Avenue Supermarts Limited (DMART) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Avenue Supermarts Limited Investors Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rushabh Ghiya. Thank you, and over to you, Mr. Ghiya.

Welcome to our Annual Investor and Analyst conference call. I have on call with me Mr. Neville Noronha, our MD and CEO; Mr. Ramakant Baheti, Group CFO; Mr. Niladri Deb, CFO, Avenue Supermarts Limited; and Mr. Vikram Dasu, CEO, Avenue E-Commerce Limited. We hope that you've had a chance to look at our presentation, which was shared on Friday. And the same is also available on our website in case you would like to refer to it. We will start the call with Neville briefly taking you through the presentation along with Niladri. And post that, we will open the Q&A session. Just before that, I would like to draw your attention to the safe harbor statement for good governance. So with that, over to you, Neville.

Good morning, everybody. Like the format is every year, we'll spend some time on the presentation and then give most of the time for the Q&A. This time, splitting the presentation in 2 parts. I will be taking the business overview, followed by our CFO, Niladri Deb, who will then take you through the operating and financial summary. So on the business overview, which is the key product categories page. It's more or less the same. I think last year has been a period of consolidation and also a lot of the anxieties that we had around general merchandise and apparel is more or less behind us. While the numbers do not indicate to that extent yet, but we are seeing a smart recovery in the second half of last year and even the first quarter of this year. So GMA has moved from 23.04% to 22.37%. It's a drop, but more or less, it's coming back. But just to preempt some of the questions that may come on this, we are not going to be 28% or 27% like it used to be earlier. A broad trend line will be around the current run rate of around 23% is the sense we get, yes? But otherwise, it's been a good year. I mean, most of the numbers have been shared, and I would take more specific questions in the Q&A and discuss more about this. We go to the next slide, cluster-based expansion strategy continues to be the same. It's again, principle is more of the same, try and open as many stores in existing markets. We also keep trying to go to new states, new regions, new cities. But otherwise, the broad principle is if there's an opportunity to deploy capital in existing markets, it's a better option. So we opened 41 stores in the last year gone by. And as usual, the numbers look good. We're all doing fine in all the new stores opened also. So it's a usual day at work broadly from that standpoint. When we come to DMart Ready, again, we had said last year that -- in the last year's analyst meet that this year would be a year of consolidation, and we'll try and test whatever we have done. And hence, we added just one city. Again, the strategy around the e-commerce business, the DMart Ready business is very consciously to be not very fast. We can generate significantly higher revenue than we do currently, but it's a conscious decision to fix the model and make it right and bring in high throughputs in the existing cities. That's the thinking that we have on this business. But obviously, we'll take more questions on our business as well as what's happening in the market from a larger context of competition and all of that. Year-wise store addition, already said that, we opened 41 stores. We maintain to deliver basis of past performance. That's what we keep saying. So number of stores opening will be around these numbers going forward. But we, as usual, don't give forward statements in terms of what the exact number is and reasons also remain the same. But broadly, as a company, we are primed to open equal to or even more than these number of stores, but there are a lot of other factors that depend on our store opening numbers. So with that, I end my part of the presentation, and I would request Niladri to take over the operating and financial summary part of the presentation. Thank you.

Thank you, Neville. I take you through the bill cuts. We delivered INR 30.3 crore bill cuts in the year just gone by. Like-for-like growth that we disclosed is about stores which have opened more than at least 24 months. We delivered 9.9% like-for-like growth. The total retail business area at the end of the fiscal '24 was about 15.1 million square feet. We opened 1.8 million square feet area in the current year. And the revenue from sales came at about INR 33,000 per square feet in FY '24, very close to the FY '20 number of INR 32,879. Moving on, the revenue from operations disclosed earlier, INR 49,533 crores delivered in the stand-alone business. EBITDA margin of 8.3%, almost INR 4,100 crores of EBITDA. We delivered 5.4% PAT about INR 2,695 crores and the net cash flow from operations of INR 3,343 crores. All of the indices grew over the same period last year. We move to the operating financial summary for the days inventory payables. Our payables came at about 7.1 days and the inventory is about 29 days of inventory, more or less similar to what we were in the pre-COVID period. Debt and equity, we all know we don't have debt, but the debt that you see on the balance sheet is about the AS 116 disclosure and the equity of about INR 19,281 crores of equity. Fixed asset turnover ratio came at about 3.6, very close to the number that we have been trailing even pre-COVID and inventory turnover ratio about 14.6. And finally, the return on net worth and ROCE, the return on ROCE came at about 19.1%, marginally lower than FY '23 and return on net worth about 15.1%. Slide 13 has the key financials for Avenue Supermarts and the stand-alone and consol. Sales grew by 18.4%, gross margin reduction of about 37 bps and PBT reduction of 43 bps led by those -- the gross margin slide and a bit of cost increases in other expenses that came up. And the PAT delivery of INR 2,556 crores -- INR 2,697 crores, which was a 5.4% growth. We must point out that last year, we had an exceptional tax gain. So ignoring the tax gain of the prior year, the PAT improved by close to 12%. At consol level, the sales improved by 18.6% of INR 50,789 crores and a PAT delivery of 6.6% growth. Without the onetime tax advantage of prior year, the PAT grew by 13.5% to INR 2,536 crores. The key subsidiary financials, Avenue E-Commerce delivered a 31.7% sales increase of close to INR 2,900 crores, and we had a loss of INR 185 crores, which was a 2.4% loss reduction over the prior year. Avenue Food Plaza, INR 177 crores of sales and a loss of about close to INR 6 crores. It's in the expansion phase. Align Retail Traders, our subsidiary, which does grocery packing, about INR 2,800 crores of sales and a PAT of INR 33 crores, improved by 44%. That's the summary from the financials and operating section.

I think we can now open the floor for Q&A. Thank you, Niladri. Thank you, Neville. So we'll just open the Q&A.

[Operator Instructions] The first question is from the line of Abneesh Roy from Nuvama.

My first question is on the product mix you have given. So I see that foods is the only segment which has gained as a percentage of the mix, while rest of the 2 have seen a slight dip. I wanted to understand, is it purely because of the food inflation and -- in FY '25 because FMCG companies in the HPC space will take a hike, the non-foods FMCG should regain some of the lost share. What will be your comment on that? Plus you are focusing more on general merchandise and apparel. So I wanted to understand why it's not visible in terms of numbers. There was a dip of around 33 bps. When do you see this reversing?

So Abneesh, on the food contribution going higher, it was primarily driven around agri food inflation. It was primarily driven on that. While staples, if I look at edible oils went through a deflation period. But I think the minus oil basket, the agri side, that is the staple agri, minus oil went through unprecedented inflation during this period of time. So that is the reason why the food contribution has gone up. In the GM and apparel side, I think we had a larger issue on the apparel side. But like I have commented last year, apparel is a smaller contributor in the GMA mix. So hence, the blended impact was only what you see on the slide, right? So GM is more or less back on track, trending equal to what we were prior to COVID. Apparel has done a very smart recovery. We did a very quick improvements there, primarily around leadership team, sizes, all of that is in place. In fact, 70%, 80% of the work is already done. And if we look at the last 2 quarters' performance, one thing too heartening to know is apparel is the highest growing category amongst all our categories, okay? So we are seeing -- and like I had commented last year, right, it is more of an internal issue on the apparel side. We just needed to build a very good leadership pipeline. And I think the -- I'm, in fact, quite delighted with the early -- I didn't expect it to be improving so quickly, but I think the team has done a brilliant job. But still a long way to go, but we're seeing brilliant green shoots on the apparel side of the business.

Sure. My second and last question will be on the DMart Ready. So we have seen a year of consolidation and only one city getting added. So what were the learnings from there? And we have seen other quick commerce, for example, now they are seeing more consolidation more on service rather than discounting. So rain fee, delivery fee, loyalty fee. A lot of fees are coming in, and that's good from an overall business sustainability perspective. I wanted to understand, are you also thinking at some stage quick commerce and start charging for some of these because ultimately, now it's more of convenience rather than pure discounting. Plus what is your take, is the worst behind on discounting because then Zepto has raised a huge funding very recently, while the other 2 players seem to be focusing more on service rather than just discounting?

So our whole perspective has always been, Abneesh, is to divert -- I mean, have a divergence in terms of our approach to the business. We prefer not to do stuff like what most people try to do. So we continue to chart our own course on the e-commerce side of the business, and we are pretty confident of expanding this business, albeit not as fast as we would expect it to be, but we'll continue with the current model. We don't intend to do any quick commerce. I think our model is pretty robust. And the learnings has been try and get more and more revenue in the large town cities. That's the low-hanging fruit. That is where there is convergence between our model about our ability to deliver and also the expectation of the market. So a Bombay customer or Ahmedabad customer or a Delhi customer, they like e-commerce. They like material coming to their home. Time is of short supply, timetables are tough to manage, things like that. They sometimes perceive going to a -- so I mean, I'm not saying everyone, but mostly the more affluent people. They would like to have a certain component of their grocery buying to come through e-commerce. I think serving that customer through our Ready channel sounds very interesting and promising. So we will continue with our own method, methodology of running the Ready business.

Just one follow-up on this, and then I'll end. So could this be second year of consolidation? And when I see you have DMart Ready in a few Tier 3 cities also, for example, Kolhapur, Belagavi, Bhilai, Raipur and, say, Anand. So could these be deprioritized and ultimately may not make much of a sense given your kind of a business model?

Quite possible, quite possible. See, I think the brick-and-mortar retail is still very aspirational and still fun and enjoyable in small towns. And we clearly see that from a psychological standpoint that customers enjoy going to retail stores like ours in small towns.

Okay, that's all from my side.

The next question is from the line of Arnab Mitra from Goldman Sachs.

So Neville, my first question was on store expansion. I think last call, you had mentioned you have invested in the people in the expansion side and also in some of the processes, which will increase the capacity of adding stores. Do you see that happen in FY '25? Or it's going to take some more time before you can significantly step up from this approximately 40 stores that you've been adding for the last couple of years? And what are the other bottlenecks that you're still seeing in that capacity?

So I don't have a very, very clear concise answer in numbers for you, but I'll just give you a feeling and flavor of what we intend to do here. We are primed and ready in terms of opening around 40 stores per year, 40, 50, whatever, I mean, anything between that is what we are ready and we will deliver broadly. So obviously, subject to regulation, permission and all of that. But we have that kind of inventory to at least commit saying 40, 45 [Foreign Language] every year. The way to look at our store opening trend is we'll do 40, 40 something. But in another 2 to 3 years, I think we are all working towards in another 2 years, this 40 should go to a 60 or 70 per year. We are working like that, okay? We're thinking about it like that, but it will be very lumpy. So you'll see 40, 40, 40, suddenly, it may go up a little bit higher, okay? That's the way we are thinking about it and working towards it. See, I've been saying this repeatedly that typically 10% to 15% of my number count should be my new store opening, broadly. That's the way we think about it, yes? So if that happens, then we'll get a very decent CAGR run rate over a 10-, 15-, 20-year period. That's how it has been in the past, too, right? So for example, if I have 400 stores, then I should be opening 60 stores. If I have 800 stores, then say, 15% of 800 stores. That's the North Star. That's the way we think about it.

The second question I actually had was a follow-up on the quick commerce thing. So clearly, one of the big changes last 1 year has been this big scale up of quick commerce, especially in the top 6, 7 cities. Are you seeing any impact on your big city stores like a Mumbai, Bangalore kind of location? And does it in any way impact the future store potential in, let's say, the top 10 stores that you would have earlier envisaged? So any thoughts on how you're seeing this evolve?

Yes. Actually, we've been crunching data for the last 2 years on this and how is this format impacting us. Surprisingly, it is not. And if there is any one reason that impacts our metro revenues, it's actually our own ability to operate the stores. So if any store is not run well for whatever reason, either it's an infrastructure issue or the store has already peaked out, delivering very, very high revenue per square feet or the quality of management is not up to the expectation. That's when the stores struggle and not really because of the competitive context of -- specifically about quick commerce. That's our analysis of things. But okay, if you say a city that is not having any intense quick commerce versus a city that has quick commerce, there could be a 1% to 2% CAGR -- SSSG CAGR impact could be. I mean I don't have a very clear point of view there. I can't pinpoint it exactly. But will I say no, absolutely not. I will also not agree to that. [Foreign Language] maybe a 1%, 1.5% kind of an impact could be there. But is any of my store declining negative? Do I see very large red flags? Absolutely not.

Understood. And just one last question. Any rethink -- you have historically not had a big focus on fresh as a part of your mix, and that's one of the categories which at least quick commerce companies say has had high growth and high margins. So anything that is changing, which would change your approach towards that category versus what it is currently? That's it from my side.

Brick-and-mortar, I don't think so. Brick-and-mortar, there has to be some structural changes in the economy, which prevents the roadside seller to stop selling fruits and vegetables. Only then could be a case for modern trade to sell fresh in a profitable manner. That's our view, especially in a model like ours.

Okay, Neville, all the best.

Yes, thank you.

The next question is from the line of Avi Mehta from Macquarie.

Just wanted to get your thoughts on the apparel segment. I mean, what exactly did we change? What is -- where are -- you said 70% to 80% on that journey. So what is left to be done? Would love to get your thoughts on that, please.

I have -- we have done whatever we've done for the current size of revenue, but we're imagining what we would be 5 years, 10 years from now. And apparel is very, very, very talent-driven and an individual guy who's -- or the lady who's running that specific category, how he or she thinks about what should be done. So from a team capability standpoint, the confluence of the synthesizing between what DMart stands for, what the ethos of DMart is and what apparel should be. It's not very easy. A category like apparel for a grocery kind of a model is very complicated, right? So -- and a lot of people who come from outside, their understanding of value retail, their understanding of deep discounting is, I would say, very limited. So first that buying itself is very, very challenging because every -- and this is a very talent individual-driven kind of a business, right? Everybody brings in their own personality to the category. So it's not very easy to get that synthesis.

So -- because you said that you wanted to focus on basics there. So is that thought now no longer the case? You still want to have some fashion, but the type of fashion is probably what has to be realigned. I mean I just want to kind of better understand that portfolio change that you're trying to do here.

Philosophy remains the same, basic, basic, basic, okay? You can have -- you can be fashionable yet by being basic. When you say fashionable, it's about being in trend. But how do you ensure that your line, your product line is not susceptible to the vagaries of change of trend at very short notice. That's the whole idea.

Okay. Okay. Fair enough. The second, Neville, was on your comment that you do not expect salience to move back to the 26% to 28% levels for general merchandise and apparel. Why this thought? And if that is the case, does that change how should we look at same-store sales growth from a new category addition based uptick that it has traditionally or earlier come?

See, I've commented on this earlier, I have maintain that stand that whenever you open a new store, okay, you get people from a larger radius coming to our stores. So when you get that kind of a customer into the store, they end up buying a lot of non-FMCG. But as the store matures, okay, the percentage of households who begin to buy from you from a smaller radius significantly increases. And hence, that basically drives the intensity of the food and FMCG and grocery sales. And this has been a secular trend for the last 20 years. So it is just simply because of that. It's a trend. It's a secular trend. And as we mature and we become larger and larger, the food and grocery and the low-margin contribution will increase. So we have to then figure out how should we run the model such that you will deliver on your profits in line with the construct changing with time.

Okay. But sorry, Neville, I mean just to push back, I thought focus on adding larger stores would have probably helped us drive, maintain that salience. That thought is not accurate?

That thought continues to be accurate because we continue to believe in the fact that having larger stores keeps you ready for the opportunities of the future. But at the same time, I do not want to build in very high expectation that, yes, we will go back to 27%, 28% and hence, there will be a bump in gross margins, not really. I'm just giving you a very realistic scenario of the future. So they're getting ready for the opportunities that can emerge because of GDP going up and hence, people wanting to buy more and more horizontally in the high-margin sector. We are priming ourselves for that. But will that definitely guarantee 26% or a 28% contribution of GMA? No, I don't think so.

Okay. Okay. I understood. I understood. And lastly, if I may, sorry, just on the quick commerce bit. You did point towards 1%, 1.5% odd impact, very rough in your view. Is this more about the need to kind of start -- is this reflecting in more discounting in your view or just that the consumer is now keeping less pantry? How should we look at this from a consumer...?

The way we are looking at it, Avi, and this is through real experiments, real events that have happened, any store which has very, very high throughput, right? I mean it's kind of overflowing at the brim, I just need to open more stores around that cluster. It's as simple as that. So assuming I'm doing INR 20 crores a month on a particular store and it's like very high throughput turnover per square feet. And I open another store close by. And this INR 20 crore stores drops down to INR 15 crores, but that additional store again gives me an additional INR 20 crores, right? So that's the whole idea. So can I add in more stores is the solution to issues like these. And we have done these kind of activities or whatever. I mean, by design, we bought -- during COVID time, we bought on many new locations even in Mumbai, and this is the outcome that net of both the old and the new stores, it is value accretive for us. So that's the way to do it. Notwithstanding the opportunities that are available in DMart Ready. We do that, too. But it is not the or. It is always, I will keep saying, brick-and-mortar and e-commerce is the way to go.

So, sorry, Neville, I was referring to the 1%, 1.5% that you said is possible from the quick commerce perspective. And that's what I was trying to kind of understand. That when you say there is a possible impact on quick commerce, you're essentially saying because the consumer is reducing her inventory? How are you looking at this impact? That's what I was trying to understand. The impact from our own capacity that I am clear of. But this one, I was trying to kind of better appreciate how do you look at this?

So like I said, right, stores which are doing exceedingly high revenue per square feet, its ability to grow at a rate of inflation gets a bit challenged, okay? That's the point I wanted to make. And then at the other end, you have from a competition standpoint, quick commerce was delivering excellent convenience, okay, almost 0 friction and delivery at home. So then the top end discerning customer probably who's shopping at DMart may fall off. So to that extent, there could be a 50 bps to 100 bps kind of change in growth rates for such stores. That is the point I was trying to make.

Okay. Okay. So you are referring from that consumer probably going away and that is the possibility -- and that would be a -- okay, got it, sir. That's all from my side.

Just a disclaimer there, and my observation and comments are only for this year. So if something significantly changes during the year, I will talk about it next year. So this is my understanding of what's happening right now.

Okay. Okay. So you're saying as on date, if this scenario becomes either less favorable or more favorable for us, it might kind of reduce or increase?

Yes, yes.

Got it, sir. Got it.

Thank you, Avi. Thanks.

The next question is from the line of Latika Chopra, JPMorgan Chase.

My question is on your expectations on gross margin profile over the medium term. You clearly mentioned the mix is going to probably be stable in -- with gross -- with general merchandise and apparel. I was trying to understand a couple of enablers of gross margins and your thoughts on that on the FMCG and food side. One was would your terms of trade with leading suppliers in order to leverage the scale benefits, how does that play out? Do you see premiumization of the FMCG and food portfolio within your mix? And the last enabler could be the private label contribution. So if you could share some thoughts on how these 3 things could behave? And would they, in any way, imply potential for gross margin improvement over the medium term? That's the first question.

Latika, so broadly, I'll take the terms of trade and the branded FMCG question -- part of the question first. So this is all work in progress. The whole idea is the more and more revenue you deliver the more and more contribution you deliver from a business contribution to a FMCG company's business, obviously, your bargaining power improves. Now you have 2 ways to deal with it. Your improvement in bargaining power means more gross margins or better value to consumers, yes? So on -- that's the choice as a retailer, you have to take. And we do that, right? We decide, okay, how much of this has to go back to consumers and how much of it has to be retained. So that is one way of looking at it. On private labels, I have constantly made comments, which have remained consistent, and it continues to be the same. It's a very, very long journey. You have to give it a lot of time. India is still USD 2,000, USD 3,000 per capita income country. Private labels play out beautifully when at least the country at USD 7,000, USD 8,000 kind of per capita. So we have a long way to go from all these standpoints. And I continue to hold that position that branded companies are very, very competitive, and it's not very easy to deliver a private label at equal to a better quality at significantly cheaper price. See, we want the product to be significantly cheaper than a branded company product at a significantly large discount. Only then does it really plays around with the ethos of what DMart stands for. We would like to put the DMart name on the product only if it stands for that, yes? So that's why from that standpoint, we believe that this is going to take a lot of time. Now coming to the overall scheme of things, see, whatever we do today, 14%, 15% gross margin, we're going to play around that, right? So anything beyond that, we are going to pass it on to the customer. We don't want to retain it because we're concluding this on the basis of value, delivering great value through high-quality operational excellence and keeping costs low. So that's the broad philosophy. Like, for example, the feel I'm getting from this question is more about margins. My response to you is we are more a top line-driven company, and we believe that if we continue to remain relevant to the customer from a value standpoint, margins, ROI all of that will follow. It will come. But the philosophy is to be very, very relevant, distinctly relevant, differentially relevant to consumers, consumers when they think about demand, they think different, okay? That's the whole philosophy. We capture the imagination of the customer from delivering great products at great value. That's the philosophy of the business.

The second bit was a follow-up on something you alluded to while answering the question on apparel on talent. Just wanted to hear from you any particular changes or incremental talent that you've hired at category head level, on the technology side, on your e-commerce operations, anything you want to talk about or share with us on capability building side?

Yes. See, actually, it's a good question. I think we are grappling with 2 things, okay? One is that we are running an enterprise, which in absolute terms is very, very large. So when you -- even when you talk about a 15% or a 20% CAGR, if you add that and look at that from a value term, it's a very, very large value, right? And this value is being delivered again from distributed points of sale. It's a different, different stores, locations, culture, people, all of that. So it creates a lot of -- there's an enormous, what should I say, management bandwidth requirement to just get this entire ship running in the right trajectory, right direction and with the right relevant speed. So we are thinking about what this company would be 10 years from now. We're not talking about the next year. And hence, if you want to reach there in a nice way without too much of damage or bruises, then what is the kind of talent we need to hire today in the next 2 years, in the next 3 years, next 5 years. That's the way we're thinking about it. So if you ask me, my team and I, the top leadership is thinking about how we should imagine the quality of talent we should have that can take us to where we want to be 10 years from now. So the moment you start questioning -- I mean, put the right question on the table, then you have a very clear view about what you need to do from a talent standpoint. I mean that's broadly the ethos I wanted to share with you.

The next question is from the line of Vivek Maheshwari from Jefferies.

Neville and team, a few questions. So first on the store addition. You did mention about lumpy additions at some point. But when we look at additions internally, do you also think about it as a percentage or you typically look at it more like 40 to 60 stores? How do you think about the additions on an annual basis?

Like I said, for this year also, we have projected 40, 45 stores. I mean, again, I'm saying that I don't want you to project something very large in the immediate future. But yes, so -- but in the longer term, yes, we have to go at a run rate higher. If you remember, in my last analyst call also, I said that we are ready to even open 60 stores. So capability as of last year was we can even open 60 stores per annum, yes? So you can take a range of 40 to 60 over the next 3 years.

Okay. And a follow-up to that, Neville, and pardon me if it's a naive question. But let's say, in an economy where real estate is doing so well and there are -- there is a formalization, what is the bottleneck when you are thinking about adding the store? I know you buy out the land and it is a substantial investment. But in a cycle where real estate is doing so well, what -- can you just highlight why it is lumpy, why it is not as predictable? Is it the team issue? Is it the site issue? Can you just elaborate?

Because I cannot predict which -- so we decide all these stores should -- whatever you decide to store open, right, we decide -- we think, okay, all of them will open in this very time line. But India being the way how India is a lot of things don't happen on time. And sometimes some locations surprise you. They also happen ahead of time, but that's more of a rare phenomenon. Yes, but that's how it is. It is unpredictable. And I have commented on this multiple times over the last 3 to 4 years.

Sure, sure. I recall that. The other question is on DMart Ready. What would be -- at the system level, Neville, what would be the average delivery time in case of, let's say, DMart Ready wherever the customer opts for delivery?

So on home delivery, we fleshed out some data. We are now I think -- by the way, we ignore the time between 11:00 p.m. and 6:00 a.m. in the morning, ignore this time. We don't count that as time. But I think around 40%, 45% of our deliveries happen within 12 hours.

Within 12 hours, okay.

Yes. Yes. And around 86% of our deliveries happen within 24 hours.

Okay.

And then the balance 14%, why it doesn't happen because customers plan the date of delivery. It's not that we can't do it. But when we give them visibility on when do they want their slots, they purposefully pick up a date, which is later because of which the balance 14% is after 24 hours.

Got it. Okay. Okay. And on the -- one of the points, again, Neville, you mentioned about there is maybe 1%, 1.5% impact and -- because of QC, et cetera. But do you find yourself in a bit of -- although that's a conscious choice you have made, but in a bit of a disadvantageous position simply because you don't have a customer data. So let's say, if I'm a shopper at DMart and I move to QC, you will never come to know given that you don't have the intelligence in terms of my -- what -- how many times I'm coming to you to your store. Do you think there is a -- you may need to rethink on the data strategy sheerly because the competition is coming from unknown quarters also now? Or do you think that you are happy working with the aggregates as has been your strategy for such a long time?

Yes. It's a good question, Vivek. But my counter point of view is always even internally when some of the same questions are asked by my team to me. I say that, look, the only one single indicator that probably we are blindfolded or refuse to accept what is obvious is if my sales or my profits is telling me something, right, negative. So if my sales are great, my customers are talking nice about me, my model is working perfectly fine. My margins are intact, my SSSG growths are intact, then why should I change, number one. Number two, specifically to answer your question on the QC side. QC is convenience. QC is full price. It is completely opposite to what DMart stands for. DMart is value, yes? DMart is, I would say, a little inconvenient I probably say a little so probably not doing justice. It is a bit inconvenient, right? But it delivers great value. So that's it. So we would like to rather play on the positioning of value and then create something in the digital space. And I think when you think like that, see DMart always believes in doing something which is very difficult for others to follow, yes? If you build DNA that everybody can see what you're doing, but they can't do it. I mean -- and that is our pursuit, the model that we try to build.

Got it. And as a follow-up to that question, and that would be my last one, Neville, from a top down, when you look at as the head of the organization or the CEO, there are, let's say, for argument's sake, there are 2 verticals that you have, right? One, which is DMart and the other is DMart Ready. I know there are a few more beyond that. One has a lot of data, right, DMart Ready, whereas the other one is working on aggregates. Do you find the DMart Ready data to be rich? Are you able to do -- do you do a lot of analysis on that? Is that a precursor for you to -- if the data is rich, if you have a lot of insights, is there a precursor to also think about them that -- or implement that in DMart? So can you just talk about what is your view on all the data that you collect at DMart Ready level?

I think I'll give this opportunity to -- for Vikram, who heads Ready for us to respond. Vikram, can you take this question?

Yes, sure. That's Vivek, right?

Yes.

So the question is around how we are leveraging data, right? Is that right?

That is right. And so one part is how are you -- what all are you doing with that data, number one? And number two, from a DMart Ready, is there a case -- if there is something good that we are doing with that data, is there a case to think about it in case of DMart-based business itself?

Yes, sure. I'll -- the latter part, I'll let Neville address. But on the data part, yes, you're right, there's a lot of data that we generate on an every second basis within the business. And we use a lot of that data to sort of improve our own input metrics, right? There are tons of things that happen for us to be able to fulfill an order that a customer places, right? So you may also have seen that we are not super big into aggressive marketing or advertising, right? So all of that data that we are generating, we are using to improve our internal metrics. So there is a lot of data that we generate, not just on customers, but also on how we are operating. And will that be useful for DMart? By all means. But as Neville mentioned, there are tons of things that we are already doing, right? We are working on making sure that the value proposition is right for the customer. What else do you really work on, right? As long as we know that the stores are working at the most efficient levels and the input metrics are showing the right directional trajectory. There's not too much else that you can really do with data. And we use that data in a sensible manner. I'm not suggesting that data is useless or anything like that. It's just that we are not big into using data to manipulate customers' behavior with a short-term outlook. Does that make sense?

Okay. Sure. I like the word that you've used. And Neville, any thoughts on -- from this perspective to the off-line stores?

Yes. So integrating information of the online space for the off-line store, I think I'll tell you only one very clear impact, Vivek, which I think I have alluded to not last year, but I think last to last year. I think the digital space, data just fascinates in terms of what they can do, which we cannot. I think there are some very powerful elements of what online space can do, which we cannot, which is the cost of experimentation and the long-tail item selling capability. I think that is something that brick-and-mortar, at least the DMart brick-and-mortar can't do, yes? So that's -- and I think that's where the complement is also there that it's fascinating. I mean there are so many things where actually, they are the bigger brothers, say, and not us, right? So I think -- so it's very humbling, yes, very humbling what digital can tell you, teach you at a very short notice. And I think from that standpoint, we're leveraging the information and the learning. So yes, so that's it. That's my point of view on the digital side, the Ready business.

Got it. Got it. Wishing you and your team all the very best, Neville.

Thanks. Thanks, Vivek.

The next question is from the line of Sheela Rathi from Morgan Stanley.

My first question was to do with your opening remarks, Neville, that since the second half of last year, we are seeing a smart recovery in the GMA portfolio. So just -- and you also said that we will maintain the current levels of 23% and not going back to 27%, 28%. Now how should we understand this from going forward perspective, that where will these improvements get reflected in terms of the Company's P&L going ahead?

That's what I keep saying. Sorry. So I keep saying this, I don't know what is the aspiration level in the analyst community on gross margin, but we've been towering between 14% and 15% or 14% and 15.5% and that's where it's going to be. So whether it's GMA, whatever it is or whatever it could be. And the way we look at it is what is the blended average gross margin going to be. And this is a business, I really cannot predict beyond a point. I mean there is a range within which we can say, okay, fine, this is where we're going to be. But I can't give you a finite number. And most importantly, business is dynamic, competition should be factored in, multiple other things, right? So ideally can't give you a straight answer. But I think 14.5%, 15%, 15.5%, those are the kind of ranges we play in from a gross margin standpoint. You have to look at the blended gross margin.

Actually, my question was not to do with the margins actually. My question was, the GMA is coming back, the shares are maintained at 23% level. Will it get reflected in the top line growth then? I mean, how should we capture it apart from your commentary that GMA is coming back? Will there be a way to capture it? Because like you're saying margins will be maintained. It will get more and more challenging for us to analyze that in terms of share.

I can't give you any projections on what our growth rates are going to be, number of stores that we are going to add, gross margin is going to be. I can't give you that. I -- it's difficult. I can't tell you that. It's not that I have information, I'm not sharing with you, but I can't crystal ball and give you a finite number there. I'll give you color. I'll give you a qualitative understanding of where we are trending.

Fair point. Second point again is that we have -- you mentioned for e-commerce that consciously we are making a decision not to grow very fast. But are there any areas in the last few years where we think that we should speed up in terms of growth going ahead? Obviously, store expansion is something you have already called out. But when you think about formats like Minimax, is there an opportunity for us to take that up? We added 6 stores this year. But how does that fit into our growth strategy?

So I think from the e-commerce standpoint, and this is again a very divergent call I'm making from what I actually thought would be the way e-commerce would be. We are seeing that the home delivery model is a better model. So it's exactly opposite of what we used to -- at least I used to say earlier because the numbers prove it. And so home delivery in large town is the way to go. So that's the broad point that we're trying to make. And hence, whatever it needs to -- whatever it takes to build fulfilment centers in large towns quickly, as quickly as possible so that we are able to deliver in at least 12 hours. I mean that's the aspiration. So primarily growing faster than what we are doing right now in large towns, in DMart Ready, is the way to go.

And on Minimax?

It's still experimentation. I think we feel that not yet ready. Market is not yet ready for that model.

And in the past, you have mentioned the share of home delivery used to be 50%. How has that number trended now?

Had I said 50%?

More or less similar. That is what you had mentioned in the past, a couple of years ago.

So now it's better. Whatever was in the past, it is getting better and better. See, what is happening is there is a sharper segmentation in the consumer's mind. The consumer says, look, if you want me to take all the effort and come to a store, then I want great value. And that's where DMart stands for. And there's another customer who says, great, DMart is giving me great value, but it's also charging me for home delivery. So if you're giving me convenience, I might as well take the convenience wholeheartedly and get the product delivered at home. So there's a clear, clear segmentation happening in the consumer's mind. And the pickup point is sitting somewhere in between. So it's a bit fuddy-duddy, right? It's neither here, neither there. And hence, the gravitational force is tilting either to the store or to home delivery.

So we will have to relook at our DMart Ready stores. Is that what you are coming to, Navil?

So if you've seen the data, we have recalibrated, consolidated, right? We've shut a lot of pickup points. It's primarily to kind of rework on the whole operating model on the Ready side.

Just one final question. We saw some advertising on first 3 orders free on DMart Ready. Was there a tactical call in terms of getting more customers? And what was the kind of success we saw around it?

I'll ask Vikram to respond to that.

We are seeing some good traction there on that promotion. So the idea here is to let customers sample our service. And our data has suggested that people who use our service for 2 or 3 times tend to stick with us because they've really grokked the value that we are providing. And so that's something that we've started doing a few months ago, and it's starting to show some really good results.

The next question is from the line of Aditya Soman from CLSA.

Sir, 2 questions. One, I mean, just mathematically, as your cash from operations increases and especially as you're opening more stores in smaller towns, would the number of stores just mathematically go up because you have more cash available to open stores given that you typically would match store adds, CapEx and cash from operations?

Yes. Yes. Opportunity to open more will increase definitely.

Correct. And the other thing is, I mean, just to add to this, right, I mean, your cluster, the area of the cluster also keeps widening, right? So when you open within the cluster, even that cluster itself is widening. So in theory, I mean, there is no reason why -- I mean, I know you've said 40 to 60 stores over 2 to 3 years, but in theory, that number should keep going up as your -- one, as your revenues and cash flows improve and second, as your cluster size increases, right?

Absolutely, Aditya. So I was just reflecting back on all my comments over the last 7, 8 years, just reading through all of them. If you remember post IPO, I should talk about 10 to 15 stores. So we've moved from there to 40 to 60 stores. So obviously, it goes up, right? It will. It has to. So our entire effort is in that direction.

Very clear. And secondly, I mean, just on private brand, right? I mean I just want to break this question up a little bit. So one, you have these D-Mart Premia products, which I can sort of get this from sales of Align Retail, which would be somewhere between 5% to 6% of sales. And then you have all these branded products that you are now launching. At last count, I found about 130 of them, but maybe there's more. And then there is general merchandise, which you pack. So can you give us a rough sense of what the contribution of each of these would be overall?

We don't disclose it. We don't disclose those numbers.

But -- I mean the DMart Premia stuff, I can -- that would be fair, right? That the Align Retail numbers would be a good way to deduce that?

Yes, partly, yes.

Okay. And the other part of the business, would it be at least similar size, larger size, any sense on that?

No, I'll prefer not to comment on that.

Then maybe just -- I mean, even if not numerically, right, I mean, I see that the number of products has been increasing and maybe accelerating in the last year or so. Would that be a fair assumption?

So I'll give you a direction about how to look at this. You will get a sense of how well we are doing in private label, simply basis the PKD. That's it. That's the way to look at it. If the shelf is lying -- if the product is lying on shelf for too long, that means the category is not doing well. It's as simple as that. So make a call basis that.

The next question is from the line of Garima Mishra from Kotak.

Navil, first question, previous call, you had mentioned that the proportion of overall store count located in cities with population of more than 1 million had declined to 60% in FY '23 from a larger number earlier. So was this a trend you witnessed in FY '24 as well and maybe this is a trend to be witnessed in the future also?

Yes. So I remember last analyst call, I kind of jumbled up a lot of numbers. So we made -- we ensured the homework was better this time. So we've got 1% better in less than 5 lakh town population. We were at 28% of the store cohort in FY '23, it's become 29%. So we have 29% of our store cohort in less than 5 lakh towns. In financial year 2020, that number was 21%, okay? So in 5 years, we've got an 8% increase in store count in this pop strata. I hope you're getting it, Garima. So from 21% of the store cohort in financial year 2020, we were at 28% last year. This year, we are at 29%. So 29% of our stores are in 5 lakhs or lower pop strata towns.

Understood. That is clear. Second, if we just look at that slide on store addition and while, of course, a lot of stores do go back into clusters where you're already present, you do keep adding stores in newer areas as well, let's say, Rajasthan, NCR, et cetera. So for specifically some of these stores, are these stores tracking metrics that are similar to those in your core geographies, let's say, of Maharashtra, Gujarat, et cetera?

Yes, Garima, broadly, yes. Broadly, everything is in line. There is no major divergence. So younger the vintage, the financial metrics will be relatively lesser than the balance cohort. But the newer store cohort trend line has been the same for the last 10 to 15 years. So everything under control.

Okay, okay. Understood.

And irrespective of regions, yes. So that's the beauty about our model. This -- one beautiful thing about our model is whether it's North India, South India, West India. East, we're still not there. From a metric standpoint, financial standpoint, we are doing fine. And that's why the model cuts across all SEC, ethnicity, culture, everything, and that's the beauty.

Understood. That's good to know. One question, Navil, in the 1Q FY '25 results release, you did mention that some of your OpEx had gone up due to efforts on improving service levels and building capabilities for the future. So could you explain what exactly, which line items are you referring to here?

So broadly 2 things are happening. I think we've been all talking about product inflation. But I think at a lower level, wage inflation is also going up rapidly, okay? That's one thing is very, very clearly being observed. The second thing is we are also working on building our capabilities, talent, all of that from a perspective of a little bit more longer thinking in terms of like I just answered in the previous question that what will this company be 10 years from now? Or what should it be like? And hence, what is the kind of talent ecosystem we need to build and start thinking about from today. And I think this thought had emerged 1.5 years, 2 years back, and we were in the journey of building those capabilities over the last 1 year. So yes, so it's a combination of both of these.

Got it. So if I hear you right, this essentially refers mostly to people and talent within the organization.

Absolutely.

Got it. Last question from me. This is on DMart Ready. So Mumbai is, I think, your oldest city in terms of numbers of years present. So do you think at least in Mumbai or, let's say, MMR to be specific, you're present in pretty much all pin codes that you would want to be present in?

This is Vikram. Yes, we are present in all but a couple of pin codes, which are actually not very serviceable. But yes, MMR, Mumbai Metropolitan region, we are fully covered.

The next question is from the line of Amit Sachdeva from HSBC.

I have a question on -- I have 2 questions, one on DMart Ready. So just it's a very basic question. Is DMart Ready consumer seeking convenience at the margin or more value? Basically, where I'm getting at is because there is a clear -- you also mentioned there's a convenience pie, which is consumer is trying to sort of get a service, is willing to pay for it. But my question is, in the last 4, 5 years, you've built DMart Ready, which is clearly showing that EBITDA margin is still minus 2% to minus 3%. So operating model, even if some scale-up has happened, profitability is still elusive. Is there an opportunity for price discrimination here between physical store to online? And if it is profitable and stands on its own merit, then your ambition to grow faster may change as well. I mean what I'm trying to ask is that, is it the limitation because you want to give value, but convenience is a conflict. How do we think about this? Why not pursue that as a convenience opportunity, which can price discriminate and you get more profits out of it and hence, can grow faster and can service more customers who want that convenience? I just wanted your thought on that.

So the thought is very clear, Amit. We -- just because it's digital, we are not saying it will be convenience. Our positioning will be on value.

Sure.

We are very clear because in the consumer's mind, DMart stands for value. We want to maintain that. We don't want to create dissonance in the customer's mind. It's not good. DMart stands for value. The idea is how do we build an operating model that in spite of delivering at home, can you bring that value proposition saliency in the consumer's mind? That's the whole idea. So -- so whatever it takes to do that, I think that's what we'll focus on.

So what will -- what we need to change that this EBITDA margin starts to move in a positive direction?

I don't have a point of view there. I can only simply -- we simply feel very delighted and excited that we've reached here in such a short period of time and with the kind of EBITDA losses that you just mentioned, I think it's promising. And you have to give these things time. See the best part is you have a brick-and-mortar business who's delivering great profits, is able to fund. And with such low losses, I think we can -- the business -- the larger business can afford to give it more time to make it profitable and to stand on its own feet over a period of time.

Got it. No, fair enough. Just the last bit on this is on DMart Ready. What's the ticket size of DMart Ready order, if I may ask?

We don't disclose those numbers.

Okay. Okay. Okay. Fair enough. No worries. On DMart, I completely understand. My second question on the general merchandise. I don't know whether this estimate is correct, but correct me if I'm wrong. I think for the full year, the revenue mix was 22.37%. And in the first half of FY '24, this mix was 23.21%, which would imply that this mix actually deteriorated to 21.6% in the second half of general merchandise, which seems like a bit of a deterioration rather than an improvement. And while you say Q1 has become better, how do we reconcile that? Has the number in Q1 is substantially better than 21.6%, which was in the second half? Or is this assessment wrong? Correct me if I'm reading this incorrectly?

How are you comparing it? How are you comparing Q1?

No, I'm just saying that for the full year, that number was 22.37%.

Okay.

So if I take that number, 22.37%, you get a certain number in the revenue mix, taking the 4 quarters, right? And when you take first half, first half was 23.21%.

Where did you get first -- okay. Okay. Sorry, yes, okay.

So implicitly, the second half becomes 21.6%.

Correct.

So which seems like a marked deterioration rather than an improvement, while you say the second half was quite good and Q1 seems quite better as well. It seems to me that there was still deterioration happening in the second half of the revenue mix.

So okay, I've not done the numbers the way you've done, but I've got the sense of what you're trying to say. My retort or response to that is that first half, first quarter is actually from a revenue mix standpoint, the best.

Okay.

And then is the Diwali quarter, okay? Then is Q2, okay? And the worst is Q4, the March quarter.

Sure.

The blending of that with a reasonable confidence, I can say that this financial year, we'll be equal to us better than FY '24 GMA contribution.

Got it. Got it. And it is because the merchandise -- apparel has sort of bottomed out and looking like a little bit better and other things? Is there an opportunity to shape the general merchandise mix, non-apparel basis as well? Or are you -- it's still stable and nothing really much can change here?

So the way to look at it, Amit, is apparel, we believe we can go back to the older days of contribution, which was maybe pre-COVID. We see -- so that's one part. The other part is we see an opportunity in GM, general merchandise, to be a larger opportunity in the long term. So for us, the general merchandise opportunity is a larger opportunity. And apparel is more defensive. We can get back to where we should be. But are we very, very optimistic about apparel as much as we are about GM? No. GM salience to our model is better than apparel salience to our model.

Got it. Now without seeking any guidance because I think one of the things that was earlier asked as well that if say GMA, general merchandise, starts to do at least better, one would expect that revenue growth should accelerate in the rest -- remaining of the year. I mean, without seeking guidance, but do you feel a little confident that we are on that trajectory that revenue growth should accelerate as well over FY '24, given the network rollout and given the earlier problems are getting fixed because we saw something like 18-odd kind of percent of numbers in the first 4 quarters on an average. But do you see that number should be better as well in FY '25, that growth trajectory? Is it without seeking any guidance, but the way things are moving, what's your sense?

I would say the other way around, I would be a little conservative on the guidance from that standpoint. Rather than being optimistic, I would say that it is getting more and more challenging to maintain a 15% to 20% CAGR growth rate if I continue to grow at only 40 stores per annum. The real driver of CAGR growth rate is accelerated store additions.

Sure.

Yes. So that's the way to look at it. And we don't look at, oh because my GMA contribution went up and that should be a driver of revenue growth. Absolutely not. The driver of revenue growth is store additions.

Understood. That's very clear, Navil. And on the store addition since we are at it, like last 2 quarters, the average area that we roughly calculate is still around 40,000 now, which was way high in '22 or something like that. Is it now the right template of 40,000 kind of store is a reasonable way to sort of see the store sizes? Or is it quite variable still?

Very variable, Amit. We don't look at it like that. I've repeatedly said that. When you're in the model that we have, I mean, whatever land is available, what sizing we construct, all of that, right? So there's a broad range we play in.

Sure.

But like we said, historically, we were at 30,000, 35,000. Obviously, we see opportunity in the store sizes being larger, for sure. But it's always a range. Don't go by this 5%, 10% vagaries of average store size every year.

The next question is from the line of Harish Bihani from Kotak Mutual Funds.

So again, my question is on the store addition. If I look at your last few years' conversation, even in the last conference call, you clearly mentioned that you test your team yourself on a 15% number. But when we look at this number for last few years, it's trending below the 15% number. Now we were presuming that this 15% number should at least start coming through from fiscal '25, given that there would be backlog of some delays, et cetera, in fiscal '24 that should come through. But basis the initial conversation that we had so far, it seems like we'll be again closer to 40, 45. So this is a little perplexing to me. And you mentioned that there will be delays, India factor, delays happen. But at least there should be a point of breakout. It's not happening, Navil, for last few years, especially last year was, okay, there was issues last year, but at least this year, we should have seen some signs of things improving on that store count number. And we should be doing, say, 55 this year, 65 next year and 75 next year ballpark to be able to do a 15% CAGR number that you're talking about.

I take that feedback, Harish. And the only thing I'll tell you is we're trying our best. I completely feel and sense the point you're trying to make. Yes, but we'll try our best to do what's needed for the health of the business and the growth of the business. But point taken, I have no defense on that standpoint that you have. That is also our aspiration. So yes, but we'll try to do our best on that front.

Sure. And like in the apparel business, where you clearly mentioned that there were internal issues and we are working on that and things should improve. In this case, how much of this is internal and how much of this is external?

I've answered. I've answered repeatedly on this question. I understand the mood that your community has on inorganic growth, top line revenue growth and the drivers of it, which is primarily store opening. But the story is the same. It's both internal, external, everything. And but...