We initiate coverage on Khadim India with Buy rating and a target price of Rs 1,020 (27x Jun’20 EPS). We see Khadim India as a structural play on the fast growing value-for-money footwear market. Khadim India is one of the leading footwear retailers in India and has established its identity as an ‘affordable footwear brand catering to the needs of all members of a family, for all occasions’.
Retail business (66% of FY18 sales), started in 1993, has a network of 753 exclusive stores (66% stores in East) with 54% sales from Company Owned Company Operated (COCO) stores and the remaining from franchisee stores. Retail sales grew at 11% CAGR over FY13-18 to Rs 5.1 billion in FY18. Distribution business (24% of FY18 sales) is operated as a separate business vertical since 2015 and caters to mass-market product categories like EVA, Hawai, injected PVC, PU, PVC DIP and Stuck On products under the Khadim brand. With a network of 455 distributors as of Mar’18, the business reported sales of Rs 1.9 billion in FY18, posting 27% CAGR over FY13-18.
Other business (10% of FY18 sales) primarily constitutes institutional business and services certain government departments of West Bengal, Uttar Pradesh and Tamil Nadu. Structural growth story: The Indian organised footwear market is expected to grow at 23% CAGR over FY16-20e as penetration of modern retail increases from 26% in FY16 to 34% in FY20e driven by (i) higher per capita consumption, (ii) accelerated shift to organised, (iii) strong growth in women footwear, (iv) premiumisation and (v) expansion in tier 2/3 cities.
Strong brand has helped Khadim —one of the key retailers in the economy segment – to also build the distribution business, thus enabling the company address ~94% of total market potential.
Valuation: We value the stock based on Jun’20 EPS of Rs 37.8 and 1-year forward target multiple of 27x (18% discount to our target multiple for Bata). Our target price of Rs 1,020 implies 26% upside from CMP of Rs 811. Khadim trades at a discount to other footwear players despite (i) higher retail RoCE (at 25% in FY18), (ii) stronger growth profile and (iii) second largest retail store network (next only to Bata).
