Khadim India Limited (KHADIM) Q3 FY23 Earnings Concall Transcript

Khadim India Limited (NSE:KHADIM) Q3 FY23 Earnings Concall dated Feb. 16, 2023.

Corporate Participants:

Nachiket Kale — Investor Relations

Siddhartha Roy Burman — Chairman and Managing Director

Indrajit Chaudhuri — Chief Financial Officer

Rittick Roy Burman — Whole-Time Director

Analysts:

Viraj Mehta — Equirus PMS — Analyst

Dhwanil Desai — Turtle Capital — Analyst

Anish Jain — JB Capital — Analyst

Ishan — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Khadim India Q3 and Nine Months FY ’23 Earnings Conference Call organized by Orient Capital. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Nachiket Kale. Thank you, and over to you Mr. Kale.

Nachiket Kale — Investor Relations

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 hardor 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.

Siddhartha Roy Burman — Chairman and Managing Director

[Foreign Speech], everybody. On behalf of Khadim India Limited it is my pleasure to welcome you all to this conference call to discuss the Q3 and nine months results for the financial year 2022-23. 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 faint 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 six 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 physical majority of our sales for the festive season of Pujo 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 nine 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 a 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 to all demographic with a basket of products providing affordable fashion for all. We accept the positive trend generated this year in nine months [Technical Issues] for 2.3 and aim to deliver steady growth within improving the profitability. Our endeavor to establish Pan-India presence with an asset-light strategy have taken the retail store tally to 838, as of December 31st. With an addition of 73 stores in nine 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 nine-month financial highlights. Q3 FY ’23 revenue at INR149 crores is down year-on-year by 19%. However, the trend is largely positive year-to-date with nine-month FY ’23 revenue INR501 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 Tire II and Tire III markets has registered a year-on-year drop of 36% in Q3 FY ’23 and 7% in nine months FY ’23. However, the retail portfolio is doing well and registered an encouraging 13% [Phonetic] on year-on-year growth for nine-month FY ’23.

Gross margin for Q3 and nine-month FY ’23 Stand 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 INR17 crore and nine-month FY ’23 EBITDA at INR56 crores registered a grow of 60%. EBITDA margin at 11.2% has been subsequently flat in Q3 and over the period nine months improved by 320 basis points from 8% EBITDA margin in nine months FY ’22. The PAT for the quarter was INR5 crore and the nine-month FY ’23 PAT at INR13 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.

Questions and Answers:

Operator

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

Viraj Mehta — Equirus PMS — Analyst

Thank you, sir. Sir, my first question regarding the management change now that Ms. Namrata has decided to move on and we’ll be taking care of the company from here on, do we see any — so there was a clear strategy part that she had guided the investors in terms of both the B2B, as in the franchise business and in the retail business and the mass-market business. 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 three, four years?

Siddhartha Roy Burman — Chairman and Managing Director

The system will be same. [Foreign Speech] and everywhere there is a ahead. So there will be no problem and the promoter side Rittick ake and myself [Foreign Speech]. So there will be no problem.

Indrajit Chaudhuri — Chief Financial Officer

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.

Viraj Mehta — Equirus PMS — Analyst

Right. [Foreign Speech] And even for nine months, we have done very badly compared to last year first quarter was total wipeout [Foreign Speech].

Indrajit Chaudhuri — Chief Financial Officer

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

Siddhartha Roy Burman — Chairman and Managing Director

7% to 12%.

Indrajit Chaudhuri — Chief Financial Officer

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…

Viraj Mehta — Equirus PMS — Analyst

Demand.

Indrajit Chaudhuri — Chief Financial Officer

Demand in the Tire II, Tier III sector where the distribution business generally operate. And overall there is also inflationary pressure in this mass-market segment. So all these three has created a demand going downward in this distribution business.

Viraj Mehta — Equirus PMS — Analyst

Right. And sir, after seeing robust gross margin in different 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 standby it?

Indrajit Chaudhuri — Chief Financial Officer

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 presence looks difficult, but we’ll gradually try to increase the margin. We are now at 35% level. We can improve by 100 basis point in the next year.

Viraj Mehta — Equirus PMS — Analyst

Right. And sir my last question is on sales, management were very confident of doing INR750 odd crores this year, looking at what we have done in nine 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 INR1,000 crores that — I mean, we had also mentioned publicly a few times.

Indrajit Chaudhuri — Chief Financial Officer

Yes, if you see the sales that, which is reported it is net of GST and scheme cost, in there is 115. If you see the gross turnover of the company this year, we’ll reach INR750 crores. And next year, definitely in this retail we’ll expect a growth of 10% to 12% and in distribution around 15%.

Viraj Mehta — Equirus PMS — Analyst

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

Indrajit Chaudhuri — Chief Financial Officer

INR750 crore gross will mean around GST of around average 12%. INR750 crore in gross will turn out to be around INR670 crores in net.

Viraj Mehta — Equirus PMS — Analyst

Okay. So we’ll still do around INR170 crore, INR180 crore in the last quarter is what you are saying?

Indrajit Chaudhuri — Chief Financial Officer

Yes, yes.

Viraj Mehta — Equirus PMS — Analyst

Understood. And any target for next year, sir?

Indrajit Chaudhuri — Chief Financial Officer

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.

Viraj Mehta — Equirus PMS — Analyst

And sir, can you talk a little bit about the competitive intensity, a lot of players in this segment had to take a price card significant price cut in the lower level flip flops of INR150. I mean, we have seen price CUTS of 10%, 12% in that region. What kind of price cuts would be have taken this quarter?

Indrajit Chaudhuri — Chief Financial Officer

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.

Viraj Mehta — Equirus PMS — Analyst

On a blended basis.

Indrajit Chaudhuri — Chief Financial Officer

On a blended basis.

Viraj Mehta — Equirus PMS — Analyst

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 is at a same page? Let’s say, the normal gray flip-flops.

Indrajit Chaudhuri — Chief Financial Officer

We are at INR10 lower than them.

Viraj Mehta — Equirus PMS — Analyst

So they would be at INR129, you would be at INR119.

Indrajit Chaudhuri — Chief Financial Officer

Yes.

Viraj Mehta — Equirus PMS — Analyst

Okay, thank you so much, and best of luck.

Indrajit Chaudhuri — Chief Financial Officer

Thank you. Thank you.

Operator

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

Dhwanil Desai — Turtle Capital — Analyst

Hi. Good afternoon, sir. Sir, my first quesiton is, [Foreign Speech] appear in the range of INR6 crore, INR10 crores to maybe we land up with INR750 crore. In between [Foreign Speech] 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 Speech] is that the real on-the-ground scenario what am I missing? Am I missing something here?

Indrajit Chaudhuri — Chief Financial Officer

The problem that most retailer is facing is the volume growth. And we have seen that in the last few years the footfall has grown 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.

Siddhartha Roy Burman — Chairman and Managing Director

And we are also trying to…

Dhwanil Desai — Turtle Capital — Analyst

I’m sorry, I’m not able to hear you.

Siddhartha Roy Burman — Chairman and Managing Director

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

Dhwanil Desai — Turtle Capital — Analyst

Okay. [Foreign Speech] is what I think realistic on the retail side. [Foreign Speech]

Siddhartha Roy Burman — Chairman and Managing Director

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

Indrajit Chaudhuri — Chief Financial Officer

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, 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.

Operator

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 JB Capital [Phonetic]. Please go ahead.

Anish Jain — JB Capital — Analyst

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

Indrajit Chaudhuri — Chief Financial Officer

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 that, it is because of the India’s 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 number one. 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, cost have reduced and there is also a profit that has been adjusted in our sale of the properties.

Anish Jain — JB Capital — Analyst

Okay, thanks.

Operator

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

Ishan — Individual Investor — Analyst

Yeah, thanks for giving me the opportunity. 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?

Indrajit Chaudhuri — Chief Financial Officer

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

Ishan — Individual Investor — Analyst

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

Indrajit Chaudhuri — Chief Financial Officer

Total?

Ishan — Individual Investor — Analyst

Total square feet of operation.

Indrajit Chaudhuri — Chief Financial Officer

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.

Ishan — Individual Investor — Analyst

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

Indrajit Chaudhuri — Chief Financial Officer

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

Ishan — Individual Investor — Analyst

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

Indrajit Chaudhuri — Chief Financial Officer

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.

Ishan — Individual Investor — Analyst

Yeah, thank you.

Operator

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

Viraj Mehta — Equirus PMS — Analyst

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?

Indrajit Chaudhuri — Chief Financial Officer

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

Viraj Mehta — Equirus PMS — Analyst

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.

Indrajit Chaudhuri — Chief Financial Officer

Price [indecipherable] sales volume.

Viraj Mehta — Equirus PMS — Analyst

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 in difficult. So where will that 4% come from?

Indrajit Chaudhuri — Chief Financial Officer

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

Viraj Mehta — Equirus PMS — Analyst

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

Rittick Roy Burman — Whole-Time Director

Actually premiumization is happening. 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, which is Pro is like a sportswear brand, British Walkers is that premium leather brands. And the rest 40% is coming from mother brand Khadim, which constitutes of mainly flip-flops, So it has to be the margin — the Khadim brand products prices have to be made until 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.

Viraj Mehta — Equirus PMS — Analyst

Sure sir, thank you so much. I’ll get back in the queue.

Operator

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

Dhwanil Desai — Turtle Capital — Analyst

[Technical Issues] 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.

Operator

This is better, sir.

Dhwanil Desai — Turtle Capital — Analyst

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

Operator

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

Dhwanil Desai — Turtle Capital — Analyst

I will. Yes. Hello?

Operator

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

Siddhartha Roy Burman — Chairman and Managing Director

Hello?

Operator

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.

Siddhartha Roy Burman — Chairman and Managing Director

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

Rittick Roy Burman — Whole-Time Director

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.

Operator

[Operator Closing Remarks]