Khadim India

CM RATING48/100
Khadim India was promoted by Siddhartha Roy Burman and Knightsville Pvt Ltd in 1981 as a wholesaler and distributor of branded basic utility footwear. The retail foray came in 1993.

The footwear maker has a two-pronged focus on retail and distribution of footwear. The second-largest footwear retailer in India by number of exclusive retail stores operates under the Khadims brand (which is owned by the company) and has the largest presence in East India and was among the top three players in south India and the largest footwear retail franchisee network in India in the fiscal ended March 2016 (FY 2016), as per Technopak Report.

The two business verticals of retail and distribution has own customer base, sale channels and product range. The retail business operates through exclusive retail stores that cater to the middle- and upper-middle-income consumers in metros including mini-metros and Tier I and Tier III cities, who primarily shop in high street stores and malls, for fashionable products. The distribution business operates through a wide network of distributors catering to the lower- and middle-income consumers in metros and Tier I – Tier III cities, who primarily shop in multi-brand-outlets (MBO) for functional products. Institutional sales and exports of footwear are also undertaken.

Retail Business

There were 853 Khadims branded exclusive retail stores, constituting channels of sale, end June 2017. Of these, 168 were owned and operated outlets (COO), and 685 franchisee-operated stores, further categorized as exclusive branded outlets (EBO), branded outlets (BO) and franchisee run and managed outlets (FRM), across 23 states and one Union Territory in India.

Certain accessories are also sold along with footwear in exclusive retail stores as a one-stop solution to complement retail business vertical. The retail business constituted 70.02% of the net revenues in the three months ended June 2017, 73.48% in the fiscal ended March 2017 (FY 2017), 75.23% in FY 2016 and 72.19% in FY 2015. As many as 66.59% and 67.19% of the exclusive retail stores catered to east India end June 2017 and FY 2017, 17.58% and 17.37% of the exclusive retail stores catered to south India and 15.83% and 15.44% of the exclusive retail stores catered to the rest of India.

COOs are owned and operated and are in metros and tier I cities, where the responsibility of the inventory, capital expenditure and operating cost resides with the company. EBOs are operated by franchisees and are in Tier I and Tier II cities. EBOs, being economic formats with small store size, are in Tier II and Tier III cities. EBOs and BOs are responsible for inventory, capital expenditure and operating cost. FRMs, in metros and Tier I cities, were launched as a vehicle to venture into new geographical markets by maintaining an asset-light model, with the inventory risk being borne by the company.

The gross margins from EBO and BO are lower than the gross margins from COO and FRM as they are net of channel margins offered to EBO and BO franchisee operators. The gross margins of outsourced items are on purchase price and of manufactured items on material cost.

The focus will be on COO, EBO and BO models, going forward

The retail business promotes nine home-grown sub-brands of Khadims: Pro, Lazard, Softouch, Cleo, British Walker, Turk, Sharon, Bonito and Adrianna, with varied product offerings and merchandise category.

The retail segments maximum retail price (MRP) ranged from Rs 77 to Rs 3599 in the three months ended June 2017.

Due to the fashion-oriented nature of the retail business requiring lower volume per stock keeping unit (SKU), a significant portion of products sold through exclusive retail stores are outsourced from vendors, who are able to deliver smaller quantities of premium high quality products. The portion of products procured from outsourced vendors for the retail business amounted to 85.60% of the products in FY 2017.

Distribution Business

There is a wide network of 377 distributors in the three months ended June 2017 to distribute products to MBOs across India. The distribution business constituted 27.12%, 21.68%, 18.57% and 14.51% of net revenues in the three months ended June 2017, FY 2017, FY 2016 and FY 2015.

The products distributed are ethylene-vinyl acetate (EVA), Hawai, injected poly-vinyl chloride (injected PVC), polyurethanes (PU), PVC– direct injection process (PVC Dip) and stuck-on products, under the Khadims brand. The distribution business complements the retail business and enables deeper market penetration.

Issues Size and Purpose

The initial public offering (IPO) is fresh issue of Rs 50 crore at a price band of Rs 745-750 per share of face value Rs 10 each. As much as Rs 40 crore will go towards repayment of all or a portion of term loans and working capital facilities and rest for general corporate purpose.

There is also offer for sale (OFS) of 65.74 lakh equity shares by selling shareholders comprising up to 7.22 lakh equity shares by Roy Burman and 58.52 lakh equity shares by Fairwinds Trustees Services, acting in their capacity as the trustee to Reliance Alternative Investments Fund – Private Equity Scheme – I. The OFS size at the lower price band of Rs 745 per share works out to Rs 539 crore and at the higher price band of Rs 750 per share works out to Rs 543 crore.

Strengths 

The leading footwear brand offers affordable fashion across various price segments. The second-largest footwear retailer in India by number of exclusive retail stores operating under the Khadims brand had the largest presence in east India and was one of the top three players in south India in FY 2016. There was the largest footwear retail franchisee network in India in FY 2016, as per Technopak Report.

The extensive geographical reach and penetration across east and south India was through a network of 853 exclusive retail stores across 23 states and one Union Territory in India end June 2017.

The asset-light model leads to higher operating leverage. Out of 853 exclusive retail stores, 80.30% were operated by franchisees end June 2017 and out of 829, 80.46% were operated by franchisees end March 2017. Moreover, premises for operating COOs are taken on lease. The portion of products procured from outsourced vendors in the retail business amounted to 89.18% of the products in the three months ended June 2017 and 85.60% end FY17. A scalable, asset-light and less capital-intensive business model ensures faster growth, with increasing profitability.

Affordable fashion is provided across various price points. Brand Khadims enjoys mass appeal due to unique positioning of smart-priced value fashion, targeting the entire family

Weaknesses

The footwear industry is highly competitive.

Any delay or default in payment from franchisee-operated stores or distributors can adversely affect profit and cash-flows. The operations involve extending credit for periods ranging from 30 to 75 days to franchisee-operated stores and distributors and, consequently, face the risk of uncertainty of receipt of outstanding amounts. Accordingly, there might be high levels of outstanding receivables. Trade receivables were Rs 92.36 crore end June 2017, Rs 77.16 crore end March 2017, Rs 34.85 crore end March 2016 and Rs 24.09 crore end March 2015. As much as Rs 0.13 crore, Rs 0.42 crore, Rs 0.42 crore, Rs 0.11 crore and nil have been written off in these periods on account of non-receipt of trade receivables and advances.

Results of operations can be materially adversely affected by failure to anticipate and respond to changes in fashion trends and consumer preferences in a timely manner.

The business is relatively concentrated in east India and might be affected by various factors associated with that region. As many as 66.59% of exclusive retail stores catered to the east India market end June 2017 and 67.19% end March 2017.

Inability to maintain an optimal level of inventory in stores might affect operations adversely. While the aim is to avoid under-stocking and over-stocking, estimates and forecasts might not always be accurate. The forecasts are also dependent on the ability to track secondary sales of retail stores as well as the distribution business and predicting consumer preferences for the products. If inventory is over-stocked, capital requirements increase and result in additional financing costs. If inventory is under-stock, the ability to meet customer demand is undermined and operating results adversely affected. Additionally, there might be inventory pile-up if product designs are not in sync with market demand. There have been inventory pile up and related write-offs in the past, materially affecting sales, the gross margins and profit.

Valuation 

Net sales increased 16% to Rs 621.25 crore and the operating profit margins were up 80 basis points to 10.6% in FY 2017. Net profit jumped 22% to Rs 30.75 crore. .Net sales (net of discount and taxes) of the retail business rose 14% to Rs 456.49 crore and those of the distribution business by 36% to Rs 134.7 crore.

Net sales stood at Rs 178.43 crore and the OPM at 9.3% in the June 2017 quarter. Net profit stood at Rs 7.10 crore. Net sales (net of discount and taxes) of the retail business stood at Rs 124.9 crore, in line with the growth of existing stores and revenue contributions from 28 new stores and of the distribution business was Rs 48.38 crore, primarily from growth in the distribution base.

At the upper band of Rs 750, P/E works out to 43.8 times EPS of Rs 17.1 (on post-IPO equity) for FY 2017. On a comparable basis, Bata India is trading at a P/E of 57.5 times FY 2017 EPS of Rs 13.5, Liberty Shoes at a P/E of 63.6 times FY 2017 EPS of Rs 3.88 and Relaxo Footwear at a P/E of 51.7 times FY 2017 EPS of Rs 10.24.

Khadim India: IPO Highlights 
Fresh shares offer size (in Rs crore)50
Price Band (Rs)745-750
No. of fresh shares on offer at Rs 745 per share(crore)0.07
No. of fresh shares on offer at Rs 750 per share (crore)0.07
Offer for share sales (Number of shares)6574093

 

Offer for share sales size at Rs 745 per share (in Rs crore)489.77
Offer for share sales size at Rs 750 per share (in Rs crore)493.06
Total issue size (Rs crore)539-543
Minimum Bid Lot ( in number of shares)20
Post issue equity at Rs 745 per share(Rs crore)17.97
Post issue equity at Rs 750 per share(Rs crore)17.97
Post-issue promoter and promoter group stake at Rs 745 per share (%)59.68%
Post-issue promoter and promoter group stake at Rs 750 per share (%)59.70%
Issue open date02/11/2017
Issue close date06/11/2017
ListingNSE & BSE
Rating 48/100

 

Khadim India: Financials
Particulars1303(12)1403(12)1503(12)1603(12)1703(12)1706(03)
Net Sales423.03478.14460.16534.52621.25178.43
OPM (%)10.310.43.09.810.69.3
OP43.4149.5613.7452.3565.7716.66
Other Income2.694.915.554.314.301.33
PBDIT46.1054.4719.2956.6670.0717.99
Interest24.3025.6119.2214.5513.473.26
PBDT21.8028.860.0742.1156.6114.73
Depreciation and Amortization8.2810.5719.1816.2915.903.89
PBT before EO13.5218.30-19.1125.8240.7010.84
EO0.000.000.000.000.000.00
PBT after EO13.5218.30-19.1125.8240.7010.84
Tax4.606.15-0.450.589.953.73
Net Profit8.9212.15-18.6625.2430.757.10
EPS (Rs)*5.06.8-10.414.017.1#
EPS (Rs)**5.06.8-10.414.017.1#
* on post-issue Equity of Rs 17.97 crore; Face value Rs 10 (issue price Rs 745)
** on post-issue Equity of Rs 17.97 crore; Face value Rs 10 (issue price Rs 850)
EPS excludes EO (extra ordinary items) and relevant tax
#EPS can not be annualized due to seasonality in business
Figures in crore
Source: Capitaline Databases

 

Khadim India: Change in the business over the quarter and last five fiscal years
Particulars1303(12)1403(12)1503(12)1603(12)1703(12)1706(03)
Retail Business 
Net Sales305.20358.06332.19402.11456.49124.94
Gross margin in retail business (%)42.5%43.7%45.4%45.6%46.9%47.1%
Distributor Business
Net Sales55.0852.6766.7399.23134.7048.38
Gross margin in retail business (%)28.5%33.5%24.4%38.7%39.2%37.8%
Figures in Rs in crore
Net of discount and taxes
Gross margin for outsourced items is on purchase price and for manufactured items is on material cost
Source- Khadim RHP

 

Khadim India: Contribution of revenue from retail and distribution operations as a % of net footwear revenue
Particulars1503(12)1603(12)1703(12)1706(03)
Retail81%78%73%70%
Distribution16%19%22%27%
Others*3%3%5%3%
Total Footwear Revenue **100%100%100%100%
*Others include institutional sales, e-commerce sales, export sales and sale of packing materials
**does not include revenue from Sona and Super Stores in FY 14-15 and Jewellery in FY 15-16
Source- Khadim RHP

 

Khadim India: Retail store network as at June 30, 2017
Store formatNorthSouthEastWestTotal
COO10516740168
Franchisees (EBO, BO, FRM)489950137685
Source- Khadim RHP

 

Khadim India: Gross Margin of Store type
Store typePresenceStore Counts as at June 30, 2017Gross Margin for FY17Gross Margin for Q1 FY18
COOMetros, Tier I cities16851.6%52.4%
EBOTier I and Tier II cities38740.8%40.8%
BOTier II and Tier III cities27743.3%43.2%
FRMMetros, Tier I cities2148.5%49.6%
Source- Khadim RHP

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