Khadim India Limited (KHADIM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Khadim India Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nachiket Kale from Dickenson World. Thank you, and over to you, Mr. Nachiket.

Hi. Good evening, everybody. Thanks for connecting to the results call for Khadim India. I welcome you all to this conference call, and we have already uploaded our results press release -- results presentation on the exchanges. Hope you had a chance to go through it and look forward to your great discussion with the management. I would now like to hand over the call of the company, Mr. Siddhartha Burman, who's also the Chairman and Managing Director. Over to you, Mr. Burman.

Okay. Namaskar, everybody. Good evening, everyone. We welcome you to this conference call to discuss our second quarter results of the financial year '21/'22. Hope everyone continues to be safe and had a great festive period. This quarter has been a story of reliance, resilience. We are proud to have bounced back to profitability after a second wave. Our strategic efforts on improving product portfolio focus on profitability, managing supply chain, controlling cost and efficiency, improving our working capital position helped actually turn around. In the post-COVID era, our affordable fashion positioning has resonated well with our existing and new customer base. We achieved healthy revenue growth across both business retail and distribution. We have now recorded significant improvement in margin for last 4 consecutive quarters. We continue to strengthen our retail presence in Tier 2 and 3 cities by opening 25 new franchisee stores during the second quarter despite partial lockdown, taking the overall tally of 555 franchisee stores. The retail network now stands 762 stores and distribution footprint has increased 606. Coming to our performance for the quarter comparing year-on-year to Q1 FY '22, revenue grew by 33% to INR 161.6 crores. Second time the company has achieved the highest ever gross margin in retail at 52%. Generated positive EBITDA of INR 13.7 crore with a 8.5% EBITDA margin and reached pre-COVID level as -- the pre-COVID level versus an EBITDA loss in Q1 FY '22. PAT stands at INR 6.5 crores, with a PAT margin of 4% compared to a loss of INR 22.4 crores Q2 FY '21. Working capital efficiency has improved. Cash flow position has strengthened the balance sheet. The majority of population gets vaccinated, gradually unlocking increased the COVID-related restriction cases that economy is on track to reach normalcy. After being confined indoor in the lockdowns, we now see a tremendous desire in the people to venture out again, and this is driving high demand, especially for footwear. We are already witnessing improving traction at our stores and are very optimistic of scaling operation further. We thank you all of your continued support and look forward to continue interaction with you. We can now proceed with the question and answer. Thanks.

[Operator Instructions] The first question is from the line of [ Monica Arora ] from ShareGiants Wealth Advisors.

On the back of like we see the revival of economy and improved consumer sentiment, so we see that lot of brands are offering various deals and discounts to attract more footfall in their stores. So have you also offered some kind of deals to your franchisee?

Thanks for your question, [ Monica ]. So I think we are -- throughout the year, we have done a very silent discount in our stores to ensure that we are liquidating most -- our stock. The old stock, which have been -- which we manufactured last year and last, last year. But there's nothing active promotion of the discount, generally, which we do have EOSS. We will have our regular EOSS twice a year which will be in December and March and which we'll promote very aggressively and where we'll be having a much more aggressive discounting. And -- but during the festive season, we did have a very good scheme, which is called Milega Much More! wherein on a minimum buy of INR 1,000, INR 2,000, INR 3,000, we offered a credit note, which you could redeem immediately. And for which we saw a very good response of 25% to 80% redemption. So I think, yes, recovery has been good and people are responding to good schemes.

Okay, that's it. And also, if you can update on like deals to franchises to set up new stores and expand further?

So you are asking in terms of the expansion this year?

Yes.

So we've opened 25 new stores in this, in the last quarter, Q2, and we're looking at opening stores in a total of around 80 stores this year.

Okay, okay. That's it. And we see that a lot of corporates are open now. So do you also see some institutional sales in Q2? And also, what is the status of like cash flows from the big orders and all filled during the Q4?

This quarter, there is no institutional sales. In terms of big order that was there, fourth quarter, 70% of the payment has been received, 30% balance payment, we will get in this third quarter.

[Operator Instructions] The next question is from the line of Deepan Shankar from TrustLine PMS. We move to the next question, which is from the line of [ Varun ] from VJB Securities.

Looking at the -- congratulations for the turnaround. The COCO store seems to produce much more revenue, given it is having only 30% retail stores, whereas the franchisee stores are producing much lower revenue. Why is that?

So COCO stores, the sales are recorded at MRP; and the franchisee stores, the sales are recorded at net sales value, which is post the margin that we give -- like retail margin that we give to the franchisees for them to do business. That is why the sales seems lower. That's number one. And number two, the COCO stores are generally much bigger and they're larger and they're generally in metros and Tier 1. We believe the franchisees are more in the Tier 2, Tier 3 cities and the average store size is generally lower than the COCO stores.

So from an accounting perspective, the discounts in COCO stores are recorded as expenditures? It's not -- the revenue is not basically recorded as the sale price but the MRP price?

No. I mean, if the product is sold at MRP, it is recorded at MRP price. If it's sold at a discount in COCO, it's recorded at a discounted price. But what Namrata was saying that in a COCO sales recording is in MRP, whereas in case of EBO, we give a trade discount of around 30% to 35%. So the company records the primary sales of 65%. So that's why the difference what you see that COCO numbers are higher compared to the franchisee.

Okay. In terms of the -- how many stores have a breakeven already out of the 800 stores, how many stores are cross subsidized? Can you give some data on it? In the expansion force, we will say, once the expansion over, completes over the next 2 years, the breakeven percentages may go up and that is the interest in it till now.

See in case of COCO, we have already last year shut down 13 COCOs, which were at a negative thing. So if we consider 220 out of that, 10 stores are not in breakeven term. Otherwise, all the COCO stores are breaking.

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

Congratulations for this set of numbers. So firstly, I wanted to understand, so last year H2, we have done a sales of INR 340 crores-plus only in terms of retail and distribution. So are we looking to grow considerably over last year H2 base as well for this year H2?

Yes. Firstly, thank you for, Mr. Shankar, for your question and your good words. Appreciate it. Yes, I think we will be looking at growing in H2. The recovery has been extremely healthy and very comforting. And on the retail side, for sure. The distribution side also the recovery has been good. So yes, we're looking at growing on both the fronts in the businesses.

One thing is that in last year H2, there was institutional sales of around INR 90 crores.

Yes. I'm not counting on that. So including that, it was INR 440 crores. So accounting only the INR 340 crores for retail.

Okay. That is correct.

Okay. Okay. And are we confident enough to get back to our pre-COVID quarterly run rate of INR 200 crores for next year onwards?

Yes, that's the hope for sure. We are all hoping that we don't see a fourth and fifth wave and any further lockdowns and any further health issues in the country. And if that is not there, I mean, we definitely are looking forward to a pre-COVID number.

Okay. And also in terms of fashionwear, so are we seeing substantial improvement over that? So that will give us improvement in average selling price as well, right?

Sorry, I didn't get your question. Can you repeat it, please?

Yes. During COVID times, our fashionwear contribution has gone down tremendously in retail. So are we seeing that coming back strongly in coming quarters as well?

Yes, yes, sure. We've already seen an improving and coming back to normal in Q2, in fact in the end of Q2, especially during the festive season, we have seen a normalized buying in terms of categories, all the categories. So we are -- and we're also seeing the trend currently. So we're looking -- we are hoping on that the fashion buying continues.

Okay. And at the gross margin levels, we have seen a substantial improvement. So are we expecting that to sustain over coming quarters? Are we seeing the raw material pricing trend is able to pass on?

On the retail side, we are hoping to be able to pass on the raw material price and still make an incremental margin because the pricing relatively is on the higher side from competitive distribution. So there, we should be able to absorb and pass on and also grow. But on the distribution side, it's a bit choppy and the raw material pricing is very sensitive to the pricing of the product. Because you are dealing over there on Hawai chappals, PVC chappals, PU chappals, low-priced sports shoes, where the prices are very, very sensitive aspect of the product. So there, raw material pricing, we are hoping the choppiness stabilizes. There can be some clarity and stability to the pricing as well. So till the raw material price stabilizes, I think there will be some choppiness in the gross margin, which we're hoping to pass on as much as possible. But we also have to be careful and consider to the MRP because they are dealing with the mass audience. So there will be that much price increases that one should take to be able to pass on to the customer, but we are trying to build, our best to balance it out.

Okay, okay. And lastly from my side, this fixed cost, employee costs plus other expenses. So the quarterly run rate has fallen from INR 66 crores to INR 46 crores. So are we seeing that run rate to continue? Or are we -- as things start improving, we are expecting some amount of fixed expenses to shoot up in like the coming quarters?

In case of employee expenses, for the last 18 months, there was a cut in the employee around 20%. So that we -- in October, we have already given the money back to the employee. So the run rate, what you have seen in the last quarter, it will increase. In other expenses, there are a lot of expensive cuts. But there are some maintenance and other expenses we need to incur. So there also, you will see a rise but not at the level of the pre-COVID level.

Okay. And what about advertisement expenses? So already it has reached pre-COVID levels or what is the run rate currently?

Advertising expenses is very less, means pre-COVID means in 2019, it was around 4%. So now it is around 1%. But obviously, in -- when -- in next FY '23, it will increase from 2% to 2.5%.

The next question is from the line of Girish Pai from Nirmal Bang Equities.

I just wanted to -- I think you said that 2H of FY '22 is going to be better than 2H of FY '21 if you exclude the institutional sales number. Will the profitability be better in terms of EBITDA margins? Would that be better than 2H of FY '21, if you exclude the institutional number?

Compared to which period you're saying, FY '20 or FY '21, I didn't get your point.

FY '21, FY '21. Last year, FY '21. 2H FY '21, will it be better than that? In 2H FY '22?

We believe the revenue will be better on EBITDA margin, excluding the institutional sales, definitely.

Okay, okay. And I think these EBITDA margins are pre Ind AS 116 or post Ind AS 116?

It's post Ind AS 116.

Okay. And how much is the price increases you've taken because your gross margins have been fairly strong. On your portfolio, how much has been the price increase you've taken say cumulatively in the last say, 9 months or 12 months?

So again, we've got 2 businesses, one is in the retail side, one is in the distribution side. Retail side, we have increased our ASPs quite significantly since FY '21 for sure. And since FY '20, we've increased our ASP by 9%. In FY '21, we've increased our ASP by 25%. The 25% is an aberration probably because last financial year, the consumer behavior was a bit different and more steered towards low-priced products and basic products. So comparing it to FY '19 -- sorry, FY '20 would be the ideal number. The 9% growth is what we are seeing in ASP, out of which I believe around 67% would be price increase and that's on the retail side. On the distribution side, we have taken in this financial year, approximately 15% increase in prices, owing to the raw material price increase.

Okay. And you mentioned in one of the earlier questions that you would want to go back to a INR 200 crore kind of a run rate in terms of revenue on a quarterly basis. What incremental steps are required from your side to achieve that number? Is there anything required or just the demand -- just demand coming back naturally because of post-COVID footfall increasing? Will that lead to the INR 200 crore number? Or do you think there are any incremental steps required on the side?

So again, I would answer this question to pass on to the retail, one is distribution. On the retail side, we will have to ensure that our base of stores -- existing business to grow at a healthy pace of SSG, which is around 5% to 6%. And we will be -- we intend to grow the retail business overall around 10% to 12%, so the balance coming mainly through new store expansions. And on the distribution side, it's going to be slowly through increasing the market share and the wallet shares with the existing list of distributors and also building a list of new distributors.

Lastly, you mentioned that the end of season sale would be December and also March. It's like, would you see pressure from that? Or do you think that can be offset?

Sorry, can you repeat your question?

I thought I heard you're holding 2 end of sale, EOSS, one was end of December or end -- and end of March. You think you can offset the discounting pressure that's going to come through because of that?

The discounting pressure owing to what? Sorry, can you -- actually voice is a bit blurred. Can you put your handset a bit closer to your mouth? If it's possible, please?

Yes. I was asking on the end of season sale related discounting, how much of that is going to have an impact on margins?

No, I think -- see, that's all planned and adjusted for. So I think there is an end of season sale every financial year and there is in every period. So I think that -- there will be an incremental growth because the overall gross margin is increasing, your discounting will be just from the increased margin. So your net margin will always be higher than the previous year.

[Operator Instructions] The next question is from the line of [ Bharat ] from VJB Financial.

Hi. Am I audible?

Yes.

Yes.

Yes. Congratulations on a good set of numbers. I have 3 questions. The first would be, what would be the total number of pairs sold in retail and distribution? I think last time I got the number, but just to reconfirm the numbers on a yearly basis in a normal year. And the second question would be, I think we've got an order from the U.P. government. When is the execution of that order likely? Or has it already been executed or what portion has been executed? And is there any other institutional orders from government or from anybody else that is likely? And three, the revenue per store as compared to our competitors is slightly lesser, like, say Bata is say INR 3 crore per store and we're at, I'm assuming at, INR 1 crore per store, but correct me if I'm wrong. Is it possible that we will be bridging the gap or what is the way followed on that one?

So I'm taking your second question regarding that institutional sales. So that institutional sales have been executed in March itself in the fourth quarter and 70% payment has also come. In regard to -- there is no institutional orders now pending in our side, okay? And in terms of we have pairs sold in quarter each, this is distribution is around 67 lakhs, and in retail, it's 22 lakhs.

Okay.

Revenue per store, if you compare our COCO stores, it's around INR 1.5 crores or INR 1.25 crores per store. Yes, it is compared to Bata, it is less because the ASP of Bata is higher compared to us. And also the product mix of retail, 75% of our products are below INR 1,000. But in compared to Bata, there 50% of the products are sold over INR 1,000.

But I'd like to add over here. This is the revenue per store you are comparing, if you compare revenue per square feet and gross margin per square feet, we are as good as them and in some cases even better.

Okay, fantastic. Okay. So is it possible, like you've already answered the question in part and when the earlier gentleman asked the question with regard to you adjusting gross margins and then discounting and giving as net margin would still be efficient because you increase the price and give a discount or whatever that is to maintain the net margins. What is the elasticity of demand, even if you increase price, let's say, 3% to 5% on retail because say if I'm buying a shoe from -- as I'm buying PRO or LAZARD, what is the propensity for you to increase prices in that -- in these segments where you can increase prices by 5% without affecting demand because like you said, Bata's average ASP is much higher. So if I'm buying a Power Shoe or PRO if I buy a like-to-like a PRO shoe is INR 700 vis-a-vis a Bata at INR 1,600. So is it possible for us to go from INR 700 to INR 800 without impacting demand? And what is the cushion that you have?

So I think I am -- just to answer, I can give you a, but if you see last 2 years, we've just taken regular price increases of all our existing range as well. I have not seen an impact on demand owing to the price increases. Our base is generally so low. And secondly, the kind of product range and the price points that we are selling at, we don't see too many brands being able to sell the kind of variety at that price point. So we are very confident in our product offering, and I don't think 3% to 5% increase in prices are going to impact the volumes percent definitely.

So we can increase. We have headroom there to increase prices and hold up margins if needed be?

Yes, yes, definitely. There is no two thoughts about that.

Okay, okay. And with regard to last time when you -- last time on the con call, you had spoken about omnification of the channels where if I don't find a shoe in our store, I can get it through another store. So I buy from Khadim's personally. So if I buy -- say for example, I want an Oxford shoe and it's not available, the store manager doesn't -- even though it's a COCO, the store manager doesn't know if the stock is available in the next store. So there's no integrated stock management even within the city. So how would you do an omnification, like how does it work?

The store manager does not need to know if it is available in the next store or in the third store. He will just place the order and it would reach you from the nearest possible store where it is available.

Because it is integrated backwards because in the retail end, we don't have that kind of bandwidth that will show that store manager can see everywhere. It is to the integrated EMS commerce thing that we integrate back end so that if an order comes in the retail outlet, that will be picked up from the next store or from other states also.

No, that I believe. So I have to place an order. So suppose I'm in Chennai and I'm buying from say Thiruvanmiyur and I'm going to Adyar and your store is on the way. So if I'm going to a store and if I want that particular product, so I'm buying for myself and my family, and I really want it because there is not a particular color available there or whatever. Though it's in the catalog, it's -- and I know it's there. And I want it because the choice in the store might be slightly limited for various reasons. But why we shouldn't be -- why wouldn't it be -- if it's more democratized where we know, as for your selling own product. Why wouldn't it be right if you have an ERP which tells you what store has what stock so that it can be given to the customer if it's needed. Because most customers don't find the product in the store and go away. So like, for example, I went to buy a Bonito for my child and it was not available. They said it may be available in T. Nagar, which is like 5 kilometers away. Maybe it's like impossible to track. If it's there, I go and buy. So how do you -- is there -- I mean, is there a methodology where we can do this because in most apparel retail and other players, the store -- at least the store warehouse side knows where the stock is. So like I go to Louis Philippe, I know if it's not in this store, it's in the next store. So just asking more out of curiosity.

[ Bharat ] I think it's showing that you're a very loyal customer for us and I can sense the pain that you have gone through. And thank you for sharing this to us. This is something which has been on our mind to be able to implement in our stores as well. And maybe in the due course, we will do that to ensure that the customers have a better and seamless experience. Right now, we don't have it for sure, but we're definite they're developing it, and we will try doing it as soon as possible. I think it's a valid view that you have given us and we will definitely try working on it.

Yes, because 3 times I have gone without buying. Since I'm a shareholder and I buy only from Khadim's I go back in. For example, I don't find an Oxford, I've tried my best. And I thought of buying it online. Then I thought, okay, for whatever reason, I thought I'll buy from a store, I just don't find an Oxford on the store. So I said, okay, let me try till I get it. It's okay, if I have to do 5 rounds. But I've not got it, and nobody has told me that I can place an order and I'll get it.

I think...

No store manager has told me that I can place an order and get it. And I'm not complaining. I'm just saying because you said that I can request for the product and get it.

Which store did you go to?

I've gone to 5 stores in the city. 5 plus 1 store.

Were they all COCO stores?

Yes, they are all COCO. I don't go to a franchises. I'm a Khadim's shareholder, I go to COCO.

Okay. So you did not -- okay, so I'll possibly take it up definitely and we'll see what the best we can do over there. But on the side line, request you to -- I'll ask my team member to connect with you with the design that you like and ensure we'll get delivered to you.

Yes, please do so. Okay. The whole family need one, one. So, yes. Like my wife needs PRO, my child need Bonito. So, yes.

We'll definitely ensure that delivered to you. We won't lose you as a customer for sure.

The next question is from the line of [ Ankit Shah ], an individual investor.

Can you hear me, yes?

Yes.

Yes, so one question was on the -- basically just when I look at the balance sheet, there are some in other advances, there is a INR 115 crore-odd amount. So is this relating to GST credit because it shows us advance to government authority?

Yes, it is a GST credit that has accumulated over the years.

Okay. And this is because of the difference between what you charge the customer and what you pay to the suppliers on your raw material?

Here, there is a 2 concept. One is that our output tax is lower than the input raw material. So the input is 18% whereas the output tax less than MRP INR 1,000 is 5% where, there is an accumulation, but that accumulation, the government gives refund. But the service tax accumulation or the GST of 18%, that the Supreme Court has given a clear verdict that there will be no refund for that. So that accumulation can be set up with the next output tax. But since our output tax is less than the input tax, so that accumulation carries on and on. So I think in this GST committee meeting, this tax, this inverted credit structure would be revamped, only then that credit that has accumulated will be utilized.

Okay. And what's the proportion of that refundable versus the one which we are saying the Supreme Court has sort of said no?

Mainly, the around whatever the -- I mean, the raw material thing is around INR 7 crores to INR 8 crores. Balance is the service tax input that is carried over for the years.

Got it. So unless this inverted duty structure, the government does something about that, this will continue to be a challenge and it will keep backing.

The accumulation will be there.

Understood, understood. Okay. The other one was to understand that because you mentioned that we do -- we sold around 22 lakh pairs in the last 6 months. So typically, what would be the average customers either bought, meaning what will be the average bill size for 22 lakh orders, what will be the number?

For 22 lakh is for this quarter and half year, it is around 31 lakhs, okay?

Okay.

The average bill size would be in the range of around INR 850.

Okay. No, but I'm saying that there will be repeats also, right?

INR 750.

INR 750 for the retail throughput.

Yes.

Yes.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management of Khadim India for closing comments.

Thank you for all your questions and your interest in Khadim. We are all working very hard to ensure that we are able to do good business, and we look forward to keeping in touch with all of you and answer your questions. Thank you.

Thank you. On behalf of Khadim India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.