Khadim India Limited (KHADIM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q2 and H1 FY '24 Earnings Conference Call of Khadim India Limited hosted by Orient Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumeet Khaitan from Orient Capital. Thank you, and over to you.

Yes. Good evening, everyone. Welcome to the conference call to discuss the results for Q2 and H1 FY '24 of Khadim India Limited. Today, from the management, we have Mr. Rittick Roy Burman, Whole-Time Director; and Mr. Indrajit Chaudhuri, CFO. Before we start the call, I would like to give a small disclaimer that this conference call may contain some forward-looking statements, which are based on beliefs, opinion and expectations of the company as on date. Actual results may differ materially. Our detailed safe harbor statement has also been published in the company's investor presentation, which was uploaded on the stock exchange today. I hope everyone had a chance to go through the results and the presentation before this call. I would now like to hand over the call to the management for their opening remarks. Over to you, sir.

Thank you. Good evening, everyone. On behalf of Khadim India Limited, it is my pleasure to welcome you all to this conference call to discuss the Q2 and H1 FY '24 results. We appreciate your time and interest in our company's performance. I hope that everyone had an opportunity to go through the financial results and investor presentation, which have been uploaded on the stock exchange. The demand linked to festival season has been pushed to Q3 of this fiscal year. The impact was seen in our revenues, which declined by 16% year-on-year in the second quarter. However, despite such challenges, we continue to maintain healthy gross margins of 44.7% in Q2 FY '24, benefiting from the lower raw materials prices as well as higher contribution from the retail wing of the business -- contribution of sales from the retail wing of the business. We expect the demand to rise in the festive season and our growth trajectory remains positive for second half of FY '24. Contribution from retail sales stood at 70% in Q2 FY '24 and 66% in first half of FY '24. Our retail stores count as on first half of FY '24 stands at 861 stores. We opened 51 new stores this quarter, moving to model-wise store count, our COO store count on half yearly basis stands at 225 stores. And for franchisee, which includes EBO, FRM and BO, stands at 636 stores. We are continuously expanding in tier 2 and 3 cities and retail presence in tier 3 cities stands at 49% in Q2. Our distribution business contributed 27% to revenues in Q2. And for half year '24, the contribution stood at 30%. We added 19 new distributors in the quarter, taking our total count to 741 distributors as on half year FY '24. Our distribution network continues to remain strong in each zone with 475 distributors as on half year FY '24. Our retail and distribution business are currently present in 25 states and 4 union territories as of September 2023. In the last quarter, I mentioned about the demerger of our distribution business. The wholly owned subsidiary, namely KSR Footwear Limited, has been formed for the said purpose. This business was part of distribution segment of Khadim India Limited, which provides branded and affordable footwear in the mass footwear category in Tier 1 to Tier 3 cities. The demerger will facilitate the allocation of resources necessary for each business to concentrate on its expanding operations. This will also aid in attracting suitable talent and offering enhanced growth prospects to existing talent, aligning with a more targeted strategic focus for each business segment within distinct entities. We are also closely monitoring the market situation and simultaneously preparing to implement the BIS regulations on footwear effective from Jan 2024. We might face some issues in supply chain, but we are not front-loading our inventory to prevent any delays in future. Now moving on to Q2 and half year FY '24 financial highlights. So the quarterly performance. On quarterly performance, revenue from operations for Q2 FY '24 is at INR 157 crores as against INR 186 crores same period last year, degrew by 15.6% year-on-year. Gross margin for the quarter stood at 45%, up by 400 basis points year-on-year as higher contribution from retail led to favorable product mix. The EBITDA for the quarter stood at INR 17.6 crores, registering a [ de-growth ] of 21% year-on-year. Operating EBITDA margin for the quarter stood at 11.2%, down by 80 basis points year-on-year. The net profit for the quarter stood at INR 1.8 crores, down by 64% year-on-year. PAT margins for the quarter stood at 1.1%, down by 160 basis points year-on-year. Now I would like to tell the half year FY '24 highlights as well. Revenues from operations for half year FY '24 stood at INR 315 crores as against INR 352 crores in half year FY '23, a decrease of 10.5% year-on-year. Gross margins for half year FY '24 stood at 45%, up by 380 basis points year-on-year. EBITDA for half year FY '24 stood at INR 35.9 crores as against INR 39.4 crores in half year FY '23, a degrowth of 8.7% year-on-year. EBITDA margins for half year FY '24 stood at 11.4%, up by 20 basis points year-on-year. Profit after tax at INR 3.4 crores half year FY '24 versus INR 8.4 crores in half year FY '23, a decrease of 59% year-on-year. PAT margins for half year FY '24 stood at 1.1%, down by 130 basis points year-on-year. With this, I conclude my speech and open the forum for question and answers.

We will now begin the question-and-answer session. [Operator Instructions] We have our first question from the line of [ Abhimanyu Kekar ] from KC Capital.

I have 2 questions. We are witnessing a consistently improving trend in gross margin and now even EBITDA has improved. Can you please explain how the product mix is changing favorably or any sub-brand in particular, which may be driving this premiumization? And the second question is how are we doing in women's footwear? And which brand is seeing good traction?

Yes. Thanks for the question. So yes, the premiumization trend is strongly at play, especially because we have launched a good range in the sports shoes segments, which is our Pro sub-brand. So that is seeing a good traction that is leading to. So the overall, the sub-brands is 60%. And the mother brand Khadim sale contribution is around 40% to 45%. So it has increased. The sub-brand -- since the sub-brand has increased, the realization has -- the gross margin has improved.

Also in the sports shoes, we have launched product in Pro brand in the range of INR 2,000 to INR 3,000. Previously, we were selling sports shoes from INR 1,200 to INR 2,000 range. So we -- this year, we have launched this, and this was very much successful. We have seen there is a lot of attraction in these type of products. In the ladies segment also, we have seen good traction in Cleo and also in Sharon. So whereby we were able to generate the higher margin by premiumization of the sub-brands.

And ladies and gents is almost like 45, 55. Gents is a bit higher value-wise, and 45 would be ladies percent.

Just one last question, sir. Just wanted to know if there is going to be any change in your brand ambassador? Or is it going to be the same as we are currently with?

We have a contract till March. So we are continuing till March. Then whenever the budget for the next year is finalized, we'll then decide whether we will continue or not. .

[Operator Instructions] We have our next question from the line of [ Ninad Sabnis ] from [ Sabnis Financial ].

Sir, I want to ask what is the outlook for expanding the distributor network? Also, what will be the closing count for FY '24? And if you can help me with an estimate for FY '25, that would be very fine, sir.

So we are expanding distribution business only in East. And we have a target of opening around 70 to 75 distributors. However, for the next year, we are doing a demerger. So we'll consolidate on the distributor focus on the big distributors so that when the new company is coming up, the company, instead of expanding with different distributor in the same area, we will concentrate in one direction with a big distributor in a particular district. So the FY '25 will be coming with the new company and with the new policies.

We have our next question from the line of Deepan Shankar from Trustline PMS.

So firstly, from my side, so can you please throw some light on the reason for degrowth in top line for retail and distribution business for the current quarter?

Retail, the thing is that we have grown in franchisee because franchisees took the primary sale before the Puja. But last year, since the Puja was in September, in the first of October the Puja started, so the COO sales shifted to October. So that's why there is a little degrowth in the total retail sales. In Distribution, we have seen a huge degrowth as we have already mentioned that the Distribution business, the traction is less, and we are also checking on the credits, and there is also the low muted demand for the lower segment product for Hawai and PU. We are not pushing to the distributors with the product and increasing our working capital days. So, there, we are taking corrective measures so that whenever you take corrective measure in working capital, your sales decline, but we have gone and made distributor in Bihar and UP. So while correcting we have seen that there are some changes that we have to do, as I have already told that we are consolidating the distributor. So that there is -- the price cut that happens in the market can be stopped and we can consolidate the distributor. And so that the demand for a particular product remains and there is no price cut, which reduces the demand and create chaos in the market. So that's why we have taken the corrective action in the third quarter also the retail we'll see growth. Distribution, we are trying to keep whatever sales we have done in the last quarter that intact. But however, there will be some in distribution, but hopefully, this will give better results from the fourth quarter onwards.

Okay. Okay. So in retail per se, so most of the degrowth was coming from volume degrowth or we have some price degrowth also?

Volume degrowth, I mean, this is because the Puja shifted. Otherwise, there's only the impact of Puja, but you will see that COCO will be having a higher growth in the third quarter.

And in Q3 already, have we started seeing improvement in footfalls and the volumes growth coming back during this festive season? .

Yes, yes. In Puja, we have grown in our COCO business by around 7% to 8%.

Okay. Okay.

So that's why the shift was there in Puja. That's why that happened. But in distribution business, we are taking some corrective actions so that the overall, we should improve the health of the business.

Okay. Okay. And retail, have we taken any price increase during the current quarter? And are we planning to increase anything in future?

Yes, yes. We have seen an ASP increase of around 4% to 5%. And again, we will try -- we'll take the increase in the next festive season.

Okay, okay. And so initial commentary you talked about the sports shoe contribution. So what is that contribution currently? And where are we planning to increase that contribution level for over the next 2, 3 years?

The sports shoe contribution is around -- Pro is giving around 20% of the total volume. We are also going -- we have -- our merchandiser has attended the China fair. So we are trying to improve our product by -- we have gone and seen the design. We try to manufacture them in India because there are BIS problems, because the Chinese vendors are not going to take the BIS. So we are trying to give that same type of product in India only. And with a variety of color and option, I think this sports shoe will definitely have a growth. And we have already taken price increase, as I have told, we are selling product -- sports shoe in the range of INR 2,000 to INR 3,000. So we will come up with other later design so that the volume in this segment grows and the overall profitability of the company increases.

So sports shoes contribution to margins, are margins for the sports shoes is much higher than company average levels?

No, sports shoe margin is around 2%, 3% higher than company level. But we want to keep the price competitive also. So increased volume will give an overall contribution to the company.

Okay, okay. So lastly from my side, regarding this demerger. So when are we expecting that whole process to get completed? What is the status currently?

We have already applied in the BSE, NSE and the SEBI. So that is a process. I think next year May or June, we'll complete the formalities and the new -- the company is already in existence, the KSR will start from maybe June 1 or July 1.

Okay. So overall, 6 to 9 months, this will get over?

Yes.

[Operator Instructions] We have a question from the line of Sudharsan N from Prosperity Wealth Management.

My question is on your current debts and finance cost. Could you give me the numbers on your current outstanding debts? And what is the percentage of finance cost?

Current debt is around INR 116 crores. And the average cost of EA is around 10% to 10.5%.

Okay. And regarding your retail business, I see that the EBITDA margins are at close to 20% for this coming quarter. Moving forward, post the BIS thing comes in and when you switch to Indian suppliers for retail, what will be the margin erosion in this part for Retail? Any guidance on that?

At present, we don't exactly know what will be the cost of the product with the BIS and all. So we can definitely give you guidance in the fourth quarter.

Okay. And regarding your retail business, could you give us a number on what kind of PAT margins are at the current quarter? Net profit margins for Retail business?

At present, we are doing the analysis of distribution and retail till EBITDA level. PAT and PBT cannot be segregated till the demerger has happened. Once the balance sheet item goes from one company to other, then only we will be able to give the exact number. Tentatively, the PAT margin would be around 7% to 8%.

Okay. And your current receivable levels, how much is of distribution business? And how much will it be of the retail business? I think retail is...

Around INR 45 crores is distribution business and retail would be around INR 80 crores.

Okay. All right, sir. And any other expenses breakup, if you can give us on retail and distribution segment?

Come back again?

So I just wanted to know the breakup of other expenses between your retail and distribution business?

No, that -- I mean I think the better you can take this question one to one. I can give you the breakup of the cost. .

[Operator Instructions] We have a question from the line of Jagvir Singh from Shade Capital.

In the retail business, we did around 17.5% margin in the current quarter. So what is the guidance for the second half and for the next year?

Again, the margin will be a little better because of the festive in the third quarter, maybe 1% improved from the first half. Next year, when the 2 businesses are demerged, so we expect retail margin -- we are planning to have a retail EBITDA margin of around 20%.

And can you say the ASP compared to the last quarter, this quarter? Average sales price.

Okay.

ASP is INR 650.

INR 650. What was it in the last quarter?

A Little lesser. Like maybe 3% lesser than this. A little bit lesser.

And the finance cost and depreciation is around INR 70 crores per year for both the businesses, retail and distribution. Can you segregate this number, how much will go to the retail and how much after the demerger?

That is the process is going on. Once the asset of the retail and distribution is classified, then we will be able to give the numbers.

Okay. And how much was the impact of shifting of Durga Puja to the second half -- in the first half, how much impact on the first half of this?

Durga Puja means you can expect a COCO sales of around INR 20 crores to INR 25 crores shifting to next quarter.

Okay. Earlier, we had a professional CEO. So he has resigned, so now we have any plan for any professional CEO or we will manage it?

Our Whole-Time Director, Rittick is taking the role of the CEO. So we are not planning for any professional CEO at present.

The last question regarding the size of the store in the -- mainly in the East. So what is the size -- average size of the stores in the Eastern region?

The average size of the store in the Eastern region is around 1,000 square feet.

Okay. And what is the strategy for the UP? Because I have seen some stores in Noida. So stores they also around 1,000 square feet. So what is the overall strategy to expand in UP?

1,000 square feet. We will not open big stores. We'll limit our stores to 1,000 to 1,200, depending on the rental of the area.

And what is the plan for Uttar Pradesh? How much do you want to open in the next 1 year or 2 years?

At present, we are considering opening stores in the Eastern part of the country. We have opened this year around 12 stores, out of which around 9 to 10 is open in the Eastern part of the country. So in the next year also, we'll consider only opening in Eastern part. Maybe 1 or 2 strategic location is found in other part we'll open.

We have a next question from the line of Kashish Shambhwani from Negen Capital PMS.

In the last call, we mentioned that we would be targeting somewhere around 16% EBITDA margin in the retail business. Now we are saying that we might touch 20% number. So what led to the change, I understand there has been raw material softening. But apart from that, what changes have been made which give us the confidence of almost 400 bps?

See, what we have seen is that the raw material price has softened. And also, as I told you, we are considering some premium product in the sub-brands. So this added margin is increasing the EBITDA margin.

Right. So you say there are more levers from where we can probably cross 20% as well in 2, 3 years down the line?

At present we cannot tell. But obviously, we'll try to increase the product profile and generate more contribution to increase the EBITDA margin.

But at per current visibility, 20% would be the normal base for us going forward?

In the retail business.

Yes, in the retail. The Second question is on the receivables front. We do have some receivables from the government entity. So any update on how -- when can we expect that money to flow in?

We have already got money from the UP government of around INR 28 crores so that we have received in the second quarter. In UP, there is 1 district left, around INR 9 crores. So that maybe we will be getting in this quarter only. And in regard to Punjab, we'll try to get it within this financial year.

How much would be our receivables from Punjab, sir?

Around INR 32 crores.

And most of the money would go for debt repayment, right?

Yes.

Okay. And in the last call, again, we guided for somewhere around 10% to 12% growth for FY '24. So do you think we are on track to sort of achieve that number?

We are expecting a good festive, because festive has shifted, maybe a little lesser than what we have told, 10% to 12%, but definitely in the range of 7% to 8%, we will be doing this.

Second half should be good. This one, this second half of the year, this should be good.

What I understood, at least high single digit is possible, if not 10%, 12%?

Yes.

As there are no further questions, I would now like to hand over the call to Mr. Sumeet Khaitan from Orient Capital for closing comments. Over to you.

Thank you, everyone, for joining the call. I would like to thank the management for sparing the time and answering the questions today. We are Orient Capital, Investor Relations Advisors to Khadim India Limited. For any queries, please feel free to reach out to us. Thank you, everyone.

Thank you.

Thank you to all. 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.