Khadim India Ltd Management Discussions.

Economic Overview

India has emerged as the fastest growing major economy and is expected to be one of the top three economic powers of the world over the next 10-15 years, lead by its strong democracy and bourgeoning population. Indias real Gross Domestic Product (GDP) at constant (2011-12) prices in the year 2018-19 is estimated at र 140.78 lakh crore, showing a growth rate of 6.81%. The nominal GDP for 2018-19 is estimated at र 190.10 lakh crore, with growth rate of 11.20% against र 170.95 lakh crore for 2017-18.1 With an accelerating growth rate, India has retained its position as the third largest start-up base in the world with over 4,750 technology start-ups.

Its labour force is anticipated to touch 160-170 million by 2020, helped by an increase in the rate of population growth; a larger labour force participation; and higher education enrolment; amongst other factors, according to a study by The Associated Chambers of Commerce of India (ASSOCHAM). The interim Union Budget for 2019-20, announced on February 01,2019, focuses on supporting farmers, economically less privileged population, workers in the unorganised sector, and salaried employees, while continuing the Government of Indias thrust on better physical and social infrastructure.2

Footwear Industry Overview

The footwear industry is one of the most rapidly expanding industries globally. Increasing demand for new and innovative footwear and emergence of various global as well as regional brands across segments in the category is primarily driving the market. Innovative and trendy footwear are being consistently manufactured by leading market players due to advancements in the footwear manufacturing process, technological innovations, and development of new material.3

High Growth Potential for Indian Footwear Market

Given changing preference for fashionable footwear, the per capita consumption of Indian consumers is likely to increase going ahead. With rising disposable incomes, robust economic growth and increasing awareness of fashion through opening of malls, the Indian footwear markets is well placed as a sweet spot.

In 2018, the footwear market was valued र 63,520 crore and it is expected to grow to 95,350 crore by 2021. At a compounded annual growth rate of 14.5%, it is the fastest growing category among lifestyle products.5

By 2021, the branded segment is expected to make up half of the market, aided by the rapid growth in both organised and online retail.

Footwear Industry dynamics in India

Footwear market is segmented based on different price-points: Indias footwear industry can be divided into four sub segments based on retail selling price namely mass (less than 500/pair), economy ( 500-1000/pair), mid ( 1000-3000/pair) and premium (more than 3000/pair) segments.

Branded vs Unbranded Footwear in India

Emerging as a distinct category — with a significant presence of both, retail and distribution led brands — players in the footwear market have adopted best practices to drive growth and provide an effective customer experience. This market enjoyed the highest branded quotient across retail categories, and is expected to grow at a robust CAGR (2018-2021) of 19%.

One of the largest footwear retailers in India, with an extensive product range, offering affordable fashion options for every occasion.

Growth Drivers for Indian Footwear Industry

Increased preference for branded footwear: Currently, large part of Indias population is below 45 years of age, and with factors like growing younger population and rising middle-class, there has been a significant rise in demand for branded products across categories, especially Footwear. Moreover, the younger generation is more aspirational, well-connected and networked, tech- savvy, and has high spending power. Indias demographic dividend in the form of higher youth population with rising incomes is likely to have a significant impact on retailing and consumption of many categories and products as this class is likely to consume more number of categories with increasing preference for branded products.

Premiumisation opportunity and focus on kids/youth segment: domestic footwear brands are seeing good traction in premium segments on the back of new launches in the womenswear category, apart from increasing sales of high priced leather footwear. The rising share of premium footwear is expected to drive the gross margins for the companies in the coming time led by rising Average Selling prices. Additionally, kids footwear segment, which currently contributes only 10% of total market, is seeing a rapid growth. Indian players have launched or added new variants in the kids segments to cater to the increasing demand of the same.

Evolution of E-com channel to drive next leg of growth: Brick and Mortar retailers have started venturing into omni channel or E-retailing, and are finding out ways to bridge the gap between offline and digital channels. The E-com platform in India is on a rapid growth trajectory and is expected to reach 8% to 9% of total retail sales by FY25 . The e-retail sectors market size has grown on the back of rising internet penetration, increasing awareness of online shopping, and lucrative deals and discounts. But despite growing at a high rate, e-retail accounted for a mere ~2-3% of the total retail sales in FY17, indicating its enormous growth potential. However, after the initial phase where e-retailers focused only on gaining market share through discounts, the next phase will be majorly driven by consolidation of e-com players, geographical diversification, business realignment and working on customer stickiness.

Company Overview

Your Company is one of the largest footwear retailers in India, with a product range that offers affordable fashion options for the entire family, for every occasion. Along with having our largest presence in East India, your Company is one of the top three players in South India, and is an emerging brand in West and North India.

As the domestic footwear market is expected to grow at 15% between FY2016 to FY2020, and the branded footwear market is projected to observe a 20% growth in the same period, your Company is well placed to benefit from the increasing size of these markets.

Your Company operates with a twopronged market strategy, which straddles two distinct business segments — Retail and Distribution — each with its own customer base, product range and sales channel. This strategy enables us to capitalise on the growth potential of both the markets and reduces the risk of depending on only one business segment.

Your Companys business model for both segments follows an asset-light approach. Around 74% of retail business operates through our extensive franchise network and, as of financial year 201819, we also outsourced 90% of our product requirements. Your Companys distribution business is also a highly scalable model, operating with a mix of in-house and contract manufacturing.

Your Company also has an extensive reach and presence across the country. Our retail network is spread across 23 states and one union territory. As of March 2019, we counted 799 operational stores under "Khadims" brand name, with an additional extensive network of 544 distributors selling to Multi Brand Outlets (MBOs) across India.

Your Companys design capabilities are geared towards understanding the latest domestic and global fashion trends.

These capabilities have helped us to create and grow our sub-brands, driving the premiumisation of our product portfolio, and to target and retain aspirational customers, which enables us to enhance our gross margins.

The financial performance of your Company was stable in financial year 2018-19. The revenue stood at र 7,992 million. The Compound Annual Growth Rate (CAGR) of our Company from FY2015 to financial year 2018-19 was 15%, with the retail and distribution business at 11.6% and 34.3% respectively. The EBITDA margin for the financial year was 7.1%, with retail and distribution business at 8% and 5.9% respectively. The PAT margin of your Company stood at 2.6%.

Our Business Model

Based on the two-pronged market strategy of straddling retail and distribution markets, your Companys business model is an integrated model, that allows us to de-risk our dependence on any one business, and cross leverage our experience in each segment to capitalise on the potential of both the business opportunities.

Retail Business

Your Companys retail business includes 799 exclusive branded outlets under the "Khadims" brand name. The target audience for this segment includes middle and upper middle-income consumers in metro cities, including mini metros, and Tier I to III cities. The product range consists of leather, nonleather sandals, slippers, boots, ballerinas, stilettos, moccasins, sports shoes and accessories, all available under the Khadims brand, or one of our various sub brands.

Distribution Business

Your Companys distribution network is spread across 544 distributors supplying to Multi Brand Outlets (MBOs) in India. With the larger audience of lower and middle-income consumers in Tier I to III cities, our distribution business product portfolio has a wide and affordable price range. Available under the "Khadims" brand and sub-brands, the product range for this segment includes EVA, basic and premium, PVC, PVC DIP and PU, and Stuck On products.

Our Geographical Reach and Penetration

Your Company is present across 23 states and one union territory in India. As of 31st March 2019, we have 799 retail stores, under which 204 stores are Company- Owned-Company-Operated (COCO) and 595 stores franchises. Our Company further plans to expand into new markets by opening new COCO stores and augment the presence via its franchise network. 74% of Khadims retail presence is through its franchise network.

As of 31st March, 2019 we have a distribution network of 544 distributors. The distribution business of Khadim is a highly scalable model to capitalise on retail brand recall and target new markets.

Institutional Business

Your Company has conducted institutional business in the states of West Bengal, Tamil Nadu, Uttar Pradesh, and Punjab. The revenue from institutional business for financial year 2018-19 was र 696 million.

Marketing and Branding

During the financial year 2018-19, your Company launched pan-national campaigns through elaborate outdoor hoardings and market specific hoardings in different states and regions of the country that helped boost overall sales. The Print and Outdoor campaigns conducted after identifying important sale phases, targeting specific locations or zones, were particularly helpful to increase the overall footfall in stores during the peak sale periods. The wedding campaigns in Bihar and Uttar Pradesh and Back-to-School campaign in South India targeted local customers and benefitted from communication that was markedly different from the regular summer and festive campaigns. These zonal activities not only gave desired exposure to the brand, but also helped in increasing sales throughout the respective seasons. During the festive season, Pre-Puja in the East and Pre- Diwali across India, we also launched a series of Print Advertisements to support our Outdoor Hoardings.

Your Companys e-commerce presence has been consistently growing and has witnessed an increase in sales through major online players like Flipkart,

Amazon and Snapdeal, including other marketplaces, which continue to help us reach a wide customer base in areas with Khadims stores as well as Multi Brand Outlets.

Your Companys social media presence has grown from Facebook to Instagram and Twitter. Our branding activities carried out by an empanelled digital agency has also resulted in increased exposure and awareness of the brand.

Your Companys association and sponsorship of team Kolkata Knight Riders and Chennai Super Kings in the twelfth IPL season and subsequent instore activity has further supported both our retail stores and distribution business.

In the Distribution sector, the channel partners were provided branding materials and collaterals to enhance the visibility and improve sales.

Moreover, to make the "Khadims" brand more contemporary, and to appeal to a younger audience, your Company roped in celebrated personalities — namely Farhan Akhtar and Kangana Ranaut — as our brand ambassadors. We are planning to leverage their celebrity through different media usage and at various points of sale.

To promote our active wear and sports range product named "PRO", which has the highest revenue share among the sub-brands, your Company has also engaged the famous Indian cricketer Dinesh Karthik, and his campaigns will be used across every branding platform.

Our Backend Infrastructure Procurement and Quality Control

Your Company procures substantial portion of its products for the retail business from outsourced vendors, as of financial year 2018-19. Your Company has a uniform process and standard set for the procurement of raw materials from vendors. The required materials are procured from the nominated vendors, ensuring they meet the standard specifications. To incur cost benefits, direct open costing is obtained from vendors supplying our raw materials. Your Company has set up a laboratory for the procurement department that undertakes pre-production material testing.


Your Company operates two manufacturing facilities in West Bengal. In addition to this, we work with two contract manufacturing facilities located in West Bengal and Haryana. The raw material to these facilities is supplied by Khadim, catering primarily to the distribution business. The quality control process in the manufacturing facilities are stringent and are in the accordance with the guidelines.


Our dedicated design team keeps track of developments and changes in the latest trends and ensures that our product portfolio is updated with the latest styles. We have sub-contracted steadfast vendors who specialise in manufacturing certain types of footwear. This enables us to have a shorter turnaround with the latest trends while controlling costs. The portion of products procured from outsourced vendors amounts to 90% of our products.


Your Companys in-house manufacturing facilities help us achieve economies of scale and exercise better control over cost and quality. Our two factories are located at Panpur and Kasba in West Bengal.

Warehousing and Logistics

Your Company has four distribution centres across India, located at Bantala and Titagarh in West Bengal, Chennai in Tamil Nadu and Sonipat in Haryana.

Our centres in Bantala and New Delhi also serve as purchase hubs for products purchased from outsourced vendors.

The Titagarh centre exclusively caters to our distribution business. Your Company selects transportation vendors on the basis of their location and load distribution. We monitor the entire process till the completion of delivery.

Supply Chain Management

In the retail business of your Company, each SKU is classified on the basis of the location where such product is intended to be sold and an estimate of the quantity of such SKU - "Norm" is done. The orders placed by COCOs are automated, based on the norms set. The orders placed by EBOs are based on actual sales for each SKU. This enables your Company to maintain complete visibility over inventory at all levels and manage orders and procurement against actual sales, which prevents stock outs and dead stock.

Our Growth Strategy and Outlook

Your Company continues to expand both its retail and distribution network consistently with every passing year.

Our strategy, as we go ahead, is to concentrate on strengthening our brand image through effective marketing activities to increase footfalls in our stores. Our focus is more inclined towards implementing marketing activities.

Having appointed three celebrated personalities as brand ambassadors, we are working towards increasing brand recognition and creating a desirable aura around the Khadims brand. We believe that these measures will positively impact our sales and customer traction for the near to medium term.

Additionally, we plan to expand our presence in Western and Northern India, and further strengthen your Companys penetration in Eastern and Southern India. In the retail business, we are focused on expanding our retail footprint in the markets across South India, West India, Uttar Pradesh and Rajasthan in North India. We are also working on detailed micro-mapping to understand customers profile, purchasing habits, competition, average footfalls, amongst others. In our distribution business, we are focusing on penetrating the existing markets in Eastern and Southern India and capitalise on retail brand recall and target markets in West and North India.

Your Company also plans to further optimise our asset-light model led growth. In the retail business, we expect to enter into new markets through COCOs and further augment our presence in these markets through our franchisees. Furthermore, we will continue to leverage the advantages of outsourced manufacturing for the fashion-oriented range of products.

In our distribution business, we are concentrating on increasing the utilisation of our existing installed capacity, and invest in machines and moulds at existing manufacturing facilities. We are also engaging contract manufacturers to restrict investment in properties and buildings.

Overall, your Companys strategy is to strengthen its brand image and reach, while also working on the premiumisation of our product portfolio.

For our retail business, given the aspirational nature of our customer base, we are increasing our attention towards the quality and design of our sub-brand product portfolio. While our mother brand "Khadims" helps us to capture the target audience that is transitioning from the unorganised to organised foot-wear market, the sub-brands help us to target and retain aspirational customers. In our distribution business, we will continue to introduce premium version of product offerings in Hawai, PVS and PU, further enhancing our product range and increasing our average selling prices.

Financial and Operational Overview Financial Summary

In financial year 2018-19, the net sales for your Company increased to र 7991.81 million as against र 7,487.06 million in the previous year, marking a jump of 6.74%. The operating EBITDA decreased to र 569.39 million as against र 756.82 million in the previous year, down by 24.77%. The operating EBITDA margin decreased to 7.12% of net sales as against 10.11% in the previous year. Profit Before Tax (PBT) decreased to र 332.04 million as against 569.61 million in the previous year, down by 41.71%. The Profit After Tax (PAT) decreased to र 211.70 million as against र 379.01 million in the previous year, down by 44.14%.

Financial Ratios

FY2019 FY2018 Reason
Debtors Turnover Ratio 0.17 0.17 -
Inventory Turnover Ratio 0.19 0.17 -
Interest Coverage Ratio 3.85 5.61 Due to lower operating margins, there was an impact on the interest coverage ratio.
Current Ratio 1.45 1.49 -
Debt Equity Ratio 0.38 0.26 During financial year 2018-19, in order to mitigate the shortfall in cash accruals, the borrowings were high.
Operating Profit Margin 7.12% 10.11% Retail sales grew at 1% YoY. The margins were lower in the retail segment on account of various discount schemes run by the Company to enhance the sales. Also, margins in the distribution segment were lower on account of increase in raw materials cost and foreign exchange fluctuations.
Net Profit Margin 2.65% 5.06% As a result of lower operating profit, the net profit margin was also low.
Return on Net Worth 8% 15.45% Return on net worth was lower on account of lower net profit during the year.

Financial Outlook

In financial year 2018-19, your Company witnessed lower sales because of a subdued growth in retail sales and continuous pressure on the distribution gross margin.

The sales from our institutional business was positive during the year under review. However, being a low margin business, the impact on the overall sales was minimal.

Your Companys focus is on the improving asset turnover, profitability, return ratios and free cashflows. In financial year 2018-19, we observed a significant improvement in the revenues/capital employed ratio, which stood at 20.70%. Our aim is to further emphasise it by leveraging our asset light model. Our objective is to enhance the operating margins of your Company by concentrating on the premiumisation of our product portfolio through our sub brands, and positive operating leverage. We aim to achieve a higher asset turnover and improve our margins, leading to higher return ratios. By limiting capital expenditure on store expansion, we expect that our existing capacities — including machinery supply at contracted facilities — will lead to positive free cashflows in the coming years.

Threats and Concerns

Continued onslaught of e-commerce:

During online portals periodic sales, deep discounts on footwear tilt the competing field. A recent survey highlighted that footwear was the highest selling category in the marquee sales. A major cause for this anomaly is that since footwear is an above average expense, and not incurred regularly, people are increasingly finding it more convenient to buy it online when available at a heavy discount.

We have updated our website and android based app and added more categories of our products to the online channel. While it contributes 1% of our total revenue, we plan to increase this to 3% of the total revenue .

Marketing and Branding by peers:

Increased social media engagements via celebrity endorsements was observed across all our peers, even among forthcoming newly launched brands. Furthermore, influencer led marketing has gripped the industry and multiple brands are vying for the screen time of the customers simultaneously. We have pro-actively engaged Farhan Akhtar, Kangana Ranaut and Dinesh Karthik and increased our advertising budget accordingly.

Human Resources

Your Company maintains its focus on Human Resource Development and Management through several interventions. Enhancing the quality of Human Capital has been the major focus of the Company to ensure business results.

Your Company revisited alignment through extensive Key Responsibility Area (KRA) framing exercise. Additionally, it maintained and strengthened the development of store staffs through rigorous on-the job-training. Assessment Centres were carried out in your Company to ensure multi-fold assessment of sales force and their individual development with the help of project-based studies. Khadim has maintained its strong relationships with the premium institutes of the country in the domain of footwear, manufacturing, retail, and management while taking it forward by placing high potential employees for their further professional development. Internal process in your Company in terms of recruitment has been streamlined further for both lateral as well as campus hire. Your Company has also developed internal HR tools to evaluate the job positions in order to maintain industry parity. Furthermore, the Reward and Recognition program of the Company runs smoothly enhancing the engagement and commitment of employees.

During the year, Khadim has also tied up with the Government for assisting in the skill development programme in the state of Kerala and Karnataka.

As on March 31,2019 there were 822 permanent employees on the rolls of your Company.

Internal Control Systems and Adequacy

Internal Audit

Internal Audit of your Company is keeping a close vigil on a regular basis on the overall adequacy and effectiveness of the organisations framework on governance, risk management and control (that is, the organisations system of internal control). This is achieved through a defined plan of audit work approved by the Audit Committee. In addition to the planned transaction audit, Internal Audit has taken up operational audit and proprietary audit in the framework. During the year, an initiative of proprietary audit has been taken up at the factory locations and multiple dealers points of your Company, in order to assess control over the production process and smooth functioning of large number of dealers with enhanced sales.

Khadim has an adequate system of internal control procedures, which is commensurate with the size and nature of business. All the assets are safeguarded and protected against loss. Furthermore, all the transactions are authorised, recorded and reported correctly. The internal control systems of your Company are monitored and evaluated by internal auditors and their audit reports are periodically reviewed by the Audit Committee.