DSIJ Mindshare

Khadim India IPO - to subscribe or not?

IPO Rating - 43

About the offer

Khadim India plans to raise approximately Rs 540 crore through the issue of fresh shares and offer for sale. The selling shareholders through offer for sale plan to offload 65 lakh shares to raise about Rs 490 crore on the lower band. The company plans to issue ~6.7 lakh shares to raise approx. Rs 50 crore. The issue price band is Rs 745–750 per share and the issue will remain open from Nov 2 to Nov 7, 2017. The minimum lot size is 20 shares and would require minimum investment of Rs 14,900. The company’s share has face value of Rs 10. Post the issue, the company will be listed on both NSE and BSE.

Purpose of the issue

With fresh issue of ~Rs 50 crore, the company plans to pay off its term loan and working capital facilities and utilise the rest for general corporate expenses.

The total short term debt as of June 2017 was Rs 136 crore and creditors were ~Rs 119 crore.

About the company

Khadim Ltd was established in 1981 and since then it has emerged as the third largest retailer in the Indian market. Positioning itself as the affordable brand and with strong presence in eastern India, it has now 853 branded exclusive retail stores in 23 states and Union territories. The company, through its store in malls and high street places, target middle and upper middle group looking for fashionable footwears. Also, through its retail chain in tier I and tier II cities, it targets lower and middle income groups. This is categorised under retail business and contributes ~70% to the revenue.

Due to lower quantity and high quality products, the company outsources its production to vendors and procures ~85% of its requirement.

The company caters to customers who shop at multi-brand outlets (MBOs) through distribution network. This revenue line contributes ~27% to the revenue. For this unit, the company manufactures or contract manufactures products due to high volume per SKU.

Financial performance

The company’s revenues have grown at a CAGR of 10.1% over FY13-17, while its operating profits have increased at 31.8% over the same period. We see that this is due to revenue mix shift towards higher distribution revenue where manufacturing is in-house/contract. The company suffered losses in FY15 due to higher expenses and inventory built-up.



We are more concerned on the higher debt and rise in working capital loans in the quarter of June 2017. The company as of June 17 had D/E of 0.7x, however, it has seen increase in creditors.

Industry overview

Indian footwear market is expected to grow at a CAGR of 15% over FY16-20. This growth is likely to be driven by rising share of women’s footwear. The market, as of now, is dominated by men’s footwear (54%), which will give way to women’s and children’s wear. Also, implementation of GST will shift focus to branded products as price differential will narrow. This will particularly impact the price sensitive audience.

Also, with increased penetration of footwear per person, the demand is likely to increase.

Valuation

From the table below, we see that Relaxo has demonstrated better revenue growth rates and margins than the peers. Khadim, on the other hand, is working on very thin margins and has high D/E and capital blocked in inventory. Its brand is strong but faces competition from imports and ability to offer attractive products.




On the valuation front, we see that Khadim is priced at the lower band in terms of P/E and reflects its growth and margin profile as compared to its peers.

Our view

Khadim is a known brand in East India and to some extent in South India. However, it needs to innovate and need to invest in branding to penetrate markets in the West and North. Relaxo has been able to engage celebrities and built its brand. Khadim’s, with its weak financial profile. may find it difficult to take on competition head on.

However, Khadim has been shifting focus to tier 1 cities through multi-brand outlets and own manufacturing that will help it lift margins and also innovate products.

We recommend investors to avoid the issue as we see it as Risky.

*40 or lower – Avoid Investment,
41 to 45 – Risky,
46 to 50 – Invest with limited exposure,
51 to 55 – Investment recommended,
56 & above – Excellent Investment.

To know further on rating click here

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