Khadim India Limited (KHADIM) Earnings Call Transcript & Summary

My question is on the distribution business. We saw 13% growth. So last quarter, we had mentioned that there have been some north-based players which have not been able to open up on time. So is that the -- I mean, is that the only reason why we've been able to stock such good growth in distribution business?

So I think it's a function of 2 things. Number one, yes, we did get a first-mover advantage like most of the branded players in the country, that where a lot of the smaller players and midsize players were not able to open shop as fast and which is why we were able to sell much more in terms of our production. Second point is that the demand for low-priced product is, majority being Hawai increased quite drastically because a lot of people meet in the rural areas, even semi-urban areas, even in the urban areas are staying much more at home or being in the locality, which increased the demand for Hawai Chappals or low-priced products, which did increase the demand for even Khadim products and which is why we saw that kind of growth.

Okay. So do we see such kind of growth, I mean, going ahead? Or I mean do we see the -- I mean, the growth to even improve from this level?

So we are hoping for the growth to continue and Q3 at least seems to be going in that direction. And our endeavors will be to ensure that we'll try at least that we are able to recover whatever loss is in April and continue the growth for the year.

The next question is from the line of Aditya Bapat from Equentis PMS.

My question is a bit long term in nature. Now that you're seeing a lot of adoption of online sales due to the pandemic, do you see a change in the way your stores are sort of -- the format of the stores or the area of the stores or something like that, do you see a change in that going ahead? And how willing are your franchisee owners willing or unwilling to adopt the omnichannel?

Thanks, Aditya, for your question. So I think in terms of store economics, we believe that generally, we have been in the range of 1,000 square feet overall with the 70-30 ratio in terms of selling area. And that generally has worked well for us in terms of store economic breakeven and ROI. And I think in terms of the franchisees, a little bit lower from since -- to ensure that they are able to get the ROI and payback as well. And I don't see that really changing or impacting the way based on the way e-commerce and omnichannel is shaping up. In our mind, at least internally, we should -- the idea of having this kind of stores, this size of stores helps us ensure a good revenue per square feet and also gross margin per square feet. Larger the area, you tend to have -- you tend to increase the number of SKUs and inventory and not necessarily generate the kind of gross margin per square feet that one would like. In terms of servicing omnichannel orders through your stores, if that were also you are trying to get at, we've had conversations with a lot of omnichannel agencies. In fact, we have omnified most of our stores [Audio Gap] the customer walks into the store and they do not find a footwear of their choice of color or size, the product is delivered to them. Servicing of the orders from our own website, from a couple of marketplace is also done from our own stores. But they do not necessitate that the stores act like warehouses. If they use the inventory of the stores, the way it is. We do not need to increase the inventory of the stores to service these orders. The way it works is that suppose today an order is placed, the order goes to one store. If the order's not there that -- the product is not there in that store, then the order hops on to the nearest possible store where the product is. So it does not necessitate for us to have a larger number of -- larger stock to service those orders. Because eventually, if the stock is not at any of our stores, it goes to the warehouse. So I hope I'm able to answer your question there. Aditya, could you repeat your second question, if you don't mind?

No, those were my questions actually.

The next question is from the line of [ Jainis Chheda ] from Dimensional Fund Advisors.

A couple of questions. Number one, what will be your current working capital days and the breakup in terms of your retail working capital cycle and distribution working capital cycle? And number two, what has been the trend in the e-commerce sales? And how has it performed Y-o-Y and Q-o-Q basis?

Thanks, [ Jainis ], for your questions. So I think, see to give you a day -- answer in terms of days may not be appropriate because the numbers would be very skewed because of the lower base in terms of sale numbers. But one thing I can definitely tell you that the working capital has definitely improved from last September and to an extent also from March. So if you see that our inventory today stands -- as on March -- as on September was almost at INR 160 vis-a-vis INR 200-odd crores last year, 100 around -- the debtors were almost INR 100 versus INR 190 crores last year, and creditor's situation also has improved. So I think in terms of working capital, we are in a much better position. And in terms of your second question regarding e-commerce, so we have -- last year sometime, we were approximately at less than 1% in terms of net sales in H1. We have reached approximately 2.5% to 3% this -- H1 this year. So we are seeing an improvement in e-commerce sales, and we're also working very hard to try to omnify the entire sales along with other marketplaces and our own platforms. So hopefully, we should see an improvement from here.

Okay. And in e-com, what are the margins that you make, net to the company after all the commissions and transportation charges and all?

I'll give you that number offline, yes.

[Operator Instructions] The next question is from the line of Devendra Pandey ] from DP Advisory Services.

So I had a couple of questions. My first question is on your overall working capital days and inventory days, which is obvious that would be stretched for H1 FY '21. So how should we look at those numbers for the second half and for FY '22?

So in terms of second half, the endeavor for us is to continue at the same level. I don't think we're looking at increasing our working capital. The teams are bead on -- with regard to the debtors, the teams are working extremely hard to ensure that we are recovering the past debts a little more aggressively, and we're also trying to ensure that we're coming up with a policy so that the debtors remain at the same level. In terms of inventory as well, we are working on the back end in terms of liquidating the [indiscernible] inventory on a very, very aggressive basis. So I don't think we are looking at increasing the working capital cycle for this year. For the next year, I think on the retail side, we're looking at approximately 75 to 80 days in terms of net working capital cycle and around 2.5 to 3 months. And in terms of distribution, we are looking at around 1.5 to 2 months in terms of net working capital cycle.

Okay. And my other question is on a Y-o-Y basis, the gross margins in the distribution business, it has increased, but EBITDA margins have reduced. So can you throw some light on that, some outlook maybe?

So thing is that the gross margins to be fair, have improved owing to 2 main reasons. One, there has been an increase in -- there has been some price increases that had been taken pre and post lockdown. And that has definitely helped improving the gross margin. The EBITDA margin has been -- so I said the way the corporate cost is allocated as basically generally based on the quantum of gross margin contribution from each of the businesses. Given that the distribution margin contribution in terms of absolute gross margin has increased this year, that's where the corporate cost allocation has increased there, which is giving us huge number, which is why it would not be appropriate to see the numbers right now. I think in the next couple of quarters, you'll have a better -- we'll give you a better picture.

And my last question is on your average realization per piece. So are you expecting that to improve or remain at the similar level for FY '22? And if we are expecting average realization to increase, then what kind of strategy we have undertaken to increase the realization?

So I'll answer you this question in 2 parts, one is the retail and one on distribution. On the retail side, I think we have worked on improving the entire range architecture and -- so as to ensure that we have improved -- we have an improvisation in product mix towards the sub-brands, so that -- which helps us increase the ASP. And there have also been some level of price increases taken in this year. As I mentioned earlier, the ASPs have been negatively impacted owing to 3 reasons. One, people buying lower price -- preferring to buy lower-priced footwear this year. This silent discounting offered so that the customers have the option of buying more discounted footwear this year. And third, we have also been giving retail scheme. This impact -- we are seeing this impact slowly wearing off. In the third quarter, we should see the impact on the ASP better, I think, compared to the last couple of quarters. Whether it will increase or it will decrease, it's a bit premature for us to tell you right now. But I am quite confident and the team is quite confident, next in the foreseeable future that is maybe the fourth quarter or the first quarter next year, you'll see an increase in the ASP on the retail side. On the distribution side, we -- what we're also doing is, we are working very hard trying to increase the number of the sale of the non-Hawai PVC and EVA business, which is more focused on sports and PU, basically the footwear business. And which will help us increase our ASP. And we are also simultaneously taking -- we have taken some price increases to ensure that we are able to recover some of the cost increases we're anticipating. So the ASP is hopefully expected to improve in the next couple of quarters.

[Operator Instructions] The next question is from the line of Ankit Merchant from Reliance Securities.

So my question is related to the debt level. Can you share some highlights on the debt front and how do we see our debt going ahead?

So I think we -- in terms of our limit, utilization is relatively on the lower side. I think we are looking at -- we don't intend to increase our debt level, for sure. Our endeavor is to increase -- to reduce the debt through internal cash flows and improve working capital cycle.

Sure. And suppose if we have to do -- over the next 2 to 3 years, if we have to touch a top line of close to INR 1,000 crore or INR 1,200 crores, okay, so what is the sort of CapEx which we would be requiring going ahead? And how many store expansion can we see if suppose the growth come back to the normalcy and, if at all, we have to touch that figure in the next 2 to 3 years?

I think I can give you -- I can answer you this question off-line. Yes.

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

Just wanted to check whether the franchisee stores performance, how has been the performance during last 2 quarters? And are we seeing an improvement over the next 2 quarters?

Thanks, Shankar, for your question again. So I think the franchisees are -- majority of the franchisees are actually located in the Tier 2 and Tier 3 markets. And in general, we have seen the performance of the stores in those markets better than the stores in the metros purely because the impact of the COVID and also the lockdown was relatively lesser on the inside than in the metros. And because of that, the secondary sales performance in many cases, for our franchisees is better than our COs because most -- many of our COs are there in the metros and mini metros and Tier 1s. So on a relative basis, the performance of the franchisees has been better.

So are we expecting some primary sales increase over next 2 quarters during second half because secondary is doing well in franchisee?

We are seeing a decent trend as of now.

Okay. And also a trend on these fixed expenses, so full year, are we expecting some 20% decline over past year?

Around 20% in overall basis.

20% is positive.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Ankit Merchant for his closing comments.

On behalf of Reliance Securities, we would like to thank the management for taking your time and guiding us on the prospects of the company. And we wish the management all the best for the coming second half of Q1 -- of FY '21. And thank you so much for joining.

Thank you all for joining the investor call, and I really appreciate your interest and your patience and look forward to being in constant touch with all of you. Thank you.

Thank you. Ladies and gentlemen, on behalf of Reliance Securities Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.