Khadim India Ltd Management Discussions

Industry Structure and Developments

The global footwear market is progressing at a compound annual growth rate (CAGR) of more than 4% between 2023 and 2028¹. The global footwear market is changing rapidly due to shifts in consumer preferences worldwide, driven by fashion and design. The footwear is gradually evolving into a lifestyle purchase with increase in demand for comfortable and stylish products.

The future of the footwear industry in India is being shaped by various market players and emerging trends, highlighting its diverse and ever-evolving nature. The market is further stimulated by the entry of international brands and e-commerce developments. Additionally, government initiatives backing the leather and footwear sector contribute to production capacities and boost exports.

Indias footwear revolution is rapidly advancing towards USD 90 billion milestone by 2030². India accounts for more than 9% of global footwear production and ranks second worldwide in both production and consumption. The footwear industry in India has the potential to create upto 425 jobs for every 1,000 pairs manufactured and sold per day across varied fields like manufacturing, allied industries and retail³. Factors like rapid urbanisation, rising disposable incomes and an expanding fashion-conscious demographic are driving the growth in the footwear segment. Conclusively, the Indian footwear market is thriving, powered by a growing middle-class, Millennials & Gen-Z and increase in online shopping.

Company Overview

Khadim India Limited (also referred to as Khadim or Company), trading under the brand name Khadim, is a distinguished footwear Company with legacy of more than six decades in the Indian footwear sector. Based in Kolkata, West Bengal, the Company ranks as the second-largest footwear retailer in India, with a strong foothold in Eastern and Southern India.

The Company operates under two distinct business models - Retail and Distribution. The retail business targets middle and upper-middle income consumers via exclusive retail stores (Company Owned Outlets and Franchisees) in Metros and Tier I - Tier III cities, who primarily shop in high street stores and malls while the distribution business caters to lower and middle-income consumers through a network of distributors in Metros and Tier I - Tier III cities, who supply to Multi-Brand Outlets (MBOs) across India.

The Company remains committed to designing products that reflect contemporary fashion trends through continuous research and development. It has expanded its reach and continues to grow through 868 Khadims branded retail stores across 27 States and 5 Union Territories as on March 31, 2024. Additionally, the Company has established a wide network of 753 distributors, catering to MBOs nationwide as on March 31, 2024.

A "Scheme of Arrangement" between the Company and KSR Footwear Limited ("Resulting Company") and their respective shareholders and creditors ("Scheme"), has been approved by the Board, which inter alia provides for the demerger, transfer and vesting of the entire Distribution Business of the Company into the Resulting Company, on a going concern basis, subject to necessary statutory and regulatory approvals.

The retail and the distribution business address different market segments with divergic dynamics in terms of business strategy, customer set and distinct capital requirements. The Demerger will enable both the Company and the Resulting Company to focus on their activities in the respective segments and shall enable them to move forward independently, with specialisation building on their respective capabilities.

Further, the segregation will enable unlocking value of each vertical thereby paving the way for focused growth with a view to create significant stakeholder value. The demerger process is well underway, with approvals expected to establish a more robust and focused business structure.

Khadim, renowned for its affordable fashion, caters to the entire family for every occasion. With a strong presence in malls and high streets, the brand has now extended its reach to transit locations like airports and railway stations. They offer a diverse range of high-quality yet reasonably priced footwear suitable for all age groups from kids to seniors, easily accessible across urban and semi-urban areas as well as small towns.

Operational & Financial Highlights

In the financial year 2023-24, the net sales for the Company decreased to 6,149.04 million as against 6,602.64 million in the previous year, marking a fall of 6.87%. The operating EBITDA decreased to 709.78 million as against 725.24 million in the previous year, down by 2.13%. The operating EBITDA margin increased to 11.54% of net sales as against 10.98% in FY 2022-23.

Profit before Tax was 82.56 million as against Profit before Tax of 225.71 million in the previous year, down by 63.42%. The Profit after Tax for FY 2023-24 was 63.16 million as against Profit after Tax of 175.07 million in the previous year, down by 63.93%.

Gross margin for 2023-24 stood at 45.4%, up by 350 basis points year-on-year. The gross margin for retail and distribution was 56.1% and 38.5%, respectively. The segment share percentages for 2023 and 2024 indicate an increase in the retail segment from 63.0% to 65.4%, while the distribution segment experienced a decrease from 33.8% to 30.9%.

The Shoe Protection Programme, introduced by the Company across 100+ retail stores, marks a revolutionary step in the retail shoe industry. This programme provides customers with excellent post-sale benefits, guaranteeing an excellent shopping experience and long-term satisfaction with their purchase.

Following an asset-light approach, the Company focuses on expanding its store network throughout the country while prioritising premiumisation and maximising operational capacity for sustainable growth. The Company primarily operates its retail segment, accounting for 74% of its presence in franchising, while also outsourcing 90% of its product requirements to improve operational efficiency. In the distribution sector, the Company employs a highly scalable model, utilising both in-house and contract manufacturing to effectively meet market demands.

Segment-wise Revenue Bifurcation

Retail Business

The Company has significantly expanded its retail footprint by opening 94 retail stores in FY 2023-24, reaching a total of 868 branded retail outlets across 27 states and 5 union territories. These include Company Owned Company Operated stores (COCO) and Franchisees (in various forms). This growth adheres to the Companys asset-light model, with 74% of its retail locations being franchises and 90% of its products outsourced.

The Companys product range is extensive. It includes leather and non-leather sandals, slippers, boots, ballerinas, stilettos, moccasins, sports shoes and accessories (socks, shoe polishes, brushes, leather belts, wallets and laptop bags, etc.) with price points ranging between 105 to 4,199. The range includes the main brand "Khadim" along with sub-brands like British Walkers, Lazard, Pro, Softouch, Sharon Cleo, Turk, Adrianna and Bonito. Through the mother brand and sub-brands, the Company offers varied options to consumers of different age groups expending an affordable amount.

The Company adopted a trinity approach in the retail segment. This strategy includes offering a trendy yet vibrant product range, redesigning the in-store experience and maintaining affordable price points to enhance the overall retail experience for customers. The Companys retail business targets middle and upper-middle-income consumers in metropolitan areas as well as Tier I to Tier III cities through exclusive retail stores. These stores include both COCO outlets and Franchises, mainly located in high street stores and malls.

The Company has its largest geographical presence in the East, which accounts for 64% of its retail network. Additionally, the Company is diversifying its market base by expanding into South & West India and Uttar Pradesh in North India, by opening new COCO stores and enhancing its Franchise presence.

The Companys strategy optimises market reach and growth potential by strategically placing its retail stores across various tiers and zones. There is a strong presence in Tier III cities constituting nearly half of their retail locations, enabling the Company to tap into emerging markets while attracting a broader customer base. The remaining stores are located in Metros and Tier I-II cities, focusing on areas with higher purchasing power.

Distribution Business

The distribution segment is a volume-based business primarily focusing on offering branded and affordable footwear within the mass footwear market. The Companys distribution business operates through an extensive network of distributors, catering to lower and middle-income consumers in Metros and Tier I to Tier III cities, who primarily shop in MBOs.

During the financial year under review, the distribution network saw remarkable expansion, reaching a total of 753 distributors. This extensive reach ensures a robust presence across India. The distribution segment offers products priced between 75 and 999, including EVA, basic and premium Hawai, PVC, PVC DIP, PU, Stuck On products, etc. under the main brand "Khadim" along with sub-brands such as Kalypso, Wash n Wear, Fliers, FitNxt, Dunford and Pugo, each catering to different user needs. Following an asset-light model for products growth, the Company employs a combination of in-house and contract manufacturing to maintain efficiency and scalability.

Geographically, the distribution segment has a stronghold in the Eastern region, followed by significant presence in the North, with some presence in the Western and Southern regions.

Marketing and Branding

Khadim, the home grown footwear brand, believes in affordable fashion for everyone and has shaped up its journey to be in step of every Indian. Khadim as a brand is undergoing a significant transformation. It is consistently launching new shoe styles that align with current fashion trends, particularly to younger demographics like Millennials & Gen-Z. Strategic marketing, coupled with continuous product improvements and better margins while staying updated with the latest fashion trends and evolving brand campaign, have collectively enhanced the Companys recognition. To achieve its mission and vision, the Company continues to reinforce its consumer connect approach through various focused marketing initiatives that aid in consumer engagement and resonates with brand image. During the FY 2023-24, the Company launched several exciting marketing and branding campaigns to stay connected with customers and make the brand more visible.

The Company launched a festive campaign, "Cholche Khadim Cholbe Khadim", to showcase its over six decade long legacy of offering "affordable fashion" footwear. This campaign involved branding the famous Darjeeling Toy Train with Khadim logo, transforming it into a moving billboard. Wrapping buses with Khadims designs and installing large hoardings (billboards) throughout the region to ensure widespread visibility. This campaign was initiated in regional languages to connect with consumers of all ages during Durga

Puja in West Bengal, Assam and Tripura. It promoted festive collections from Khadim and its sub-brands. In- store incentives were provided for purchases of 1,000 and above, which were promoted across various channels including Above The Line (ATL), Below The Line (BTL) & digital media. To further increase the slogans visibility, the Company partnered with ABP Live, utilising L branding to reach a wider audience.

The iconic British Walker 888540 was reintroduced to the market with a nationwide campaign, "Royal Comfort Once Again". This comprehensive relaunch included retail store decor, a bulk WhatsApp campaign and PR promotions to highlight the classic elegance and contemporary comfort of British Walker shoes. These efforts were aimed at catering to discerning customers across India.

The Company launched extensive campaigns for both Durga Puja and Diwali. For Durga Puja, the Company executed a comprehensive campaign that included product catalogue promotions in leading newspapers like Ananda Bazaar Patrika, Telegraph etc. We collaborated with 20 influencers, such as RJ Priyanka and Bong Princess, to enhance social media presence. The Google P-Max campaign highlighted exclusive Durga Puja offers, driving traffic to stores and online platforms. Additionally, TV commercials were aired on channels such as ABP Ananda, News18 Bangla, R-Bangla, 24 Ghanta and TV9 Bangla to highlight our diverse product range and seasonal offers. We have partnered with Bazar Kolkata for a consumer exchange program, enabling gift vouchers to be used interchangeably at the outlets of both Company and Bazar Kolkata, enhancing convenience and value.

For Diwali and wedding seasons, the Company targeted Bihar and Uttar Pradesh with a large hoarding campaign across cities including Bhagalpur, Buxar, Patna, Prayagraj, Lucknow etc., to ensure that the Companys festive collections were the go-to choice for the celebrants.

In FY 2023-24 the Company launched 6 targeted LOYALTY campaigns, reaching 6.8 million customers and generating substantial incremental sales, highlighting the Companys strategic focus on customer engagement and personalised marketing.

The Company also collaborated with top Indian banks and corporates to introduce SBI Card Rewards, Edenred Rewards, Ferrero Rewards and many more thereby promoting gift vouchers to attract more customers. By combining targeted local advertising with nationwide corporate partnerships, the Company successfully made its festive collections the preferred choice for celebrations.

The Company was one of the sponsors of the 53^rd Statesman Vintage & Classic Car Rally 2024 held in Kolkata to further enhance its reach to the consumers.

The Company has introduced Amazon Pay as a QR payment partner in its retail stores, thereby simplifying the payment process and ensuring a seamless shopping experience for its customers. By strengthening its e-commerce capabilities to meet growing demand, the Company ensures seamless shopping experience across multiple platforms which is Amazon, Flipkart,

Ajio, Myntra, Snapdeal, Limeroad, Tata Cliq and its own website. Furthermore, the Company invests in digital marketing by curating content that resonates with young audiences and maintaining an active presence on social media channels. Collaborations with YouTube influencers and local celebrities ensure widespread marketing reach, while the transition to WhatsApp marketing enhances direct consumer communication.

The Company has also onboarded Abir Chatterjee and Ishaa Saha, renowned Bengali Actor and Actress as its Brand Ambassador to leverage their popularity and target young consumers. This strategy boosts long-term consumer relationships, driving organic traffic to e-commerce platforms including Companys website at www.khadims.com.

In conclusion, the Company continues to strengthen its position as a leading footwear brand by staying true to its core principles of offering affordable fashion. Through strategic marketing initiatives, collaborations with influencers and significant investments in digital and traditional media, the Company effectively connects with a diverse consumer base. Launching innovative product ranges while deeply understanding market trends and customer preferences has allowed Khadim to resonate strongly with Millennials and Gen-Z audiences today. With these dynamic and comprehensive marketing initiatives, Khadim continues to stride forward, blending tradition with innovation to meet the evolving needs of our customers across India.

OUTLOOK

Khadim, a well-regarded brand in the footwear industry, has a long-term vision of becoming the one-stop destination for stylish yet affordable fashion for every member of the family. Keeping a sharp eye on market trends, the Company continuously evolves through innovation and robust marketing strategies. The Company aims to further strengthen its position in the market.

The demerger of Khadims retail and distribution segments represents a strategic move with potentially significant impacts on the Companys outlook. The separation of the distribution business into KSR Footwear Limited (KFL), 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.

Government initiatives supporting the leather and footwear industry further strengthen the Companys growth prospects. The Companys focus remains on customer satisfaction and product excellence, aiming to maintain its leadership position and connect with consumers across generations.

Looking ahead, the Company is committed to both customer satisfaction and product excellence. By aligning with market trends and broadening its reach, the Company is prepared to maintain leadership in the footwear sector while connecting with people of all age groups. Expansion plans involve entering new COCO stores and Franchises, with a focus on Eastern and Southern India and exploring opportunities in Western and Northern India.

At its core, the Company believes that fashion should be inclusive and accessible to all. Moreover, the Company is strategically positioning itself to enhance its presence in the competitive footwear market by prioritising product innovation, increasing retail reach and strategic marketing efforts. With a vision to be a part of every Indians journey, the Company aims to influence the future of the industry.

Key Ratios

In accordance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015, the Company complies with the requirement to provide details of key financial ratios along with detailed explanations thereon in case of a change of 25% or more compared to the previous financial year. The key financial ratios are depicted below:

Sl. No. Ratios	FY 2024	FY 2023	Change (YoY)	Reason
1 Debtors Turnover Ratio	0.30	0.28	5.74%	NA
2 Inventory Turnover Ratio	0.31	0.27	15.24%	NA
3 Interest Coverage Ratio	1.26	1.78	-28.87%	The decrease was mainly on account of lower profits earned during the year.
4 Current Ratio	1.43	1.35	5.54%	NA
5 Debt Equity Ratio	0.51	0.53	-3.61%	NA
6 Operating Profit Margin	11.54%	10.98%	5.09%	NA
7 Net Profit Margin	1.03%	2.65%	-61.27%	The decrease was mainly on account of lower profits earned during the year.
8 Return on Net Worth	2.92%	8.66%	-66.33%	The decrease was mainly on account of lower profits earned during the year.

Opportunities

The footwear industry in India offers significant growth opportunities for the Company.

The governments plan to extend its Production Linked Incentive Scheme (PLI) to include footwear and leather goods, aiming to boost domestic manufacturing, stimulate investment, create jobs and reduce import dependence⁴. Additionally, initiative such as Make in India, further strengthens the industrys growth. This supportive environment is ideal for expanding operations and growing the Companys market share.

The Indian footwear market is expanding on the back up of rise in income and purchasing power. Further, technological advancements, including virtual try- on and augmented reality (AR) technologies, digital payments are reshaping online shopping experiences. By taking advantage of these trends, the Company has the potential to attract a wider customer base and higher sales.

Key consumer trends include a shift towards branded and premium footwear, driven by the growth of online shopping. Additionally, theres a rising preference for athletic and athleisure shoes. These trends align perfectly with the Companys strategic initiatives, including enhancing in-store experiences, renovating product portfolios, focus on branded athletic footwear and strengthening e-commerce capabilities, which promise high margins and increased profitability.

Overall, Indias booming footwear market offers significant opportunities for our Company. With a strong presence in the domestic market, the Company is well positioned to leverage the projected market growth. Furthermore, the Company is committed to exploring every opportunity, from improving product offerings and customer experiences to adopting innovative technologies and seeking government support.

Risk, Threats, Concerns and Mitigation

The Company has in place a proper risk management framework which forms an integral part of the strategy and planning process. The Company time to time identifies and undertakes appropriate mitigation measures for various types of risks, as stated below:

a. Market Competition

Risk: Highly competitive market and stiff competition from unorganised retailers and organised players who have similar product lines leads to pressure on margins. The situation is further aggravated by the competition from national and international organised retailers.

Mitigation: The Companys strength is its wide range of family-oriented products. The Company is expanding its market presence by growing its retail, distribution and franchise networks. Strategic marketing and partnerships are key to increasing brand value and customer base.

b. Higher inflation and subdued demand

Risk: Increasing inflation coupled with higher living costs impact purchasing power of the people and thereby impact spend on non-essential stuff which includes footwear.

Mitigation: The Company maintains a diverse product range, from premium and affordable options, ensuring accessibility and affordability to different consumer segments, thereby reaching a broader audience.

c. Fast-changing trends

Risk: Consumer preferences are rapidly changing, with a rising interest in sustainable and stylish footwear. Keeping pace with these changes and the inability to respond to customer expectations can adversely impact the business.

Mitigation: The Company continuously monitors market trends and consumer feedback to adapt its product offerings. The Company consistently upgrades its products with new designs based on extensive research and focus on digital campaigns to build the brand and attract customers.

d. GST Rate hike

Risk: Changes in government policies, trade regulations and tax structures can impact operational costs and profitability. The distribution business faced pressure due to the GST hike from 5% to 12% on footwear below an MRP of 1,000. This change has negatively impacted the profitability of distribution business, making it a financial drag.

Mitigation: To address the impact of the GST hike, the Company restructured its distribution business to minimise financial strain. The Company focuses on optimising its operations to drive growth and profitability while keeping an eye on policies to comply with regulations.

e. Technological Advancements

Risk: Rapid technological advancements can render existing processes and products obsolete, needing continuous innovation.

Mitigation: The Company invests in R&D to stay ahead in technological trends. Moreover, the Company successfully implemented omni-channel services, linking stores with advanced technology platforms for better customer services.

f. Regulatory Compliance

Risk: Adhering to stringent regulatory standards and compliance requirements, including quality control norms and labor laws, adds complexity & costs for the Company. The Central Governments mandate for the footwear industry to comply with Bureau of Indian Standards (BIS) quality norms demands strict adherence to quality standards, posing significant operational challenges.

Mitigation: The Company has adopted measures to comply with the regulatory shift. The Company is diligently monitoring the situation and taking necessary steps to ensure full compliance with the orders.

Human Resources

The Company believes that good Human Resource Management ensures success through high performance and Customer-Centric Culture with Happy and Value Oriented Employees. Efficient management of the workforce is crucial for reaching transformational objectives. This involves aiding managers in their day-to-day responsibilities, spanning from hiring and employee growth to offering valuable insights to senior leadership. These efforts further bolster strategic planning and decision-making by providing a solid foundation of data and knowledge. Ultimately, effective workforce management is a key to organisational success and progress towards overarching goals.

The Company places a strong focus on nurturing its human capital through comprehensive training programs that aim to systematically enhance employees knowledge, skills, attitudes and teamwork abilities. These training initiatives are strategically crafted to improve personal competencies essential for current job performance while also equipping employees with the necessary skills for future career growth. Moreover, the recruitment processes within the Company are consistently aligned with established procedures and business needs. Various measures and programs have been implemented to boost employee engagement and foster a deeper sense of commitment among the workforce.

The Company is implementing targeted strategies aimed at attracting, retaining and nurturing top talent, irrespective of factors such as race, gender, religion, age, culture, sexual orientation, disability, or background. The Company is committed to support young individuals in securing apprenticeships that provide them with practical skills essential for overcoming everyday workplace obstacles in the corporate realm.

As of March 31, 2024, there were 780 permanent employees (including 19 female employees) on the rolls of the Company.

Internal Control Systems and Their Adequacy

The Company has an Internal Financial Controls (IFC) framework which commensurate with the size, scale and complexity of the Companys operations. The Company has laid down Standard Operating Procedures (SoP) and policies which governs the business operations of the Company.

The scope and authority of the Internal Audit function is defined in the Internal Audit Charter which is approved by the Audit Committee of the Company. The Internal Auditor reports to the Audit Committee and develops an audit plan for the Company, which covers, inter alia, corporate, core business operations, as well as support functions. The Audit Committee reviews the annual internal audit plan.

Significant audit observations are presented to the Audit Committee, together with the status of the management actions and the progress of the implementation of the recommendations. The Audit Committee also reviews the adequacy and effectiveness of the Companys internal control environment and monitors the implementation of audit recommendations.

Through this process, the Company continuously strengthens the internal controls, ensuring transparency, accountability and compliance across all operations.

Cautionary Statement

Statements in the Management Discussion and Analysis report describing the Companys objectives, projections, estimates and expectations may be "forward-looking statements" within the meaning of applicable laws and regulations and futuristic in nature. These forward-looking statements by their very nature involve assumptions from the Company and are subject to inherent risks and uncertainties. There is a significant risk that the assumptions, predictions and other forward-looking statements will not prove to be accurate. Readers are cautioned not to put undue reliance on forward-looking statements as multiple factors could lead to assumptions, actual future outcomes and events to differ materially from those expressed in the forward-looking statements. Hence, this document is subject to the disclaimer and qualified in its entirety by the assumptions, limitations and risk factors included in the Management Discussion and Analysis of Annual Report of the Company for FY 2023-24. Investors, therefore, are requested to make their own independent judgments before taking any investment decisions.