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

Ladies and gentlemen, good day, and welcome to Special Analyst and Investors Call for Aditya Birla Fashion and Retail Limited. This call is being organized by the management of ABFRL to update you all on the recent transaction that the Board of ABFRL approved yesterday. Through this call, the management wishes to update you all on the transaction and address your questions on the same. Please note that this is not an earnings call, and hence, no questions pertaining to the current quarter, performance of the company will be taken. From the management of ABFRL, we have with us Mr. Ashish Dikshit, Managing Director; and Mr. Jagadish Bajaj, CFO. They will conduct the session and take your questions. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jagadish Bajaj to give his opening remarks, post which, we will move into the Q&A session. Thank you, and over to you, sir.

Thank you. Good afternoon, and welcome to this call. It gives me immense pleasure to inform 2 important events: number one, completion of preferential offer of 7.8% equity to Flipkart Group today; and strategic partnership with India's largest design brand, Sabyasachi. First, I'm very pleased to update you that the Board of ABFRL in its meeting today approved allotment of shares to Flipkart Group company pursuant to receipt of INR 1,500 crore to ABFRL accounts. With allotment of shares, FK Group will hold approximately 7.8% equity of the company. Second, I would like to inform that the Board of the company yesterday approved an investment of INR 398 crore for acquisition of 51% stake in India's largest designer brand, Sabyasachi, by signing a definitive agreement. Let us see the deal in context of ABFRL's growth and portfolio strategy. Number one, Indian apparel market presents large market opportunity. Currently at USD 70 billion, the industry is expected to reach $100 billion by FY '25. ABFRL has presence across all consumer segments and price points. It also has legacy of building strong brands, commands a formidable market position. In recent years, we have entered potentially attractive new segments to create new growth engines. Talking specifically about ethnic space. In FY '19 onward, company identified branded ethnic as the next big growth opportunity. Ethnic currently forms 30% of overall apparel and is expected to grow rapidly over the next 5 to 10 years. ABFRL kick-started its foray into this space by making 2 small investments into distinct segments last year. Building on the same strategy, company now proposed to invest into the largest designer brand, Sabyasachi. Would like to update you briefly about the brand, Sabyasachi. Sabyasachi is India's largest and most influential luxury designer brand with a strong Indian root and global appeal. The brand [indiscernible] categories such as apparel, accessories and jewelry as strong franchisee in India, United States of America, United Kingdom and the Middle East. The brand has add on more than 50,000 brides since its inception, and it is the Indian brand of choice for global and Indian celebrities. The brand, Sabyasachi, is also an undisputed piece of aspirational ownership in USD 24 billion Indian wedding market. The success of the brand is also in its immense malleability, providing a huge opportunity to build an ensemble of offering across product categories and consumer segments. In terms of business performance, the brand had a top line of INR 270 crores in fiscal FY '19 and '20 and has been consistently operated about 20% EBITDA margin for the past few years. The funds will be used by the business to build upon the current luxury brand, build an accessible lifestyle business and also around institutionalizing manufacturing and design capabilities. Now for ABFRL. This acquisition is in line with our long-term strategy of building a formidable ethnic wear portfolio of brands to position ABFRL as a significant and serious player within the largest and one of the fastest-growing apparel segment. This will accelerate the company's strategy to capture a large share of ethnic wear market through a comprehensive and attractive portfolio of brands across key consumer segments, usage occasions and price points. We are absolutely thrilled to partner with the brand, Sabyasachi, in our journey to create a formidable ethnic play. Let me close by updating you all on our balance sheet situation. As you're all aware, we started the financial year with a debt of INR 2,500 crores, with the inflow of INR 1,500 crores from Flipkart and rights issue collection of INR 255 crore out of INR 1,000 crore. Our debt at the end of March '20 -- the rights issue collection of INR 750 crores out of INR 1,000 crores issue size. Our debt at the end of March '21 will be approximately INR 400 crores before investment in Sabyasachi. This illustrates our commitment to strengthen our portfolio and our balance sheet. Thanks a lot, and we are happy to take your questions.

[Operator Instructions] The first question is from the line of Tejash Shah from Spark Capital.

So when we spoke last in second quarter call, we were looking to focus on revival of the business debt reduction through external funding and internal accruals is if possible. So were we parallel actively looking for opportunities in ethnic space or because of pandemic, we got this opportunity and we thought of capitalizing on it?

So Tejash, you know we have been talking about our long-term strategy very consistently for a fair bit of time. We entered the ethnic wear market in FY '19 and with 2 small investments, which we wanted to grow into significant businesses. As we got into pandemic, we obviously reassessed our strategy and we held back some of our expansion plan for the year. You know that we have managed to significantly strengthen our balance sheet during the course of the year. And as the normalcy was beginning to come back, which perhaps may take a little longer as we go forward, but we clearly saw an opportunity when such outstanding brands and partnerships become available. And we have, therefore, chosen to move forward at this point of time. It's a reflection of -- as J.B. said, we are apparently moving on both sides. One is to continue to pursue the opportunities, which we think will create long-term value for our shareholders. At the same time, significantly strengthen our balance sheet position. He has indicated the strength of our balance sheet as it's likely to land at the end of March. And I think we feel very confident that it is a good time to make this investment.

Sure. Sir, our best wishes are with you. But when we look at the empirical evidences of inorganic growth at times in the sector and within our company also in the recent past in terms of F 21, the growth story has not been smooth, and we have failed to see many success stories or easy success stories in the sector. So what gives us confidence that this brand or this acquisition, in particular, has potential to buck the trend and scale it profitably for us?

Tejash, I think you'll have to recheck your memory a little bit more. Pantaloons is an acquisition which has created value. Madura itself is an acquisition over a period of time. Remember, Forever 21, which you're talking about, was a very different business, which was struggling and loss-making at that point of time where the challenge was to turn it around, which we have managed to do remarkably well, a business which was losing INR 40 crore, INR 50 crore in 3 years has broken even. So that's a turnaround story. The investment in Sabyasachi is a totally different situation. It is a brand which has consistently delivered more than 20% EBITDA, generated cash right through its history. One of the most outstanding return on capital and cash generated over a long period of time. So I don't think it's fair to compare the investments of different times. They have a different strategic role at different points of time. As far as this investment is concerned, it's going into a company which is extremely profitable, a brand which has no parallel in India and very few outside India in terms of its appeal as an Indian global brand. As a player which commands significant premium and yet has so much long-term potential in the chosen segments in place. We are very excited about its growth. This is very different from some of the other acquisitions that we've made.

Sure. And sir, lastly, I can understand that what Sabyasachi brings to us in terms of our ethnic portfolio. But was just thinking from Sabyasachi perspective, what we bring to the table? Because this is an extremely niche brand. Our capabilities are more on institutionalizing brands. So what are the plans ahead? Do we want to take it mainstream or it will remain niche?

See, each of the brand, Tejash, has its own position in the market, and they address different needs, different market segment. While you can extend brands, and Sabyasachi itself is a beautiful brand, which is extended itself from apparel to designer jewelry, to accessories as it has built its equity over a period of time, it cannot be taken to every possible segment. So it's not that we want to take a brand and position it somewhere else. I think the opportunity in the place that it plays itself is large enough. In terms of what this partnership brings is a very strong brand, a great creative person and team, which has built this brand over a period of time. Along with us, which brings management, stabilization, building strong processes, capital, execution ability to scale it at a very different level and elevate the brand to help it achieve its maximum potential. And I think that's why -- that's the spirit which you should see. Neither should we try to change our business, nor should Sabyasachi should become a different brand from what it is today. I think it's the combined strength that the 2 partners bring which will allow the brands to fulfill its maximum potential.

The next question is from the line of Aliasgar Shakir from Motilal Oswal.

A couple of questions. One is...

Ali, you'll have to speak a bit louder or get closer to the microphone, please.

Yes. Is this better now?

Sorry, to interrupt. Ali, can you speak a bit louder? We're not able to hear you.

Yes. Is this better now?

Much better.

So the first question I have is, we've made 3 acquisitions in the ethnic space. Before this, we've already acquired Jaypore and Shantanu & Nikhil. So would it be -- I mean, what I wanted to understand is you could have probably acquired any one of these bands and extended the product profile towards other categories? I mean I just wanted to understand the strategy between investing in 3 separate ethnic wear brands.

So just to give you a perspective on apparel marketing sites. Indian apparel on the men's side in the formalwear segment is about $15 billion. Ethnic wear is about $17 billion. Over the last 25 years, we have built 4 brands, which subsequently expanded from men's formal to casual wear to other categories. And it's the combination, not individual brand, which allows us to fulfill various needs, price point segments, usage occasions. Similarly, if you look at ethnic wear market, which is, by far, much larger than the entire men's market that we are talking about. It is a market which has multiple needs. At a base level, there's a traditional value affordable market, which is best served by Pantaloons. And at some point of time, if one of the Pantaloons brands needs to be taken out, we will do that. So that is a market at the value end of the ethnic wear. Above that is the market which is premium market, which is equivalent to where we have Louis Philippe, Van Heusen and Allen Solly. And we have 3 large brands, each 1 of them INR 1,000 crores and growing and establishing equity. In that market, we have Jaypore, which we have just acquired out 1.5 years back. Unfortunately, we couldn't really grow it during the COVID period because within 6 months, we ran into this crisis. If you look above that is where the larger piece of ethnic market is. Unlike most other segments, and it's important that I highlight this, the ethnic wear is the only market where Indian brands own the luxury end of the market. You don't see it in many product categories. There are very few product segments in this country, which are large and Indian brands have a space in the top end of the market, which is bridge to luxury or luxury segment. And this is where, first, we acquired Shantanu & Nikhil, which is predominantly a men's wear market with small play in women's. And we took their help and with their brand, we extended it into prêt line, which is, I would say, bridge to luxury. Again, men-focused brand, which is for people who go to wedding, not the groom themselves, but the cocktail, the visitors and so on and so forth. That's where the Shantanu & Nikhil and [ S&N ] play. Sabyasachi brand is associated with the largest segment of the market, which is women wearing to an Indian wedding. And that's the largest market. Jagadish talked about the total size of the market being $20 billion, $24 billion. And this is where Sabyasachi is the leading brand. It's created a tremendous premium. It's a very large market, and it's likely to go away. And this, in fact, the brand -- this market has the largest appeal as you can make out because wedding is very important to Indians. Wedding occasions are sort of perpetual and it has an appeal right across the world. So in that sense, don't look at ethnic wear as one market. In a narrow market like men's formal wear, our strength comes from building 4 large meaningful brands. Ethnic market similarly offers this opportunity to create a bridge to premium luxury brand, which we have not been able to -- or no Indian brand has created in any other segments for that matter. It also has an opportunity in premium where Jaypore will play and scale itself. It has a menswear market at the prêt side, which is where the S&N, the Shantanu & Nikhil brand will play. And at the bottom end, of course, we have Pantaloons, which has a significant play in this. So you have to see it, Ali, as a portfolio. Our intent is large because it is the largest market, which we have entered after 25 years in existence in this industry. We're entering the largest part of this market. And we will play it out exactly the way we have played out in other parts of the market where there is space for multiple brands to create significant equity and market presence.

This is very useful, sir. Just one quick follow-up since you mentioned your keenness to grow in this space. I mean where do you think -- we have about -- somewhere about INR 500-odd crores, give or take, between these 3 brands today, which is like, I mean, less than 5% of our overall revenue. So given this kind of focus that we have, where do you think we can be in about 3, 5 years with these 3 acquisitions? And can Sabyasachi, which is probably predominantly in the women ceremonial category, but it's a very, very luxurious brand, could also cater down to a slightly lower price point? Or do you think that market is still not tapped by us and will probably require maybe an additional category creation over there?

So Ali, each brand has certain elasticity to which you can stretch and create extension. I do not know what lower means. But from luxury, it's hard to bring the brand too far down. And remember, the luxury market in India is in a very nascent stage. I think next 5 to 10 years, you will see a very strong growth in market as the economy improves, as the consumption increases as more people get wealthier in life and aspire for better things. So there is an opportunity where this brand exists. Of course, we will look to extend the equity of the brand. Sabyasachi himself has extended the brand very beautifully in last 3 years into designer fashion jewelry, which has become a good adornment for a bride, along with her bridal wear. The accessories, which is bags and belts and shoes, are a very early stage of infancy. So there are many opportunities in where this brand is playing by extending across product segments, and there are a few other product categories. Of course, with time, we'll build scale, and that's where, to the previous question, that Tejash was asking, we will add ability to scale this by creating extensions, and perhaps a little bit more accessible parts of this business. But they won't be very different from where the brand is.

[Operator Instructions] The next question is from the line of Nihal Jham from Edelweiss.

Sir, my first question is, when you read up of what plans Sabyasachi has, and that's been in the public over the last 1 year that there is a thought, as you said, of extending into jewelry and a lot of other segments. So just as a perspective, this INR 400 crore infusion, would that be enough, at least for the next 3 years? Or it could be incrementally that more investment would be needed as we end up figuring what are the incremental businesses that the brand could expand into?

Nihal, from our current projections and the plans that we have made over with Sabyasachi, and we have worked very closely on that, we don't think the business will need any infusion of capital for next 5 years. The reason is not because we don't have ambition for this business because the reason is the substantial capital to begin with that we are putting in the business. And the business itself is extremely -- don't forget the business generates strong cash flows. It is one of the most profitable brand in the apparel industry in India.

Sure. That's helpful. And just taking off from some of the questions earlier asked also that in terms of the ethnic wear currently, we have 3 brands, Jaypore, S&N and now Sabyasachi. Now when you create your positioning metrics and in terms of gaps, do we see the need of potentially any other brand to service the entire ethnic wear market? Or we believe that these 3 brands more or less help capture the entire market opportunity?

See, the way we have segmented the market, Nihal, is we have looked at, of course, men and women and multiple price points. If you look at on the women's side, we have Pantaloons and its brands at the bottom end of the market. Jaypore is one brand, artisanal in terms of its taste, and therefore, is a little bit more premium, and about that is where Sabyasachi's brands will play. On the men's side, both Shantanu & Nikhil at the luxury end and S&N, which is the prêt brand that was launched, it's playing on the premium end -- sorry, luxury to bridge to pre-luxury end. We would look to fill other segments, which is the menswear side of the ethnic market. And as and when there is any update on that -- see, this is a long-term strategy, please remember, Nihal. This is something at least we have been sharing with you for at least 2 years. In every call, in every presentation, our intent to be a significant player in India's largest market. Because we believe our ability to build brands, now a good understanding of this category initially through Pantaloons and subsequently through the other 2 acquisitions that we made. And our understanding of the market. We strongly believe that it's a market which could be very, very large for us. So as we go forward, we look to fill these opportunity gaps in a selective manner and move forward with them.

Sure. Last question...

Sorry to interrupt, Mr. Jham. We'll move on to the next question, that is from the line of Aditya Soman from Goldman Sachs.

Just a couple of questions on the acquisition itself. I mean can you tell us more about what the total store count for this will be, say, 5 years down the line? What your strategy is regarding online versus off-line? And talk a little bit more about how you would develop this internationally, given that a large part of the brand's sales come from overseas? So this is sort of one part of the question. And then secondly, in terms of the brand itself, what would be the input from the current management and relative to what will be the input that ABFRL provides now that ABFRL will be the majority owners?

Thanks, Aditya. In terms of stores, as we had announced, we currently have -- the brand has 5 stores in India. And most of its revenue come from those stores. It also has presence in few luxury multi-brand outlets in India and sells in small ways from a couple of chosen international luxury multi-brand outlets. The strategy in terms of expansion is there is an opportunity to test international markets. And we will obviously test one, go carefully and then build strength around. The brand has tremendous equity wherever there is a large rich, successful Indian, that's where we exist. So whether it's New York, whether it's Bay Area, whether it's London, whether it's Dubai, and we'll make a beginning, and we'll see how it goes. Currently, close to 40% of traffic on the brands, Instagram pages or websites and other digital engagement, nearly 40% of that comes from the U.S., and another 20%, 25% comes from business like U.K. and Middle East and so on. So I think there is an inherently large opportunity there. As we look at next 5 years, perhaps, I mean, it's early to say. We are still sort of learning the full controls of the plan. But it is likely that we will probably have 3 to 4 international stores in 5 years. Our international domestic store count, which is 5, may probably go to 7, 8 or maybe 10. Remember, this INR 250 crore business INR 275 crores business which came in FY '20, came out of 5 stores and few MBOs and a little bit through direct sales. So it's a very high throughput brand, and you don't need to open too many stores to get the revenues unlike other brands that we have in our portfolio. In terms of online, it's a very strong pull. The brand has very carefully nurtured equity for digital consumers, it doesn't have too much of an online sale, but it's more engagement and desire that is built around that, and that's really what -- how the luxury brands have positioned themselves. Over a period of time, we will build online exclusive channel and build on that also. I think the equity of the brand is -- makes it easy for brands to be extended into that. In terms of the role that we will play. We are very, very sure that Sabyasachi brand has been made and carefully nurtured over the last 2 decades by one of the finest creative minds that this country has seen and a very good brand builder. What we would provide is management support to help him focus on areas that he wants to invest in, which is to grow the creative aspects of the brand, ensure that the quality, the esthetics, the design remains true to his vision. And we are able to help them execute it by providing execution supports, both at the back end, which is building sourcing capabilities, investing in a little bit of infrastructure at the back end, enabling business development on the front end, ensuring governance for the organization as it grows and scales. So that's really the kind of role that we want to play. And I'm sure over a period of time, it will be run as one business where both parties are able to infuse their individual competence. And that's really how we see it. It's the best of both worlds that we both aspire to build, and it will be largely built around the creative genius that Sabyasachi has.

And just 1 follow-up on that. Is there any debt at Sabyasachi that you would have to take on?

See, I think, Aditya, Jagadish has given you a sense with expected -- our rights issue was INR 1,000 crores. Out of it, INR 750 crores would have come by this year-end. INR 500 crores has come, INR 250 crores is to come in the next 15 days. We have today received INR 1,500 crores from our [ preferential ] share issue to Flipkart. At the end of March, our estimated debt prior to this transaction would be between INR 350 crores to INR 400 crores. So we'll be extremely strong to be able to take this on. Our current infusion that's coming from Flipkart will be sufficient, very easy to take that.

No, my question was, was there any debt on the Sabyasachi book that you...

No, no, no. It's been a consistent cash generator, and therefore, never had to take debt.

The next question is from the line of [ Vaibhav G. ] from SBI Life.

Yes. So I wanted 2 understanding on the overall thought process. So probably, at the time when we last spoke about our dilution and with rights issue as well as raising money through Flipkart, you were a bit -- I mean, I felt that we were clear that we are not looking for much on the inorganic side as of now. So what gives us comfort in terms of -- because I still -- we think that we are out of woods, but is there a clear visibility that our cash flow generation or the business as such is in very good shape to continue as -- and generate cash on a consistent basis. Because still, we feel that in the earlier calls also, we are talking about there can be hiccups, and there is still no clear as such visibility that things are out of wood. So what's your take there? And is it -- and what's -- how do you think that -- on those lines?

So Vaibhav, let me say the following. I would not comment on current state of the business. This call is not supposed to do that. But I think it's sufficient indication to you when Jagadish stated that we feel our balance sheet, which started the year with INR 2,500 crores of cash is headed towards INR 400 crores -- INR 2,500 crores of debt is headed towards INR 400 crores of debt situation. That was the projection that we have, and we are feeling reasonably confident towards that. And therefore, also post the difference between earlier conversation, which was at the end of quarter 1 or quarter 2 would have been, we have indeed got both the INR 500 crores first round of rights, INR 250 crores to come in next 15 days, the final sort of date is tomorrow. And we have also got INR 1,500 crores. So there has been significant strengthening on the balance sheet. And as a long-term player in this industry, it is proven, unique and perhaps the only company which has built multiple brands in various parts of the market, turned around businesses. We were talking of Pantaloons, Madura brands to build over a period of time, turnaround in some of those brands. We feel strongly that current situation, once the balance sheet gets stronger, does offer us at times opportunity, which will be hard and rare to come by. It is one of those exceptional opportunities that comes once in a while, and this is one of them, and therefore, we chose to move forward. We obviously have factored in everything that you are mentioning. We feel very strongly about the strength of our balance sheet to be able to execute this.

Sure. And on the second part, what about -- so we are taking [ 51 ], so how does this -- in future also we'll stick to that majority ownership and that is how it will continue? Or is there a point -- some milestones through which we want to take over the entire company and continue with it? Because Sabyasachi as such, becomes a very single man or brand kind of a thing. So how do we ensure that things remain in the control, and there is no second competing thing, which comes up?

No. I think the nature of arrangement is such that it gets the exclusive rights to go on and raise our stake over a longer period of time. Please remember, these brands require the founder's vision and creativity to do maximum justice while we can add value on the site. It -- the maximum value gets generated when both parties put the best together. It is in our interest to ensure that the current founder and the creative owner of the brand stays for a long period, and that's really how it's thought. But there is no space for anybody else to come in without our -- sort of agreement from our side. So it's a very deep partnership and meant to build probably the finest and one of the best luxury brands coming out of India, if not only 1 over the next 10, 15 years. And we do require both partners to work very closely in that to happen.

The next question is from the line of Richard from JM Financial.

Ashish, I have 2 questions. The first one is broadly on the line of what was asked just prior to this? And can we now conclude that balance sheet shape need not be too big an area of focus or concern for us as outsiders because you will always have the Birla Group reputation support, and we can tie through whatever difficulties in funding, et cetera, that should come up in the future? And in light of this, should we as outside observers, stop pampering our thought processes? Because unlike most commoners in the business world, ABFRL did not ever worry about wanting a debt-free balance sheet, et cetera, because funding is never going to be a concern. Is that the right way to think about it? And while on this, in your previous answer to Vaibhav, where you stated that INR 2,500 crores debt in the beginning of the year has gone down to INR 400 crores. But my humble submission is that, that reduction is not through own accruals, right, because -- but it is through an external fundraise at what I think was at an extremely intrinsic value dilutive price?

Yes. So I think, Richard, fair question, both ones. First, I think we have always said so and maintain that being part of Aditya Birla Group company in a market where the company, Aditya Birla Fashion, is a pioneer and leader in Indian branded fashion. Having said that, we are just starting our journey in terms of the headroom that is available, the capability that we have proved over a very long period of time and the portfolio of businesses that we have, and we intend to build. So we have a very large headroom for growth available over the next 15, 20 years. And the benefit of being part of a group like this is that this is an issue that we don't have to worry about as long as we keep making sure that we are sort of running the business well and managing situations, both in terms of capital productivity and business efficiency. And I would, therefore, double down and would like to comfort you that this should finally settle any doubts in anybody's mind that if the company takes debt for a short period of time, either due to need for some acquisition, like what happened in Pantaloons case or exceptional once-in-100-year situation like what we went through in this, where fashion industry has got specifically impacted. I don't think our long-term journey is going to get strong sponsorship and support from the group as well as other investors. Of course, there are times when you don't get the valuation and the fair value that you think you have, and which is why, at 1 point of time, we moved out and got a preference share issue done. But needless to say what we have established during this period, and I would like to reiterate. We are in a position, pivotal position to take a very strong business, profitable and value creating over a long period of time. We can continue to expand both the existing businesses and add wherever there's strategic portfolio addition possible. And we'll be able to manage our balance sheet, hopefully, through internal accruals, as you are rightly suggesting. But even as and when there is any need for fundings required, I think they have very strong parentage. And that should sort of comfort all investors.

Okay. And 1 more question, Ashish. I think you've said a lot in this regard. But pardon me for this, it is my shortcoming, but I'm not able to visualize what you are trying to create by putting together all these various small, disparate brands into one basket. What's the big picture here? And how do you create a harmonious ethnic business of size and scale, and of the kind that the larger Indian middle-class cohort can afford? Because we are after all a country of masses and not classes, right?

So Richard, the opportunity is in all. I mean if you were to look at only one market and try and create only one brand, there are many other players who do that. We think we have the capital, the skills, the management bandwidth and the patience to pursue multiple opportunities. We have proven it over the last 25, 30 years. But let's look at your own question. The Indian wedding market is a very, very large market, largely driven around bridal wedding. Sabyasachi is once in 30 years, 50 years brand with the strength and power of the brand. You cannot call it small isolated assorted business. It has potential to be one of the largest brands ever to come out of India. So it's not small, it's not insignificant, it's very influential in very long run. It is just that in its history of its journey today, the brand may look small. It's still at INR 275 crore last year. As we mentioned, it has multiple dimensions of growth. The luxury in India will grow. There is opportunity to create a slightly more accessible range. Jewelry, Sabyasachi brand has entered only 3 years back. It's already showing tremendous traction. Accessory business has just started. That's on product portfolio. On geography, the brand has strong recall presence and admiration globally. Presence is only in India, so we'll selectively have that opportunity to build it outside India over the next few years. So I wouldn't agree with you, Richard, that these brands are -- they are -- some of them are in different stages on life. And remember, we are talking of the single largest market segment in Indian apparel industry. And this is the only place where perhaps India can build a luxury brand and a very profitable one at that. But in terms of your question on portfolio, the way we have looked at it, I think the business has opportunity on multiple sites. We will, as you're rightly suggesting that a play in the sort of premium and sub premium could be larger. We will patiently build that, look for the right opportunity. We are currently nurturing organic development of a new brand inside Pantaloons in the premium women side. We'll take it at an appropriate time and will take it outside. So I think what I want to make sure that our ambition and strategy is not combination of disassorted brand. It's a comprehensive and carefully laid down strategy. The opportunity present themselves at different points of time in different ways, and we'll have to act on them as and when they do. In the meantime, we'll continue to nurture the organic part of our business.

The next question is from the line of Kunal Bhatia from Dalal & Broacha.

Sir, just initially, one clarification. Sir, you mentioned that Indian wedding market is about of $24 billion, if I'm not wrong?

Yes. That, of course, includes everything that goes in the wedding.

Right. Sir, so if I'm looking at the ethnic side of the business, just to extend the question which the previous participants asked. Sabyasachi, if we consider it's about a INR 274 crore brand at the moment, which in terms of the pure -- if you consider the overall ethnic, not even 1 percentage market share. So taking that into account and at this point in time, where we are in a space of reducing our debt. Going in for this acquisition, what's the focus? Or what's the thing we had in mind in terms of taking this brand to what level of growth or a revenue perspective over the next 4- to 5-year period? If you could give some thoughts on that.

So first, Kunal, let me clarify something. When we say size of the market, please remember, the top end of the market will always be the small part of that market. It doesn't cover. And so in terms of the luxury designer wear brand, Sabyasachi is perhaps the largest and by far, the biggest brand in the portfolio. We will continue to grow it, perhaps at 20%-plus rate. We'll have to discover it as we go along with what the growth rate is 20%, 25% or so. And that may take us some time to get a better sense of what kind of projections we can make on that. So it's a journey. It's a very strong initial starting point, and we have multiple levers to sort of exploit as we build on the equity of this brand.

Okay. And sir, also in terms of the margins, which you mentioned, were about at 20% EBITDA. And my sense would be, since it's an ultra-luxury brand, so it would be a very high gross margin kind of a business. So do you believe that even in terms of the operating margin profile this number could be much higher going forward, if the scale is expanded?

See, I wouldn't want to, Kunal, at this stage, get into the details of the numbers at the top end, at the bottom. What I do know is that the brand has delivered this kind of profitability over a sustained period of time. As I was answering previous question, it has generated strong cash every year and funded its growth and still had cash reserves. And therefore, I think it's too early for us to start figuring out the exact levers of profitability and further improvement in profitability. But fair to assume, as the market grows in that segment, the brand's ability to generate premium and also its scale generating operating leverage will only improve as time goes.

The next question is from the line of [ Ankit Garodit from VEC Investments ].

Congratulations on the transaction. Again, 2 pieces from me. One is, if you could throw some light on the transaction. In particular, is all of this INR 398 crores secondary? Is there any primary infusion? And of course, the road map forward, are we looking at becoming a 100% shareholder-basis milestone? And second would be, while some of it has been answered earlier, if you could throw some light. Will Sabyasachi be involved in -- maybe even as an advisory role in helping us in some of our ethnic wear?

So 2 questions. I think your first question was around primary and secondary. At this point, we are working through the scheme of arrangements into that. There'll be a substantial investment, which will go into the primary of the business. And that's why I've indicated the business in our projections despite a reasonably robust plan of growth will not require fresh infusion of capital at this stage in our view next 5 years. Because the business itself is cash flow generating. So that's on that part. As I had mentioned the previous plan, our long-term strategy is to, over a period of time, invest and increase our share, but that will happen over a longer period of time. Sabyasachi will definitely be involved and run this business because we believe that's the best arrangement, which allows maximum power. I don't think with the potential of just this segment and this brand that we would like to distract and take his attention on other parts of the business. We have always built businesses, always. Our brands and our businesses are built with dedicated management focus and attention. That's why we don't compromise, cross-optimize or cross-subsidize, both in terms of capital and management and management infusion. So this will be run as a brand with large potential opportunity with full-time commitment from Sabyasachi, and the management team, which will be totally focused on this business. That's how we run every one of our brands and businesses.

Sure. Just to add in one. Given that the business of Sabyasachi is cash flow generating and has enough cash reserves and doesn't need cash, then what are we infusing the primary for, given that the expansion is also restricted to maybe opening another 3 to 4 stores in the next 5 years?

So there would be -- these stores are international stores and some four, 5 stores in India. The stores are more expensive than regular stores being luxury there. We also will put some capital in terms of strengthening the back end capability in terms of both expansion as well as adding new facilities as the jewelry and the accessory part of the business grows. So it will require all that.

The next question is from the line of [ Aman Vora ], an investor.

I just wanted to know. Can we have some light on the Sabyasachi numbers for current export and the Indian market?

The export numbers today are small, while the demand and the aspirations are very high, but -- because there's no store outside India. It's our judgment that a lot of international travelers who come to India buy it. There is a very strong following that the brand has outside. And it is reflected in few exhibitions and sales that Sabyasachi has participated in Dubai and New York. He has had exhibitions in places which are luxury department stores in the U.S. and affiliations in Middle East, which is Dubai, which has given us extremely strong reason to believe that there is a business possibility there. But in today's term, the business is very small outside India.

Right. And Ashish, as a company, do we have any aspiration of becoming a net debt-free company any time in the future?

See, we have aspiration to serve our consumers well. We have aspirations to serve our shareholders well and create a large business out of the opportunity that apparel business sort of offers. It's a market which is in early-stage of infancy in terms of conversion to ready-to-wear at the lower end of the market and growth in the premium in the upper premium segment. I don't think we need to set our objectives around things like zero net debt. It's easy to achieve, as you've seen. Even before this, if we had not made any of the acquisitions, for last 15 years, our Madura business has been cash flow positive business. So I think it's a question of where you set the scale and what's the ambition for the business. Indian apparel market is to be $100 billion. We are less than $2 billion in our revenue. We are -- we perhaps are one of the strongest players in terms of portfolio management, our understanding of consumer, design, supply chain. I don't think we'll be doing great service to our shareholders and the opportunities, if we do not combine strengthening balance sheet with portfolio, which does just suits to the opportunity.

The next question is from the line of Percy Panthaki from IIFL.

This question has been asked in some form, but I just wanted to address it once more. So if you could just give us some idea. I'm not looking for exact numbers, but whatever color you can give in terms of the cost structure of Sabyasachi. The 20% EBITDA margin is derived from what kind of gross margin? And what are the main costs which go into? Because with this kind of scale, they are doing probably INR 30 crore, INR 40 crore, INR 50 crore per store of turnover. So things like rental, et cetera, or store running costs are very, very minimal. And with the high gross margins that the high price point should dictate, 20% EBITDA margin seems to be rather on the lower side. So what am I missing in this story? If you can just give some idea. I'm not looking for exact numbers or anything.

Okay. So I think you're right. Unlike conventional businesses, because the throughput is so high, the store costs are not as large as they would be for businesses which do lower throughput per store. But the assumption that all high-priced luxury brands will have disproportionate margin is not always true. They have strong healthy margins, but a lot of it gets plowed back into product, product development. Remember, jewelry has a different margin structure. Apparel has a different margin structure. Accessories have a different margin structure. So even gross margin is a blend of all this. I think as the business grows and the operating leverage comes, hopefully, store rentals in luxury businesses, that threshold, perhaps, we'll be able to cross is our sense in -- that offer is not the largest cost or as significant a cost as it is a mid-premium segment. Most of the product cost lies -- most of the cost lies in the product and the operational overheads of the company. The first one will deliver improvement in terms of gross margin as the brand sort of creates and gets into richer markets, better segments. And the second one will come through scale over a period of time.

Okay. Secondly, you haven't decided the proportion of primary and secondary in this transaction, is it?

No, we have. It's part of a structure. At this point, we are not disclosing the full details of that. We are still trying to figure out. Based on the business plan, we have agreed on a principal of shareholding, and that's how it will flow. In our sense, the primary should be between INR 70 crores to INR 100 crores, and the rest will probably be into secondary.

The next question is from the line of Mayur Parkeria from Wealth Managers.

So Ashish, just first is the initial comment, and I'm really thankful to the investor team also for allowing us to ask a question because quarterly calls, it's just impossible to get through despite holding the company shareholding for 4, 4 years. So thank you for giving an opportunity to ask. I was just linking your comments on the opportunity to service the customer on a scale runway, which you have, in terms of apparel. Completely agree on that side. And connect that with the shareholder wealth, which you plan to create. Apart from the top line growth, the shareholder wealth is a function of all. In a single way to say, is a function of a significant improvement on the return on capital employed. Just some back of the envelope calculation. If for us, the capital employed for this -- overall this segment is closer to now INR 660 crores, INR 400 crores plus INR 250-odd crores, if I remember well. And even if we want to make 20%, 25% ROCE, which is much lower than our traditional Madura ROCE, which on a normal course could have been achieved. We are looking at a EBITDA of -- or a cash EBITDA of close to INR 150 crores at a 20% margin or a 15%, 20% sustainable margin. What I'm trying to come to is, we'll require a closer to INR 1,000 crore of turnover on this. What do you think is a time line when we can look at this kind of a scale on this ethnic side?

So you're absolutely right, Kunal (sic) [ Mayur ]. I think 2 parts, let me say.

Mayur.

Yes. Sorry, Mayur. Yes. So there are 2 parts. One is intrinsic return on capital on some of these businesses, particularly Sabyasachi business, is exceptionally high. Of course, in our case, as a company, because we're making an acquisition, and therefore, there is a goodwill involved, it will take longer time to play out for us. And therefore, it might be 4 years or 5 years by the time the numbers look the same. But you know, I know that fundamentally, the business is generating that kind of returns and cash flow. The brand business, as we have seen ourselves having built brands in 1990s, which are creating cash flow for 25, 30 years now, are a very long-term perpetual [ candidate ]. So growing inorganically does for the short period of time reduce your return on capital, but then it unlocks the value over a very long period of time. I think some of them are a function of time as we see. If you look at even this investment, if you look at a 1-year horizon, you probably argue that return on capital will not be -- if you look at 5 year, they will start to look very good. If you look at longer, they will be even better than anything that Madura has delivered because the return -- the EBITDA margins are much, much higher than our core business, twice of that. So I think we have to balance both profitability, cash flow, balance sheet with the timing horizon that we are looking for the business. And while I'm not talking of the very long term, but 3 to 5 years, the case is a fair time in which the business should start delivering reasonably healthy returns, even post goodwill and acquisition costs.

Okay. Second question, again -- in some way, again, these questions may be asked, but just to put a little more specific. Over the last 3 years, we have understood -- 3 to 4 years, that Fast Fashion has been the segment of market where a very large opportunity is there and continues to be there. And I think we have played it phenomenally well through the Pantaloons and Peter -- to some extent, casual plus Fast Fashion through Peter England, through Forever 21, which we tried, which is still there, or even the Pantaloons, which has been a very successful journey. And that is one segment which actually moved the needle for the company from taking it to almost INR 18,500 crore now. If, from this size onwards, don't -- I mean, instead of putting this kind of a money into this segment, while I understand your aspirations on ethnic and the market opportunity, but don't you think a Fast Fashion was a segment where we could have put in -- looked at some kind of more opportunity, which could have delivered better returns from the company perspective and also made it very large for us?

No. I think you have a fair point, Mayur, in terms of the market size and the opportunity. You probably mean the value fashion, which is the more affordable fashion. That indeed is the largest opportunity. I think there, our view is that we have made -- we perhaps have one of the strongest brands that this country has seen in the value segment, which is Pantaloons. Some other businesses may have built more scale but there is perhaps no other brand, which is as familiar, as comfortable and a business model, which is constantly improving. Our aspirations of Pantaloons are large. We are both improving the business, enhancing the quality of brand, increasing scale, and we see our largest growth opportunity in the long-term coming from there. And we will continue to invest in that. I don't think we are making choices where we would compromise either on Madura, on Pantaloons before we make other pieces. Having said that, as I started, sometimes you have to look at opportunities holistically. Just as value fashion has created the big shift for ABFRL last 5 years with Pantaloons, similar is the opportunity to create a play in the ethnic wear. In lower end of the market, scale comes typically through retail brands, which will increase. And Pantaloons have 350 stores, and as I keep saying, the opportunity is much, much larger. On the branded segment, typically, it comes from brands which have their own distribution and the portfolio brands, like what you've seen in Madura, will create the value. And that's a path we are on. We think we have both the ambition, the support of shareholders and the opportunity to execute on both. And that's why we are on this path.

The next question is from the line of [ Bhimal Sampat ], an investor.

Can you hear me good? Yes. Congratulations on getting into a new segment altogether. Now this new segment is -- obviously, it will be higher margin than our existing -- this thing. So are we thinking on the lines of Titan? Something like in next 5, 7 years, after we grow this ethnic, we can get into a lot of accessories. I mean Titan can be a role model for us. Are we thinking on those lines? I mean what is our this thing of getting into ethnic because there is a lot of scope in your men's and value fashion?

Yes. So I think, sir, you're right. We have a lot of opportunities in apparel segment. We remain focused on apparel segment. We have been, for the last 30 years, focused on single definition of the market. It is what men, women and kids wear to look good. And that's been what our play, whether it was initial days, men's formal or men's casual or subsequently western women and now ethnic womenswear. Of course, over a period of time, different parts of the market grow differently. Ethnic wear market for a long time was more unbranded with very few opportunities. The designer segment was very, very small. So we have seen the opportunity emerge. We think just as in the menswear in '90s and 2000, branded clothing took center stage, that's what will happen in the womenswear, both in the western and ethnic wear side. And that's really what we'll play. We will continue to expand accessories and other things, which are related to fashion. And that is our definition of the market. We are not looking at anybody else's example because we have followed this strategy for 30 years now. We have get in apparel segment, wherever we see the opportunity to create new brands, where the markets are emerging, where a premium can be created, we have entered that. And that's how we have entered women's western wear, men's athletic, at leisure, men's innerwear and now women's ethnic wear in last 2 years.

Ladies and gentlemen, that's the last question. I now hand the conference over to the management for the closing comments.

Thanks a lot, dear shareholders, for participation into this call. We'll see you again once we announce our Q3 details. Till then, goodbye.

Thank you. Ladies and gentlemen, on behalf of Aditya Birla Fashion and Retail Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.