Buy Khadim India; target of Rs 846: Dolat Capital

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Dolat Capital's research report on Khadim India

Khadim’s Q2FY19 revenues beat our estimates, but EBITDA and APAT came below our estimate. The revenue growth in retail business was at 7% - below the company’s target of 10-14% primarily due to – (1) decline in footfalls (25-30% decline in H1FY19) (2) de-growth in SSSG at 2% and (3) delay in price hikes. The distribution business posted 32% sales growth but GM were impacted due to significant delay in price pass on. The company gained institutional contract from UP government worth ` 350mn which helped the top-line to grow. Going ahead, we believe that the company would regain its lost momentum with (1) Penetration into new geographies (2) Increasing distribution reach (3) Incremental spends on brand building and (4) New launches. In addition, margins would improve slowly with softening crude oil prices and price hike plans in Q3FY19E. In a long run Khadim’s sales growth would remain strong vs peers, mainly due to lower penetration, increasing reach, better economic offerings and ongoing store additions. However, in the ensuing quarters, the company would have to battle against a very strong base and increased competition.

Outlook

Consequently, we have revised FY19E and FY20E estimates downward to ` 21.3 and ` 30.2 to factor in Q2 performance. Valuing Khadim at 28x FY20E EPS (35% discount to BATA) to arrive at a TP of ` 846. Maintain Buy.

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