Aditya Birla Fashion and Retail Limited (ABFRL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Second Quarter and First Half FY '21 Earnings Conference Call of Aditya Birla Fashion and Retail Limited. The call will begin with a brief discussion by the company's management on the quarter's performance, followed by a question-and-answer session. We have with us today Mr. Ashish Dikshit, Managing Director; Mr. Jagadish Bajaj, CFO; and Mr. Vishak Kumar, CEO, Lifestyle Business. Ms. Sangeeta Pendurkar, CEO of Pantaloons, will not be joining the call today as she is indisposed. I would thank the management team on behalf of all participants for taking value-added time to be with us. I must remind you that the discussion on today's earnings call may include certain forward-looking statements and must be viewed, therefore, in conjunction with the risk that the company faces. [Operator Instructions] With this, I hand the conference over to Mr. Jagadish Bajaj. Thank you, and over to you, sir.

Thank you. Good evening, and welcome to the earnings call of our company. The quarter under review saw a gradual recovery after the very tough first quarter. Our network continued opening up as mall stores were allowed to resume operations late into the quarter. While more than 95% of our network was able to open by the end of the quarter, footfall were low, especially in the larger cities and bigger malls. Smaller cities and high street [Technical Difficulty].

Sir, should we continue with the question-and-answer session? Hello, can you hear me?

Hello, can you hear me? Can you hear us?

Yes. Yes, I can hear you.

Good evening, and welcome to the earnings call for our company. The quarter under review saw a gradual recovery after the very tough first quarter. Our network continued opening up as mall stores were allowed to resume operations late into the quarter. While more than 95% of our network was able to open by the end of the quarter, footfalls were low, especially in the larger city and bigger malls. Smaller cities and high streets, which have been opened for a while now, saw a faster recovery of business. Let me appraise of 2 key developments that took place this quarter. Firstly, the company launched and successfully completed its price issue in record time, receiving an equity infusion of approximately INR 496 crores in the end of July, out of total issue size of INR 1,000 crores. Secondly, the company announced a strategic capital raise from e-commerce giant Flipkart. As part of the transaction, Flipkart will buy a 7.8% stake of ABFRL at INR 2.05 per share, translating into an equity infusion of INR 1,500 crores into the company. The transaction is an empathetic endorsement of the growth potential of India. It also reflects the strong conviction of both Aditya Birla Group and the Flipkart in the future of the apparel industry in India, which is poised to touch $100 billion in next 5 years. The proceeds will be utilized to strengthen the balance sheet of the company and accelerate its growth trajectory. The company plans to aggressively grow its existing businesses where it holds a formidable position while expanding its newer business opportunities in innerwear and ethnic wear segment. Now let me give you a snapshot of the financial performance of our company. Quarter 2 FY '21, the revenues of the quarter are not comparable with Q2 of FY '20, given the changed scenario we are operating in this year. The company has recorded INR 1,028 crore revenue at consolidated level, which was down by an expected, but significant 55% over the same quarter last year, leading to a decline in EBITDA. Our revenue would have been much better, but for 2 specific regions. The wholesale channel in lifestyle business performed in line with our retail segment. While the retail channel achieved more than 60% of last year's sales, the wholesale decline is primarily because we controlled dispatch to them, allowing them to liquidate their existing inventory. The Pantaloons sales must be seen in light of higher base last year as puja sales fell in quarter 2 last year as against Q3 this financial year. This is in no way a reflection of the potential of the business and is not a permanent condition. Sales have been consistently growing every month from June to September, which is reflected in the tripling of revenue from Q1. We expect this sales improvement trend to continue into the next 2 quarters. As we already told you in Q1, the company has continued its deep and comprehensive cost reduction exercise of cutting fixed costs in rentals, salary and wages and discretionary overhead like advertising and travel. The company could save INR 417 crore in this quarter, resulting in a total cost optimization in H1 of INR 872 crores when compared to cost expenditures in Q4 FY '20. Your company's focus on revenue improvement and continued endure to reduce cost has resulted in a turnaround EBITDA performance for this quarter, posting an EBITDA of INR 136 crore, recovering from the negative EBITDA posted last quarter. Losses at PAT level too were significantly reduced from INR 410 crore in Q1 to INR 188 crore this quarter. I would also like to draw your attention to other income of INR 143 crore, which includes rent concession of INR 122 crore. These also include concessions for subsequent period amounting to INR 38 crore for both the businesses. We also continue to focus on optimizing working capital in line with the scale of our business by scaling down buys for autumn/winter and even spring by repurposing existing inventory. Despite paying our creditors, we managed to reduce net debt by INR 90 crores from Q1 with a date figure now standing at INR 3,159 crore and our net working capital at INR 1,277 crore. The increase from March is on account of reduction in payable of more than INR 500 crores. With INR 750 crore of total amount of INR 1,000 crore of price rights issue proceeds coming in during this financial year along with expected recovery in the market over the course of the year, we expect the date to come down to approximately INR 2,000 crore to INR 2,200 crore. Important to note that this is without taking into INR 1,500 crore infusion into the company from Flipkart for the successful completion of the deal. Responding to the challenging -- challenges posed by the ongoing situation, our brand teams are constantly working towards finding innovative ways to continue servicing our customers after receiving early encouraging consumer response towards omnichannel initiatives launched in Q1, like hyperlocal delivery, WhatsApp commerce and Buy Online Ship from Store, BOSS as we call it. All our brands are now working towards rolling out these initiatives across the network. We are also working towards further strengthening our e-commerce capability utilizing our expansive store network as fulfillment centers for our e-commerce orders, delighting our customers. I will now take you through the performance of individual businesses, starting with our Lifestyle Brands business. Lifestyle business innovated to come up with new lines of products that the consumer wanted. The business probably holds the title of being India's largest premium clothes market player, having sold over INR 1 crore mark in H1. The performance during the first half of the year is marked by innovation and agility. Business should be complemented for achieving significant cost optimization, which was made possible by collaborating with vendors, B2B customers, employees and real estate partners. The business added 100 new stores this quarter, which reflects the confidence our parties -- partners have in with us. On the digital front, the business continued building on its transformative journey, retaining the focus on delivering a delightful shopping experience to its customers. The own website business for the business grew 3x over last year numbers, suggesting a strong customer affinity for our brand and a seamless shopping experience through our website. Our hyperlocal and Buy Online Ship from Store pilots have rendered encouraging results, reinforcing our faith in these innovative models. Our brands are now in the process of extending these models into newer markets, servicing an even wider customer base. During the quarter, the business recorded revenues of INR 531 crore and posted an EBITDA of INR 39 crore. Moving on to Pantaloons business, while stores resumed operation gradually as the quarter progressed, the new delivery channels was the business driver for Pantaloons in the previous quarter. Investments of highly targeted digital marketing campaign, addition of newer categories on brand website and e-stronger -- and a stronger assortment of products, all contributed in diving significantly higher traffic to the e-commerce channel, which grew 3x. The WhatsApp retailing concept was a hit amongst customers witnessing strong word-of-mouth traction amongst loyalty customers who contributed to majority sales and delivering a higher average bill value compared to retail sales. Signaling the start of its recovery journey, Pantaloons reinitiated its expansion plan by adding 7 new stores to its network in the preceding quarter. The business also launched its renewed store identities this quarter, promising to give its customers an even greater experience while shopping at their favorite shopping destination. While the new identity has been rolled out in 2 stores currently, the business will soon renovate more stores in its network. Pantaloons remarkably accelerated its e-commerce presence with average daily orders growing at 4.2x on pantaloons.com, which was launched last year, gained strong traction during this quarter with 75% high-traffic and robust growth in orders. The Pantaloons business has achieved revenue of INR 369 crore for the quarter and posted EBITDA of INR 71 crore vis-à-vis an EBITDA loss of INR 72 crore in Q1 this financial year. Other businesses, innerwear and athleisure, we are pleased to share with you all that innerwear and athleisure business are selling more than same quarter last year. Athleisure and work-from-home categories are doing fantastically with new sales records being established on e-commerce. The business has taken an aggressive expansive market to result in continuous strong revenue growth in line with our ambitions to be a leading player in this segment. International brands, this business has been setting new records through e-commerce sales within our own best estimates. Both collective and mono-brands have had a solid performance in H1, gradually inching towards profitability. Finally, I would like to conclude by saying that we have achieved our strategic goals for the first half of the year by significantly reducing costs, improving our balance sheet and continuing to innovate with our brands. As we go forward, we expect the market sentiments to improve further and see the return of consumers to our stores in a much faster manner. Accordingly, we will resume our growth plan with accelerated expansion of stores, build on our momentum in the e-commerce business and defer investments in our brands. Happy festive season. Thanks a lot, and we are open for question and answers.

[Operator Instructions] We have our first question from the line of Aditya Soman from Goldman Sachs.

Sir, firstly, you indicated a cost reduction of INR 417 crores this quarter, how much of this cost reduction would we see continue in 3Q, especially as revenues come back?

So Aditya it's difficult to get. If you look at the elements of cost reductions, they're all different. There are overhead cost reductions, which come through operating expense, salaries, et cetera. A significant part of that would continue into the third quarter, but it would be lower than what it was in Q2. Similarly, on the rent expenses, a large part of cost reduction we have already achieved in the previous 2 quarters. There are still parts which will flow over into Q3, but will be lower than that. It's difficult to give an exact number because some of these are linked with variables, some of them -- it's contract with individual stores. And we have differential reductions that we have achieved across different stores. So it would be difficult to give a number, but it will be lower than what we have achieved.

No. No, I totally understand that. I was just trying to understand directionally, if, let's say, sales are up 30% sequentially, then there would be the -- as far as cost would costs increase much more than that? Or would costs increase at a similar rate of sales?

It's difficult. I think both are -- as far as Q3 is concerned, both we'll have to wait and see how sales respond. Fast because it split. As I said, it split across thousands of individual stores of individual contracts. So it will be hard to give a number at this point in time.

I understand. And secondly, in terms of sales trend, any indication from how we've done, say, in August, September and October or the festive season?

So I think I would stay with what I had mentioned in the previous call and even in earlier interactions. We had projected at that point that we would do about 20% in Q1, about 50%, 55% in Q2, between 70% to 80% in Q3 and perhaps get closer to last year numbers only around towards the end of the March quarter. We are broadly in that range as we speak. And as you know, this is very difficult to predict at this time. So I would say this is really the overall trend that we are working. It varies across geographies, size of the stores, small versus high street. But at broad level, this has been the trend so far.

Understand. And if you look at, let's say, stores in Tier 2, Tier 3 towns and high street stores, would it be fair to assume now that footfalls are back to normal? Or is it still significantly lower than that?

No. They are not significantly lower. I think in smaller towns, especially high street stores are much closer to their previous sales numbers. And it's only as we come to bigger towns, larger stores that the numbers start to come down.

We have next question from the line of Tejash Shah from Spark Capital.

First question on Flipkart deal. So sir, how would you suggest to look at this deal? Is it just an excluded clean nature right now as we have seen in many such investments in online/offline player in the past? Or you believe there is a long-term partnership? And if that's the case, then how should one see it synergy benefit from both the sides on this deal?

So Tejash, let me first -- at the context of the deal, we have very deep partnership with Flipkart and Myntra irrespective of the deal for much longer in part. They are the largest players in online fashion. We had a significant portfolio of brands. 6 months back, we had put 300 to 400 stores, which were serving orders, which are coming from online into offline. So the nature of partnership -- and we have similar arrangements with a few other people, but shear size of fashion business on online is very high. And with our portfolio brand, it makes us a very attractive portfolio even for -- from their point of view. This investment is a purely financial investment, in which they have taken a space and that strengthens our balance sheet. The strategic part of partnership is outside this, and that's been growing over the year. As I mentioned, 4 to 5 months back itself, we had started operating our omnichannel initiative with retailers, the largest one being -- with e-commerce player, so largest one being Flipkart at the largest share of that. And that's really where it would do. I don't want you to read anything more than that being a very large player in fashion industry. We will continue to sort of remain an important player on that platform. And similarly, with the portfolio that we bring, we will -- they will probably continue to look at us as important stakeholder in their business.

Sir, our merchandise will be available on other online portals as well?

Absolutely. Absolutely.

Okay. Sir, second, on the deal proceeds. Any reason that why our guidance on debt does not take in consideration of INR 15 million investment? And in fact, after the current experience, shouldn't we target to reduce that as early as possible to mitigate the situation?

Which guidance are you referring to?

Mr. Bajaj just said that we are targeting INR 21 million -- INR 2,100 crore debt by the end of March.

No. No, this is -- okay, so let me clarify. All he was saying, so that people don't confuse whether you have factored in or not factored in, the only reason he has called that out separately because there is a timing issue that still needs to be resolved in that. As and when that will come, that will reduce the debt level from this.

Okay. Sir, third, in the quarter, fall in Lifestyle Brand or recovery in the Lifestyle Brand is similar to Pantaloons, despite higher share of [indiscernible] contribution in Lifestyle Brand. So any reason because intuitively thought that Pantaloons will do much better or Lifestyle will be slightly laggard on the recovery part.

So I think, Tejash, I will get Vishak to comment here a little bit more, but let me tell you, we have always maintained. Our brands are meant for consumers whether they stay at home, they go to office, they go party, they go for celebration. And therefore, to that extent, as a portfolio of businesses that each of the brand carries, they are very, very prolific in terms of occasions like this when it's getting reflected in the numbers. In fact, if you look at the investor presentation, look at the retail sales number in Lifestyle Brand. The retail sales of Lifestyle Brands across a very vast network is in Q2. And this is the number which is reported in the investor presentation, is in excess of 60%. It reflects, therefore, what we have always said very strong brands, very diverse portfolio and constant ability to move our products and consumers around the evolving needs. Vishak, do you want to add anything to this?

Yes. So, Tejash, I think one of our brands, one of our strength with brands is the kind of versatility we have around our brands. So as consumers in the early months wanted protection, we were able to create an entire line around protection, whether it was masks where we have sold about 1.1 crore masks in H1 alone, units. Through protective gear, antiviral fabrics, we were amongst the first to tie up with various partners on creating great products on this. Two, where consumers said we want to work from home, we created work-for-home merchandise. We created very comfortable lines. People said, look, we want wash and wear. There is nobody to iron the clothes. We created lines, which were very easy wash and wear, quick dry. So a lot of product innovations went into making sure that the brands were relevant to consumers. Now when the weddings are starting again, casual wear is picking up quite fast, again, the brands are up to it, and we've been able to add. Thanks to our 12-season model of creating merchandise, our ability to respond fast is of a very high order. So all of this together, Tejash, creates a method by which the bouncing back is much faster for these brands. And I think that will continue. The other interesting piece, Tejash, for you is that the desire of various business partners to want to put up stores. So the network expansion through a lot of partnered expansion itself is 100-plus stores in the last quarter alone and another 100-plus stores, which are signed for pipeline. So all of this will drive in the inside and that sends the recovery much faster.

Super. Last one on Pantaloons. Private label share has jumped from 62% to 67%. Is it much more tactical or any structural read here?

So there are a couple of reasons. Of course at times like this, when such extraordinary circumstances, one has to watch over a longer period. But still, let me give you some underlying factors. One, we have increased the share of private label as a business. You are aware, just before pandemic, we had launched saris in Pantaloons. We had launched home as a large category. We have extended -- you're aware of people as a brand, which we added into Pantaloons stable. And therefore, the share of private label by deliberate action itself was increased. The second factor is that of the total mix, kidswear has been growing very fast. And you can understand at times like this, while older men and women can probably buy less clothes, stay out, on the kids' side, it's the opposite happening. Kids are wearing less uniforms because they're staying at home, consume their products actually lot more. And kidswear category contribution has gone up, and kidswear is primarily, if not entirely privately. The third, to a lesser extent, could be a marginal shift from brands to private brands from the pricing point of view, but I don't see that trend to be visible at this point in time.

We have next question from the line of Nihal Jham from Edelweiss.

Yes. Sir, 3 questions from my side. First, in case of Lifestyle Brands, you mentioned about lower dispatches to the wholesale channel. So just wanted to check the reason for the same and also that are the dispatches now in line with the recovery that we are seeing with the other channels?

So, I think, Nihal, we should see in context of -- in retail business, we are counting our sales only when the actual consumer sales happen. And therefore, it's a good reflection of how the consumer markets are behaving. And therefore, for our brand, if retail sales is 60% as reported in quarter 2, that's how consumers are coming to our brand. But for wholesale customer who is buying from us has sold very little during April, May, June, July period, he still is sitting on a lot of inventory. What we record as a primary sale is what we record and reflect in the wholesale business. So our secondary sales perhaps may still be good there. But because they're sitting on inventory, our primary sales were lower. In terms of recovery, I presume it will take a little longer, but definitely, it will recover as they start selling inventory, exactly like what is happening to our stores. Vishak, do you have any more flavor to add to them?

I think, Ashish, you're right. Also the fact that the department stores mostly are in malls, which took a little longer to recover. So there is also perhaps the reason why there is a little more lag there. And -- but the good news is all malls are open already. So, Nihal -- and what you've seen is it's taken 2 to 3 months for a mall to come back to some kind of bounce back after it opens. So most of the malls in the second way, Maharashtra, Tamil Nadu and so on opened in August. So they are now, in that sense, getting back to shape. So it's -- I think, like Ashish said, it's a matter of time that we get that kind of normalcy in these chains.

Absolutely. Then just for understanding, is it possible that in Q3, there is a primary filling because these guys may be lower on stock? Or that is not something that may happen?

Not really. In the sense that, yes, the way we work is we work very close to consumer in terms of replenishments. So as they keep selling the inventory keeps getting replenished. So which is the way we work. So at some stage, once the onetime problem of COVID inventory block gets cleaned up, then after that, it's a steady flow.

That's helpful, sir. Sir, the second question was on the Flipkart deal again. You mentioned about, obviously, this first being an investment. But just on the strategic side, as I understand Flipkart and both Myntra have preferred partners, so does this deal automatically make all our major brands as preferred partners? And just in the long-term, what do you see the share of e-commerce, both in case of Madura and Pantaloons, which I think are around 8% and 1%? So if you could just throw a light on that.

So 2 separate questions. First, Nihal, let me assure you, we were preferred partners with all leading e-comm players, primarily because we carry some of the most desired brands and a vast portfolio of such brands. So it's not something that is unique or new to that extent. We'll, of course, work closer, and as their business grows and our brands and portfolio grows, we'll look to grow that business. But there is no -- there's no new preference that has come in this, which we didn't have. As a very desirable set of strong brand portfolio, all e-commerce players have given us a fair opportunity to present ourselves, are deeply invested in the technology in terms of building APIs to each other and so on and so forth. So many of those things are already in place. This will accelerate it, but this is not unique to this arrangement. As far as the e-commerce share is concerned, I think you saw several times in Jagadish's speech and also in our investor presentation, our own e-commerce business is also growing rapidly because consumers are getting used to now looking for brands and products at their own website. Each one of our own websites have grown between 3x to 5x in this period, which have given us also confidence to sort of invest in it, improve this. A lot of work is happening in improving our brand's own business. But clearly, there is a very large traffic at third-party platforms. I think there is -- maybe for short-term exaggerated, but long-term also, there is a structural shift, which will -- which was happening all the long for last 2, 3 years, has got accelerated in last couple of months. And therefore, share of e-commerce in our branded business, which was around 7%, 8% at this point of time, we expect it to get to -- when stores also fully open, we expect it to grow to early double digit. While Pantaloons business, we think, should grow first to about 4% to 5% in the next 12 to 18 months.

We have next question from the line of Vicky Punjabi from JM Financial.

This is Richard here. Ashish and Vishak, why are you also sure that you'll still need that 100 stores every quarter kind of an opening? I mean you're talking a lot about omnichannel, e-commerce, et cetera. I mean, why do you think you'll still need these 100 stores? I agree, we are in the middle of a once-a-century event, hopefully. But before one got a hang of how that will pan out, I think you're already back to your expansion strategy, et cetera. Are you sure the other side of COVID will be exactly the same as the earlier side?

I will do, Vishak, first and then you can add to it. First, all these stores are not what we are pushing. These are stores which franchises are opening in their markets because they see demand for our products. Remember, they're putting the capital, they're putting everything else. They are taking risk on rentals. Having said that, we consider it our responsibility to make sure that franchises are making sensible decision because their long-term interest is our long-term interest. And therefore, if anything, we ask more questions, look at the place. But what it truly reflects, Richard, is the deep under-penetration of apparel retail in this country if you compare it with any other category, where we are selling product at INR 1,500, INR 2000, INR 2,500, T-shirts at INR 800 to INR 1,500. The overall penetration of retail industry in apparel is exceptionally low. And therefore, whether it takes 3 years, 5 years, it has to catch up over a period of time. Your question about consumers moving to digital experiences online, it's a fairly valid question. We keep ourselves asking that. I think that trend will go over a period of time. Share of e-commerce will grow, but I think what might grow even faster and perhaps more certainly is the more evolved omnichannel method. You've seen it being played out in the last 2, 3 months. Imagine when the normalcy is restored, our operations are fully in place. We are trying to actually fully play out the technology integration between our stores and our websites and fully evolve local delivery system. I think these stores will be great effect. But in terms of visibility of those stores, why these stores are being open, Vishak do you want to add more flavors on how is it happening?

Ashish -- Richard, I think we are a very, very under-penetrated industry. And within that, I guess, even though we are better off, but there is still huge opportunity for growth. And I tell you, it's across the country. It's not as if it's in some pockets, it's in large towns, small towns, malls, high streets. It's all over. I was just -- as Ashish was speaking, I was scrolling through the last 10 stores that we've opened; opened in Surat, opened in Hyderabad, opened in Namakkal, opened in Kumbakonam, opened in Ahmedabad, opened in Thane, opened in Delhi, opened in Bangalore. I mean across the country, and all of these are business partners who either wanted to change their business or who created a new property and want to grow with the company. So there is tremendous opportunity for creative, and all of these, Richard, can be omnichannel stores. As -- we have already lit up 800 of our stores, and they are omnichannel stores already. And it's an amazing experience where both consumer gets -- the consumer wants to stay at home and shop, also has a real close-by source from which he gets it. And of course, it makes the merchandise rotation in the store even faster. So all of this together, I would say, yes 100 stores, but am I happy with that, answer is no. Richard, there is so much potential in this country.

And so is this thing about penetration of apparel retail actually playing out? Because if you look at the net store opening, it is about, I would think, 25, right? I mean, 25 for the quarter, I mean 100, I guess, is the gross number, but have you probably closed down 75? So are you actually increasing penetration of apparel retailing in the country?

Absolutely. There was a closure, which was perhaps warranted by COVID and some of those challenges, including places where we couldn't get rent concessions and so on. But the opportunity is actually for the net expansion of 100-plus stores in that sense. And we have 100-plus lined up in quarter with no closures in that sense in the next quarter or marginal closures in the next quarter. So Richard, the point is, it is truly about increasing retail density across the length and breadth of this country, both in big cities and in the smallest of towns.

Okay. And Ashish if I can just trouble you to refuse what you said regarding your expectation of how that recovery will play out going forward into the third quarter? And I think you said full recovery by end of March. I just missed some part of that.

So Richard, I was just repeating what I had said in April. And while it is very difficult to predict, we had made a broad focus about how this year might look like. We don't give sort of forward estimate, but it is coming close to what we had said. So I'd repeated that. We had said Q1 about 20%, up to; Q2, about 50%; Q3 between 70% to 80%. And by end of March, we expected it to come back to normalcy. And I think Aditya had asked that question, and I was saying, look, we are trending that trajectory as we speak.

Okay. Can I just push in one more question on the balance sheet. If I look at your inventory and your trade payables, your inventory is down versus March by just about INR 200-odd crores, INR 250 crores maybe. But your payables are down INR 550 crores. I know these 2 items are not strictly related, but any perspective you can throw on this?