Khadim India Limited ($KHADIM)

Ladies and gentlemen, good day, and welcome to Khadim India Limited's Q4 and FY '26 Earnings Conference Call hosted by MUFG Intime. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Omkar Bagwe from MUFG Intime. Thank you, and over to you, Mr. Bagwe.

Thank you. Good evening, everyone, and welcome to Q4 and FY '26 Earnings Conference Call of Khadim India Limited. To discuss the results, we have with us from the management, Mr. Rittick Roy Burman, the Managing Director; and Mr. Indrajit Chaudhuri, the Group CFO. They will take you through the results and business performance, after which we can begin the question-and-answer session. Before we begin the conference call, I would like to mention that this conference contains certain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. The actual results may differ materially. These statements are not guarantee of future performance of the company, and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Rittick. Thank you, and over to you, sir.

Yes. Thank you. Thank you so much. Good evening, everyone. Thank you for joining us today. On behalf of Khadim India Limited, I welcome you all to the conference call to discuss our Q4 and FY '26 results. We appreciate your continued interest and support for the company, and I trust you have had the opportunity to review the financial results and investor presentation shared with the stock exchanges. FY '26 continued to be a challenging year for the footwear industry, with muted consumer demand and continued pressure on discretionary spending, particularly in the mass and value segments. Demand conditions during the quarter remained soft across several markets, impacting overall throughput and store productivity. In this environment, we remain focused on disciplined indication, inventory rationalization, prudent cost management and strengthening our product portfolio to align with evolving consumer preferences. Despite the subdued operating environment, we continue to make progress across key strategic areas. Our focus on premiumization and category diversification continues to support brand positioning and customer engagement. The athleisure category witnessed good traction and -- supported by growing consumer preference for comfort led and casual footwear. Our TFM portfolio delivered a strong growth of 46% year-on-year during FY '26, reflecting improving acceptance across customer segment and continued traction in premium and semi-premium categories. British Walkers also maintained healthy momentum and registered a growth of 6% year-on-year during FY '26, driven by consistent demand in the men's formal and semiformal footwall categories. Partnerships with Skechers also progressed positively, with the plan according sequential growth during the quarter, supported by improved store throughput and strengthening consumer response. Operationally, we continue to maintain a cautious and calibrated approach towards inventory and working capital management in line with demand trends. We also remain focused on enhancing franchisee engagement, improving store-level efficiencies and optimizing operating costs across the network. Our asset-light expansion strategy continues to remain central to our long-term growth plans. During the year, we also completed the demerger of the distribution business and manufacturing segment into KSR Footwear Limited. We believe this strategic restructuring will enable sharper operational focus and improve efficiencies across the respective businesses over the medium term. Let me now take you through the financial performance of the quarter and the year ended 31st March 2026. For Q4 FY '26, revenue from operations stood at INR 83.6 crores as against INR 93.8 crores in the corresponding quarter last year, reflecting a decline. Gross profit for the quarter stood at INR 43.1 crores, with a gross margin of 51.5%. EBITDA for the quarter stood at INR 11.9 crores, while EBITDA margin stood at 14.3%. PAT for Q4 FY '26 stood at INR 0.77 crores, with a PAT margin of 0.9%. For FY '26, revenue from operations stood at INR 367.1 crores as compared to INR 418 crores in FY '25, registering a decline of 12%. Gross profit for the year stood at INR 179.6 crores, with a gross margin of 48.9%. EBITDA for FY '26 stood at INR 49.1 crores, with an EBITDA margin of 13.4%. Profit after tax for the year stood at INR 3.1 crores, with a PAT margin of 0.9%. As of 31st March 2026, our retail footprint stood at 851 stores, comprising 189 company-owned outlets and 662 franchise-operated outlets across 23 states and 4 union territories. We continue to strengthen our omni-channel presence while focusing on profitable growth and improving store productivity. Looking ahead, while the demand environment continues to remain uncertain in real term, we remain cautiously optimistic about gradual recovery, supported by improving consumption trends and product innovation. Our key priorities remain centered around strengthening our core portfolio, driving premiumization, expanding presence in high potential markets, improving operational efficiencies and maintaining financial discipline. We believe our strong brand recall, extensive retail network, diversified product portfolio and focused execution strategies position us well to capture long-term growth opportunities in the Indian footwear market. With that, I conclude my remarks and would now be happy to take your questions. Thank you.

[Operator Instructions] The first question is from the line of Raj Patel from SG Finance.

Am I audible?

Yes, sir, you are.

So my questions were more regarding the financial part. So as we saw that there was an operating deleverage in FY '26, so just wanted a clear picture that how we will be able to maintain the minimum revenue growth required to sustain 14% EBITDA margin?

See, we have already -- last 2 years, we have seen degrowth, but the degrowth has come mainly there is a closure of stores. And also, there is a less push of primary sales to the franchisee. But once that this store closure has been done, so I think there will be no new further store closure. So there, also the sales will remain the same and also some correction in the EBO for not doing some primary sales will happen this year, but we have -- already last year, you could see we have reduced our cost and we have done many cost-effective exercises. So with the revenue remaining at around INR 400 crores, again, next year, we have a growth of -- we will remain steady at the EBITDA level of 14%.

Got it, sir. My next question was with regards to the brand. So if we assume that the premium brands are being scaling and the margins are being improving, so why does the blended gross margin is being declined?

Blended gross margin has declined last year due to our -- during -- we have taken a price cut for the -- in the last 1 or 2 years, we have taken some price cut in our product less than 500. So there is -- some margin the growth has been seen. But if you see the fourth quarter margin has improved, and we'll continue with the new season product coming in, in the spring summer, where the ASP has been increased. So you'll see that the gross margin remains more or less in the upper side of around 48%, 49% to 50%.

Got it, sir. And on a quarter-on-quarter basis, as our revenue contribution from the premium sub-brands have increased...

Yes, we have seen the growth in British Walkers and also in our Sharon thing, we have seen the growth. And we are now launching more products on British Walkers and Sharon. So the premium product will contribute more, and the premium product contribution more -- will bring more gross margin to the company.

Got it, sir. And can you give us a more clear picture on the expected time line for premium mix to be meaningfully offset the discounting pressure?

See, discounting, there are products which after 2 or 3 season needs to be discounted. But if the quantity of discounted product in the total stock has reduced, so next year, the contribution of discount of total sale will reduce that, thereby also we'll try to improve the margin in that trajectory also.

Got it, sir, got it. And my last question was with regards to the inventory. So we saw that the inventory has been reduced sharply at talks around 40% year-on-year. So what are the risk of the lost sales due to the understocking in Q4 FY '26?

See, there are -- when you take some calls in the working capital thing, some because we have taken a call to reduce the inventory risk. Yes, in the fourth quarter, we have lost some sales because of lower inventory. But you have to take a call, and we have done -- taken that call and reduced our creators and also stock -- and also sold discounted things. So now we have the means -- the luxury to purchase some good products so that the product makes up running product and discounted ratio improves. So that's the reason we have taken call last year for a reduction of inventory.

[Operator Instructions] The next question is from the line of [ Santo Shetty ] from LGC Capital.

Sir, just wanted to ask when do you plan to transition from inventory correction to inventory let growth?

Already, the inventory correction has been done. Now this year, we'll increase the inventory to the extent that is needed. We'll not go overboard on inventory. We have achieved a lower level of inventory now. As I told earlier also, we'll purchase the inventory which are required and reach for the new season and for the spring, summer. So that product will -- we'll increase the good stock and reduce the level of discounting stock in the total inventory -- total inventory of our -- Khadim India Limited.

Okay. With the continued store rationalization into Q4, how much additional revenue drag should we expect in FY '27?

See, we have reduced around 60 -- closed around 60 stores in the last 2 years. So that means that thing, we are focusing on opening some strategic store, which will give us more sales. But we'll not keep the store which are making losses. So we will track down that. And if all are needed to close the store, we'll close the store, but we'll focus on profit-making stores and focus on e-commerce business. And the franchisees, we have taken some steps to correct the franchisee. Like last year, we have corrected the inventory. This year, we'll make correction in the data also.

Just for my last question, what is the steady state store count you are targeting post cleanup?

Around 200 coco stores.

[Operator Instructions] The next question is from the line of [ Yash Mehta ] from SKP Capital.

Am I audible?

Yes.

So for like a few questions. So the [ first ] sales are newly opened franchisee stores delivering higher throughput versus legacy COCO stores?

See the franchisee that we are now open more is the AFRM PFM, where the stop is on our side. Yes, that is giving us more margin. And our investment is also not there, only we have to invest in stock. So in COCO opening, we have to invest both in CapEx and in stock. But in this type of AFRM and PFM, we have to only invest in stock. So that is giving us more profit as now compared to COCO. But in strategic location where the revenue will be high, we'll definitely go with the COCO.

Okay. Okay. Got it. And can you share the Q4 LFL growth in terms of volume plus value versus Q3?

In the volume, sale in Q4 is around 14 lakh pair, where in Q3, it was around 12 lakh pairs. So there is the volume has increased. And the sales has remained more or less same because in Q4, there is some discount also. Q3, it was a season for more fresh capital sale.

Okay. Okay. And what is like the current e-commerce contribution in exiting FY '26 versus 3%, 4% earlier?

Around 5% and -- but we are focusing now more on e-commerce, especially on our khadim.com. This year, we have -- we are expecting the contribution will be high than last year.

And is the demand recovery driven by ticket size or footfall improvement?

Both. Credit size also has an impact and also the footfall. Both of the factors are important.

Got it. Got it. And I want to ask like what kind of investments are required to scale up to 10%? And how it will impact margins in near term?

Investment in the sense that COCO opening is one of the investment. But in case of opening a franchisee, we have to invest only in stock. So that will be there. We will be opening franchisee both EBO and PFM, and in strategic location, COCO.

So has the scale manufacturing meaningfully in Q4? Or is there any still subscale budget expectations?

Can I come back for the question again?

Yes. Yes. Yes. Sure.

Hello? Yes, HSL has improved. Skechers sales has improved. Yes, we are trying to increase the volume of Skechers. Definitely, this year, we'll increase the volume of Skechers and we'll send it to more stores compared to last year.

Okay. Yes, yes. Got it. Got it. And like I've got like 1 or 2 more questions. So like what is the player road map in terms of time line for athleisure to become a meaningful percentage of revenue?

See, athleisure, we have seen, but there are some issues in athleisure because our stores are very small. We don't -- we cannot have changing rooms. So we have to keep only the main thing. So that we have kept, but we will not increase it to a further because we don't have space for that in our store. And we cannot give it to the franchisee because also the franchisee stores are very small. So we'll keep the athleisure to the extent it is required, but we will not go far-fetched in athleisure.

Yes, yes. Given that -- like the space on [indiscernible] in store. So is athleisure structurally limited versus peer?

It's limited. We are keeping because we don't have that much space to keep all the athleisure like tracksuit, pants and everything. We are only keeping men's thing because the ladies thing, we cannot keep because we have -- don't have change room and all this.

[Operator Instructions] The next question is from the line of [ Amay ] Sakhuja from Ambit.

So my first question is you have given the GST rate cut that was recently announced by the government. How much of a positive impact of that are we actually seeing on the ground?

See, the GST thing, when it was launched, we have reduced the price at that point of time. But I think the demand for the product has not increased with the GST lowering. The demand has remained the same. And thing is that the ASP has reduced a bit compared to the last year when the GST rate was high.

Right. And so just to clarify, could you -- what is the guidance for FY '27? Do you think 14% EBITDA margin, 48% to 50% gross margin and INR 400 crores of revenue. Is that correct?

Yes, yes.

Okay. So this year, I think we -- in the full year, we achieved 48.9% gross margin. So I mean, are we not expecting more of an improvement in the gross margin considering that you are saying that you are focusing more on the higher value products?

Yes, yes. We assume that the margin will be high on both the sales that the premium product will sell more. And also there is an increase in the ASP also.

Okay. So we can resume close to 50% gross margin, I think that would be fair?

50 basis point.

50 basis point improvement, okay.

[Operator Instructions] The next question is from the line of [ Rajeev ] Jain from [ Arkin ] Investments.

So I have a couple of questions. So starting with, firstly, in Q3, you indicated that demand weakness was partly self-inflicted due to inventory rationalization. Now that inventory correction is largely behind, why has revenue not recovered sequentially in Q4?

The thing that in this [indiscernible], stock correction does not pick up in one quarter. It takes time. We have reduced the stock and the reduction because your order for product has been given in the fourth quarter. So that product comes in, in the first quarter. So that has also impacted in the fourth quarter. Otherwise, you cannot see a drastic improvement in stock. So that has taken a hit in both the quarters. But still, as we have done the correct thing of reducing the stock and flushing out some product. And now, as I told earlier, now we are filling up that stock in Q1, the stock is coming in, and there are lots of stocks in pipeline. So the thing is that in -- by the end of first half, we will go to a stock level, which is generally required to suffice the sale of around INR 400 crores.

Understood. Understood. Okay. So meaningfully, we would require 1 or 2 more quarters to -- for this to populate into our numbers, right?

Yes.

Understood. And sir, secondly, how much of this FY '26 revenue decline is still structural demand weakness versus the internal factors? Could you throw some light on that?

Our stocking, maybe around INR 10 crores to INR 15 crores of sales we have lost for the last 2 quarters.

Understood. And sir, also, you had targeted stabilization in FY '27. So bought concrete evidence like traffic or conversions or SSSG are you seeing exiting Q4 that supports this conviction?

But Q4 has remained more or less same. And Q1, as you know that we mean -- in our case, the eastern part of the country gives more sales. But in April, we have looks going on in Bengal and Assam. So that impacted some sales. But still, we are trying to carry on the sales and do better in the month of May and June.

Okay. From May and June onwards. Okay, understood. And sir, despite discounting and pricing we had already playing out in Q3, why did Q4 see further sharp gross margin compression? Or were there any particular reason that you can think of?

On the new product that is coming in Q4 and now it will be coming up have helped to increase the margin. And this stock reduction has helped us to flush out the discounted. So now the discounted sales is compared to be less compared to in the earlier quarters.

Understood. Understood. And at the current 48%, 49% of gross margin, the new normal structurally? Or do you still expect recovery from premiumization?

I think we can expect another 50 basis point improvement in gross margin.

Understood. Understood. And can you explain the sharp decline in equity and cash levels during FY '26? Or were there any pertinent reasons for those?

Sharp reduction in equity.

In cash levels.

Demerger transfer was there, no.

Understood. Yes, correct. Understood. Understood. And so also with the low cash on books, how comfortable are you with working capital funding going into FY '27? Do you foresee any challenges? And are there any ways to mitigate that?

No, we have working capital, but we have not utilized the total limit. So we have our limit available. So both with the new -- with the collection coming in from our EBOs, we're able to manage the cash flow situation also.

Understood. Understood. And perhaps, what is the target net debt to leverage level post restructuring that you're looking into? Is there any particular event that you're looking at?

Around 110 -- INR 110 crores to INR 115 crores.

Okay. You're comfortable around that. Understood. And given FY '26, exit margins are materially below FY '27 target. So what gives you confidence in sharp recovery next year? Are there any factors that we can look up to?

No, we are targeting a turnover of around INR 400 crores and an EBITDA margin of 14% at present.

Understood. Understood. Also, if the transitioning from a mass value retailer to a premium fashion brand, and what is the execution risk if we go into that?

No, it's not transiting from mass value to -- we will have mass value and also some premium product also. So it will be a blend of both.

You do not foresee any one particular -- any one particular of this to be becoming much more larger portion than of today?

Khadim is mainly a middle class brand. So we have to keep our foot -- strong foot in the middle class segment and try out some premiumization where we promote the middle class to buy some premium products like British Walker and Sharon and all this.

Understand Understood. And sir, lastly, given persisting demand weakness in discounting, is the industry structure -- structurally changing? Will you see that or?

Yes, there is a continuous -- demand slowness is there in the industry. So -- and there is a continuous demand in the lower segment of product in the distribution market. So retail has become really tough, but still, we are carrying out. We have good shops. We have some of the shop located in the prime area. So we will be able to deliver better in the years to come.

[Operator Instructions] The next question is from the line of [ Priti Agarwal ] from SK Associates.

Actually, I joined a little late. So I'm not sure if my questions have been taken earlier. But I just wanted to know that is hard transitioning from a mass value retailer to premium fashion brand, and like what is the execution risk?

No. As I told it earlier also, it's a middle-class brand. So it will keep its put in the mass value product. And it will provide some premium products to the middle class, so that the middle class can be graduated to take some premium products, but not that it will leave away the mass brand and go totally in the premium segment.

Understood. And given the persistent demand weakness and discounting, is the industry structure -- structurally changing?

Yes, there is a continuous demand weaknesses have been found. And also this discounting thing is carrying for more than years now. But still last year, we are able to push out the discount stock and reduce our stock level. Now we are trying to fulfill some more the stock and to increase the stock, but it will be for the products which are selling at the MRP, not taking lots of product and then selling it in discount.

Understood. And what do you think are the key risks of achieving your FY '27 guidance?

There are risks like -- demand weakness is a risk, then some risk comes in the political turmoil, all these are there. But still, I think INR 400 crore target is an achievable target, and we will try to get it done.

Understood. And like what percentage of the total revenue currently comes from the product price about [ 1,500 ] and how has this mix evolved versus FY '24 and '25?

Which product range [ versus ] price range? Up to 500.

1,500.

1,500 crore is around 80% to 85%.

You are talking above or below 1,500?

Above, above.

15%.

Okay, understood. And the premiumization, as you mentioned, has been one of our strategic priorities. So can you provide some quantitative indicators showing progress in premiumization over the last 2 years?

And I can tell you one, British Walkers, that has -- means growth around 6% during FY '26. There are Sharon also, which has also grown this year. And we are now focusing on some -- this product in and to spend. We spread out this product in more retail outlet and also in some of our top franchises.

Understood. And like have these premium product delivered better gross margins and stronger sell-through compared to lower ticket categories?

No, one thing is that this premium product has given the gross margin somewhat 2%, 3% more than the normal mass market product. And also the discounting of this product is comparatively less compared to the lower category product.

Understood. And there are new articles that India's leather and footwear industry is struggling with high input cost due to ongoing Middle East crisis. So what is your situation in terms of raw materials sourcing?

Yes. The raw material prices are increased around 20% to 25% compared to -- in the month of February to now. But still, we have also increased our MRP and trying to remain competitive and again, don't reduce the margin, gross margin. We are trying to find a way to how to tackle both the situation so that our volume does not go down and our margin is also protected. But this is more impact in distribution thing than in retail. Retail, we can take the call of increasing product price from INR 25 to INR 50. But still, price is very volatile, raw material, petroleum product, which is one of the key components in our segment.

[Operator Instructions] The next question is from the line of [ Pahel Sharma ] from [ BB ] Capital.

Yes. I want to ask some set of questions. So first is that what are the specific initiatives being undertaken like to improve the EBITDA margins back towards historical levels?

The EBITDA margin depends on 2 things. One is the increase in sales and an increase in margin and cost reduction. So what we have done, we are able to reduce the cost. And -- but our sales has not grown. So EBITDA remained more or less at the same level. If we are able to do more sales, there is a growth of sales of 5% to 10%, definitely, the EBITDA will increase by 100 to 200 basis points. But at present, we can foresee EBITDA of 14% for FY '27.

Okay. So like would management expect EBITDA margins to recover gradually over the next few quarters? Or is the current margin profile more reflective of the new normal of the business?

See, whatever margin we have delivered, we -- in gross margin, we can expect a 50 basis point jump because as I told earlier also, the raw material price is very volatile. So to comment on the gross margin, we cannot, I mean, give a comment on the gross margin because it depends on the volatility of the raw material product. But if it remains the same, we're able to deliver 50 basis point growth in gross margin. And with the cost structure that we are following, if there is a growth in sale of 5%, definitely, a 100 basis point EBITDA will -- we can achieve a growth.

Okay. Okay. Understood, sir. And the next question is that PAT margins are now below 1%, which is significantly, you can say lower than historical levels. So may I know that what is management's medium-term profitability aspirations for the business?

See you means all depends on the sale. The sales growth, we will be able to have PAT of around 2% to 2.5% that we used to do earlier. But if the sale doesn't happen, then the situation become because costs to an extent you can reduce, but you cannot reduce all the costs. So taking that, FY '27 late as consolidated, then we can think of increasing -- if EBITDA margin improves, definitely, the PAT or the PBT margin will also improve.

Okay, sir. Understood. And the last question is that the trade payables declined sharply from, I guess, INR 196 crores to INR 111 crores. So was this reduction vendor-driven or part of a deliberate deleveraging strategy?

So one part has reduced because of our demerger because last year's figure is comparing with both the company. But still considering that also, we are able to reduce the creditors of Khadim India Limited because we -- for the last 2 quarters in Q3 and Q4, we deliberately reduced the purchase and paid our creditors so that the creditors balance has also come down.

Ladies and gentlemen, as there are no further questions, I now hand the conference over to Mr. Omkar Bagwe for closing comments. Thank you, and over to you, sir.

Thank you, everyone, for joining us on the call today. I would also like to thank the management for sparing the time and answering all the queries. We are MUFG Intime, Investor Relations advisers to Khadim India Limited. In case of any queries, please feel free to reach out to us.

Thank you.

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