Khadim India Limited (KHADIM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Khadim India Q3 and 9 Months FY '23 Earnings Conference Call organized by Orient Capital. [Operator Instructions] I now hand the conference over to Mr. Nachiket Kale. Thank you, and over to you Mr. Kale.

Hi. Good evening, everyone. Welcome to the conference call. Today from the management of Khadim India Limited, we have the promoter Mr. Siddhartha Roy Burman, Chairman, and Managing Director; Mr. Rittick Roy Burman, Whole-time Director; and Mr. Indrajit Chaudhuri, CFO. Before we proceed with the call, just a small disclaimer that this conference call will contain some forward-looking statements, which are as per the beliefs and expectations of the company as of today. Actual results may vary maybe in the future depending on multiple factors. A detailed safe harbor statement is mentioned in the Company's investor presentation also. I hope everyone had a chance to go through the presentation, which was uploaded on the exchange. I would now like to hand over the call to Mr. Siddhartha Roy Burman. Over to you, sir.

[Foreign Language]. On behalf of Khadim India Limited it is my pleasure to welcome you all to this conference call to discuss the Q3 and 9 months results for the financial year 2022-2023. I would like to begin by sharing an update on leadership structure of the company. Ms. Namrata, CEO, has resigned from the service of the company stating personal reasons. The Board of Directors have accepted the said resignation. The day-to-day operation and executive leadership are being led by Mr. Rittick Roy Burman, Whole-Time Director, who belongs to the promoter group. Coming to performance for the quarter; after posting year-on-year revenue growth for 6 consecutive quarters, we saw a decline in the base quarter Q3 FY '22. We had posted a strong growth due to unlocking of COVID. In the current fiscal, majority of our sales for the festive season of Puja were booked in Q2 FY '23. Hence, we see a decline in sales growth Q3 FY '23. Our trajectory for the year remains positive with the revenue from 9 months FY '23 showing a double digit growth. The raw material prices are still trending at a higher level and we are now witnessing a gradual softening. Despite the inflationary pressure on prices, we have maintained our gross margin above 40% with healthy improvement. After posting our highest-ever EBITDA margin in the previous quarter, we have maintained the EBITDA margin in double digits. Our focus remain on providing trendy and vibrant products to our customers at an attractive price point. We take pride in creating (sic) [ catering ] to all demographic with a basket of products providing affordable fashion for all. We expect the positive trend generated this year in 9 months so far to continue and aim to deliver steady growth within -- improving the profitability. Our endeavor to establish Pan-India presence with an asset-light strategy has taken the retail store tally to 838, as of December 31st. With an addition of 73 stores in 9 months FY '23, the company is also capitalizing on the retail network to grow aggressively in footwear distribution and has a network 682 distribution as on December 31st. Q3 and 9 month financial highlights; Q3 FY '23 revenue at INR 149 crores is down year-on-year by 19%. However, the trend is largely positive year-to-date with 9 month FY '23 revenue INR 501 crore, by up 15% year-on-year. The distribution business in which we carry the most affordable and economic product has suffered significant headwind with muted demand in the Tier 2 and Tier 3 markets has registered a year-on-year degrowth of 36% in Q3 FY '23 and 7% in 9 months FY '23. However, the retail portfolio is doing well and registered an encouraging 31% on year-on-year growth for 9 month FY '23. Gross margin for Q3 and 9-month FY '23 stands 41.6% and 41.2% respectively, with a significant improvement almost 400 basis point across both periods. EBITDA for Q3 FY '23 is down by 22% at INR 17 crore and 9-month FY '23 EBITDA at INR 56 crores registered a growth of 60%. EBITDA margin at 11.2% has been subsequently flat in Q3 and over the period 9 months have improved by 320 basis points from 8% EBITDA margin in 9 months FY '22. The PAT for the quarter was INR 5 crore and the 9-month FY '23 PAT at INR 13 crore shows strong uptrend in the year so far with 250% growth year-on-year. So now we can proceed for the question-and-answer.

[Operator Instructions] The first question is from the line of Viraj Mehta from Equirus PMS.

Sir, my first question regarding the management change. Now that Ms. Namrata has decided to move on and you'd be taking care of the company from here on. Do we see any -- so there was a clear strategic part that she had guided the investors in terms of both B2B, as in the franchise business and the retail business and the mass-market business. So is there any change in strategy, we are looking at as such, or we'll continue to build on what she has already done over last 3, 4 years?

The system will be same. [Foreign Language]. And everywhere there is a head. So there will be no problem and the promoter side Rittick and myself [Foreign Language]. So there will be no problem.

The strategy will remain the same for both the distribution and the retail business. So there will be no change on that side. And there is every head for every operation. So they will continue and Rittick will overall guide the team and also take active part in the merchandising of the product.

[Foreign Language] and even for 9 months, we have done very badly compared, to last year first quarter was total wipeout [Foreign Language]

Mainly, the distribution business, if you see the last year in December, there was a GST increase from January 2022.

7% to 12%.

From 5% to 12%, so 7% increase. So that has created a mass offtake in the month of December. So that's why in this third quarter, we have seen a degrowth in the distribution business. And another impact is that there is a muted demand in the tier 2, tier 3 sector where the distribution business generally operates. And overall there is also inflationary pressure in this mass-market segment. So all these 3 has created a demand going downward in this distribution business.

Right. And sir, after seeing robust gross margin in distribution business, Namrata at least had articulated that we are looking at early 40s kind of gross margin in distribution business and 55-odd percent kind of gross margin in retail business in a couple of years. Do we still stand by it?

See in the retail, we stand by it. We are already doing 54% margin in retail. But in the distribution business there is a pressure in the sales price also after the GST increase. Everyone has taken a hit in the sales price. So reaching 40% at present looks difficult, but we'll gradually try to increase the margin. We are now at 35% level. We can improve by 100 basis points in the next year.

Right. And sir my last question is on sales, management was very confident of doing INR 750 odd crores this year, looking at what we have done in 9 months, I mean, I'm assuming we'll fall short of it. Can you give some targets for next year, what are we looking at? And by when are we looking at INR 1,000 crores that -- I mean, we had also mentioned publicly a few times?

Yes, if you see the sales that -- which is reported, it is net of GST and scheme costs, as per IND AS 115. If you see the gross turnover of the company this year, we'll reach INR 750 crores. And next year, definitely in this retail, we'll expect a growth of 10% to 12% and in distribution around 15%.

Sorry, can you just translate what will INR750 crore in gross will mean in net?

INR 750 crore gross will mean around -- GST of around average 12%. INR 750 crore in gross will turn out to be around INR 670 crores in net.

Okay. So we'll still do around INR 170 crore, INR 180 crore in the last quarter is what you are saying?

Yes, yes.

Understood. And any target for next year, sir?

Next year we are in the process of making the budget. So we expect a growth of 10% to 12% in retail segment and 15% in distributions.

And sir, can you talk a little bit about the competitive intensity, a lot of players in this segment had to take a price cut -- significant price cut in the lower level flip flops of INR 150. I mean, we have seen price cuts of 10%, 12% in that region. What kind of price cuts would we have taken this quarter?

We have taken a price cut of around 5% to 6% in the distribution segment because there are a lot of competitors who have taken a huge price cut. But we have taken around 5% to 6%. Because our price was lower compared to them.

On a blended basis?

On a blended basis.

So if we were to compare our product, I mean, roughly like-to-like products with the largest distribution player in the country. Our like-to-like product will be now at a premium or at a discount or it is the same price? Let's say, the normal gray flip-flops?

We are at INR 10 lower than them.

So they would be at INR 129, you would be at INR 119?

Yes.

Thank you. We have the next question from the line of Dhwanil Desai from Turtle Capital.

Sir, my first question is [Foreign Language] in the range of INR 6 crore, INR 10 crores to maybe we land up with INR 750 crore. In between [Foreign Language], we are probably one of the largest in terms of the number of stores. So sir, why are we as a promoter, satisfied with this 10%, 12% growth? And this I'm asking because [Foreign Language] is that the real on-the-ground scenario, what am I missing? Am I missing something here?

The problem that most retailer is facing is the volume growth. And we have seen that in the last few years, the footfall has gone down, 30% footfall has gone down. So there is a inorganic growth in opening new stores. There is growth in ASV, but the volume has not grown. So volume, there is a degrowth and the volume degrowth is not only in the retail segment, it is -- this time has also hit in the distribution market. Because of the inflationary pressure that has been in the middle and the lower segment of the market.

And we are also trying to [indiscernible]...

I'm sorry, I'm not able to hear you.

We have seen that there is also volume -- muted volume in the distribution segment also.

Okay. [Foreign Language] is what I think realistic on the retail side, what you are saying? [Foreign Language]

[Foreign Language]. We cannot forecast more than that, at present.

And we are -- Hi, we are also taking some action, because of the degrowth in volume that you were just mentioning. So over the years, some of the prices of our products had become way too expensive. So we want to keep our ASPs high, we want to keep our ASPs high mainly in our sub-brands. Like, Pro and British Walkers. But when it comes to our mother brand Khadim's, we need to -- we are reducing some of the prices keeping the margin as it was before in order to reduce the volume degrowth. So that is the plan to grow even more.

Sir we seem to have the current participant in the line dropped from the question queue. We'll move to the next question from the line of [ Anish Jain from JD Capital ].

So, I have a couple of questions on the financial side. So the first was that, we are seeing an increase in our finance costs. So just wanted to understand the reason for this exactly, like is there any increase in debt in this quarter or something like that? And the other one was a drop in the other expenses, so maybe your comments on that.

Yes, what has happened this year, we have shifted one of our warehouse from Bantala to Panchla and factory from Kasba to Serampore. Well, now this finance cost increase is not because of debt, it is because of the IND AS 116 impact, because now the -- rent is now treated as depreciation and interest. So for that reason, since we shifted from our own warehouse to rented one, so that thing has impacted the increase in finance costs. This is #1. And other expense is lower compared to last quarter, because there is a profit element. There is a -- one is the reducing of the cost of the -- in the other segment, costs have reduced, and there is also a profit that has been adjusted in our sale of the properties.

[Operator Instructions] The next question is from the line of [ Ishan ], an Individual Investor.

My first question is, I want to know the number of company-owned stores and the franchise stores? And the total square feet of operation we are doing in the retail, in the company-owned stores?

We have around 220 company stores -- company-owned stores, and around 500 franchisees.

And total square feet of operations in our company-owned stores?

Total?

Total square feet of operation.

In January, the average square feet in company-owned stores is 1,000 square feet. And in the franchisee, it is around 700 square feet.

Okay. And the EBITDA margin for the retail and distribution business individually?

That we can give you one-to-one basis, you make a call to our company secretary, we can provide the data there.

Okay. And what should we expect from you for the next 3 to 5 years, what would be your outlook?

Outlook is that in the retail, we tend to grow at a level of 10% to 12%, and in franchisee -- in distribution, around 15%. And we tend to have an EBITDA of around 15% in the next -- in FY '25.

[Operator Instructions] The next question is from the line of Viraj Mehta from Equirus PMS.

Sir, when you mentioned 15% EBITDA, is it adjusted for rent, because rent is now below EBITDA or not adjusted? Like are you saying this 15% EBITDA before paying out the rent or after paying out the rents?

Before paying out, the EBITDA, which is around 11.2% or 11.3%, we tend to make it around 15%.

Okay, okay. So essentially 4% -- 3% to 4% improvement directly in the PBT margin is what you expect? Because that's the improvement you are expecting?

[ Slightly ] sales volume.

Right. But where will that come from? Because you are saying gross margins in the retail business is 53%, 54%, we can go to 55%. And in the distribution business also, improving gross margins is difficult. So where will that 4% come from?

I'm considering this 4% in the span of 2 years. #1, it will come from the economies of scale of cost, because when the sales volume increases, the costs do not increase in that manner, #1. And #1, the increase in premiumization of the product and increase in gross margin of 1% to 2% in retail business.

Okay. But sir, [Foreign Language] people are downgrading rather than premiumization, do you want to -- can you comment anything on that, sir? [Foreign Language]

Actually premiumization is happening sir, still. Like right now, 60% of our retail sales is coming from our sub-brands, the sales value -- 60% comes from the sub-brands, which is Pro, Pro is like a sportswear brand, British Walkers is like premium leather brands, and the rest 40% is coming from mother brand Khadim, which constitutes of mainly chappals, flip-flops, So it has to be the margin -- the Khadim brand products -- prices have to be made a little competitive. Whereas the British Walker or the Pro, the sportswear brands their premiumization will still be at play. And the good news is that, our sales value is more for our sub-brands now, than the mother brand, which was little different before.

[Operator Instructions] The next question is from the line of Dhwanil Desai from Turtle Capital.

[Technical Difficulty]

Sorry to interrupt, sir, the line for you is not very clear, we request you to please use the handset and speak closer to the mic.

Sir, my question is, the earlier CEO our sales and marketing side [Technical Difficulty]

The line for you is breaking up again. Mr. Desai, if you could please move to an area with better network?

I will. Yes. Hello?

Hello, Mr. Desai, if you have the moved to a better network area, you may proceed with your question, sir.

Hello?

Sir, the line for the current participant is not very clear. [Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments. Over to you, sir.

I thank all the participants who have joined the con-call. And also our IR team. Thank you all.

Thank you all for joining the conference call. And this year -- this third quarter was a bit tough quarter as we have mentioned in the speech -- opening speech as well. But we hope that -- we are hoping -- we are seeing -- we are hoping for better -- slowish, but better recovery in the months to come. So we will continue to perform and reward the investors. Thank you.

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