Reblog: Khadim India IPO review

IPO Snapshot:

Khadim India is entering the primary market on Thursday 2^nd November 2017 to raise Rs. 50 crore via fresh issue of equity shares and an offer for sale (OFS) of up to 66 lakh equity shares of Rs. 10 each by promoters (11% of OFS) and Fairwinds PE (89% of OFS), both in the price band of Rs.745 to Rs. 750 per share. Representing 40.32% of the post issue paid-up share capital at the upper end, total issue size is Rs. 543 crore. The issue will close on Monday 6^th November and listing is expected on 14^thNovember.

Company Overview:

Khadim India is India’s second largest footwear retailer, and the largest in East India, with 853 Khadim’s branded retail outlets (80% of which are franchised out) and 377 distributors, as of 30-6-17, with retail accounting for 73% of Rs. 621 crore FY17 topline and distributors accounting for 22%. The company has a dual strategy to grow both retail outlets and deepen distribution pipeline. The company offers a bouquet of 9 brands across different footwear categories, besides parent brand Khadim. Positioned as a value retailer focusing on mass and mass premium category, 55% of its stores are located in tier 3 cities.

Financials:

Since FY13-17, the company has achieved profitable growth, with revenue rising at 10% CAGR, while net profit grew at a stellar 36% CAGR during the same 4 year period. A one-time inventory rationalization affected FY15 financial performance but helped the company start on a clean slate, to capture future growth. On FY17 revenue of Rs. 621 crore, Rs. 70 crore EBITDA was earned, leading to EBITDA margin of 11.2%, up from FY16’s 10.5% EBITDA margin, despite higher raw material costs in FY17. Net profit for FY17 stood at Rs. 31 crore, translating into net margin of 5.0% and EPS of Rs. 17.78 on an equity of Rs. 17.30 crore. Q1FY18 financials are also healthy, with net revenue of Rs. 178 crore, EBITDA of Rs. 18 crore and net profit of Rs. 7 crore. EPS for the first quarter is 4.11.

Company’s return on net worth of 16.61% in FY17 is quite healthy, while same-store sales growth of 14.34% was maintained in F17, up from FY15’s 12.37%. While outstanding receivable days have nearly doubled to 1.5 months from 0.7 months 2 years ago, inventory days have fallen to 2.2 months outstanding, from 2.97 months as of 31-3-15, which reflects prudent working capital management, despite growing store count.

As of 30-6-17, the company had a net worth of Rs. 192 crore (BVPS Rs. 111). Total debt stands at Rs. 140 crore, while cash and equivalents are Rs.54 crore. Post repayment of Rs. 40 crore debt from fresh issue proceeds, the current net debt-to-equity ratio of 0.44:1 will contract to 0.19:1, giving headroom for growth. Promoter holding of 66.17% will reduce to 59.69% post IPO, while Fairwind PE is completely exiting its 33.83% stake of past 4 years, at handsome gains of ~49% IRR.

Valuation:

At Rs. 750 per share, company’s market cap and EV will be Rs. 1,347 crore and Rs. 1,392 crore respectively, which leads to EV/Sales, EV/EBITDA and PE multiples of 2.2x, 20x and 42x, based on FY17 performance. On FY18E earnings, these multiples are 1.8x, 17x and 38x, respectively, which are quite attractive, in comparison to listed peers.

India’s largest footwear retailer Bata, with majority foreign holding, is ruling at an EV/sales multiple of 3.3x, based on FY18E performance, while Relaxo, although having lower store count but higher sales, is ruling at multiples similar to Bata – EV/EBITDA of 23x and PE of 44x. In relation to both of these, Khadim’s IPO pricing is attractive, even after adjusting for smaller size but improving margins. 400 stored Liberty Shoes is the only one ruling lower due to its slim margin profile and higher leverage (debt-equity ratio of 0.8:1). Thus, Khadim IPO is priced attractively, aided by positive macros.

Conclusion:

Consumer brand posting profitable growth with deepening distribution reach, strong balance sheet position and healthy pricing get a thumbs-up, making the IPO a subscribe.