Khadim India Limited (KHADIM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 and 9 months FY '22 Earnings Conference Call of Khadim India Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. Actual results may differ materially. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Siddhartha Roy Burman, Chairman and Managing Director. Thank you, and over to you, sir.

Namaskar, everybody. Good evening. We welcome you to the conference call to discuss the third quarter results for the financial year 2021 and 2022. Hope everyone continues to be safe. Third quarter is full of activity and is a major factor in determining the trajectory of the retail industry. Overcoming lockdowns and gradual resumption of economic activities across the country led to a significant recovery, thus giving a much needed boost to the retail industry at large and footwear sector as well. As people start stepping out again, we are seeing a significant recovery to pre-COVID levels. To exploit the opportunity, to garner festive sales this quarter, we launched catchy marketing campaigns in our strategic efforts to gaining a brand recall through young stars. [indiscernible] puja [indiscernible] and Diwali all were in Khadims campaign saw a viral response on social media and lead to good traction. We published our revamped product portfolio, and our new variant designs are driving sales in retail business. The launch of new range, the support in the Hawai categories has contributed to growth and distribution business. Our deferable 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 registered growth for the last 5 consecutive quarters and have poised our profitable in 9-month basis. We continue to strengthen our retail presence in tier 2 and tier 3 cities and opened 21 new retail stores during the quarter. The retail network now stands at 768 stores and distribution footprint has increased to 617. Coming to our performance for the quarter in 9 months FY 2022 revenue grew by 22% to INR 434 crores. The company has recorded improved gross margin at 37%, higher from 34% in 9 months FY '21. We generated positive EBITDA of INR 35 crores with an 8% EBITDA margin versus EBITDA loss in the corresponding period. PAT stands at INR 3.8 crores compared to a loss of INR 45 crores in the 9-month FY 2021. Our focus on managing cash flow and improving working capital efficiency is leading to strengthening balance sheet. We continue to witness improving traction at our store and are very optimistic of scaling operations further. We thank you all for your continued support and look forward to continuing interaction with you. We can now proceed with the question-and-answer session. Thanks, and namaskar.

[Operator Instructions] The first question is from the line of Nitin Akanker from Proprietary Investor.

Mr. Burman, I would just like to understand the strategy for the company to improve its overall EBITDA margin, get higher post-tax profit for the shareholders?

Can you repeat yourself?

Hello?

Can you repeat yourself, Nitin?

The question is, what would be the company's strategy to improve the EBITDA margin. So we have already improved over the last quarter, but what is the strategy to further improve the EBITDA margin, so that the net profit for the shareholders also grows going ahead?

So I think it's a function of basic 2, 3 things. Number one, the sales increases, which we are anticipating based on increased units per transaction, increased call, increased conversion, increased ASP, which will eventually help us increase our overall sales, along with increasing the number of stores through the franchisee model. We are on a continuous basis trying to increase our gross margin, which is reflected if you can see in the last 2 years, our gross margin has increased quite well in this particular year, gross margin increased by almost 100 basis points. So that has -- that is one of the very -- main reasons why we're able to have a good economy of scale coming to the EBITDA level. Plus, there is also a very strong control on the cost increases that we are looking at. The gross margin also is increasing owing to the fact that there is a gradual premiumization happening across all our product lines in the retail business, which is reflected from the fact that a branded proportion of sales has increased. So gross margin in economies of scale, which we are confident will only improve once the footfall comes back to normal pre-COVID levels.

What is the strategy -- I think you have been asked this question quite a few number of times on earlier calls also to repeat the question, as to how to penetrate the key markets of North India and Western India?

So I think it's a function of 2 things, which we have mentioned earlier also opening new company offices and establish our presence in those markets. And given our experience, a lot of our customers have a good response in the markets we are opening purely because of the product offering that we have. In fact, when we open our stores, the people are -- in the western and northern part of the country are quite impressed with the kind of product and the price points that we are offering. And the products are -- have only improved and become more trendy and fashionable in the last couple of years. So the response has been good. And we are using that platform to attract a lot of franchises and to which we're getting a decent response across the markets. So I think our products and our product offering will speak for itself, and we're getting a good response from those markets as well. And as we speak, we are on a continuous basis opening franchises there as well.

[Operator Instructions] The next question is from the line of Amit Shah from AG Capital.

I would like to congratulate the management on a good result and the recovery in performance is encouraging. I would like to understand, we have launched multiple products in the distribution business recently. And there has been some change in the GST in that price range. So what is the impact of the sales? And how do we plan to expand this business in India?

So I think, yes, GST, there is an impact in this price point, both in distribution and retail and then in fact, a majority of the players across the country. But I think the way we are looking at it is that we intend to continue offering the products and the price points. In the distribution range for that matter, we have a good range of products in the Hawai segment, which is in the range of 120 to almost -- 220, 230. So yes, there has been a significant price increase, but they're trying to control the pricing to make the product more affordable. And I think in the long term, I think the GST impact will stabilize, I think the people will be acceptable for the pricing that is there. In our retail business, also 80% of our product range is [indiscernible] rupees. But I think on the retail segment as well, I mean the price sensitivity is relatively lesser, so I think we will start to see it stabilize.

Sure. The second question I have is in terms of our distribution network, how do we -- what is our strategy to increase the network, especially in the [indiscernible].

Sir, right now, our main target and strategy is to focus on the Eastern India itself. And by east, I'm talking about Bengal, Bihar, Odisha, Northeast, Eastern UP, we have also a presence in Central India as well. So again, in this market only, I think we had the significant scope for penetration further. We are the market leaders over there. So I think in Maharashtra definitely in rest of India, definitely, there's a lot of scope in for the next -- for the medium -- short and medium term, we're looking at predominantly penetrating and -- penetrating further and maximizing the potential in our existing markets by our brand presence and brand recall is extremely strong.

Okay. Okay. And a last question, if I can. In terms of the promotion expenditure, how much did we spend for this quarter? And how does that compare to previous quarter?

Promotion expense for this quarter was around INR 2 crores because it is a festive season. And the last quarter, it was around INR 1.5 crores.

[Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital.

Now sir, you did mention about the strong economies of scale and a better gross margin that can drive our EBITDA margin, right?

Yes.

So I just wanted to understand what is the optimum or a normalized kind of EBITDA margin we are looking at maybe at a higher scale of revenue of maybe INR 800 crores to INR 1,000 crores. You have some understanding on that?

I think it will be -- our target is to ensure that we are in the high teens in terms of EBITDA margin. And I think it's very much achievable. And it's also -- if we have seen the kind of growth in terms of numbers and margins in the last 2 years, I think we have enough confidence to be able to implement that with the product strategy that we have taken in the retail and distribution segment both. On the retail side, also, as I mentioned in the earlier calls, we are working very strongly on the range architecture so as to ensure that we are able to ensure premiumization, we're able to get higher a ASP, we're able to -- which will also drive to a large extent the gross margin. And we have the largest franchise retail network in this country. And we're extremely proud of it, and we plan to use that platform to be able to grow further in an asset-light model, which should drive our EBITDA margins significantly higher.

Great. But high teens, we are talking about high teens is around 16%, 18%, right?

Before rentals we were watching EBITDA of around 10%. And if we consider the rental expense as a percentage of sales -- so it is around 5% to 6%. So we can expect an EBITDA margin of around 15% to 16% when the sales becomes normalized.

And what that is 1 to 2 years? Is that what one can expect?

Yes, maybe if the next year go without any intervention of these lockdowns and all these things, we may expect a 15% EBITDA margin.

15%. So currently, I think we are at about 11.5%, right? So this 3.5% is -- hello?

This quarter?

Yes, this quarter. Sorry.

11.5% in this quarter.

Yes, 11.5% in this quarter. So basically, this 3.5% jump would be driven by the factors that you mentioned, right, of economies of scale, the gross margin and your asset-light model.

We need a full year without interruption.

Full year without interruption. Okay. And what would be the revenue that we are looking at maybe next year?

We are in the process of making the budget. So we will come up with the numbers in March.

Okay, okay. And any kind of raw material pressure we are seeing on our business as such?

The raw material pressure was in the third quarter. In the fourth quarter, it has eased out. But compared to last year, it has grown about 60% to 70%.

Okay. And we have been able to pass because we have been able to maintain our gross margin, right? So...

Yes, we have passed on. But in distribution, passing of the higher prices is very difficult. It impacts the volume also.

Okay. Okay. Now this fourth quarter, you mentioned -- in the current quarter, the raw material prices are on declining, right, trend?

Yes.

So ideally that will also give a kick to your margins because ideally, you would not decrease your prices at least in the retail segment, right, once you have taken the higher prices?

But the thing is that in the fourth quarter, the past month due to this one is the GST increase and also the Omicron, the sales was muted.

The next question is from the line of Varun Gia from Dimensional Securities.

Sir, if you could provide the breakup of COCO and FOFO revenues in retail and even the number of pairs sold for retail and distribution this quarter?

In the retail, the number of pairs sold is 21 lakhs and in distribution around 81 lakhs.

Okay. And...

And sales numbers, in FOFO it's -- it's INR 67.5 crores and in COCO, it's INR 46.4 crores. Total retail sale is INR 116 crores.

And I wanted to know your net addition to the overall retail stores is around 6. So there has been store closures and in what region have they been?

21 stores retail stores have been opened and 15 has been closed.

And 15 are closed in which regions? If you could mention that.

It's been across the country. I mean and subjected to the performance, there is no particular [indiscernible] on the region.

Because there was a CEO, which was bleeding in the COVID period. So we decided to close some stores.

Okay. And last question, if you could provide how much revenue comes from online sales currently, and if that would grow going forward, what is your outlook on that?

The sales through the online platforms contributed almost approximately 3%. We're looking at growing it to approximately 5% to 6% in the coming future.

This would be from your own site -- website or all the other?

All the online platforms which include COCO and -- sorry, on the upside and marketplaces only.

The next question is from the line of Hemant Shah from Asian Market Securities.

My question has been answered.

The next question is from the line of Tejash Shah from Spark Capital.

So in this quarter, we have registered the highest gross margin for the period, also we have registered highest gross margin. So if you can help us understand the factors, which have led to this improvement?

I think predominantly improvement in our AST premiumization and efforts to reduce the cost of production, the main 2 catalysis. Because as I mentioned earlier, we've done a lot of work around the product range, making it more friendly and fashionable. We have tried to increase the foreseen value the product as well. We have taken the required inflationary increase. The focus is on increasing the sub-brand proportion of sales and now trying to drive customers to more fashionable product, which is driving the ASP, which is driving the gross margin.

Fair enough. Second question is the last 24 months have been tremulous for economy for world in general and retailers in particular. And we had our own headwinds which started way before COVID also hit us. Now visibly a lot of work -- repair work has happened in the last 24 months on cost front on efficiency trend. So at what level of revenue when threshold number, we should actually expect carbon to become very steady state for third player which has not disturbed periodically by all these headwinds? And then just to put in perspective now with more and more footwear players getting listed, we can see that the profitability curve or volatility in the numbers is way, way lesser than what we have experienced in the last 2, 3 years. So what are you doing? What are we actually taking steps to ensure that we remain much more stable entity as we go along, and we come out of this crisis?

So Tejash I think we've already steady-state levels. And I think it is reflected from the fact that our numbers and our profitability has -- and we said our gross margins have been increasing quite well in the last 2 years. Our EBITDA margins have improved. I think the point Indrajit was trying to make earlier was that if there is no impact in terms of a wave or a lockdown. Your point that a lot of other retail companies or the consumer companies have not -- have been relatively less impacted. I tend to disagree with that because based on the numbers that we have seen in terms of be it in the retail side and distribution side, we have had a similar kind of a growth or impact owing to the COVID lockdown or something. So the impact is the same compared to the others. And I think it may have looked a little tougher on us purely because we had a distributor rough start prior to COVID, but I think we are back to strong footings. We are very -- we are aggressively looking ahead. We are working on all the business fronts and the product fronts, and we are expanding our teams very aggressively. We are building -- or rebuilding ourselves. So I think we are pretty much on a strong and sound footing. And whatever impact you are seeing on us I think we're seeing on the industry at large and vice versa.

Sure. Fair point. And then just last one, I logged in late, so I'm not sure if you've touched upon this earlier. So in our recent channel fix, we -- in general, we picked up that our merchandise has definitely improved, and it is very much visible also. So if you can explain or help us understand what have we done on the back end in terms of design element, production element to actually improve our merchandising that is visible in ASP as well?

So I think it's -- on the retail -- I divide the answer in 2 part in retail and distribution. On the retail side, I really invite everyone on this call to come to our office and possibly come visit our sample rooms to see the kind of change that we have made. The products are more casual in nature. They're more trendy, they're more fashionable like, for example, you'll have a fair of moccasins, or a pair of wedges, which are very, very fashionable compared to what we had earlier. You'll have pairs of men's chappals and men -- women's sandals, kids footwear. So I think for me to explain to you a qualitative question like this will be a little tough, it'll be great if you can come and have a look with us. But I think the stronger point over here is that compared to -- we've done like a very, very strong analysis of -- on the competitive landscape, in terms of product. Like we've asked and our entire team has gone and visited like a lot of stores, trying to understand what the other brands are selling in terms of products, in terms of price points. And I can confidently say that the kind of product offerings that we have created is significantly superior, in my view, compared to a lot of competitors purely in terms of product and the pricing, which is what I'm calling the product offering. So on the retail side, for sure, even in distribution, I think we're using our retail experience to be able to provide the kind of products, be it in Hawai, be it in TVC, be it in PU, be it in stores. Again, a lot of work, a lot of competition analysis with a lot of industry analysis, what is working internationally, and we're trying to incorporate all that into our product range. So I request you to come and visit our stores and visit our sample rooms, and we'd love to host you and show you around. So you need to understand and experience the change that we have made.

The next question is from the line of Aditya Sangh from Robo Capital.

Congratulations on such good set of numbers. This quarter, we did some -- around 8 CR of PAT. And so given that all the factors remain constant for at least 1, 2 years, so can we achieve the pre-COVID levels of profit after tax in FY '23?

Yes. I agree. I don't see it as an issue, assuming everything remains the same, and there's no external impact, I don't see that as an issue.

Okay. So basically, we will be crossing around 38 CR PAT in FY '23 because we did back in March '18.

Yes. So I think that should be achievable.

The next question is from the line of Amit Shah from AG Capital.

So I think one thing that we have noticed that many of our competitors have announced their expansion plan to open franchisees to in tier 2 or tier 3 cities which is what we have been doing, and which is why doing we are looking strong in that space. How do you see this changing of competitive landscape for Khadim?

Sir, can you repeat your question that you're not very...

Sure, sure. Is my voice audible now?

Yes, yes.

Yes. So what I'm trying to understand here is many of the competitors have announced their plans to open franchisees in tier 2 or tier 3 cities, which has been our strength, right? So how do you see that impact, the overall competitive landscape for Khadim?

See, I think we have seen the other brands, product ranges, what they have to offer in terms of product and the price points. This is the entire offering. Frankly, we in turn are relatively purely because we are able to offer the entire product gamut, product range, for the entire family for all occasions. So we have -- on the men's category, we have men chappals starting from INR 300 to like INR 4,000, across all categories. So we'll have Hawai chappals, we'll have sandals, we'll have open chappals, we'll have moccasins, we'll have loafers, we'll have driving shoes, we'll have formal shoes and casual shoes. So I think -- on the women's side, similarly, Hawai chappals to fabrication chappals to Eva's floaters to wedges, stilettos, normal shoes and same similarly on the kids side. That's the kind of range which starts from like INR 200 ending around INR 3000, INR 4,000. We don't -- we have not seen too many competitors being able to offer this kind of ranges. So yes, there are some brands offering particular categories, offering particular ranges of products and focus on particular price points and many of them we need to evaluate how profitable they are. Because some of the brands they're offering are on -- are still on the lower -- much lower price points. And also how the ROI fits, we don't know, and we -- good for all of us to evaluate. Similarly, some brands are focused in a particular category. So it will be very interesting to see how that really works out. And some brands they are premium in nature, how it will really work in a tier 2 or 3 city. It's -- we'll have to see how the volumes pan out. So I think there's a potential for this country overall to be able to sell more. We have consumption per unit per person in this country, 1.7x, which is on the lower side. So there's definitely scope of volume increase. But we'll have to see how all these pan out in terms of numbers, in terms of economics and in terms of viability. So I think it will be -- let's see how it goes.

One thing I'd like to add is that we have already penetrated in tier 2 and tier 3 cities long ago because we have the largest number of franchisees in footwear. And our sales from the tier 2 and tier 3 cities in retail is around 57% of our total sales. So we are already penetrated position advantaged in these cities, tier 2 and tier cities.

No, I understand the point. I was trying to get to is, with more options, the chances are there that people might want to try something else. But I think this is what I heard is it fair to assume that you don't see any material impact of this on the volume or pricing?

Material impact on the?

On your volume or pricing because of the increased competition?

No, I don't -- I mean, we don't support it internally.

Okay. Understood. And the last question I have is, in terms of the outlook for next 2 to 3 years, where do you see the gross margin and especially the EBITDA margin to stabilize? Is there an internal target that the company is trying to achieve?

So on the gross margin side, I think we're looking at increasing year-on-year by 100 to 200 basis points. On the EBITDA margin, as I mentioned earlier, we're looking at high teen numbers.

And the target is to achieve that over the next 2 to 3 years?

Next couple of years.

[Operator Instructions] The next question is from the line of Aditya Sangh from Robo Capital.

Just one more question. Are we looking forward to expand to more stores? And if yes, what would that be, company-operated stores or franchisee-operated stores?

So we're looking to open company-operated stores in areas where we want to establish our presence, or where we know there's no good stores at a location, and we are definitely going to make money in these areas in our very, very established markets. But the larger focus will be to increase our store presence to franchisees.

[Operator Instructions] As there are no further questions, I now hand the conference over to the management for their closing comments.

Thank you for expressing interest in Khadim India Limited. We internally are working extremely hard to ensure that we are able to deliver to our shareholders all the value. And we are delighted to consumers. We stand by our positioning of affordable fashion, and we continue to -- we plan to continue to grow in that strategy, both in our retail and distribution business. Thank you, and we wish to remain in touch with you, are happy to connect with any one of you later on. Thank you.

I now hand over the conference to Mr. Nachiket Kale from Orient Capital.

Thanks, everyone, for participating in this call and asking your questions. We at Orient Capital Investments [indiscernible] Khadim India. So for any queries and doubts, for any data requirements, feel free to reach out to us. And we look forward to continuous interaction with market participants. And we again thank you for your interest in the company and supporting Khadim throughout the year. Thank you so much.

Thank you. Ladies and gentlemen, on behalf of Khadim India Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.