Khadim India Limited (KHADIM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Khadim India Limited Q3 FY '21 Earnings Conference Call hosted by Antique Stockbroking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Priyanka Trivedi from Antique Stockbroking Limited. Thank you, and over to you, ma'am.

Thanks, Melissa. On behalf of Antique Stockbroking, I would like to welcome all the participants in the earnings call of Khadim India Limited. I have with me Mr. Nachiket, who is the IR of Khadim India. Without taking further time, I would like to hand over the call to Mr. Nachiket. Over to you, Nachiket.

Yes. Thanks, Priyanka. Good afternoon, everybody, and a very warm welcome to all of you all to the Q3 FY '21 earnings call for Khadim India Limited. I hope all of you, all your teams and families continue to stay safe and healthy and everybody is looking forward to an optimistic year where things are unlocking steadily and we are putting the worst of the pandemic behind us. We have on the call representing the management Ms. Namrata Chotrani, who is the CEO of Khadim India Limited; and Mr. Indrajit Chaudhuri, who's the Chief Financial Officer -- CFO of Khadim India Limited. I would now like to hand over the call to the management.

[Foreign Language] Good afternoon, everyone. We welcome you to this conference call to discuss the company's performance for the third quarter of the financial year 2021. I hope all of you, your team and families continue to stay safe and healthy. The past year has undoubtedly been challenging for all of us. The collective efforts shown by the medical warriors and people to go above and beyond the risk is truly remarkable. The year 2021 has begun on an encouraging note. The industry and economy is slowly inching towards revival. The news of vaccine rollout has created further optimism and edge in moving towards normalcy. In the last quarter, following unlock 5.0 -- 5 guidelines and nationwide ease on restriction, our entire retail store network was operational. We incorporated enhanced safety and hygiene measures at our store to welcome our customer and incentivize them to shop with attractive offers. As we mentioned on the last con call, we saw good growth in the distribution business. We are happy to report that the positive momentum has continued in Q3 as well. Our newly launched exclusive sub-brand revamped line of product with fresh trending and designs have been welcomed by both the sellers and customers alike. As India navigates towards economic normalcy, we see increasing demand almost nearing the pre-COVID levels. We continue our customer outlets through various marketing campaigns. Our social media activities keep us connected with our customers. Coming to financial performance of Q3 '21. We recorded a revenue of INR 174 crore, almost equal to the revenue in Q3 FY '20. However, on a Q-o-Q basis, the growth of 43% was recorded over the sales of INR 121 crore in Q2 FY '21. On the Y-o-Y basis, for Q3, the retail business is down slightly, but the revenue of the distribution segment recorded a 31% growth with good margins. Gross margin for the quarter stood at 46.9% in retail and 30.3% in distribution. Improving sales, coupled with efforts of managed costs, have resulted in EBITDA for Q3 FY '21 at INR 15.1 crore, remarkably higher from INR 3.5 crore in Q3 FY '20. The EBITDA margin has also improved significantly from 2% to 8.7%. The company generated a PAT of INR 4.4 crore versus a loss of INR 13.2 crore in the corresponding period. The PAT margin is 2.5%. As a team, we are united and optimistic to face the challenges, while benefiting from the opportunities. Our team spirit and unbridled culture binds us to understand the business environment and emerge stronger. We are excited to take -- scale new heights with the brand to build upon the positive momentum going forward. With that, let's start with the question-and-answer season. Thank you very much.

[Operator Instructions] We have the first question from the line of Deepan Sankaranarayanan from Trustline PMS.

Congrats for a good set of numbers. First of all, I wanted to understand this higher gross margin for retail business at 46.9%. So this is specifically due to lower RM cost or our product mix has improved substantially?

Thank you for your question. So it's a function of 2 things. One, the contribution -- the consumer behavior in the last -- in the third quarter has been better than the earlier quarter, for sure, where they're demanding more fashionable products, [Technical Difficulty] products. In the first 2 quarters of the financial year, the focus was more on lower-priced products, products which personally we use at home. Function products are very need-based products, so which has improved. Since the higher-priced products command a better gross margin, contribution of the gross margin in general has increased. And secondly, the efforts that we have taken prior to COVID setting in multiple conversations that we've had in the last couple of quarters, that there has been a lot of work done by the team on improvising the range architecture [Technical Difficulty] wherein there's been a 2-pronged focus: one, on increasing or taking the appropriate price increases, which will -- which is justified [Technical Difficulty]; and secondly, also the -- changing the sales mix and the premium mix focused on the high-growing segments. So both of these reasons had contributed on the gross margin improvement -- improving.

And also, so are we seeing this festive demand going away and still our gross margin sustainable during Q4 and Q1 going ahead?

Yes. Though the festive demand has gone out, for lack of better words, but I think the change -- the consumer behavior is also normalizing. So in terms of the merchandise category that was set forward in normal times, maybe in January last year, the merchandise categories is similar in terms of men, women, children in terms of the open footprint, the closed footprint. So the demand is normalizing because of which [Technical Difficulty] demand is turning into normal demand. But -- and in terms of the gross margin consistency, yes, it will continue because the change in the range architecture that we had conducted early in the -- for the previous financial year will continue to show effect. So the gross margin, in our mind, hopefully, will sustain and maybe even increase to certain extent.

However, there would be some mixture of discounted sales more in Q4 compared to Q3. So there might be some impact of that coming in.

Okay, okay, okay. And also, finally, so is our confidence improved for FY '22 numbers? Can we come closer to FY '19 kind of numbers, top line and profitability?

Yes. I think we're expecting something similar in that trend only.

[Operator Instructions] We have the next question from the line of Deepak Poddar from Sapphire Capital.

Yes. Sir, just you mentioned a while back that the profitability we can have a similar to FY '19. But FY '19, we were at about 7% kind of EBITDA margin. But I presume we should be at a better trajectory when we talk about FY '22. So any comment on that would be helpful.

Yes. So I think the EBITDA margin will definitely improve because even distribution gross margins, as you can see, are improving. So -- and what used to happen is that distribution gross margins used to bring down the overall gross margin, owing to which there was an impact on the -- which is why the gross margin was a bit lower. But we're pretty confident that in the coming year the gross margins should be higher and in absolute value as well and also in percentage wise.

So any sort of range that you would like to share on the EBITDA margin front which our business can kind of witness?

It will be as per industry standard here.

We have the next question from the line of Ratish from Sundaram Mutual Fund.

I had just a couple of questions, when you're talking about these FY '19 numbers, et cetera. Today, if you look at our business, distribution mix seems to be on the higher side in the last 3 to 4 quarters. How does mix will look like as you go into the next year? So what is our strategy of within this retail versus distribution mix?

So I think this year has been a bit of an aberration in terms of contribution purely because the distribution sales was extremely aggressive. And that's because the demand was also extremely high for the open footwear, Hawai based chappal. So -- and on the other side, since the footfall was much lower on the retail side, that's why the skew has been very apparent. But as I said, in Q4 and in -- possibly in the next financial year, this number should stabilize in terms of the ratio. So we should be able to see the normalization proportion Q4 and first quarter next year onwards.

So you're talking about the retail part of the business to grow much faster than the distribution business as you go into the next year?

No, I didn't imply that. See, the retail business, the growth will be at this level of 13% to 15-odd-percent, and the distribution will be in higher double-digits. That's the endeavor. So that should continue. My only call was the proportion of retail, which is what you were asking about, the proportion of retail against distribution should improve with normalization of pre-COVID situation, purely because the change in consumer behavior is allowing that now.

Previously, it was around -- retail was around 62%, 63%, and distribution was around 30%. Balance was other institutional. So this year, the proportion has had changed. But in the future year, when the retail improves, I think it will be in the same level what it used to be. Maybe distribution a little higher because of its compounded growth in double-digit.

Okay. And just on -- second question on the gross margins, both in the retail and distribution. So what we have seen in the third quarter -- is that sustainable? Or you're seeing what you mentioned to earlier question being asked that still there is further scope for gross margin improvement in this -- compared to what we have done in the third quarter?

Yes. So I think in a -- on a gross margin level on the retail side, as I mentioned earlier in the conversation, there has been efforts taken on the range architecture which should show sustainable improvement on the gross margin. We intensified the older and the efficient prices also because of the change in the sales mix, the product mix that we have taken. Because the third quarter included October, November and December, 3 long months, and the change in consumer behavior has been slow in this year, purely because also, one, the [ peer bleeding out ], and 2, also because the disposal income has been on a lower side. That has -- that hopefully will change. And the proportion of the products which people will demand will be more higher fashion and maybe the disposable income, hopefully -- we're expecting the economy to improve, which will improve the quantum of disposable income, so -- which will improvise the demand for higher priced products, which will also continue with a sustainable increase in the gross margins. On the distribution side, on the other side, we have taken again both -- as we've done on the retail side, we've done the same on the distribution itself. They had introduction of new products across the various sub-brands that we have created across the various merchandise categories. We've taken the required price increases. And also, we -- and the sustainability in gross margin has been despite a very severe increase in raw material costs in the last couple of quarters. So despite that, we've been able to pass on the cost increases. And once the raw material prices stabilize, hopefully, we should see an improvement in gross margins. We have already seen certain amount of stabilization of raw material prices, which -- so we should be able to see that other improvement in the next couple of quarters.

Okay. So your -- whatever raw material cost increase has been completely you've passed it on. And this margin improvement is purely to do with mix improvement?

Both, mix improvement and price increases. So as I'm saying, the raw material costs which -- the gross margin that you are seeing over here is adjusting for the raw material cost increases. So moment, the raw material cost stabilizes, we are seeing that there's a lag generally of a couple of months from the buying to the production to the supply, right? The moment this reduction in production -- the raw material costs that we are seeing will have a -- will take a couple of months to show an impact on the gross margin for us. So we will see that for sure.

Okay. So any range you can give us in terms of gross margins where we could look at into next year as we move into the next year?

Actually, I think in our mind, at least 100 basis points across the board.

From the third quarter levels as we move into the next year?

Yes, yes.

And if you see that the ASP in distribution business has also increased by 5%. From INR 74, it has gone to INR 78. So you can -- we'll see the increase mainly because of the price that we have taken, around 3 price cuts in the last financial year -- 3 price rise in the last financial year.

Okay. Just one more -- third question might respect to your employee cost and other expenses. So are these numbers, which you have seen now in the last 2 quarters, we have seen sustained reduction in both. How much of these will be sustainable as we move into the next year as the recovery comes through?

See, the employee costs, we have taken 2 price -- employee expense cut from the previous year salaries. So we have to go back to that number in the next year. And in case of other expenses, there is a saving that are because of some -- we have stopped some infrastructures. That will be there in -- that infrastructure saving will be there in next year. But there are some expenses that we have to do, the normal maintenance expenses that we have stopped in the retail, that we'll obviously do. So there will be a rise in expenses. We'll get a better idea when we come -- when we have completed our budget for the next year. So that we can illustrate in the next con call.

Okay. Just one last question, some data points. Can you just give us what are the receivables and inventory numbers for this quarter?

The receivable is at INR 98 crores as on December 31 and inventory is at INR 152 crores.

We have the next question from the line of Tejash Shah from Spark Capital.

Yes. Congrats on a healthy recovery. So my first question is, Namrata, for you. So it's been almost more than a year now since you took charge of the company, and then you actually faced one of the once in a lifetime crisis after you joined. Now we had a problem in the company even before this crisis started. In fact, there were some challenges which were visible. So -- and if we couple that with the crisis that we saw in the last 9 months, what are steps we have taken which will improve the character of the business materially in terms of stability of growth, margins? And in that, if I may add, that we used to be a very stable company across cycles of at least high single-digit kind of EBITDA margin company, which got derailed in last 3 years. So if you can actually highlight all those factors, which will lead us to that kind of profitability and stability in numbers.

Tejash, good to hear from you, and thanks for your question. So I will possibly look at both the sides of the entire profitability and balance sheet. Starting broadly with the P&L, I think on the revenue side, the focus for retail will be to ensure that my base, which is the SSG, is constantly on a growth of about 5% to 6%, which, again, is a function of volume and ASP. Our endeavor is to at least grow by 1% to 2% on the volume side and ensure we have an ASP growth of 3% to 4% on a year-on-year basis, which will be carried out by a function of the price increases and the product mix that we have been already started doing. So that is something which we are very, very aggressively focusing on to ensure that our SSGs are growing in a very healthy manner. Secondly, on the gross margin side, our endeavor is to ensure that we are taking gross margin increases year-on-year, so that to ensure that your profitability -- your revenue growth is -- your economy of scale, for lack of better words, is higher than your cost increases. In terms of the cost side, we have -- I think, as an organization, now we're becoming very fluid with the cost increases. As Indrajit mentioned earlier in the conversation is that we've taken some measures in the infrastructure reduction, which will have medium to long-term impact in terms of the cost increase that we are looking at. In terms of distribution, there is a very, very aggressive view on the way we are looking at growing the business. We're looking at improvising the product range. We are taking the -- we are trying to work -- similar to the retail segment trying to work on the merchandise categories where the growth is higher. So it's like you have your merchandise category-wise, price point-wise product range. So whichever product-wise, price point-wise -- we call it assortment group. Whatever assortment group is growing at the highest pace, we're looking at introducing new products and designs in that category. And we are taking very, very aggressive steps in introducing new products every month in various categories. If it is in the -- in month of April and May, we're introducing new products in the Hawai and PVC categories. If it is in the pre-festive months, we're introducing kitos and formal shoes and sport shoes and PU products. So we are very, very aggressive -- we're getting very aggressive on the product introduction. And keeping very much in mind that we have to take our ASP and gross margin increases year-on-year. On the balance sheet side, we have also been getting very aggressive on the working capital management. As Indrajit mentioned to you, we have improvised our debtor compared to the same time last year. We have improved our inventories the same time -- compared to same time last year. Our debt has come down compared to the same time last year. So I think on the balance sheet side, we have taken very strong measures and we intend to continue improving the working capital position to be more leaner and more capital efficient. So some measures are short term, some measures are medium term and long term. But I think the entire management team is geared in the same direction towards achieving the target that we have kept on the P&L and the balance sheet.

So you spoke about increasing SSG as a retail strategy, but that will be an outcome. So what is the -- what are the interventions that we're making for that -- to achieve that outcome?

So SSG is a function of mainly of volume and ASP growth. Volume is a function of footfalls and conversion. We are taking efforts on improving the footfalls through our direct marketing strategies and general marketing strategies. We're very -- getting -- trying to get a little more aggressive on our digital media to ensure that we have an online to offline conversion as well. In order to increase conversion, we are trying to train our sales staff much more aggressively. We're trying to figure a more stronger and robust incentive policies to ensure that we're getting conversion well enough, so as to improve our -- so as to increase our volume sales. With regards to our ASP, as I mentioned earlier, same thing. I mean, we are working on very -- we're working very aggressively on our range architecture to ensure that we are getting the ASP growth driven through price increases and product mix. So the categories of items -- again, the assortment group, which is nothing but your revenue-wise, price point-wise product mix, which are growing much stronger. We are trying to focus on introductions of products in those categories. So that to ensure that we are capitalizing on the strength of the brand also and what the consumers are also buying, keeping in mind what Khadim has to work for. So we have already started seeing some kind of improvement over there. As you can see, the ASP in the retail has grown by 1%. And that's basically owing to the fact because, see, the -- in the last quarter, there has been an impact of consumer behavior and also [Technical Difficulty] a behavior driven towards lower price points. And also, there has been constant discounting on, which was not there in the previous year same time. So there has been an impact -- there would have been a higher net impact of ASO if we had not taken the change in the range architecture that we already have. So hopefully that should show a stronger impact.

What is the proportion of full price sale in the quarter and for 9 months?

Sorry. Can you repeat the question?

What was the proportion of full price sale for 9 months and the quarter?

Around -- the full price would be approximately 80% and discount would be 20%.

Is it -- was the number same for the industry or ours was materially higher than others?

This is pretty much industry standard. It's been for a longer period of time. But when you're looking at discount as a proportion of sales, it's pretty much industry standard.