Khadim India's Q3FY19 results (Neutral) - Weak performance across segments

Q3FY19 result highlights

• Net sales decreased by 14% yoy to Rs 1.76bn (est:Rs2.26bn). EBITDA decreased by 38% yoy to Rs 123m (est:Rs193m), PAT declined by 55% yoy to Rs40m (est: Rs98m).
• Retail business revenues increased by 1.5% yoy to Rs1.3bn while distribution business sales increased by 2.5% yoy to Rs490m. Retail gross margins increased by 50bps yoy to 48% while Distribution business gross margins dipped by 630bps yoy to 33%.
• Gross margins increased by 360bps yoy on account of improved mix due to higher growth in retail & absence of institutional orders. Staff cost and other expenses grew by 11% & 4% yoy respectively. EBITDA declined by 38.5% with a margin contraction of 280bps yoy to 7.0%.
• Interest cost declined by 8% yoy aided by reduction in debt, other income was up 80% yoy, depreciation was up 23% yoy. Tax rate was up 100bps yoy resulting in PAT declining 55% yoy.

Key positives: Healthy gross margin expansion due to better mix

Key negatives: Muted retail & distribution business performance

Impact on financials: We have cut FY19/20E earnings by 23%/25%

Valuations & view

Khadim’s 3QFY19 performance was below estimates as well as lagged peers, impacted by weakness across segments (retail & distribution).The retail business continues to face challenges in terms of decline in footfalls and increased competitive activity. While company has identified the problem areas in retail business & is undertaking initiatives to correct the same, we believe, the recovery in revenue growth will be more gradual. On the distribution business, management is confident of revenue trajectory returning to 20%+ in coming quarters, however, pricing continues to remain a challenge. Further, benefit of input cost will be seen in coming quarters, however, likely institutional orders as well as high competitive intensity will curtail the extent of expansion. The stock trades at 17xFY20E (steep discount to peers (Bata/Relaxo)); however, given the relatively lower earnings visibility & return profile, the discount is unlikely to narrow. We would wait for better execution. Maintain Neutral.