Khadim India's Q3FY20 results (Neutral) - Weak performance...

Q3FY20 result highlights

• Net sales decreased by 1% yoy to Rs1.75bn (est: Rs1.9bn), EBITDA decreased by 72% yoy to Rs35m, reported loss came in at Rs132m vs PAT of Rs39.7m in base quarter. The IND AS has positive impact of ~Rs90.5m on EBITDA. Adjusting for the same, quarter had EBITDA loss of Rs55.6m.
• Gross margins declined by 140bps yoy but were up 210bps qoq to 40%. Lower discounting/better mix in retail and input cost benefit in distribution business supported gross margins. Staff cost increased by 2.5% yoy, adjusted other expenses (adj IND AS benefit of Rs90.5m) increased by 33% yoy, largely on account of higher ad spends (up 2.7x yoy).
• Retail sales declined by 6%. COCO sales grew by ~1.5% yoy while franchisee sales declined by ~8-9% yoy as company continued to tighten credit and TOC implementation led to inventory clearance at franchise level and hence lower primary billing.
• Distribution sales were down 2% yoy, impacted by weak offtake in winter products & disruption in eastern markets due to protests.

Key negatives: Weak revenue & margin performance.

Impact on financials: Factoring weak performance, we cut FY20/21E EBITDA (ex-IND AS) by 60%/27%. Introduce FY22E estimates.

Valuations & view

Khadim reported weak results due to weak consumer demand, protest led disruption in its key catchment areas of east, continued inventory clearance in franchisee business and liquidity challenges in distribution business. This coupled with higher adspends & negative operating leverage impacted the overall profitability for the quarter. While company is taking corrective actions (higher brands spends, implementation of TOC model across retail stores), however, the benefit of the same are likely to accrue in more gradual manner. Valuations are inexpensive; however, the earnings delivery continues to remain significantly below peers. Given the competitive activity from leading players and Khadim’s geographical concentration (higher skew to East market), which is seeing challenges; earning recovery is likely to be more gradual. Hence despite, cheap valuations (23x/14x on Ex IND AS FY21/22E EPS), we maintain Neutral rating. Going forward, implementation of strategic initiatives as well as traction in franchisee sales will be the key monitorable.