Khadim India IPO: If the shoe fits you, wear it!

Khadim India, one of the leading footwear brands in India, sells its products through company-run own stores, four major distribution centres and many other franchise outlets.

Khadim follows a trading business model by virtue of outsourcing 60-70 percent of its manufacturing processes to third-party vendors. The output is then branded by the company and sold through its two segments – retail and distribution. Close to 80 percent of the sales take place through franchise-run stores.

Also Read: Khadim India hits primary market with IPO. What are brokerages saying about the issue?

The retail segment sells premium and high-value fashion footwear brands (price range: Rs 75-3599) through a combination of franchise and company-owned exclusive retail stores in metros and tier 1 cities of India. The distribution arm caters to the aspirational customers through economically priced products (price range: Rs 30-499) that are sold primarily through franchise outlets in tier 1/2/3 regions of the country.

Economic moats

Extensive geographical reach, premium and value product blend: A diverse presence across India (377 distributors in the distribution segment) positions Khadim fairly well to meet the varied requirements of buyers since its portfolio covers a wide range of products (branded and unbranded) across a series of price points.

Going forward, the company’s strategy entails shifting its emphasis from the southern and eastern regions of the country, where it has been dominant until now, to the northern and western metros/tier 1 cities. About 70-80 stores are likely to be opened every year. Furthermore, the company targets to achieve 20 percent growth from the stores operated by it.

Asset-light model

Khadim’s business model is scalable and doesn’t require a lot of capex. About 89 percent of the company’s retail segment sales (that comprise 70-75 percent of the annual revenue) are sourced from third-party vendors, who are capable of delivering smaller quantities of high-quality fashion footwear variants periodically.

Though 95 percent of the output of the distribution segment is manufactured in-house by the company, it is pertinent to note that the segment’s contribution to yearly sales is barely 20-25 percent, and most of this is volume-driven.

In line with its core objective, Khadim prefers to enter into new markets by setting up its own flagship stores initially, post which the network is expanded by signing up with more franchisees (once its brands are well-recognised). Thus, in case of the latter, the onus of inventory management, capex and store maintenance does not rest with the company.

Loan repayment

To strengthen the bottom-line performance, nearly Rs 40 crore raised by Khadim through fresh issue of shares will be utilised to repay/prepay term loans and working capital debt. However, the actual effectiveness of this move will be apparent only if the company manages to improve its operational efficiency.

Favourable macro variables

By FY20, footwear retail in India is expected to grow at a CAGR of 15 percent versus the retail sector’s 12 percent rate. With GST now underway, India’s fragmented footwear industry is likely to transition from the unorganised sector to the organised format, too. Population growth, inelasticity in footwear demand, higher disposable incomes, and increasing urbanisation are some of the other tailwinds that Khadim should capitalise on.

Given the commoditised nature of the products sold by Khadim, volatility in raw material (synthetic fibre) prices may negatively impact the company's margins. A high degree of dependence on external manufacturers for a considerable chunk of the revenue is also a factor to bear in mind. Moreover, competition from renowned brands and e-commerce portals cannot be ignored.

Peer analysis & valuation

Khadim’s financials have been modest when compared to its peers in the sector. The growth parameters, nevertheless, are comparable. While we are convinced about the industry prospects and the company’s vantage position to capture the same, the issue leaves little on the table for investors. So, subscribe only for the long haul and look for opportunities to accumulate on the lows post listing.

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