have improvised. In fact, premiumization as a concept has played extremely well out in the -- in our stores as well and franchisees. Just to give you a perspective, in some -- in FY '15, the contribution of sub-brands was around 40%, which has gone up to almost 60%. This is driving the entire premiumization sales. In fact in the last conversation on the call we had, we had alluded to the fact that product below 500 points -- INR 500 has seen a reduction in growth. And so we have seen a change in -- or the impact of premiumization playing out extremely well. In fact, in our new range architecture and the product line that we have selected, we've tried to make the distinction of the sub-brand with Khadim's much more fine so as to ensure that the sub-brand is promoted much more better.

Okay. Okay. Helpful. And also, Namrata, how has been the performance of our recent store expansion in West and North region? So are we seeing good response from those areas?

So I think the -- see, one has to appreciate the fact that in these markets, if you look at our brand positioning, it is value fashion. And it is -- and basically catering to the affordable segment of the country. If you look at the competition landscape, there are not too many brands in the similar -- offering a similar value proposition. So wherever we do open, we do see a good response of -- for our sales. In terms of profitability for those stores, you have -- we have still -- in some stores, we are doing extremely well. And we opened a store in Vile Parle, that's doing pretty well in terms of profitability. We'd opened a store in Chembur. We are seeing a decent -- yes, we're seeing a decent improvement in terms of compared to where we were a couple of years back. Gujarat -- so some of the Gujarat stores are doing well. But I think it's also a function of commercial viability in many of these areas, like Bombay is expensive. So I think that does impact commercial viability. But at the same time, we are getting a good response in the West, owing to the value proposition that we have to offer.

The next question is from the line of Rupesh Rajguru (sic) [ Rupen Rajguru ] from Julius Baer Advisors.

So my question is to you, Namrata. After becoming CEO, probably within a few quarters, you have witnessed probably something which none of the CEOs have ever seen in their lifetime, which is the COVID crisis. My question to you is 2-fold. One is that, has your overall strategy and vision and thought process as a CEO changed over the last 2 quarters in terms of way the things have panned out? And second, it's more probably a quantitative question. Is that -- are there any 2 or 3 parameters or deliverables which you have in your mind which probably you will assess yourself in next 1 year or 2 years down the line? No, we will not hold it against you, but at least you can share 2, 3 quantitative parameters which you have in your mind, can it be from a capital efficiency perspective or from a branding perspective or any other 2, 3 tangible parameters that you have in mind?

So thank you, Mr. Rajguru, for your questions. So firstly, yes, it's been a very interesting time in the last couple of quarters. We -- when I joined, we had a lot of ideas and plans and which we already started executing in terms of the positioning of the brand, in terms of the product range with regard to retail, with regard to distribution. And in fact, we had many shoe lines that we had -- selections that we had done based on the change in product profile that we wanted in terms of price points and design. So that does continue to still be implemented. Whatever selections we had done, they have been continuing -- that will be implemented in the next few months. Yes, there has been a delay in that. So whatever in terms of sales staff incentives, in terms of the product profile, in terms of the focus on the ASP, focus on the gross margin, focus on the SSG, that entire strategy still remains. But there will be a little deferment of that. And hopefully, we'll be able to see the impact of it in the next few quarters when hopefully footfalls and the business improves. In terms of your next question of where do we -- when do we see ourselves in the next 2 years, so retail is a very evolving business, and we have to move with time is something we all do realize. So in terms of -- and Khadims, to be frank, is a very strong brand in the market, that we already are, and we -- and hopefully, where we intend to be. We have seen some -- a couple of difficult years financially. And I hope in the next couple of years, we have a good 15% to 20% growth with a very strong profitable growth of that. And I think -- and I genuinely believe that it is possible, given the strong brand recall and the resilience that we have in the markets that we are present. Having said that, there's also a very, very strong push internally to move online on the omni-channel bit, which we are working extremely hard to ensure that we accelerate the entire process, given the existence of COVID. We have started working in that direction. And hopefully, we should be able to see that kind of impact. In terms of a few parameters which you mentioned, I think we want to -- one of the main points in the retail business is that you have to ensure that your existing base of business grows. And for that, your SSG is extremely important. So we want to target an SSG growth of 6% to 7%, which will be a function of a strong ASP growth and a strong -- to an extent, the volume growth that we can get out of this market. And secondly, the second lever that we're looking at is a strong gross margin increase. We're looking at a consistent gross margin increase year-on-year. And third is a very strong working -- I mean, a very healthy working capital base that we're looking at. I hope I'm able to answer your question, Mr. Rajguru?

Sure. And just an extension of what you said, probably, I think, at least some bit of working capital improvement kind of is slightly visible. But in the current environment, see, last year, we spent a lot on -- or we probably slightly changed our branding strategy and got a couple of high-profile brand ambassadors. So -- but unfortunately, whether -- because of COVID, whether we were benefited by that or not, it's difficult to say. So going ahead, will the strategy of keeping this celebrity brand ambassador continue? Or you think that there's a bit of micro marketing and some other strategy is something which might work with us?

See, I think any brand ambassador associations are always good, does bring the brand to a little -- certain pedestal and limelight. Having said that, this year, the focus is just to take 1 day -- each day as it comes and trying to figure out how to capitalize the maximum of whatever investments we have made in the brand ambassador creative that we have made the last year. Next year, I think it's a little premature to be able to comment on that. It depends on how this year goes and how the consumer market improves or pans out in the next few months. Maybe somewhere later in the year would be a better time to speak about it.

Sure. And my final question, if I may...

I think Mr. Rajguru, I think one thing I'd like to say is that we are trying to move -- trying to increase our focus on digital media, as you were trying to allude to sometime earlier in your question. And I think we are trying to develop our internal strength and external strength to be able to build our presence very strongly on digital media. So next year, for sure, we will be having a much larger focus on playing out the digital media strategy that we are trying to develop internally.

Understood. Sure. And just last one, if I can squeeze in. So can you shed some light on the current environment while this quarter is also kind of done and we are almost in that reopening phase? So how are things currently as you see in your stronghold market, which is East, particularly, and some of the other softer aspect which you would like to highlight? How kind of business momentum has changed? Or how is it progressing as we are getting out of this lockdown?

See, when the lockdown was instated, we did come up with various scenarios. When things open up, how the business will pan out, how footfalls will pan out, how ASPs will be, how conversions would be. And June was -- we did see some kind of improvement and the kind -- it was at least somewhat close to at least whatever plans we had made in terms of retail. In terms of distribution, we have been doing -- I mean the numbers have been pretty encouraging owing to 2 reasons: one, the distribution market is on the lower-priced market, and that is the kind of products like Hawai and PVC are the kind of products which are in high demand right now. And Khadim's, given the Khadim's brand name, we have been able to, at least whatever stock we had in March end, we were able to sell all of it by April and May actually. The June, we have been -- our production -- June and July, we have been able to increase the production to almost 85% of our capacity. And in fact, I will not be able to comment on exact numbers for you, but we have seen a pretty decent revival of the distribution business as compared to last year. But on the retail side, like in June, we started seeing some improvement in numbers in terms of conversions, in terms of footfalls. But come July because of the multiple lockdowns that have been, again, declared that has again started impacting footfalls and sales quite substantially. And so unfortunately, whatever plans we are trying to make in terms of sales, in terms of inventory, in terms of cost, we -- it's changing every month based on the kind of reactions or based on the kind of numbers in terms of COVID that we are seeing and the lockdowns that we are experiencing. So I think it's a bit fluid right now. Hopefully, we should be able to get a better perspective in the next few months once things pan out a little more openly.

[Operator Instructions] The next question is from the line of Gaurav Jogani from Axis Capital.

My first question is with regards to, as you've mentioned, before the lockdown, you have seen a certain improvement in June and again, July, it was impacted. However, what steps have you taken in terms of rent renegotiations or other cost-cutting measures that will be able to sail you through these -- the lockdown times?

There are several measures taken to -- for cost reduction. One is the rent negotiation that is going on. All the 200 stores, the negotiation is going on with the landlords. There has been a reduction in the staff cost. There is a percentage reduction based on the management cadre and the executive cadre. There has been a drastic reduction in the brand cost. The celebrity cost has also been negotiated and has been brought to -- to the extent of 5% to 10%. There has been -- also infrastructure cost cut has also been taken. We are coming out of some of our warehouses setup in Patna and Chennai, and all the logistic movement will go from Calcutta only. We have also planned for the shutdown of our stores. 10 stores has already been shut down. And we are also considering for another 10 to 15 stores.

Sure, sir. Sir, at this point, in terms of what percentage of -- despite what percentage of sales you can even breakeven. Like, for example, even if you, say, do 20% or 30% lesser sales this year compared to FY '20, still will you be able to break even with these cost reductions for FY '21?

See whatever cost measures we have taken, we have planned that would have breakeven. But again, after this continuous lockdown and phase-wise lockdown, again, there are -- I mean the sales has been affected. So we are also taking another steps to reduce the cost -- I mean the cost. So there is a continuous process of seeing how the sales is panning out and how we are trying to reduce the cost. So the target is to make at least means -- EBITDA breakeven. So that's where we are going out. Depending on how the sale is panning out, we are negotiating the cost. Because...

I fully understand it. Just what I was trying to mention is that so -- at what sales reduction levels do you see? I understand that the situation is fluid, and it will be difficult to predict the sales, but I think you would also have made some internal calculations as a 20% or a 30% reduction in sales, still you can manage to breakeven.

Personnel cost, we have planned for a reduction of around 15% overall by leaving the staffs and all these things. And in other costs, we are planning -- we have planned for around 15% to 20% cost reduction. But depending on the sale, if the further cost reduction is required, we'll also do it.

Sure, sir. And sir, my another question is with regards to the industry per se, like you have mentioned that again, the lockdowns and things have impacted and the distribution was seeing revival. So anything that you would like to comment on the industry per se? I mean are you outperforming the industry in that sense? Or the entire industry itself is seeing some revival in footfalls and everything?

In the distribution business, the industry is seeing a good exposure. I mean it is around 75% to 80% of the last year. But in retail sector, obviously, it is performing at 25% to 30% level of last year. And that is present in all the retail sector.

[Operator Instructions] The next question is from the line of Sarvesh Gupta from Maximum Capital (sic) [ Maximal Capital ].

Sir, I joined the call late. Now that first quarter is over, I wanted to know some sense of how your sales has moved in the recent June month and the trends that you are seeing in the coming months?

Thanks, Sarvesh, for your question. So I think in terms of retail business, we did see some green shoots in the month of June with lockdowns opening up and with markets opening up, with people walking into the stores. So we did see an improvement -- from the first week of June to the last week of June, we saw improvement on -- in -- on all fronts in terms of footfalls, in terms of conversions, in terms of average bill value, and we were also coming up with interesting schemes to be able to ensure that we were able to sustain or increase the average billing value. But owing to the various lockdowns, which are being instated and because of the numbers that have increased, the COVID case numbers that are increasing on a day-to-day basis, July numbers, again have -- again slowed down owing to the fact that the footfalls have been a bit impacted. So to give you an exact number will be extremely tough because the business has been a bit fluid, but we are hoping for the best in the next few months based on the way the lockdowns open up and the situation improves.

Understood. And the other associated problem that I see is, I think people's -- even the customers who are coming, their orientation might be more value rather than fashion. So what is the sort of gross margin impact because of [Audio Gap] trading that we can see on our business in this context?

In terms of gross margin, means -- we have a margin for fashion item maybe 2%, 3% more than our basics. So nowadays -- whatever we have seen in the month of June that there is -- if the customer comes, they are only demanding for the basic product. So the margin may impact around 2% to 3%, but there is no -- means the combination of fashion and basics in the near future will always try to increase, then we will see the margin -- our margin will not change to the extent that we are seeing at present. So once the festive comes, we are hopeful that fashion also catches up and whatever margin of around 2% we have lost during this time, we will be able to recover that during the festive period.

Understood. And any plans of closure of the stores?

Yes, we have closed around 10 stores, and we are also planning for further 10.

Okay. And on these rental negotiations, you mentioned that you are having ongoing discussions that now that it's been more than 4 months, so what kind of rental savings on an overall basis can we -- because most of these stores will be under fixed rentals in some way. So how much of rental savings can we assume?

We are expecting around 20% of rental savings on an overall basis. But still, we are continuing because in some cases, we are able to reduce around 40% to 50%. And the negotiation is continuing because if we stop the negotiation, the savings will be less. So we are continuing the negotiation. Out of 200, around 100 store negotiation is completed. The other 100 store negotiation is still carrying on so that we can increase the saving to a maximum extent possible.

The next question is from the line of Ammarah Khan from Quantum Asset Management.

Can I ask you a non-financial question?

Yes.

Please go ahead.

I wanted to know regarding sourcing of your leather. I mean from where do you source the leather? And how do you process it for your product?

Leather products are very few in our total range architecture. Around 5% of the product are leather product, but we don't procure any leather. It's mainly in the retail segment. We outsource the product. Our vendors procure the leather from Kanpur.

The next question is from the line of Hiten Boricha from Sequent Investment.

Ma'am, just wanted a clarification. You mentioned that we are looking for 15% to 20% growth for next couple of years? Am I correct?

Yes. In good times, yes, definitely.