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

Ladies and gentlemen, good day, and welcome to the First Quarter of FY '22 Earnings Conference Call of Aditya Birla Fashion and Retail Limited. The call will begin with a brief discussion of the company's management on Q1 FY '22 performance followed by a question-and-answer session. We have with us today Mr. Ashish Dikshit, Managing Director; Mr. Jagadish Bajaj, CFO; Mr. Vishak Kumar, Director and CEO, Lifestyle Business. I want to thank the management team on behalf of all the participants for taking valuable 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 reviewed, therefore, in conjunction with the risks and uncertainties that the company faces. Please restrict your questions to the quarter and yearly performance and to strategic questions only. Housekeeping questions can be dealt with separately with the IR team. With this, I hand the conference over to Mr. Jagadish Bajaj. Thank you, and over to you, sir.

[Audio Gap] company due to the widespread lockdowns in most parts of the country due to the second wave. The business witnessed severe...

Sir, sorry to interrupt you. Sir, we missed on the beginning of the call.

Yes. Good evening, and welcome to the earnings call of the company. The quarter under review has been a difficult quarter for the company due to widespread lockdowns in most parts of the company linked to second wave. The business witnessed severe disruption in the quarter as the bulk of our network was closed. The latter part of the June saw a substantial part of the network restarting operations. Despite loss of 1 full month of operations in this quarter, business was able to recover to 40% of pre-COVID levels that is of Q1 FY '20. With the momentum picking up strongly by the day, we are seeing our July sales coming back to 85% of pre-COVID levels of FY '20. This is despite partial lockdowns that we are still witnessing in many parts of the country. As on 26 July, out of our 2,150 stores, close to 65% of our total retail network resumed partial operations with more states gradually opening up. As we heard, Maharashtra announcing opening today, we are very confident of an even faster recovery in the coming months. We expect this quarter to be better than the second quarter of the previous year. We believe the pace of vaccination will also improve the coming months which will help rebound consumer optimism strongly. Now let me give you a snapshot of the financial performance of our company. The revenues of the quarter -- the revenues of the... [Technical Difficulty]

Sir, we are unable to hear you. Hello?

The revenues of the quarter are not comparable with the previous Q1 of FY '21 due to the more severe shutdown in Q1 last year. Consolidated revenue for this quarter are INR 812 crores compared to [ INR 323 ] crores in Q1 FY '21. Due to our extensive focus on our digital initiatives, the e-commerce channel grew to more than 2.5x over Q1 last year. While our partners' e-commerce has grown tremendously, our own brand.com have also scaled rapidly. The company has decided to make substantial investment in building its digital and e-commerce capabilities in a bid to strongly pivot its business model around digital. This will be the significant driver of company's growth in coming years in tandem with its strategy of network expansion and product innovation. Let me take you through some of the initiatives which will help the company leapfrog into a more digital company: roll out a new multi-brand e-commerce website and aim to leverage combined equity of our brands digitally by Q4 this year; enhance digital customer engagement through social media; expand omnichannel coverage from 1,300 to 2,000 stores; and strengthen our digital back-end capabilities. On cost initiatives, with our consistent focus in aligning our rental cost with the scale of the business, we are happy to report that we have been able to achieve lower rent as percentage to sales in this quarter versus the same quarter last year. This is due to continued and proportional rent reduction that we managed to get from our landlords for the quarter. We continue to engage in discussions with our landlords for further rent concessions going forward. The company continues to focus on cost optimization as its first priority. Our other expenses comprising mainly of store operating expenses, warehousing, logistics and other operating costs were higher in this sector -- that are higher by INR 70 crores compared to last year, and then most of them are variable. And they grew in line with growth in sales this year. Apart from this, we spent INR 20 crores more on advertisement and a onetime additional ECL -- expected credit loss provision of around INR 12 crores. I will now take you through the performance of individual business, starting with our Lifestyle Brands. Lifestyle business continues to focus on taking its brand to more customers at gross markets, channels and product categories. We have made a significant shift in our product portfolio last year in line with consumer demand. Because of which, our casual VR portfolio has grown to 59%. The strength of these brands has been [indiscernible] as reported in last 2 quarters. Even this year, Lifestyle Brands continue to march ahead of its competitive set by recording rapid recovery in sales post May. The revenue trajectory in July is expected to cross 85% of pre-COVID levels of July 20. This strong performance is on back of a versatile product portfolio, agile go-to-market and a deep multichannel distribution strategy. In line with this continuous focus on delighting customers, business took leaps in transforming itself digitally. E-commerce revenue of business grew by 3x over last year levels, the business in India's largest omnichannel branded fashion network with more than 1,000 stores now enabled for omnichannel retail. The business continues to place home its advantage and plans to open 400-plus stores during this financial year. Nearly 90% of these stores built around franchisee-based asset-light model. Out of the total expansion, nearly 100 of new additions will happen in Q2 itself. In line with this product innovation and premiumization strategy, business will enhance its portfolio during this year with the launch of versatile, premium product offerings such as Van Heusen flex denims and a new premium casual wear line in Louis Philippe. During the quarter, revenue of the business were INR 435 crores and EBITDA loss was INR 57 crores. Moving on to Pantaloons business. Being a large-format store, Pantaloons took longer to resume operations as a large chunk of the network is in malls, which took longer to open. However, that did not deter Pantaloons in reaching out to its consumers through various digital modes serving their fashion needs. Pantaloons accelerated e-commerce presence with average daily doubling on pantaloons.com, which was launched this year. Before I move to the various initiatives, the revenues for the quarter for Pantaloons business was INR 220 crores and EBITDA loss was INR 55 crores. This year marks a landmark year as Pantaloons embark on executing key elements of its growth strategy. Pantaloons used last year to refresh all aspects of the consumer pricing assets. In line with this, Pantaloons has launched a refreshed and contemporary new retail identity with significantly elevated brand imagery and consumer experience. In line with its strategy to expand consumer wallet share through extensions into newer categories, Pantaloons will build on its newly launched categories such as home, sarees, infant wear and bolstered offering through introduction of new brands in premium ethnic wear and street loungewear. Pantaloons will execute one of its largest ever expansion by opening more than 16 new stores this year. Nearly 20 stores are ready for launch in next 30 days. Finally, in line with emerging consumer habits, the business is launching a new website and app for its captive digital channel, pantaloons.com. In summary, business is well positioned to leverage its strong operational operating model which had already started to show strong profitability and incremental return on capital by expanding consumer product categories and channels. Innerwear and international brands. The Innerwear, activewear and athleisure business drove the strong demand for such contextual products during last year. Consistently building on the momentum, the business this quarter grew more than twice of last year levels. The products are now available across 23,000-plus trade outlets and over 50 EBOs. E-commerce posted significant growth over last year with the scale of business growing fourfold. The business is looking to aggressively expand its EBO footprint with doubling the EBO count by end of this year. Youth western fashion and super premium brands have continued to do well and have now established their profitability. Revenues have grown to 4x of last year sales and collective.in has performed exceptionally well, gaining 5x of last year's sales on website. Ethnic business. We have executed our comprehensive strategy to build a complete portfolio of strong ethnic wear brands across multiple occasions and price points. Apart from growing the existing brands in collaboration with designer partners, we are all set to launch 2 premium ethnic wear brands in coming quarters. One, men's premium ethnic brand and two premium women's ethnic wear brand in next few quarters -- in next quarter or so. The ethnic business partnership with Sabyasachi and Tarun Tahiliani has just begun. The Jaypore business continues to do well online. In parallel, we will build our off-line presence by opening 10 new stores during the year. Coming to the debt. The net debt of the company as of 30th June '21 increased to INR 1,200 crores due to losses incurred in Q1 and rise in working capital requirement in line with sales recovery last year. As sales recovery in coming months and business operations assume normalcy, we expect the debt situation to improve over current levels. Finally, to conclude, through the slew of initiatives and strategic interventions last year, we believe the company has come out much stronger and is well positioned to leverage from large opportunities that Indian fashion sector offers. Thanks, and we are open to question and answers.

[Operator Instructions] The first question is from the line of Aditya Soman from Goldman Sachs.

A couple of questions from my end. Can you throw some more light on gross margins in the quarter and why they are sort of lower sequentially? And second question on the last point you made on debt. We see it's gone up because of, obviously, operations being shut and working capital, but when do you expect debt to, say, come back to 4Q levels? Any sort of time line? Assuming there's no further lockdowns, of course.

Aditya, can you hear me? This is Ashish here.

Yes, Ashish, I can hear you.

On the gross margin, Aditya, the business has been pretty stable and strong because this quarter doesn't have too much markdown, which is the first quarter. The lower gross margin is primarily due to absorption of manufacturing costs because manufacturing operations were shut for about 40, 45 days in the month of May and parts of April and June. And that's the reason why the manufacturing costs had to be absorbed in that, and that's why it's appearing in the gross margin. There's no other reason other than that.

Understand. So there's no further discounting, right? Because I mean...

No, no, no. In fact, it's much lower discounting across businesses because there's no reason to really create leverage of discounting. I think consumer footfall was what it was. No discounting in the industry, yes. Some of our gross margin is a mix of channel mix also. Different channels operate a different level of sales realization. And therefore, there is an element of gross margin movement which happens depending on the channel movement, but not from the discounting itself. On the debt level, Aditya, I think if recoveries remains what it is showing early signs and if there is no third wave, then I think we should be able to sort of recover -- record strong recovery by Q3. It's hard to put a number to it, and I wouldn't want to give a number right now. But clearly, I think as the recovery comes back and if the cash flows remained strong, if the normalcy is restored and stays till Q3, I think we'll come back [ better and stronger ].

Understand. And since we're seeing already in July, you said cash flow, 85%. Are we already seeing an improvement in cash levels or it's probably [indiscernible].

So Aditya, that comment on 85%... [Technical Difficulty] There's a lot of echo.

Sir, sorry, you may go ahead now.

So can you hear me now?

Yes, I can.

Comment on 85% was regarding Lifestyle Brands. The Pantaloons business is relatively lower. It's about 70-odd percent. But definitely, I think as retail opens up -- a large part of this business is retail, which is where the cash flows immediately come in, your receivables is practically 0 days. So cash flows have started to come in strongly in July itself.

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

Yes. Can you hear me?

Yes. Ali, we can hear you.

Yes. First of all, a quick follow-up on this debt. Can you just share what is your inventory level today? And I was just trying to see that the debt is quite significant. I just wanted to understand the kind of [indiscernible]

So Ali, if I could get your question, there was a lot of noise. It's regarding the inventory levels right now?

Yes. Basically, I was trying to see the reconciliation of the debt increase from the last quarter. So how much has gone into inventory and how much has gone into loss [indiscernible]?

Jagadish, you have the exact number for inventory?

Ashish, the net working capital has gone by INR 200 crore and another INR 350 crore has gone into...

No. How much is in inventory, that's what he meant.

Inventory...

It's mostly the losses for the quarter. And the NWC has gone up by INR 200 crores.

Okay. Got it. This is helpful. Second thing, I was just wanting to understand your strategy on Pantaloons. We are looking to add 60 stores. So how are we seeing franchising these stores? Are we looking to do a large portion with franchisee? Or are we still looking to do largely [indiscernible] and own stores?

Very large-format stores are not amenable to franchising, beyond the point. We are perhaps one of the few retailers which has 15% to 20% of our mix which go through franchising. We'll keep the same level. I don't think we would want to increase the level of franchising.

[indiscernible] coming from the backdrop that some of our peers have a very reasonable portion of now larger stores also coming through franchisee. So is there an operational issue that we face that makes you kind of restate your franchising because obviously lifestyle already significantly on franchisee? Or what else do you think is now holding that, all these things?

No, I think, at 20% with size of the network, Pantaloons is one of the largest franchise business. We believe fundamentally, retail is about running stores and to -- unlike brand business where there are many other drivers on what you bring to the table. To that extent, we don't want to run the only skill, that sort of only core part of retailer is to manage and run stores well. I think beyond 15%, 20%, we don't think it's healthy. Also from a return on capital point of view, as we had shown in our presentation, if you recall, and you can go back and look at it, the ROC on Pantaloons stores is extremely good at store level. And therefore, it also deserves the capital. We feel in terms of managing consumer experience, standards of operations, which are important pieces for a retailer, we wouldn't want to go too much on the other side on this issue.

Understood. And just last question on the ethnic wear. You mentioned that there are 2 new launches in the ethnic wear. Can you just throw more color? Are they largely in-house or added through some of our partnerships with some of the acquisitions that we have done, or what price point, what category and what kind of investments and growth we are building here?

Okay. So in Jagadish's speech, he had called out 2 new launches that we are talking about. The first one is premium men ethnic wear, which is through a partnership, but this is the company in which we hold 80% stake and Tarun Tahiliani holds a 20% stake. The purpose of that partnership is to take [indiscernible] but launch it in an affordable premium segment, a men's wear brand. That is due to be launched in October, and we expect to open between 6 to 10 stores in the next 6 to 8 months, which is by the end of this year. That's -- as we said in our announcement of the partnership, we plan to open about 150 stores over next 3 to 4 years in that business, so it will be 5 years in that business. So that would be a very large play in the affordable premium men's segment largely built around wedding and such occasions, festivals. So that's number one. The #2 brand that Jagadish had mentioned in his speech was a premium ethnic wear line. As you know, inside Pantaloons stores, we sell a huge amount of ethnic wear at the premium end, largely through external brands. We have therefore decided to launch 1 premium brand, which will start in Pantaloons with probably 40, 50 stores of Pantaloons. And it's getting launched this September. So we are just a couple of months away from that. And we will also take it out and launch 10 to 15 stores this year to test out its external format. So these are 2 brands which will play in a very affordable segment of menswear and the womenswear. The womenswear line will be more daily wear and office wear and other such occasions, not meant for bridal or very premium occasions. While the men's wear line is created more around wedding and festivals, but again, it's an affordable range. Both these are scalable opportunities in ethnic wear.

Got it. And how much investments are we expecting here over the next 2 years?

So Ali, we'll have to see. I think at this stage, we have put in capital of around INR 70-odd crores in that business when we invested in that business. But as we scale up, we'll have to figure out. We feel both these models are very -- unlike previous discussion on Pantaloons stores, both these models, once established, are very, very franchisable because this is a store format which we do in Lifestyle Brands. And once we crack this format, these will be franchisable. So I suspect once we establish the model, I think the capital needs will come down significantly.

The line for the participant dropped. We move to the next participant. The next question is from the line of Richard Liu from JM Financial. May I request to speak a little louder, please.

Is this better?

You'll have to speak little a bit louder, Richard.

Okay. Ashish, can you hear me now?

Yes, yes, much better.

Okay. Ashish, got a couple of interrelated questions. But before that, if I can make a request to you to reconsider telling us what are the pre IND AS 116 numbers? Because I personally for one find it very, very difficult to fatten what is really going on in the business from a margin perspective with these numbers? And also considering that your FY '26 target that you have stated on the Investor Day, that is really based on pre-IND AS numbers, right? So I guess that we have to track the progress of that I think that reverts to a pre-IND AS number would be very, very helpful. So I would request you to consider that. So that's 1 bit, if I can put on the card. Now coming to the question, if I look at your -- the drop in your turnover versus the losses that happened this particular quarter, right? And if I look at Slide 11, you're really talking about a turnover of about INR 435 crores for the lifestyle Business and Pantaloons is about INR 220 crores. But with half the turnover, those key businesses have actually made the same amount of losses, which is INR 57 crores for Lifestyle and INR 55 for Pantaloons. Can you put some perspective into this? Because I would think that the Pantaloons would be a more higher operating leverage kind of a business compared to lifestyle brands.

Yes, Richard. So you can therefore see how the losses in Pantaloons are much higher as a percentage of revenue if you were to see compared to INR 220 crores of revenue. The loss percentage is much higher simply because of the fixed cost structure that a retailer has, more prominent. Despite all the savings and rent concessions, it remains a fundamental fixed cost structure. And that's why the losses numbers are much higher as the percentage of sales. In Lifestyle Brands, also to a certain extent, 55%, 60% of our business is retail. But the share of retail is not entirely fixed cost. There's a part of variable cost through franchise network, and that's a significant part of our business. To that extent, the losses are less compared to it. But if you were to look at our overall overhead, and I presume you're talking of with respect to Q1 FY '21? Or are you talking of Q4?

Q1 FY '21.

Right now, I'm just talking about Q1 FY '22 in absolute terms, Ashish, because with 2x the turnover in Lifestyle, you'll still incur as much loss as Pantaloons did with half the turnover. My question is that the Lifestyle is...

Are you talking about comparing profits or losses between the 2 businesses or...

Between the 2 business, Ashish.

Between the 2 quarters.

Between the 2 businesses in the same quarter. So let me just repeat, right? I mean, Pantaloons has about INR 220 crores of turnover for this quarter, Q1 FY '22 and made a loss of about INR 55 crores. Lifestyle has 2x the turnover of Pantaloons, which is INR 435 crores and still landed up making as high a loss as Pantaloons. My question is, if the level of revenue was significantly higher, should not the losses have been much lower than Pantaloons?

So there are 2, 3 elements. One is Lifestyle Brand runs a large manufacturing operation. As you know, close to 40%, 50% of our products we manufacture ourselves, we have 9 factories which have a large cost in that. So that cost absorption is unique to Lifestyle Brands in their comparison with -- Pantaloons has no fixed cost on that. So when we go through -- and this has just happened maybe second time in last 20 years, when we had to shut our factories because of COVID-related reasons. So there is a onetime large impact of 40, 45 days of factory overheads, which has sort of have taken away this quarter performance as far as Lifestyle Brands is considered if you were to compare the 2 operating models. Barring that, that number would have been much lower, but we had to take that cost in Lifestyle Brands. And that sort of exaggerated the losses of Lifestyle Brands. It has no impact in Pantaloons because they're purely variable in buy-and-sell model. There are a few other factors, which is advertising, which also because Lifestyle Brands revenues have been strong simply because there is a lot of support. E-commerce revenue has been strong. So there is, as Jagadish mentioned, about INR 20 crores more additional advertising. A large part of it is Lifestyle versus Pantaloons. So some of the fixed cost, whether it's factory overheads or advertising are differentially played out for this quarter specifically between Lifestyle Brands and Pantaloons, and that's showing up in the difference performance.

Okay. And now if I compare it Y-on-Y, Ashish, so you did about INR 190 crores of turnover in Q1 last year in the Lifestyle Brand. And this year, it is about INR 435 crores, right? So it is more than double. But yet, if I look at the EBITDA losses that we reported, that has come down by only INR 10 crore, right, INR 68 crores last year, INR 57 crores this year. I mean, why would it be -- why would it be so, especially since -- if I remember correctly, last year Q1, you had a very, very low gross margin of about 41% at a blended level. And this year, it is much higher at about 50%.

So I think, again, you need to look at as a percentage of that, and there is a fixed cost impact that happened. There is increase in advertising that's got played out, as I said. Last year, we had cut the cost completely because we were very uncertain. This year, if you look at it, we are talking already about 80%, 85% of revenues. So a lot of our investments are back whether it is in advertising, whether it is scale of operations or some of the costs are variable costs that have gone up, the investments in e-commerce or even in terms of the fixed overheads under absorption, which was quite severe. It was, I think, I don't know the number for last year similar quarter. It must have been probably slightly lower than that. But that's the reason. We can give you probably a closer tally maybe separately, Jagadish can take you through on the 2 numbers. Jagadish, is there anything you want to add to that?

No, it's okay. Actually, it's unabsorbed fixed overhead.

So that's a large part. I mean, unabsorbed fixed overhead is a very large part for this quarter.

Okay. Ashish, I would just once again request you to consider the pre and post IND AS thing, just to help us understand this better because it's absolutely difficult to fathom what's really going on with the numbers based on these post-IND AS numbers.

Richard, we'll come back to it. I mean, we thought that we should consistently follow what gets reported and explain that and rest of the industry. We were the only company we continue to show post-IND AS year after, but we realize that most people in the industry has moved on. So we recorded your request. Let's see, it's always difficult to keep 2 accounts and tallying between them. But let's see, if there is a smart way to be able to explain both numbers, I think we will try and do that.

The next question is from the line of Nihal Jham from Edelweiss.

Sir, 3 questions from my end. First on the 400 stores target that is reserved for the Lifestyle Brands. How many of them will approximately be future [indiscernible] store format?

Should I take that, Ashish?

Yes, go ahead.

Yes. So roughly about 150 stores is [indiscernible] and about 50 stores would be [indiscernible].

That's helpful. The second part was on the new ethnic wear brand we are launching. I'm talking about the second one. It is clear on the first part that the premium men's wear ethnic. The second one that we are launching initially inside Pantaloons, is that targeted only towards women to be sure of that aspect.

Ashish, do you want to take that?

Sorry, I missed that question. Can you repeat it?

Yes, I was asking that for the second ethnic wear brand that you are planning to launch in October, which is going to start off with Pantaloons 40-50 store format pilot. Is that only made for women's ethnic wear to start with?

Yes. Yes. That's meant for only women's ethnic wear.

And you said that it will be more of regular wear rather than it being closer to bridal or the high end format in ethnic wear?

Yes. It will be at the meat of the market at the largest segment of the market, which is mid-teen to premium. And that's where Pantaloons has a strong customer franchise right now. Most of that business is currently being serviced by external brands, and we feel Pantaloons has the design and merchandise capability to fill that space.

Absolutely. The only thought or understanding was that maybe Pantaloons had a high share of collections in women's ethnic which was targeted at these price points, maybe starting at INR 500. So is it that this is going to be more premium regular wear in addition to what we are already serving?

No, you will be surprised the amount of premium ethnic wear that Pantaloons sells between INR 1,200, INR 1,500 and INR 2,000. It's largely done through external brands. The increasing share of private label. And therefore, this brand is a premium brand, not competing at INR 500, INR 800, but more at INR 1,500, INR 2,000, INR 2,500.

Understood. That's helpful. Just one last question on the innerwear side. What I noticed is that last year when we ended, we had around 28,000 outlets in innerwear. I don't know the presentation says, currently, we are having a reach of 23,000. So I just wanted to understand is that a reduction in the number of touch points you are having on the innerwear side?

No, no. What had happened is earlier we used to report men's and women's separately and the team used to add up those numbers. This year, we did a reconciliation of common outlets. And we realize actually we should report 1 number where 1 outlet appears once. Earlier, we were reporting separately for men and women, and therefore, as we used to add up that number, very often these outlets were common.

That is helpful. And exclusively for women, what would be the touch base out of these 23,000?

Don't have the number, but it will be definitely north of 5,000, 6,000.

The next question is from the line of Tejash Shah from Spark Capital.

My first question pertains to debt type. I missed the number, a debt of INR 1,200 crores was as on June or as on today?

June, June.

So this is before the large tranche of rights money would have come in.

Yes, yes.

Okay. Second, Ashish, aspirationally and philosophically, I just wanted to understand our view on debt from here on because we have just come out from a very bad cycle, pandemic and the debt also when we entered the cycle was very high. And obviously, with the dilution and interventions that we made, our strategic investments, we brought it down to a very good level. Now as we again come into growth phase, incrementally, would you like to deploy more capital to chase growth first? Or would you like to settle the debt at certain level and then sales growth? So that number will be a Goal Seek function or it will be a residual number for us?

I think we'll have to stay balanced on that data. I wouldn't take 1 position or the other. I think we need to stay balanced on our -- remember, we have now a portfolio where there are multiple opportunities that we're chasing. We look at the opportunities for Lifestyle Brands, Pantaloons, innerwear, the new ethnic business that we are building. There is an acceleration of digital play that's going on. We feel very well positioned. In fact, probably the only company in the industry, which has such a wide portfolio and such a large canvas to play on. So we are very confident of future. And therefore, we don't want to also start with debt as an operating constraint, but we also understand the level of limits at which we need to operate. We feel very comfortable in our current sense of projections on where, let's say, debt-to-EBITDA will play a year from now. This year is hard to predict. But whichever way it goes, even if it gets a little worse, we will still be in a reasonably good debt-to-EBITDA position as far as FY '23 is concerned. So I wouldn't say that we don't care about it. I think it's important we need to keep a ratio and that in mind. But really, we will be missing -- we are very well positioned to accelerate. We are well positioned competitively, the portfolio of our brands, the opportunity in front of us. So that remains sort of north star for us.

Sure. But if you can give an objective number there on debt to EBITDA, what -- where would you like to stop that number?

So see, in past, we've gone up to 2.73%, but we will be more comfortable between 1 to 2 at best. And that's really the maximum range that we should look at.

Sure. Second, on demand, you mentioned in the PPT that recovery, we are expecting full recovery by festive season. But hypothetically, if this quarter has to open up and as Mr. Bajaj also said that, today, Maharashtra has also given some good news on opening up. Hypothetically, if you have to open up from today or next week onwards, do you think that pent-up element can actually bring back recovery faster than the festive quarter? Or do you believe that the underlying economic environment needs festive pushed to go back to normalcy?

No, there is certain element of pent-up demand, which will show up in this quarter also. But like every year, I think the real boost and trigger to demand uplift happens during festive period. This time, it's got pushed a little bit in terms of closer to October than September, and therefore, to that extent, maybe it will -- month-wise, it may sort of move over and more to Q3. But I do believe that even quarter 2, if there is no third wave, I think we'll have a reasonably good recovery. But for a full recovery with the combination of all stores operating fully -- because even today, if you look at it, Tejash, just a lot of stores that are operating on weak days, there are stores which need to shut early in the evening. So we are operating with extremely sort of difficult retail environment in that sense.

Sure. And then last one on Lifestyle Brand. Recovery in wholesale is lower than the system recovery there. So any insights there to share?

Yes. Yes, Tejash. I think it's -- there's been a slight lag between smaller formats of retail recovering and then larger formats or retail recovering. So there is that because of lag. In fact, if I were to tell you, in July, it's a lot more significant recovery in the wholesale part as well, okay? So there is just that a little bit in the Q1 piece, which in the end of Q1 period. But maybe I would say the lag is about a month between wholesale and retail.

[Operator Instructions] The next question is from the line of Ankit Kedia from PhillipCapital.

Sir, my first question is on your new e-commerce strategy. In the presentation, you have alluded on the multi-brand app a couple of quarters back, you were talking of launching individual dry mats for the Madura brand. So now we have separate loyalty programs for the 4 brands as well. So how does the change in strategy come about now? And will it also include Pantaloons on all the other international brands as well?

So first part, we remain focused on individual brands. So we are not planning to launch a platform where all brands sell across each other. But we are looking for an architecture where consumers can easily shop from one brand to another and switch over to that. But within each, he will have very unique and deep experience of that brand. Because at the end of the day, we are a branded company, and our biggest strength is the brand. So the experience will be rich and unique and distinctive for each brand, but it will allow consumers to swap across brands as we move forward. At this stage, the idea is to take Lifestyle Brands and similar brands next stage will get extended where some of the international brands can get added. The current intent is to build that and have a second platform for Pantaloons because that's more transaction-heavy business, while the nature of the brands is more content-driven, engagement-driven. So there is a slight nature in the way architecture plays out. Therefore, at this stage, 2 points I would make, separate pantaloons.com and a separate brand.com. brand.com, although multiple brands is what you can access. But it's not that you can shop, let's say, trousers of all one brand together. This is not a multi-brand site in that sense. It's a combination of single brand sites coming together, where we get synergy of data, consumer traffic, consumer also gets option to switch across that. Some of the details are still to be worked around loyalty and other pieces. I think that will unfold as we go forward.

Sir, my second was on launching e-commerce only brands. So could you talk a bit on that as well? Which category -- what price points are we looking at? And will it also be on our own app or purely from a marketplace perspective?

So first of all, in terms of where it will be, while it can be on our own app and it will eventually be, I think the opportunity that we are seeing is our ability to create, procreate consumer-facing merchandise design is our strength. And in partnership with large platforms who have consumers, we find many white spaces where this can be done. We look at it in women's fashion in some of the casual segments of the market. But the list of where such white spaces is larger, and we are in constant engagement. We will build a reasonably large business, which will be digitally. And so the proposition, the price structure, the cost structure, gross margin structure, et cetera, will be designed for pure e-commerce. And that's really the thought. I think there are multiple white spaces. We are starting to look at 1 or 2 of them now. I think by end of the year, we'll start to see the impact of this.

And sir, my last question is on the Pantaloons. In last 2 years, we have taken people to Pantaloons homes, saree, kids and now we're talking about premium women's wear brand. So we would have also removed some other low-throughput brands out of Pantaloons. So the question is, during the pilot phase in certain 40-50 lows, how is the response of these new categories? How many months do you see the throughput coming back to the normalized levels of the company averages if you can share some highlights.

Okay. So many of these categories, home, sarees were launched just before COVID. Therefore, we haven't seen even 1 full season of stable performance because Pantaloons has been more infected right through last 15, 16 months. So I would say, at this stage, while we have launched many of these categories, and we are also launching some brands and replace, we are doing both things. We are rationalizing our internal brand architecture to simplify it for customers. And we are, of course, replacing the lower throughput, low product with the more profitable external brands. So both these are getting played out at this point of time. I don't think today, we are in a position to definitively comment on how they are performing because we need to give them at least 1 season. And hopefully, this coming season will be a good place where you would have sarees in 50, 60 stores, all in 50, 60 stores, if not more. As far as new premium brand is concerned, again, it is going to, over a period of time, take share from existing external brands that we have because Pantaloons is a large franchise and a very large business of premium women's at request. But we don't -- we have not created our own brand. This is primarily a step to increase the private label share.

The next question is from the line of Priyam Khimawat from Infinity Alternatives.

Firstly, on our EBITDA margin at the company level going forward. So if I look at the last 4, 6 quarters, we've almost closed out 30 to 35 loss-making Pantaloons and 150 odd loss-making stores. So with these stores not being a drag on profitability anymore and with the cost which we would have done on account of the pandemic, shouldn't the pre-IND AS EBITDA margin at the company level structurally improve by, say, 100 to 150 basis points and reach to that 10% level mark whenever we achieve full recovery. What is your take on that?

So I think it's a very broad question. I wouldn't want to speculate right now because there are multiple elements in this. You're absolutely right. What we have done in the last 15 months is pushed very hard to structurally correct the cost of unviable stores. Some places, we have got a deal which keeps us growing and not just for this period, but going forward. In some cases, we couldn't get that. And therefore, we have been quite sharp in terms of shutting or pruning that part of the network. As we emerge from the whole situation. Going forward, obviously, we are looking at intrinsically both some of the structural costs at an operating level coming down as well as the health of network improving. But I think because it's so phased and differentially sort of timed, it's hard for me to put the number right now on that. But you have seen, if you look at our businesses, our Lifestyle Brands has been reasonably consistent in the margin profile. Pantaloons for last pre-COVID for every single year for previous 3 years was delivering between 100 to 150 basis point improvements in margin, and we were close to about 8% when we ended December of FY '20. And we were quite hopeful that, that performance will get us to 10% there. Lifestyle Brands is already above that and fairly consistent and robust on that. I think our amongst loss-making business, if you go back, Forever 21, which used to lose at its peak about INR 35 crores to INR 40 crores has become breakeven business where the losses are initially high, continues to be at this point of time, hasn't reached breakeven, but that's primarily because of COVID effect. I think a year from now that will also come back. So if you look at, therefore, the various elements of individual businesses, the profit profile was improving sharply, and I think it will continue to improve as soon as recovery comes back. Now it's hard for us to put a number right now on when that would happen.

Okay. So yes, exactly when taking what you said when I do a basic back of the envelope [Audio Gap] for our businesses. So if a COVID third wave [indiscernible] and when we reach a INR 10,000 crore revenue mark, would it be INR 1,000 crores to INR 1,100 crores EBITDA. Is that what you are working towards?

No, definitely. Our aspiration is because we think for a company with our profile, with our portfolio of businesses, INR 1,000 crore EBITDA is not a number which is out of sight. And this is pre-IND AS number I presume you are referring to. It's not out of reach, and that's something that when normalcy restores, will definitely be one of the immediate targets that we will have.

Okay. And my second question is on the size of our innerwear and athleisure business right now, with unorganized players still taking the lead especially in this segment, our growth seems to be a little [indiscernible] underwhelming. So what do you see like how when we look at a [ 3-year ] perspective from this, what is the size of the current innerwear business? And how do you see it going forward from here?

So I think we have -- because of COVID, our momentum sort of got stopped at the peak of where the journey was beginning. As I have said, our first target was to get to INR 500 crores. Realistically, we would have got there by now, if things were normal. But I think that's the underlying size of the business, although it's not showing up in numbers at that level. Our immediate next goal in the next 2 years would be to target closer to INR 1,000 crores because that's the next number that we have. We know how to get there and we know what it would take to get there, and I think we'll have to execute on that. So that's our immediate INR 500 crores, and I think 2 years from now, about INR 1,000 crores is the goal that we have for that business.

The next question is from the line of Vikas Jain from Equirus Securities.

Sir, my first question is with respect to our rental costs. So of course, we have seen a few concessions in this quarter and also we will receive some in the next 2Q FY '22. I just wanted to understand from a normalized basis, given that we don't receive any concessions and the demand is normal, what would be your quarterly ranges for rental cost that we occurring this year or probably going ahead?

I think on a base -- and these are slightly rounded numbers. We are a network of about INR 300 crores rental rupees for a quarter. So it's about INR 1,100 crores, INR 1,200 crores is the rental that comes in. It comes largely at fixed, but there are variable components of that. But if you were to put 1 number, it would be around that.

This is without any rebate and base level of number despite increasing 2 and 4x of revenue, we could reduce the rent number.

Is that the question, or you want to know range at the stage of sales?

No, no, sir, you answered my question with respect to that. Sir, my second question is also with respect to our finance costs. So this quarter, you did INR 85 crores. Out of that, can you split all those actual interest cost? Or was there some agreement of the lease into it?

It includes the lease impact also. Otherwise, the effective interest rate in the business is around 7.75%.

And what would be the absolute amount this quarter?

This -- this quarter, I have to split up again, I have to go into detail. But I have given you the numbers, INR 1,200 crores is my debt, which has built up in this quarter month-on-month.

The next question is from the line of [indiscernible] from [ Emkay Global ].

Just a small clarification first, this 85% recovery that you have indicated for July. Is it for stores that are open or a system-wide recovery?

So this is for the full business, it's not stores, nothing. This is for full Lifestyle business.

You are saying that -- saying 65% network is open. And with that 65%, we have seen 85% recovery.

No, no, no. You're wrong. 85% of network, more than 85% of network is open. But the number that we have indicated is the total growth -- total number across all channels. So obviously, the share of e-commerce, retail, all channels put together, that's wrong.

Okay. And secondly, for ethnic wear, currently, based on industry performance, the recovery in this category has been relatively slower. So in terms of consumer preference, where in terms -- in women category where ethnic has a larger share at about 70%. What according to you are the drivers for this category to maintain this higher share and continue growing faster?

So I think the underlying reason is like most categories, but let me specifically talk about women's ethnic wear. What are the usage? There is a regular daily usage that women does at home for casualization. There is an office where usage in ethnic wear. And there is a festival going out those kind of usage. As you can make out in the last 12 to 15 months, both activity has been subdued and going out has been constrained. And therefore, there are strong reasons why from a demand point of view, this category has suffered in the medium term. I think as normalcy comes back, all the 3 elements of it, which is women going to work, women buying clothes for festivals and special occasions or for going out will come back in a strong way. So we think it's quite directly linked to how last 15 months have played out in life of women or generally more consumers in absence of occasions.

Sir, do we maintain that industry percentage of 70% which this category can retain this much and even grow this year?

Sorry, I didn't get your question. What's the point?

I'm saying ethnic wear is currently 70% in women's wear. So with these growth drivers, this amount of market share is sustainable?

So 2 parts. One is at -- there is undeniable rapid growth of women's western wear, but it's happening at the lowest end of the market. Women are buying cheap, young girls, buying cheap tops and skirts and so on. So there is a large growth of women's western wear at the bottom end of the market. On the ethnic side, however, the value equation is changing. People are paying more to buy ethnic wear and less for Western wear. And therefore, while there might be -- so they are basically counter factors. There is a share of women's wear that will grow investments, but will happen at lower price points, probably the value share may not grow as much. Although organically, I think over a longer period of time, that will grow from the current levels. But what it has done, therefore, because of increase in value in ethnic wear as more and more better brands, better products, designer-led products, special occasions, a lot of interest in design and merchandising in this category has grown, women are finding that it is -- that they pay a lot more for ethnic wear today than western wear. And I think there is, therefore, a value migration upward, which is happening. And that perhaps may allow that share to drop much slower than what was anticipated earlier.

We'll take the final question from the line of Niket Shah from Motilal Oswal Mutual Fund.

Just a couple of questions. You mentioned about ethnic wear launch women. Is it going to be the price point of INR 1,000 to INR 3,000, somewhere the likes of TCNS OpEx? That's the first question. And the second question is when you mentioned 85% of the recovery have been achieved in July, are you referring to the July days of last year or are you saying 85% of equal level?

Okay. So 2 questions. The first question, what would be the price point of the premium ethnic wear line. It should be more between INR 1,500 to INR 3,000, INR 2,500, INR 3,000, maybe some entry price point products maybe INR 1,200, INR 1,300. So it's right at the heart of the business. The second question on -- when I mentioned 85% business recovery in Lifestyle Brands, that is with reference to pre-COVID times, which means July 2020, July 2020.

2019.

Sorry, 2019, which is pre-COVID levels.

Okay. Got it. And my final question is, given the fact that lower e-commerce you would have a lot of data offline as well as online now coming through. Is the strategy on cross-selling some of your products to multiple customers because you have a very rich base of database now in terms of their preference and so on and so forth?

So I think you will hear more about it as we sort of progress on our multi-brand app. But most of this consumer data is consolidated at the central server. So our customer knowledge is very deep. We know if somebody has bought across our brands, product categories, which he or she buys from 1 brand and how many brands does she have in our portfolio and so on. So there's a lot of opportunity in that. I think because our share of e-commerce and our overall revenue in e-commerce at brand.com was too small, we were not leveraging some of these things. In the last 12 to 15 months, we have picked up both capability, IT architecture and ways of actually understanding this data better. When we have our websites and app fully in place where a lot of these cross-selling and cross sort of upgrading opportunities will come up. I think that's when it will get played out fully. We are still doing it. Each of our brands have access to the full data. It's consolidated and centralized, but I think the real effect of it will start playing out in 6 to 12 months from now when there is an enabling technology infrastructure behind it.

Got it. And if I may just squeeze in 1 more question on Ethnic. Would it be possible if you give us some sense on medium-term guidance on what margins can we make, either pre-IND AS, post-IND AS, whichever number you want to give it, at some reasonable scale because what we generally thought that this would be a reasonable business and it's publicly because of COVID stuff that way. So some sense on that would be helpful.

Which business? I missed your...

Ethnic business.

Ethnic business. So see, we have a wide profile of ethnic businesses. There are established ethnic business at super premium level, which is Sabyasachi and Tarun and all that. They are already -- I mean, pre-COVID, they were very profitable businesses, though very, very small. So I believe, that aside, I think they will come back to where they are, which is a reasonably healthy profitability, but they wouldn't sort of swing the needle for a company of our size. So it has come down to these 2 brands that I talked about. In terms of our men's ethnic wear brand, we expect we should get to double-digit number in 3 years from now. because we'll be investing to build scale and sort of build equity for that brand. And that's what it will take. I think we'll get to healthy double digit numbers in this business because in many ways, this business has some of the -- is less susceptible to fashion, and therefore, obsolescence is much lower. We'll still need to invest to build the brand, build customer franchise, et cetera. It's a one-player market in which we'll have to create presence. We are quite confident that this will be a profitable business. On the women's wear side, we will -- we are playing both sides, which is to build the brand inside Pantaloons and improve gross margins of Pantaloons through increased share of private label. That, of course, is a sort of a clear strategy. As we go out, we will see how profitable is it. And the retail expansion on the physical side as exclusive stores will be managed depending on the profitability that plays out in that. So that we will have to evaluate more closely as we go along and depending on how well we find intrinsic profitability, we'll scale that business. Otherwise, it can always remain as the Pantaloons-led brand.

Sure. But on an overall basis, on a consolidated ethnic revenue, you wouldn't have any negative EBITDA because the reason I'm asking is every solution -- so if you look at historically, right, we had some of the way where we had some drag coming from some business, whether it is another in the past and now when another it is likely to break even or move to profitable territory we now have mix. So safe to assume that everything will become profitable. It depends on margins. I mean some -- it can be 2% to 3% margin to start with and then over a period of time, we will do double digit in the next 3 years as you guided, but everything will be profitable. There will not be any drag from any businesses over the medium term.

So I would hesitate to make that point for immediate term. I think even as we recover, let's say, FY '23, I think our new ethnic business, whether it's men's wear brand, or the existing business, which is Jaypore. And I would just call out these 2, I think others will be profitable. These 2 will probably take a year or 2 to turn around. So we'll have losses for 2 years in this business.

Thank you very much. Ladies and gentlemen, on behalf of the management, we thank all the participants for joining us. In case of any further queries, you may please connect and get in touch with Mr. Rahul Desai or Mr. Amit Dwivedi. You may now disconnect your lines. Thank you.