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

Ladies and gentlemen, good day, and welcome to Third Quarter and First 9 Months 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 the Q3 FY '22 performance followed by a question-and-answer session. We have with us today Mr. Ashish Dikshit, Managing Director; Mr. Jagdish Bajaj, CFO; Mr. Vishak Kumar, Director and CEO, Lifestyle Business; and Ms. Sangeeta Pendurkar, Director and CEO, Pantaloons. 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 viewed, therefore, in conjunction with the risks that the company faces. Please restrict your questions to the quarter and half yearly performance and to strategic questions only. Housekeeping questions can be dealt separately with the IR team. [Operator Instructions] Please note that this conference is being recorded. With this, I now hand the conference to Mr. Jagdish Bajaj. Thank you, and over to you, sir.

Good evening, and welcome to the earnings call for our company. Let me first take you through the highlights for the quarter. The company saw its highest ever quarterly sales and profitability in this quarter. You will be pleased to note all the business lines of the company individually also have posted their new highs in terms of revenue, profit and cash generation. Company delivered sales of INR 2,987 crores, a 44% growth over same quarter last year. The company achieved historically highest consolidated EBITDA of INR 609 crores, a 44% growth over last year level. Improved profitability was driven by an agile product-to-market strategy, better discount management and continued fixed cost controls, driving a record EBITDA margin of 20.4% this quarter. Happy to inform that the company has closed this quarter with a positive case of INR [indiscernible] of net debt of [indiscernible] at the end of Q2 FY '22, thereby generating nearly INR 1,000 crores of cash from operations in this quarter. In line with our comprehensive ethnic wear strategy, we are pleased to announce that we have launched our premium men's ethnic wear brand, Tasva in collaboration with the designer Tarun Tahiliani in this quarter. The brand also has quickly scaled up to 3 stores and will close this fiscal with a total of 5 stores across different markets. The company continued to expand its portfolio to enter into large, meaningful consumer Lifestyle segment, with signing of agreement to acquire India operations of Reebok in sportswear and 51% acquisition of House of Masaba to enter into Beauty and Personal Care segment. Both these transactions are expected to be completed by end of this fiscal. Reebok India is poised to reach INR 1,000 crores in next 5 years. Similarly, Masaba has a potential to scale up to INR 500 crores brand in the next 5 years. We have accelerated our network expansion and launched more than 200 stores this quarter across businesses, formats and town [ classes ], in line with our objective of expanding off-line footprint across India. We have expanded our omnichannel coverage with 50% of our network Omni-enabled across India, which is 1,500 stores across all our brands put together, the strong push to our digital plans continue as we evolve [ ourselves ] with changing consumer needs. Now, I will take you through the performance of individual businesses, starting with Lifestyle Brand business. The Lifestyle Brands recorded a historical high sales and EBITDA of INR 1,589 crores and INR 346 crores, respectively. The EBITDA has grown by 80% over last year, with margin of 21.8%, also being a historical high. The performance is a testimony to the strength on our brands in a resilient business model. The brand continued to gain market share and grew by 55% over last year, with retail sales growing at a historic high of 41% Y-o-Y and LTL of 34%. Retail sales even surpassed pre-COVID levels by 30%. Our focus on category extension continues as our new launches of VH Flex and Louis received strong consumer traction along with our womenswear segment doubling in size over pre-COVID level. Our recent foray into kidswear through Peter England girls and boys has been received very well in the market. Our expansion in small town India continues aggressively as we take our brands to these markets through an asset-light format. [indiscernible] now sales across 400 stores while Louis Philippe, Allen Solly and Van Heusen continue to build on their successful pilots earlier this year. E-commerce sales continue to emerge as a dominant sales channel, with this quarter recording the highest ever revenue. I want to reiterate that Madura brand portfolio is one of the largest branded fashion e-commerce businesses in the country. Pantaloon business recorded sales of INR 1,066 crores with a growth of 31% over last year, with the highest ever EBITDA of INR 216 crores. This was on the back of robust footfall during the festive period. Pantaloons almost recovered to pre-COVID levels during this quarter. The sales could have been significantly higher, but for the impact on footfalls in the last week of December due to onset of third wave. Higher share of small stores and significant presence in certain markets, which were relatively on more stringent restrictions, also adversely impacted this performance. E-commerce continues to make strides, growing by 67% year-on-year across our own pantaloons.com and partner sites, with pantaloons.com sales almost doubling in size versus previous year. Pantaloons opened 22 new stores during the quarter and expects to open 20-plus more stores in Q4. With this, Pantaloon is likely to close the fiscal with a store count of over 380 stores. Innerwear business continues to scale up rapidly and reached 25,000 outlets at the end of December '21. The revenue of this segment grew 1.5x over pre-COVID Q3 FY '20 level. The segment will have more than 100 EBOs by the end of March. The business is continuing on its strong trajectory and is on track to breakeven. Now let me talk to you about Global Brands, which is Youth and Super Premium. This business continued to witness a strong momentum. In Youth business fashion brands, Forever 21 is back in expansion mode with 3 new stores this quarter. American Eagle saw 127% jump over pre-COVID levels. Five new American Eagle stores opened during the quarter, and the brand is strongly establishing itself in the Denim segment. The Collective and the other Super Premium brands business also witnessed a sharp growth of 37% over last year. The segment has consistently maintained a strong profitability journey over the past few quarters. Our own e-commerce site, thecollective.in, recorded a 4x growth over last year. Across the Super Premium brands portfolio, we have opened 9 stores so far in this fiscal. Ethnic business, as you are aware, we have set up a number of partnership initiatives in the Ethnic sector with big brands in the Ethnic space like Sabyasachi, Tarun Tahiliani, Shantanu & Nikhil and Jaypore. In addition, we have organically launched women's mid-premium brand Marigold Lane along with affordable premium men's Ethnic wear brand, Tasva. At an aggregate level, the segment has grown fivefold over previous year and is currently operating profitably at an annual run rate of INR 400 crores. The segment has added 8 stores across all its brands and is currently operating a network of 23 stores across key markets in India as well as 1 store in Dubai. We will aggressively expand the store network across all the constituent brands over the next few years. I wish to reemphasize that ethnic wear is a huge market opportunity where we wish to build a large, meaningful play through our comprehensive portfolio. At our current levels, we are on track to build scale in this segment profitably. I'm also glad to appraise you that ABFRL Board today, approved setting up a wholly owned subsidiary for incubating a portfolio of fashion and lifestyle D2C brands. As you would be aware, D2C is a fast-growing space with an expected total addressable market of about INR 100 billion by 2025. ABFRL has played a leadership role over the last 25 years in building the most iconic fashion brand in the offline space. With this move, we intend to replicate this success into the digital world as well, thereby evolving along with our consumers. In conclusion, I'm glad to announce that this quarter, ABFRL achieved -- reached new highs in terms of revenue and profits. As we continue to leverage the strength of our brands, our resilient business model, continuous innovation and evolution in line with changing consumer needs, we are confident to reach new highs in future. With more comprehensive portfolio play in Indian fashion industry, ABFRL is poised to continue its leadership position in India's fashion and apparel sector. Thank you, and we are open to questions now.

[Operator Instructions] The first question is from the line of Yash Mehta from Edelweiss Securities.

This is Nihal Jham from Edelweiss. Am I audible?

Yes, sir, you are.

Congratulations on the strong performance. A couple of questions from my side. First, on the cash flow bit. So you mentioned that you've done a cash flow of around INR 1,000 crores this quarter. And this obviously, I would assume includes a decent working capital release also that has happened. I just wanted to understand that is any of it expected to reverse in the coming quarters. Or just -- is there something that the spending has now got completed? And incrementally, most of the EBITDA that will get converted into cash flow will be as per the past trends.

So Nihal, this is Ashish. You're right, of rough -- close to [ INR 1,000 ] crores cash is got generated. A significant part has come from working capital release as well. As you know, this quarter happens to be a relatively high quarter compared to the annual average. And to that extent, the cash release in the system is higher because you sell more, release more inventory. Some of it has a tendency of coming back, but very small in quarter 4, where sales typically come down while your purchase has become due for payment part of it. But I think that difference will be maybe INR 150 crores, INR 200 crores [ shift ] quarter-on-quarter. Otherwise, you typically go in line with how your sales and profits are.

This is helpful, Ashish. Just a question on bank loans. In your opening remarks, you mentioned that there was an impact in the last week on footfall given the COVID wave. Is it quite possible to give a sense, say, looking at a daily sale that what was this contraction that happened in the last 1 week to 10 days because of, as you said, COVID impact?

Sangeeta, you want to comment?

So Nihal. I think we -- if you look at our October, November trajectory, I think that's where we did a very, very good performance, and we saw some very good footfalls coming through festive. I think as we approached December, we saw a reduction at the back end as some of the third wave started coming in. We saw a reduction in terms of our footfall. And we believe that, that was just the beginning of the third wave, and we saw some sale loss there on account of that. And that's kind of continued as we know, in January as well. However, I think the big -- most important thing for us is to note that in October, November, when things were looking good, the business really came back to normal and our recoveries, even versus FY '20, were fantastic. If it was not for the shift that we saw in the last 10 days in terms of footfalls dropping to the tune of about -- almost about 20% versus what we would have expected, we -- our numbers would have been even higher.

Understood. That's helpful. Last question from my side. Actually, it's now a year since we held our Annual Investor Day and we've given targets out for the next 5 years. There, obviously, we have plans for each of these businesses in terms of Ethnic, innerwear and the other part. Over the last 6 months, there have obviously been some new pieces that have also been added, whether it was the Reebok part of it or even [indiscernible] Masaba. And now, there is obviously the release today on the D2C part that you're contemplating. So just in terms of the revised thought process, what is it the ABFRL looking at over the next 3, 5 years? And also a little more detail on the D2Cs part? Because in my limited experience, I've only seen many say e-commerce platform get into something because they have a platform to provide these brands to scale up. It then gives them a way to -- give them some kind of confidence with this. From our side, what is it that we plan to provide these B2C brands [indiscernible]? How do we see ourselves monetizing this [indiscernible].

So Nihal, a lot of questions in this. Let me try and address as many as I can. First is, what's our view on the longer term a year back, almost a year back, we presented during the Investor Day a long-term 5-year plan in a pretty granular detail. I think where we stand in this journey despite an intermittent disturbance due to wave -- the second wave and subsequently, even third wave. We are more confident than even a year back that we will definitely sort of exceed that plan. On top of it, Reebok is a very large opportunity. Sportswear is a large industry. Some of the leading companies are INR 100 crore plus. Reebok is also starting with a good base of INR 400 crores. Some of our plans in Ethnic have become more visible as we are going down. We have launched 2 new organic brands, both Tasva and Marigold Lane. So in many sense, if anything, I were to sit and remove the effect of the 2 waves. And just look ahead, I think we are much better placed than anything that we had said about a year back. Coming quickly to the D2C brand business that we are talking about. See, let me just take a few minutes because I think this question will come from multiple people since we have just made this announcement to explain that. Today, a whole new sale of brands is coming to the market and growing very rapidly on the platforms, as you rightly mentioned. Some of them even have capability and have learned very smartly because they are either digitally savvy or it's the next generation of idea, which has traction on their own website. But most of them, a large part of them are primarily brands which are taking shape and getting formed on large platforms. Now platforms can -- are already doing what they can do, which is to provide access of these brands to the consumers that are there on their platforms. What these brands need is really an experienced hand apart from capital because at some point of time, as they grow first INR 10 crores, INR 20 crores, INR 30 crores, INR 40 crores, at some stage, management bandwidth, expertise, competence to run larger business, ability to expand into multiple lines, sourcing and supply chain efficiency, digital marketing, technology capability just to run their business more, more efficiently. And apart from capital, whether it's working capital for growth or initial investment, these are the things which hamper what could be a promising and potentially large business from actualizing its full potential. And this is what we want to provide. So [indiscernible] years of experience of building brands, each of our brand has evolved multiple times in its journey. We have expanded into new categories. We have built deep capability in supply chain. We understand fashion ecosystem particularly, and now adjacent categories like accessories and other products. And therefore, there is a lot of value that we can add. We are not just channel providers. We can convert potentially promising small brands into meaningfully large brands through this combination of capital management expertise, access to partners, access to channels of growth. And that's really what we want to do.

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

Congrats on good recovery. My first question pertains to Pantaloons. So Sangeeta spoke about the recovery part. But surprisingly, with the lesser throughput, we are doing well on margins part. So if you help us to understand how one should think about margins going forward when the recovery happens. Is it a new base that we have formed, and on that, we build new profitability? Or is it -- there is actually more of a response to go with cost cutting and it will normalize as we go forward?

Right. So let me try and respond to your question in 2 parts. One is, I just want to remind everyone on the call, in terms of the journey that Pantaloons has been on, right? And we have mentioned and talked about this in every single call. I think our business today fundamentally is offer better quality. And therefore, the resultant -- the key things that have led to this quality of business starting right from how we started that journey in terms of improving our product and product aesthetics, the new categories that we launched to the new labels that we have introduced. More importantly, I think in terms of expansion, we know our stores are profitable right from the first year. The new retail identity that we have put out, I hope some of you had the chance to go and see it. It would redefine the customer experience that we want to provide inside the Pantaloons stores and likewise on pantaloons.com, providing a seamless kind of experience. Now from a cost standpoint, last year, we had made some decisions in terms of overheads and in terms of how we invested in marketing. I think this year, again, few measures in terms of tight cost control measures, some of which have become intrinsic to our business, and we kind of now understand the levers to manage costs. And overall, we feel pretty confident that we will be able to sustain some of those costs and keep those costs under control. As Ashish said before, this also happens to be one of our largest quarters in the year. And therefore, we do get a leverage on account of a higher turnover there. But going forward, our journey on constant improvement, if you remember, not very long ago, our EBITDA margin used to sit in single digit, which we have kind of improved constantly with all the things that I mentioned. In terms of improving our portfolio, our journey towards improving our private label share, et cetera, and we feel confident that we'll be able to constantly improve our margin. Yes, this quarter is slightly different because the quarter in itself is a quarter where our dependence on [indiscernible] is being high, we see higher numbers. And therefore, I think in the subsequent quarters, too, you will see us -- our endeavors to improve our costs will continue.

Tejash, do you have any follow-up question?

Yes. Sangeeta, this is very, very loud and clear. Second question pertains to Athleisure business. If you can help us with some trailing number and run rate over there.

Tejashji, you mean Innerwear Athleisure business, Van Heusen?

Yes. Yes, Van Heusen.

So I think we are tracking somewhere between -- if you were to look at annualized run rate kind of number, we are closer to INR 500 crores. And it's growing rapidly year-on-year, even through the COVID, it's been growing 30% plus. So that's the trajectory as of now.

Sure. And any sense on profitability there that you can tell us?

It's marginally -- some quarters, it's breakeven, some quarters marginally lower. But its profitability is, again, moving very rapidly from initial days of deep investment to now coming to a point where it's also generating enough to sort of fund its growth, but at a very nominal level right now.

Sure. And last question, I'm actually struggling to find an efficient way to ask this, but if you keep the last year's Analyst Day's business plan presentation as a compass for the strategy that we had decided for [ ourselves ] for the next 4 or 5 years, should we see this current initiatives on Reebok, Masaba and D2C platform as a detour or is it much more, I would say, agile response to [indiscernible] we are seeing in the marketplace?

So it is -- I think it's very important you see our strategy as a continuity. We have been saying and doing the same thing for last 5 years. We said we will get into ethnic wear, build a portfolio to play in all segments of ethnic wear. We took initial small steps with Jaypore and Shantanu & Nikhil, bigger steps when we made investment in Sabyasachi, even bigger when we came up with a plan to launch 2 large premium ethnic wear brands, one in menswear with Tarun Tahiliani and the other one in Marigold Lane. Masaba is a part of that, and therefore, it's no way different from our plan that we are building. Reebok is an opportunity that came to us. It is not something that we had engineered. Reebok is one of the top 3 Global Brands in the world. It is a very, very powerful brand, which we believe in India. And India is one of the few markets where Reebok has been a market leader ahead of Nike and Adidas and Puma till 6, 7 years back. So it's a strong brand, fast-growing segment. We're already playing that partly through our athleisure initiative in Innerwear, but we are never able to sort of take the sportswear brand head on. So this is something that we did, but it's part of our strategy to play in the emerging market segments. The D2C initiative is more fundamental as strategies need to absorb the large shifts that are happening. How consumers are shopping today, how brands are getting made today, the pace at which e-commerce, both in marketplace and otherwise, is growing, is creating a very large set of opportunities which is creating new entrepreneurs who are building businesses, digitally native consumers, meeting digital-first brand. It's a very large shift. It's a 5 and 15-year [ fit ] happening across the category and across the world. And in fashion also, this is a place, and therefore, we need to build next generation of brands also and not just grow what we have. And this is because it's such a monumental shift in the world, and you and I live that as a consumer and experience it. It requires a response from a large company. And that's really what we have started on, we'll, over the next few years, build a portfolio of brands where we add our ability from the ecosystem point of view, competence point of view, capital point of view, but also combine that with the entrepreneurship that is thriving in today's very digital world. So I would say to that extent, it's a part of our overall digital [indiscernible] as a company we are making.

Sure. And just one follow-up. So financial capital and all those long tail initiatives are relatively easier to track. If you can spend some time on explaining or sharing the managerial capital we would have added to support this long tail of initiatives that you have taken in the last [ 2, 3 ] years? So if you can [indiscernible].

So I think you've only talked about tail of initiatives. You've not talked about tail of -- I wouldn't call it tail, head of management bandwidth that we have got with it. We have got one of India's finest designers set that this country has produced in the last 3 decades. Sabyasachi, Tarun Tahiliani, Shantanu & Nikhil, Masaba. These people have invested individually between 15 to 25 years honing their skills, testing them against the best, creating aspirations and desires for them. This doesn't come free, Tejash. This takes decades, and that's the management capital that we have got along with the brand image that we are talking about. That's substantial. And that's what we are actually building. We are not just building stores, products and brands. We are building a management team with capability which is unmatched and very, very rare in the industry.

Sure, sure. And just last one, so that I don't have to come back in between. How -- when we are actually [ straining ] ourselves in so many directions, how do you ensure that the firm and the balance sheet has capacity to suffer mishaps, which will be [indiscernible] in this course of our journey. But how do you ensure or what does that do internally put it as a safety segment when you actually [indiscernible] initiatives?

So I think this is -- you could decide to call Allen Solly Kids, a new initiative; Peter England Girl's, a new initiative. Sabyasachi is a brand, Tarun Tahiliani is a brand, which have got -- Reebok is a brand. These are brands which have got built over decades, as I said. We have got them into new. We have got them with management expertise and more often than not. If the question is about capital, I think it's last 18 to 24 months when the global fashion industry, Indian fashion industry, retail industry, has been such -- have seen such a monumental sort of pressure on itself, you would see how we have managed our balance sheet. Not just with the infusion of capital, but managing working capital, releasing cash from it, taking business in the same period from debt, which at the peaks were INR 3,500 crores despite Wave 2 and Wave 3 coming to a completely debt-free company. So needless to say, we are very, very mindful of how we deploy cash, where we deploy cash, how we manage it. And if anything, it should give you comfort that in a growing complex but potentially large business opportunity pursuit, we are managing our capital very well.

Fair enough. All the best to the team.

The next question is from the line of Chirag Shah, an individual investor.

This is Chirag Shah calling from CLSA. Ashish, Sangeeta, Jagdish. I must say that you guys clearly seem to be in a role and working overtime to achieve your long-term goals that you spelled out at the last Annual Investor Day. So [ with that said ], real congratulations to the entire ABFRL team to have used the last 2 years of crisis so very well to emerge stronger from it, and also moving from -- moving to a debt-free company. I mean, that was seemingly impossible a couple of years back, so congratulations to the entire team. I guess a lot of my questions have already got answered. But just 2 things that, Ashish, if you can just highlight, how are you rolling out your digitization initiatives in the omnichannel strategy because that's also going to be very important as we start building that and integrate all these different modules onto a common platform and benefit from that? And secondly, how do we really ensure that while we get into a high-growth mode on revenues, we keep the working capital in mind and ensure that the inventory turns are something that we really benefit from in terms of return on capital employed, So these are the 2 questions.

Thanks, Chirag. I think the first question is around our digital play for our existing business. If you will broadly look at our digital pay even if -- in continuation of Tejash's question, consists of 2 parts. One is, what are we doing to digitally pivot the existing brand and retail network and assets that we have? And the second is, what other opportunities can our company based on the competency and strength has can build in the new age digital system? Second one is what we have just announced with the new initiative, and which is what I described to Tejash's earlier question. On the first one, we had laid out a strategy, I think, about 4, 6 months back, where we had said we are looking to build 2 large platforms. One is the super app of our brands where we can get the individual brands and also have the ability to toggle between our brands so that we get the leverage of consumers in our ecosystem of brands, which is very about the largest portfolio of strong brands in the country. And secondly, at the value end, which is more middle-class India is to build and invest in Pantaloons as a platform for brands where every middle-class Indian can come in and get his lifestyle needs from clothing, fashion, beauty, accessories and any other product categories that Pantaloons extends to. Both these platforms are underway. The brand super app is likely to be launched sometime in the quarter 2. Pantaloons' first version has just got launched for Pantaloons app. We will revisit and refine it over the next 3 to 4 months, and these 2 will become our vehicles. In terms of omnichannel capability, both these initiatives of building digital platform are the front ends, but these are backed by integration between the online and offline. Today, both our businesses have more than half their network connected through omnichannel, which means if you place an order on allensolly.com or pantaloons.com, it's most likely -- if you have ordered from Jalandhar, you'll probably get it from Jalandhar, Chandigarh or Ludhiana store. 55% of our online traffic is being serviced by stores. And at more than 1,000 stores across the brand portfolio in this omnichannel network, we had one -- India's largest fashion omnichannel player, and we'll continue to build on that.

Right. And then, Ashish, on the working capital part that I mentioned. As we really grow, how do we keep the inventory turns into context to benefit in terms of higher return on capital?

So Chirag, we had shown in the last Investor Day. And in fact, the only reason we are able to generate this cash flow that we are talking about is primarily because we are very focused on working capital returns, our ROCs of -- in individual businesses. At operating level, if you look at our total capital employed, it's about INR 3,500 crores. Of which, if you take away investments and goodwill, we are operating what is potentially anything between INR 10,000 crores to INR 12,000 crores business of a post-COVID scenario at an operating capital of less than INR 800 crores. So that's the way we are rotating our capital, and a lot of it comes from the way we manage our inventory. So we're very focused on that, Chirag.

Got it, Ashish. And Ashish, if I may just ask one more question on this new D2C strategy that you're putting in. It seems like the House of Brands concept -- clearly, some of these newer brands, which get about $10 million in size, not able to get to the next level, can use our platform. Do we also get in an external capital into that subsidiary to ensure that we have a much faster scale up of that?

Yes, Chirag. The idea, and I think we have called out in this. The reason to separate is our threefold. One, we want to build a set of competency and ecosystem, which attracts both talent and capital to win in the digital world. Second, we will put some capital and initiate this business from ABFRL's point of view. But even from a capital point of view, we will seek to go out at some point and raise whatever is required to be competitive in that model. And third, the ecosystem, which requires mindset of raising capital, investing capital, nurturing entrepreneurship is a slightly different mindset from operating companies, and that's why we are building it into a separate business entity.

Perfect. Ashish, and all the best to the entire team. Really exciting times ahead for you guys.

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

Just want to check, am I audible?

Sorry to interrupt, you are sounding very low.

Okay. Am I audible?

Slightly better.

Okay. Ashish, Jagdish, Sangeeta. Three questions really. One is, if I look at Pantaloons margin for the quarter, right? I mean, I think that has declined from around 23.5% to 20% despite this very, very strong Y-o-Y growth in Pantaloons. If you can help us understand that?

Very quickly, Richard, it's because the rental savings that we got during the Phase 2, a lot of it was flowing over in Q3 last year. This year, because the overall impact by the time we came to quarter 3 and therefore, the savings were lesser, that's what is reflecting. In fact -- inherently, Pantaloons business has improved this quarter.

Okay. So it's more an accounting accrual kind of thing? Is it, Ashish?

So it's a base adjustment of last year.

Okay. So while on that topic of rental, what got charged to your P&L this time is a number of about INR 250 crores before considering the rent waiver, right? I mean, INR 200 crores is at year-end, and then I think you had deducted INR 54 crores during the rent waiver. So the gross charge is about INR 250 crores. Now if I annualize that number, INR 250 crores into 4 quarters, it means that you will still be charging about INR 1,000 crores of rental to your P&L even on a post Ind AS 116 basis. If I look back to FY '20 for reference, the charge to the P&L rental used to be about INR 480 crores, which is now currently at a run rate of about INR 1,000 crores. Can you explain this? How should we look at it? And therefore, in light of this, what is the rental cost pool in the system as of date?

I didn't hear the full question. Yes. Sorry, Richard, I couldn't hear the question. Is your -- is your question is, rent this year is INR 1,000 crores versus INR 500 crores last year? Is that the point?

No. Ashish, so what I was saying is that if I look at the rent that gets charged to the P&L, right, which is only a part of the rent, that number is about INR 250 crores for this quarter. It's INR 200 crores plus INR 50 crores that we bought as the waiver. So the gross charge to the P&L is about INR 250 crores before the waiver, right? For a moment, if I annualize this number, INR 250 crores into 4, it means that the annual charge will be about INR 1,000 crores. If I look at FY '20, the annual charge to the P&L in the Ind AS 116 financial statement used to be about INR [ 487 ] crores. So the rent that gets charged to the P&L has doubled between FY '20 and now, and I presume that this is obviously not a full cost rent, right? Because it's in Ind AS 116, and there is still a large rent which we are capitalizing. In light of this, one, how has the INR 480 crores become INR 1,000 crores in terms of the charge to the P&L? And two, the total rental cost pool which may be a [ part of ] an entity is now incurring. What would that figure be looking like at this point in time?

So I think we'll have to come back and give you details later, Richard. But let me assure you that our rent numbers are in line with our revenue growth. And therefore, it's unlikely they'll be that dramatically different from what you have in FY '20.

So Ashish, let me -- Richard, my rent to revenue at pre-index level is 14%, whether it is from -- in Q3 FY '21 or '22 versus last year, the escalation of the -- you are deriving a number, which is 3 components. Firstly, the operations from compared to last quarter. Number 2 is the rent concessions, which were there available in the last quarter is not there. And thirdly, if I add more stores, you know the Ind AS 116 impacts will be more. Therefore, the reported number, if I remove it from rent and take it to finance and all, it is not a right measure to do that. You compare what I have done in published result.

So just a quick -- I just got a quick sort of first level of numbers, Richard. FY '20, our total rent base was about INR 1,200 crores between fixed and variable because there are multiple models exist. Our current rate is lower than that.

Yes. Okay. On a full cost basis?

On a full -- yes, yes.

Yes.

Okay. Sure. That helps. Lastly, if I can make this request again, I [indiscernible] 2 quarters back. And I guess, it's not possible for you to give it in as clear a term. If I can just request you to let us know, even on a memorandum basis maybe as a part of your address in the call, on what are the pre-MDS margins like, right? I mean, it's my fault because I'm not able to yet identify with this new margin structure. Or ultimately, if you are not going to give that, the benchmark margin that you have set in the Investor Day in terms of what you want to achieve in Madura, Pantaloons, et cetera, if you can convert that into a post-MDS number so that we can track progress against some milestone economy, yes?

Fair request, and we'll see how we can do the reverse part. The problem in giving 2 numbers was that people were picking up different numbers at different points of time, comparisons were becoming harder to do. So -- and the industry had completely moved to these. And that's why we've done that. But I think it's a fair point from your side. We'll have to convert our long-term plans into similar numbers.

But Richard, last -- now it is not one year. Last 3 years, we are giving the comparable numbers of the margins. From there, you can draw the conclusion what has happened in last year and what has happened into this year. So I think they are comparable -- absolutely comparable margin numbers.

I understand that. I mean -- so which is why the second part here, if you can reverse calculate the margin addition that you showed in February of 2021 at the Investor Day, so that we have something which is [indiscernible]?

I hear you. We'll come back to you.

Right. Sure. Wish you all the best.

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

I have a few questions. First is on Reebok. I mean, I think a very good acquisition at a very good price. I just want to understand here that in typically sportswear business, I see that there is a lot of support that the brand gets from the parent, specifically if you see our peers like probably Puma, Nike and the others. So whether it is in terms of product design capabilities or maybe even in terms of global advertisement, global brand ambassadors that they all have. So could you just explain how do we plan to address that? And what kind of advertisement we will require to do, what kind of brand -- branding advertisement cost that we'll have to do? And what are your ambitions over a 3- to 5-year period, given that maybe what you mentioned, and I understand that a lot of your peers who are now maybe probably 3, 4x your size were at one point of time actually much before -- much behind you. So I mean, what are our ambitions over the 3- to 5-year period?

Okay. This is Vishak here. I think it's -- it's a brand which is, as you would know, it's globally big for brand. It continues to have an ambition which is to become very, very large, even globally, it wants to be a $10 billion business, and this would be hopefully a part of that growth story. There is also a plan to create a Reebok design group, which would be able to address the needs of various markets, including India. It's still early days for us as we go into this. But clearly, this is something where it's -- we want to be a very large significant player in this market. It's also, as you know, a very, very fast-growing segment, and we believe that we can have tremendous [ leverage ] with our understanding of the market, consumers, relationships with various partners in the market, et cetera. I think it's a great opportunity for us to be able to create leadership in this segment. So to answer your question -- yes. To answer your question, we'll have to -- we will do what it takes to be a leader in this business.

Okay. That's useful. Can you just share some numbers in terms of -- we are probably around INR 400 crores today? What would be the kind of advertisement branding exercise we will have to do? And I mean, what is our ambition we can be [indiscernible]? Because I'm just looking at it from this point of view that, let's say, if you want to grow 3x, 4x from here, then we may have to do very significant investments in advertisement branding. How are we looking at that part?

I think it's multiple things. Segment like this, there is [indiscernible], there is events, there is advertising. And of course, at various levels, distribution, e-commerce, channel strategy, partners. So I don't think it's any one aspect of the mix. We will have to employ all of this, and we will have to do this effectively. It -- as you would know, and Ashish was saying a little while back, even up to 6, 7 years back, it was a very, very strong player in the Indian market. Some of that, we will have to bring that merger back in today's context and [indiscernible]. Both the big brands in the segment are in the INR 1,000 crores to INR 1,500 crores space. So if we had to be leader there, that -- and of course, it's a moving target. So if you look at it 3 years from now and so on, that is 3 years, 5 years, that is the kind of trajectory we will have to get to very slow.

Okay. Got it. Okay. Second question is on my -- on the gross margins. Can you just share some more color in terms of what has led to this very good 200-plus margin improvement between your discount reduction or price increases or whether Pantaloon has seen mix benefit, private label improvement? And how much of this we should see as sustainable margin for us from here?

[indiscernible] Sangeeta?

I'll take that. I'll take that. See, I think gross margin in a mixed business like this is more often than not reflective of the mix of the businesses that we are selling. So it's -- so you should literally convert gross margin into either premium -- premiumization or discounting. Having said that, and with that caveat, not necessarily related to this quarter, the fact is that we are operating in a period which is a festive period. Most of the products are fresh because our old inventory over a period of time has come down and our brands are able to sustain that premium. So that's really reflective of that. But the only reason I'm making this comment is that gross margin will change quarter-on-quarter because the mix of businesses in various quarters keep changing.

Right. And should you expect that the increase in GST to have some effect in fourth quarter? This -- the one under INR 1,000 from 5% to 12%?

No. As you know that the government has decided not to proceed with that. As an industry, we are representing the government to not go forward with that and to come up with a different plan. So as of now, we don't see it coming through, but we'll have to see if the government changes its mind.

Understood. Just last question on D2C. We have a very strong capability across products, across brands, multiple categories that they are managing. I was just wondering if this platform -- instead this platform, we could incubate more product categories in-house. Or what is the benefit of probably going through a platform route that you could not explore through in-house incubation of a lot of these brands?

So as I said in response to a previous question with Chirag, winning in digital requires ecosystem of partnerships, talent, operating model, which are different from the dominant operating model in which we have built our businesses. Lot of competencies are transferable, and that's what we will do. New competencies will be required to build that, and that's why we are creating this platform, which can focus on digital first as a primary thing. And that's why the business model there will have to be slightly different. I must also add that to your point, and you have very rightly said, that a lot of what we want to build D2C will also come from organic D2C rents that we will build from scratch. It's not just about investment in new brands and so on. We will identify niches. We have a lot of capability, and we'll transfer that by building organic digital to consumer brands, direct-to-consumer brands.

The next question is from the line of Swagato Ghosh from Franklin Templeton.

Ashish, sir, I had one very simple question. On the acquisition front, we are winning a lot. Like that's a good thing, obviously. But I'm just curious, who are we competing against? And how come we are like winning so many deals? What is the secret sauce of that?

See, I think every individual opportunity, the partner on the other side is taking a call, looking at capability, our performance, our value system, Aditya Birla Group, its partnership, its prestige and wanting to work with that. So I would say it's the wholesomeness of the whole proposition. We obviously don't chase everybody. We talk to a few people where we think there is a right value and try and find that mixture and see how we can add value and create value for that partner as well. I don't really know who we are competing against because what are the other choices for them is for them to decide. But really, our promise is very simple. As an Aditya Birla Group Company, we bring governance, we bring systems. As ABFRL, we bring capability on the fashion side, and that's what we want to partner and build.

Okay. That's fair. That's fair. And also, I just want to understand in terms of org structure, because of the lease we are doing, are we looking at like a Ethnic business hedge or a D2C business hedge, even if not now, maybe a couple of years down the line, will the org structure look like that?

So definitely, we'll have to keep evolving our organization structures in line with our strategies. At this point of time, these businesses are relatively different and independent, and we are building business heads in each one of them. D2C will definitely have a business head which will be independent and separate. On Ethnic side, at this stage, there is no immediate need for consolidation. But as these businesses grow, we look for that opportunity.

Okay. One last quick one. In 10 years' time, where do you see the contribution of Madura and Pantaloons combined for the company? Would it be still very sizable? Or can it actually come down because of the actions taken now and maybe in the next 3, 4 years?

So I think clearly, these are very large businesses, and they have their own growth story. But other small businesses are -- because they are smaller, they will grow faster. But I don't see Madura and Pantaloons being significantly lower at least in the next 2, 3 years than where they are.

Sorry, this is more of a longer-term question, but maybe it's difficult to predict and we can discuss that offline.

The next question is from the line of Gaurav Jogani from Axis Capital Limited.

Sir, my first question is with regards to the stores in the Lifestyle Brands [indiscernible]. There has been a sharp decline on a few, few bases of around [indiscernible] space. So any particular reason for this?

What is the question? Can you repeat it again for us, please?

Sure. So the number of stores at the end of Q2 FY '22 was around 2,750 stores, and now it's around 2,488 stores. So there is a decline of around 260-odd stores on a Q-o-Q basis.

Not -- I don't know where you've got that number, but I can safely tell you that in the Lifestyle Business, YTD December, we have added about 350-odd stores.

Yes. Because your presentation, as of now, it shows 2,488 stores without the current one. And the Q2 presentation, which showed 2,750-odd stores. Hence, I think we will take it offline [indiscernible].

We'll do a reconciliation and come back to you, but please be assured, the store numbers have only gone up, okay.

Sir, the second question is with regards to -- I would like to congratulate on the Ethnic [indiscernible] that you have done and [indiscernible] you seem to be really good. So I want to know if you can comment on how your Ethnic journey is pacing out now given you've already done around [ INR 211-odd ] crores sale now, and how it's planned over the next 1 year? And are there any further acquisitions or [ white ] spaces that you see in the [indiscernible] space?

So I think we have done a very rapid fill up of portfolio. And as you can see in this quarter results, I think we have commented about INR 400 crores as run rate. This run rate itself will grow 50% to 60% for next couple of years because our big expansion opportunities are in Tasva, which has just started and [indiscernible] numbers because our first 2 stores only opened at this point. So you will see very rapid expansion over the next 2, 3 years. And we had projected in our plan to be INR 1,500 crore ethnic wear business by FY [indiscernible] probably will do better than that.

Sure, sir. And sir, my last question is even with regards to -- during this pandemic time, a lot of companies have done a lot of efficiencies program or improvement in their inventory count a little bit. So any specific measure that you would like to highlight as to how you've gone about improving the inventory turns in your business, as you have rightly pointed out that within INR [indiscernible] you're able to do this INR 10,000- odd crores of revenue. So any specific measures that you would like to highlight on this front? And the process that you're taking to improve returns further?

So I can take this from a Madura perspective, Lifestyle Business perspective. So one is that, look, with this COVID and the now 3 waves that we've seen of COVID, we have figured methods by which we can become more nimble in managing the ups and downs in inventory. Also, it's important that while you do so, you don't compromise on what is required from a season-specific perspective. For example, winter wear is independent of how your summer went. So you've got to be strong on some of these segments. What we've also done is, and I said this a few quarters back, we have done away with the whole concept of 2 seasons. We move to a real season model, and in that way, we've done away with the entire concept of the end-of-season sale. What this allowed us to do is to do true active merchandising of the merchandise we have got where best sellers keep selling out fast, and it's the tail which gets marked down actively on the real-time business through the 12 months of the year and help drive [indiscernible]. Many of these [ fixed plus ] working closer with the vendor partners, with mills, quick response mechanisms, vendor managed inventory program. Many of these are methods which we're trying to keep ourselves as nimble as possible in managing inventory.

Sure, sir. So any -- if you would like to quantify this? Like how low can we break down our inventory base from the FY '20 base?

Hard to put a date -- sorry, days of cover -- color to it because one is that our days of cover does keep changing every quarter because of the seasonality in the business. On top of that now, we also have to deal with the uncertainties of COVID wave, et cetera. So we have to be prepared to build up, build down, build up, build down, et cetera. The better approach that we're looking at is to say how do we become agile and make sure that even if we add inventory, the fresh inventory and you do not get to any kind of old inventory. So if at all, you have some inventory, which gets built up because of a lockdown or because of something, it's fresh inventory and you can very quickly deploy that as soon as things come back to the market. So I don't want to give you a number here because that wouldn't be the right frame to measure this efficiency.

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 get in touch with Mr. Rahul Desai or Mr. Amit Dwivedi. You may now disconnect your lines. Thank you.

Thank you.