Khadim India Limited (KHADIM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 and FY '22 Earnings Conference Call of Khadim India Limited organized by Orient Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nachiket Kale from Orient Capital. Thank you, and over to you, sir.

Yes. Hi, everyone. Good evening. Welcome to the conference call. Today on this call, we have the promoter of Khadim India Limited, Mr. Siddhartha Roy Burman, Chairman and Managing Director; Mr. Rittick Roy Burman, Whole Time Director; Ms. Namrata Chotrani, CEO; Mr. Indrajit Chaudhuri, CFO. So just before we start the call, I'd like to give a small disclaimer that 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 will differ materially. These statements are not guarantees of future performance and involve risks and uncertainties, which are difficult to predict. A detailed safe harbor statement is also added in the company's investor presentation, which has been uploaded on the stock exchange and company's website as well. I hope everybody had a chance to go through the presentation and the press release. Now I would like to hand over the call to Mr. Siddhartha Roy Burman. Sir?

Namaskar, everybody. Good evening. We welcome you to this conference call to discuss the fourth quarter results for the financial year 2021-2022. Hope everyone continues to be safe. We started fourth quarter on a strong footing, carrying growth momentum from the third quarter in which we recorded our highest EBITDA margin during past 2 years. However, the third wave of COVID caused by Omicron variant and ensuing long-term disrupt recovery in retail industry again. In January, the footwear industry also witnessed GST rate hike from 5% to 12% footwear priced below INR 1,000. Inflationary pressure across the spectrum led to slowdown in demand. Despite facing headwinds, we are encouraged by our performance, which has delivered growth as per our strategic initiatives. We roped India cricketer, Shardul Thakur, who plays with Delhi Capitals in the IPL as our brand ambassador. The association was launched with the campaign, WowItsKhadim. We highlighted the new fashionable range of products, the refreshed in-store experience and reinforced the affordable price point. The [indiscernible] will deliver the delightful WowItsKhadim experience to consumers. We continued to strengthen our retail presence in Tier 2 and Tier 3 cities and opened 22 new retail stores during the quarter. The retail store count now stands at 782 stores. The distribution network has increased to 627. Coming to our performance for the quarter. Sales for Q4 FY '22 stood at INR 156 crores and these did not include any institutional business as compared to INR 269 crores in Q4 '21, which includes INR 110 crores institutional business. Next point. Gross margin at 37.6% has improved by 1530 bps year-on-year. Retail business continued its improving trajectory with gross margin up from 47.6% in Q4 FY '21 to 52.2% in Q4 FY '22. EBITDA stood at INR 12.8 crores with an EBITDA margin of 8.2%. In quarter 4, we recorded PAT INR 2.6 crores and cash PAT of INR 10.3 crores. We are encouraged by our full year performance in which we have delivered a significant turnaround and recovered to profitability. For this fiscal 2022, revenue was INR 591 crores, slightly lower than INR 626 crores in FY '21, which includes INR 110 crores from institutional business. Retail business has grown by 15% and distribution business has grown by 13% year-on-year. Gross margin improved significantly to 37.2%, which is an increase of 840 basis points from 28.8% FY '21. Retail and distribution gross margin stood at 53.3% and 35.4%, respectively. FY '22 EBITDA stands at reduce INR 47.8 crores, slightly higher from INR 3.3 crores in FY '21. We've turned profitable by clocking a PAT of INR 6.5 crores as compared to a loss of INR 33 crores in the previous year. Our strategic marketing initiative, product improvements, price hikes leading to improved margins, brand campaigns have all contributed towards the improving trajectory in the company's performance. We aim to build upon the growth momentum generated this year to deliver value for all stakeholders. Thank you very much.

Sir, should we open for Q&A? Members of the management?

Yes.

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

So firstly, wanted to understand this retail franchisee sales has improved quite. After declining for 3 years, it has grown at 26%. But still, it is 67% of FY '18 franchisee sales. So do we expect a sharper growth over next 2 to 3 years?

So we're looking at growing the franchisee business approximately by 12% to 15% on a year-on-year basis. We're looking at expanding the number of stores by around 60 to 70 stores and with the hope that the SSG will also be growing by around 6% to 7%.

Okay, okay. So this is post that -- our installation of the sales software and earlier we were doing some inventory cutdown, right? So those things are restoring back, right?

Yes. I mean so we've done the inventory through the Theory of Constraint model. But there's regular replenishment of the stock based on the movement of the particular item and then norm set in the stores based on the performance of each item based on which the replenishment happens. And in case of the new introductions, that happens based on a number -- certain number of pairs per item we send to the stores. And then based on their performance, then replenishment happens. So I think that model still continues with our CEO and franchisees.

Okay. Okay. And last 2 years, our COCO store addition has come down. So are we seeing store additions increasing? And sales per COCO store also is it on the anvil of growing good in the next 2, 3 years?

So the number of COCO has -- rather the reduced number of COCO addition has been a conscious decision because the last 2 years have been tough owing to COVID. So we were looking at consolidating our, as you know, our P&L and balance sheet by focusing largely on improving our existing profitability and asset-light expansion. But in this financial year, we're looking at expanding the COCO stores by 10 to 12 stores.

10 to 12, okay.

Parents will be through franchisees.

Okay, okay. And what is the reason for a sharp increase in inventories this year?

So that has largely been owing to the -- on the distribution side. Actually, last year, if you saw, that the sales also was relatively low on retail distribution, which sales has improved and which is why we were talking up because we were expecting a good Chaitra sale and [ lead ] sale and the discount, which is why the stock was relatively high. On the distribution side, actually, we have been stocking up because there has been volatility in supply of raw material owing to the geopolitical situation. So -- and also, there has been a lot of fluctuation in prices. So we have stocked up a certain amount of raw material, which is why you're seeing a little higher WIP or stock inventory.

Okay. So when do we expect that to get normalized?

Within I think -- by Q2 end, hopefully, because this Q1 you will -- again, we are stocking up for the festive. We are hoping for a good festive. So I think -- and that's normal if you see in last 2 years, Q1 and Q2 generally stock was higher for festive and then it tapers down by Q2, end of Q3.

And one thing is that in '21, stock level was down because we were keeping lower stock due to this COVID thing. So that is also at sub-optimal level. So that means the level should be 150, 152 crores which is at a normal level.

Okay, okay, okay. So lastly, from my side, this antidumping duty on PU. So what is the kind of impact we are seeing in our kind of products. So what is the proportion of PU in terms of our products?

It will impact PU later. There is a lot of -- in our retail product, that is around 60% of the product is in synthetic leather. So that will impact, but it is around USD 0.46, so that will be around INR 2, INR 3 increase in the purchase price. So that the vendor when they're purchasing the raw material will include in their PP.

Okay. Okay. So we are not seeing much impact over that?

So there will be slight price rise by them, but that is because it has just recently come in. So in the next time when we are making the price negotiation, that will be taken care of.

Okay, okay, okay. So full year, what kind of price increase we have taken during FY '22?

So on the distribution side, we have taken approximately 20% to 22%, the price increase that has happened. That's the ASP increase that has happened. And on the retail side, we have seen approximately a 15% to 17% increase in ASP, which will be driven both by premiumization and price increases. So I think that it will be partially price increases and partially premiumization.

The next question is from the line of Gaurav Jogani from Axis Capital.

My first question is with regards to the demand conditions. I mean while we understand that the demand was impacted in the Q4 due to the Omicron impact in January and because of which was the reason the distribution sales are impacted, but how it's standing now in the Q1?

Q1 has been relatively positive. Footfalls are coming back. Again, it's not still back to pre-COVID levels. We are still -- we are seeing an improvement in sentiment at the store level. We are also seeing the buying behavior of the consumer going back to normal. So you have a lot of casual shoes, outdoor shoes, sports shoes, formal shoes for women. They are buying a lot of workwear, they're buying party wear. So I think the buying behavior is going back to normal because we are also seeing the same representative purchase happening across the sub-brand and in terms of the merchandise categories -- across the main merchandise categories. So it has been pretty comforting, the numbers, and we are excited for the balance of the year.

Sure. So just one clarification here. When you said that it's not back to the pre-COVID levels, so were you referring to this footfall or you were referring to your sales for your company?

Footfall.

Okay, okay, yes. And my next question is with regards to the price hike or you may say the increase in the RM prices and inflation. How do you see this impacting the demand, especially on the distribution side, because -- given the price increases have been bearing sharp over the last 1, 1.5 years. So any impact that you see on that front of the business?

So yes, there is definitely an impact on volume owing to the fact that there have been price increases. There's not only a price increase, it's also GST, which has impacted our business, especially in the distribution side, which is 80% to 85% of the SKUs are below INR 1,000. So yes, there has been an impact and the inflationary impact is visible across the various industries, including FMCG. But what we're trying to do, we are trying to put up innovations, we're trying to do a lot of value engineering on the products to be able to ensure that the product is still affordable in the hands of the consumer. Because in today's day and age, I mean, the kind of -- the way the raw material price has increased in the last 1.5 to 2 years almost [ 16% to 17% ] rise in raw material prices. But that's not the way that the customers' income has increased, right, at the ground level. So one has to be accepting of the fact that there's that much additional the lower end consumer will pay additionally for a basic pair of Hawai Chappal, basic pair of PVC Chappal, PU Chappal. They will pay a premium of like at INR 10, INR 15, INR 20. But if it comes to INR 40, INR 50 difference, it does become a challenge in their pocket because they're not buying only for a particular person or themselves, they're buying for the entire family. So we are doing a lot of value engineering. We're working on the major products to ensure that the product continues to remain affordable for the consumer and the impact on volume is minimized.

Sure. And just one last question from my end is in terms of the margins. FY '22 has really seen a good, smart expansion, or I would say, the recovery of the margins both on the retail and the distribution front. So if you can help us out how much of this is sustainable going ahead? And what kind of margins, respectively, in each of the business can we expect?

So in our view, the margins are sustainable across both the businesses. We're looking at gross margin growth across both the businesses by around 100 to 150 basis points year-on-year.

From the FY '22 levels, is that right?

Yes.

And if you can just clarify, like while the EBITDA margins that have been reported are on a post-Ind As basis, but if you adjust for the rent, what kind of EBITDA margins would we have done both for the Q4 FY '22 and for the full year FY '22.

Just a second. See, in Q3, the EBITDA was 11.5% and the whole year EBIT -- Q4 EBITDA is 8.24%.

No, sir. I'm asking about this is the reported number. I'm saying if we adjust for the rent out of this, I mean, the rental charges, because it's post-Ind AS. So if we adjust on the rental payments, how much would be the, I mean, ex of that the EBITDA margin?

So in Q3, it would be around 7.5%. And in Q4, it will be around 5%.

[Operator Instructions] The next question is from the line of Varun Ghia from Dimensional Securities.

I have 2 questions. Firstly, what is the breakup of COCO and EBO revenues for Q4?

Varun, sir? Firstly, your audio is not -- there's some static that can be heard in your line.

Hello. Now it's clear?

No, sir. It's still the same.

Varun, COCO is INR 50 crores. I mean franchise -- EBO is INR 40 crores.

INR 50 crores and INR 40 crores.

Yes.

And could you provide the volume -- number of pairs sold for Q4 and full year?

Just a minute.

Q4 around 8 million. And for the entire year...

8 million and this is retail?

Retail, distribution together. And for the total year, around 350 million -- 35 million.

Sir, how much would be the distribution volume?

28 million, and retail is 7 million.

Okay. And the number of stores which are going to be increased, that would be in which geographies? We have been focusing more on different geographies. But overall, still a majority of the stores are in the Eastern front so...

So I think the new openings will be -- we will increase the penetration in the East India. By east, you're mentioning, we're referring to Bihar, Bengal, Orissa; northeast, Jharkhand. So that focus will continue. We are also looking and growing significantly in the northern and the western side of the country through our company-owned and franchisees.

Franchise outlet addition would be how many in next year?

Around 60 to 70.

The next question is from the line of [ Dashul Zaveri from Crown Capital ].

Hello, am I audible?

Yes, please proceed.

Yes. So firstly, congratulations on a good set of numbers in a challenging environment. I just wanted to ask, is it possible next year can we go back to our aim of INR 800 crores revenue and maybe EBITDA of 15%?

Yes. I think INR 800 crores revenue is something, which we definitely we should be able to achieve. And in terms of 15%, I think we were -- we've been able to do 12% in Q3 FY '22 and I think that's something which we're looking at doing for the entire year. That's a larger target for FY '23. We're able to get the operating leverage better. We can -- definitely driving better and the pre-COVID footfalls get back to normal. Yes, the numbers can be better, but something for this year we are targeting around 12% EBITDA.

Okay. And I also wanted to know, did our volume decrease this year because if we had a price hike of more than 20%, then that indicates a decrease in volumes. Could you just quantify if that -- how much volumes have increased or decreased?

So I think there has been an impact on volumes predominantly because Q1, again -- Q1 FY '22 again there was lockdown. Q3 again there was Omicron and plus you had a price hike impact. So I think there's a larger perspective owing to the volume impact. But we in...

In retail, there was no volume impact.

We have grown -- we have -- in terms of retail, we have -- we are almost equal in terms of volume. Distribution also, there has been a very, very minimal degrowth in terms of volume. Otherwise, we have -- I think we have -- I believe we've done pretty well despite the 2 lockdowns during the year.

Okay. And just one last question if I can squeeze in. What kind of price hike do we see in next year? And how much of volume growth will be, if possible to quantify, because you're increasing significant stores.

Yes. So we're looking at approximately 5% to 6% growth in terms of volume. And in terms of price hike, I think it will be -- have to be -- it will be a price hike, particularly [ the million ] ASP increase. We are a function of price hike and premiumization, which will be driven by the sub-brands. And so we've been looking at approximately a growth of ASP of approximately 7% to 8%.

The next question is from the line of [ Abhishek Kothari ], an individual investor.

Am I audible?

Yes.

Congratulations on the numbers, sir. So my question is based on working capital cycle. I noticed that it has stretched again and despite no institutional sales. So can you just elaborate on this?

As we have mentioned already that the inventory has increased for that reason. One reason is that due to these raw material prices, so we have to force to keep some extra raw material. And also in the distribution business, due to the GST impact, there was a volume impact. So there also increasing stock. And for the -- we -- as you know, the first 2 quarters of the last 2 years, the sales was less, but here we anticipated there will be a [ lead ] sale and Chaitra Sale so some stocks have been kept. So for that reason, stock has only increased. Later, we have driven at the same level.

Okay. So if I understand it correctly, then the inventory increase that is sale. So it is because of to mitigate any more price hikes?

Yes. And another thing is that in FY '21, the stock level was at the optimal because the first quarter of last 2 years, the sales was very less, the stock reduced significantly. In a normal level, our stock premiums at INR 150 crores to INR 155 crores. But this year, it has gone to INR 167 crores. But after the second quarter, it will be again come down to INR 155 level.

Okay, okay. And going forward, can you elaborate like how do you plan to manage the inventory levels?

We will keep the inventory -- in case of distribution, we keep our inventory level at 45 to 60 days and retail at around 90 days.

Okay. And will this be the normal level of working capital base going forward?

Yes. Because if the sales comes back to INR 800 crore level, so we will be having a stock of INR 155 crores -- INR 150 crores to INR 165 crores.

[Operator Instructions] The next question is from the line of Aditya Sen from RoboCapital.

Most of my questions have been answered, just one more. What is the revenue per store that we get from the franchisee stores?

Approximately 60 lakhs to 70 lakhs.

Okay. And from the company-operated stores?

Around 1.5, yes.

[Operator Instructions] The next question is from the line of [ Anand ], an individual investor.

Congratulations on a good set of numbers. I just had a similar question on your branding strategy. Just wanted to know, have you incurred any higher ad spend due to the collaboration with Shardul Thakur? Or are we still at the same level?

So thank you, [ Anand ], for your good words. So I think we have definitely incurred a certain fixed cost to be able to bring him on board and do the production of content and media with him. But what we are doing is that we are effectively using this content on digital media, focusing on the audience, which is -- targeting the audience, which may be more relevant to us in the areas where we have a larger presence. So maybe you and I may not be able to see it because we are targeting a certain audience with a certain demographic, which may be relevant to us, which will help us -- which will help increase the footfall in our stores. So we are using the celebrity phase in a way which will be more effective for us in terms of sales and in terms of ROI.

All right. Another question was on your future of the branding strategy. Do we look at any sort of Bollywood phase, which would help us in penetrating into other areas since we are planning to go into other regions? Or do you think that's not feasible?

As of now and near term, I don't think that's the plan. I think we're looking at focusing on regional celebrities and regional faces to be able to garner interest and footfalls in the markets that we have -- which we are present in and where we have strength around. I think because a normal volume of celebrity comes with a huge amount of fixed cost and that's not something which we're looking to absorb right now.

The next question is from the line of [ Dashul Zaveri from Crown Capital ].

I just wanted to ask, are we going to -- are you planning for any institutional sales this year? And if you could give us any margin or revenue guidance for that?

As of now, we don't have any plans to do any institutional business this year because we're not -- we're reducing the choppiness in the business also and it also reduces the impact on the working capital.

Okay. And just a clarification question from my end. The total, how many stores are you expecting to add on this year, 60 to 70 franchises and 10 to 12 COCO stores, right?

That's correct.

Thank you. Ladies and gentlemen, we take that as the last question for today. I would now like to hand the conference over to the management for their closing comments. Over to you, sir.

Thank you all for your good words and your motivating wishes. Really appreciate your interest in the organization and look forward to your continued support and our relationship in the short term, medium term and long term. Thank you.

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.