Campus Activewear Limited (CAMPUS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Campus Activewear Limited Q2 FY '23 Earnings Conference Call. [Operator Instructions] Before we proceed on this call, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties and other factors. It must be viewed in conjunction with our businesses that could cause future results, performance or achievements to differ significantly from what is expressed or implied by such forward-looking statements. The Campus Activewear's management team is represented by Mr. Nikhil Aggarwal, Whole-Time Director and CEO; Mr. Raman Chawla, CFO; and Mr. Piyush Singh, Chief Strategy Officer. I now hand the conference over to Mr. Nikhil Aggarwal, Whole-Time Director and CEO, for his opening remarks. Thank you, and over to you, sir.

Thanks, Kathy. Good evening, everyone. Welcome, and thanks for joining our second quarter of FY '23 earnings call today. We appreciate and deeply applaud your trust in our vision to create India's leading sports and athleisure footwear brand. Delighted to share that our quarterly performance has been broadly in line with our growth expectations, despite inflationary macro environment and transient demand contraction in rural and semi-urban areas. There's been a sustained improvement in our Y-o-Y quarterly financials, exhibiting marked improvement in our top line and profitable growth across all revenue streams compared to quarter 2 FY '22, which has tailwind support of pent-up demand with markets opening up after second official lockdown in India on account of COVID-19 last year. Because of seasonality seen across product mix, consumption, quarter 2 empirically has been contributing 20% to 22% of our annual net revenue. During quarter 2 FY '23, we sold more than 5.5 million pairs at an aggregate level, thereby clocking net income of INR 334 crores and a year-on-year growth of 22% versus quarter 2, which was at INR 273 crores. Both trade distribution and direct-to-consumer channels have delivered profitable growth of about 7% and [ 40%] , respectively on a Y-o-Y basis versus quarter 2 of FY '22. With the sales of 5.5 million pairs in quarter 2 FY '23, we registered a Y-o-Y volume metric growth of [ 15% ] in comparison to quarter 2 FY '22. Not only volume, our quarterly ASP has also grown by 5.3% from INR 577 in quarter 2 FY '22 to INR 608 in quarter 2 FY '23 despite a challenging inflationary environment. Balance sheet demonstrates the position of strength with robust return ratios such as ROCE and ROE of 30.1% and 30%, respectively. We are sincerely thankful to our end consumers, our channel partners, all our investors and stakeholders and our passionate team, which has helped us in delivering this performance, which earmarks the underlying strength and resilience of the brand. As always, we thank you for the invaluable support and investment. I will now hand over to our Chief Strategy Officer, Piyush Singh, for his remarks. Thank you.

Thank you, Nikhil, and greetings to everyone. Adding on to what Nikhil just said, we continue to uphold our paramount focus on sales growth and market share enhancement. As we have maintained earlier as well, just like FY '22, while inflationary environment and supply chain disruption resulted in a negative demand impact at an industry level, it also opens up interesting pockets of opportunities from a growth and market share enhancement perspective. I mean, just in line, we witnessed a robust growth in quarter 1 FY '23 and tried maintaining similar growth momentum in quarter 2 of FY '23 as well while being mindful of raw material inflation and direct and indirect impact of currency depreciation on our input cost structures. In quarter 2, while being cognizant of market dynamics, we tried offsetting input cost inflation in [indiscernible] and direct costs with sales mix led premiumization. Our endeavor is to utilize this downward impact with potential price increase and enhance operating leverage in our upcoming quarters in the second half of the year. At the same time, we continue our planned investments towards brand building agency network and infrastructure expansion and talent acquisition, all of which is expected to generate margin accretive impact in the subsequent quarters for the rest of the year. Now adding on to this, in all our distribution channels, category cohorts and pricing segments, we have demonstrated robust growth both in terms of volume and value amidst the challenging operating environment impacted by supply chain disruptions and inflationary trends, especially in semi-urban centers. [ Basis ], price segments, our sales trade in quarter 2 FY '23 has exhibited sustained premiumization vis-à-vis FY '22 full year, wherein tail contribution from semi-premium and premium categories have increased from 64% in FY '22 full year to 70% in quarter 2 FY '23. Similarly, on a category basis, revenue mix across men, women and kids have improved from 84.16% in FY '22 full year to 80.20% in quarter 2 FY '23. On a trailing 12-month basis, revenue from our operations have increased by 22% year-on-year to INR 1,457 crores in [indiscernible] first half FY '23 as compared to FY '22 full year, revenue of INR 1,194 crores. Similarly, our TTM first half FY '23 EBITDA stood at INR 278 crores as compared to FY '22 full year EBITDA at INR 244 crores demonstrating a 14% year-on-year growth. Our TTM first half FY '23 EBITDA margin stood at 19.1% versus 20.4% in FY '22, which is kind of transient in nature because of the lean first half of the year. Net profit during first half FY '23 on a TTM basis stood at INR 140 crores with a PAT margin of 9.6%, as [indiscernible] INR 124 crores in FY '22 with a PAT margin of 10.5%. On the supply chain front, we continue to stay cautious on the challenging inflationary environment in the near and medium term, ensuring [ nominal ] and semi-finished wood availability above anything else to maximize sales potential in the coming quarters. We continue to maintain a close watch on our input costs and are confident of restoring that headline growth directly and margin profile in the near to medium term in the balance year to go. I will now hand over to our CFO, Mr. Raman Chawla, to take you through more details on the results for quarter 2 and first half FY '23 performance.

Thank you so much, Piyush. Good afternoon, everyone, and welcome to the quarter 2 FY '23 Earnings Call of Campus Activewear Limited. During the quarter under review, Campus as a brand demonstrated a lot of resilience. Campus delivered profitable top line growth and protected bottom line profitability while ensuring requisite investments in future capacity and brand building that is essential for sustained growth and margin recovery. Revenue from operations increased by 22% year-on-year to INR 334 crores during the quarter, with both channel trade distribution and D2C, exhibiting profitable growth and premiumization in the quarter despite industry degrowth in mass and mass premium segment across select consumption cohorts across India. EBITDA was at about INR 44.2 crores as compared to INR 55 crores in quarter 2 full year -- quarter 2 of '22. EBITDA margin stood at 13.3% in quarter 2 FY '23 versus 20.3% in quarter 2 FY '22. Net profit during this quarter stood at INR 14.5 crores as compared to INR 28 crores in quarter 2 FY '22. Our quarter 2 FY '23 sales volume registered a 5.5 million pairs as against 4.7 million pairs in quarter 2 FY '22, thereby generating a 16% Y-o-Y volume growth, while quarter 2 FY '23 aggregate ASP stood at INR 608 per pair versus INR 577 per pair, thereby resulting in almost 5% year-on-year ASP growth. On the balance sheet side, our net debt has increased marginally from INR 174 crores at FY '22 and INR 204 crores as at September 30, 2020 on account of working capital investment to ensure the optimal season preparedness. Our net debt-to-EBITDA ratio is constant at 0.7x in FY '22 and in PPM H1 '23, despite the transient investment in the working capital to ensure season readiness. Similarly, our return on capital employed has also gone up from 29.7% in FY '22 to 30.1% in TTM H1 FY '23 and we managed to deliver a robust return on equity ratio of 30% in TTM H1 FY '23. With this, I'll conclude and hand it over to the operator to answer -- for the question and answer. Thank you.

[Operator Instructions] The first question is from the line of Jignesh Kamani from GMO.

Just want to check on the average increase. So what is our blended inflation in the raw material basket? And our ASPs increased by close to 5% Y-o-Y. So price hike been very low equity, maybe around 2 or 3 percentage. So to what extent additional price hike is needed to cover the inflation?

Hi, Jignesh. Piyush Singh and [indiscernible]. So Jignesh, are 2 components to this, which has led to an impact on our gross margin in the transient phase. First is raw material inflation. And second, there was an increase in minimum wages at one of our plants. This was a back-to-back increase in the months of August and September, which they are yet to pass on in terms of price increase. So I'll just break it up for you. While our gross margin has gone down by 4.5 percentage points on a YoY -- on a quarter-on-quarter basis, almost 3.5% to 3.75% is on back of raw material inflation for now. And the remaining 1.25% is on the back of our increase in conversion costs. But in order to offset all this we would need a price increase of around INR 100 on our average MRP. So our average MRP currently is around INR 1,200. We’ll need to take it up to INR 1,300 in order to offset this entire thing. So this price increase is something that traditionally we have always taken in our stronger half of the years for the third and fourth quarter, which is the second half of the year. And we are very mindful of how the market dynamics are and at the opportune time, we would try and make this in into our next season launch.

Understood. Second question, the demand environment. Is there a demand softness across this environment be it the Metro [indiscernible] or are we seeing more weakness in [indiscernible] the economy segment versus Premium and Metro?

Yes, Jignesh. So there has been some softness that is being witnessed in the rural and semi-urban areas, especially the states of UP and Bihar. And we are also witnessing that softness. This is true for the entire footwear trade, not only specific to Campus. And while our west areas of Maharashtra and Gujarat, these states have grown remarkably well, along with even south, but just the North has sort of not grown in expectation, and that's where the West has sort of made up for the lack in the North sales upgrade.

Jignesh, on a portfolio level, all our segments, be it mass, mass premium, or premium, they have witnessed growth. It's just the geographical pockets where we kind of offset our off-line sales with softness across UP and Bihar, are, you can say, more-than-expected sales in Gujarat and Maharashtra. And just to add to it, our distribution channel per se, despite all the softness at an industry level, has managed to grow at almost 8%. 7% out of that 8% is driven by ASP growth by the way.

[Operator Instructions] The next question is from the line of Chirag from CLSA.

Congrats on a good result. I have 2 questions. So first, Nikhil, can you just give us a sense of the distribution expansion progress that we have seen in different parts of the country? And if you can break it down more graphically. And the second question is more related to the online business. My question is, is there any lumpiness in revenues that we have because our e-commerce revenues have practically grown from about 3% of the overall revenues to about 30%, 35% today. So that means that given that hyper growth pace, you will obviously have some very high base in the subsequent quarters. Would that mean that it would be difficult to meet those numbers as we go forward in the next few quarters?

Yes. So in terms of distribution, let me give you a geographical split. So North has contributed about 44% of the revenue. West has contributed about 20%. South again has contributed about 10% to 11%. Central is 6% and East is about 18% to 19%. So this is -- like we said, we have seen some dip in the North thanks -- it's largely due to UP and Bihar, but that's been made up by the West.

Sorry, what I meant to say was in terms of the progress in reaching out to more number of touch points, what's been the progress in each of these categories? So North, obviously, they are very strong, but we need to increase the touch points in the balance part of the country.

Yes -- Piyush this side. If you recollect that we had a differentiated go-to-market strategy across our various markets. So North and East undoubtedly are our core markets. In North and East, of course, our endeavor is to go deeper into the market, gain more market share, gain more shelf space. And that is the reason why we get good growth as a paramount agenda, especially in our core markets. We are not looking at any further counter additions, meaningful counter additions in these markets. While our approach in the emerging markets, which is essentially West India and parts of MP, [indiscernible] and [indiscernible], our approach is more hybrid in nature in terms of adding more counters and distributors. Where we have added a meaningful number of distributors over the last 6 months, our digital comp has gone up by 10%, and our overall counter share has also gone up by, say, around 500 to 600 counters. And this is what has led to exceptional performance across especially the Western belt of India. That is Gujarat and Maharashtra during these challenging times, which has led to an overall growth of 22%. And similarly, we continue to stay opportunistic in South India with online and our own source network as the beachhead for kind of continuing the growth momentum in South India. So if you see our revenue contribution profile has changed meaningfully over the last 6 months, while earlier on, Central used to contribute 55% of our overall revenues, it has come down to -- it has kind of moderated at 50%, while still generating growth. West India, which around 6 months back, used to contribute only 14% to 15% has now gone to 20.6%. Similarly, South, which earlier used to contribute 9% has now gone to 12.6%, and East contributes the rest, which is 18%. So East has kind of stayed static. Earlier, it used to be 19%. Now it's around 17.5%, 18% for us. So which means that we are driving more growth from newer territories, emerging markets, frontier markets and expanding our footprint. Now coming to your second question around online. So I'm actually relieved to tell you that despite the hypersonic growth that we have seen in this channel, we still see a lot of juice left in the channel. And on a quarter-on-quarter basis, our growth numbers have been kind of fairly above expectations. If you see, even in this quarter, we have grown at [ 24% ], so far as lumpiness is concerned, the FY '22 was one full year for us. Unlike distribution, in online, we had a full complete year. So is while holistically spread out, so migrating from quarter 2 to quarter 3 in this year, we have a fair line of sight that we will maintain our growth momentum this year as well. So far as a little bit of lumpiness is concerned, that is a transient INR 20 crores, INR 25 crores of sales, which is -- which kind of says to me that quarter 2 or quarter 3, depending on the flagship platform events for Flipkart and Amazon called Big Billion Day Sale are making that investment last year, and this had a certain impact on our quarter 2 numbers this year, which is transient in the sense that last year, BBD and GIF were in the first week of October. This year, they were there in the last week of September. Because of it, then incremental sales of around INR 25 crores has what has shifted to quarter 3 in our case. Because last 5 days of sales were not considered from a delivery standpoint or a revenue recognition standpoint. Now the big impact that we have seen this time is while we had done all the [ prebuys ] marketing specifically in this quarter, the goodness of that entire marketing would be seen in quarter 3. And hence, we mentioned that our margin compression this time on account of online, which has not happened on an aggregate level, is only transient in nature. So just to summarize, we don't see any lumpiness in moving across quarters for the balance of the year. We have a clear line of sight in terms of our growth across e-commerce. And some of the margin goodness, we'll recoup in quarter 3 because investments were done in quarter 2 in the month of September, while majority of the goodness has slowed in quarter 3 in the month of October.

Sure. And to Jignesh's question, I pitched the amount of [indiscernible] needed to quickly offset the margin pressure that we are almost into the middle of the Q3. How much of the price increases have you already taken to offset the margin pressure?

We are still monitoring the market because it's not just about quarterly, it's the second half of the year, which is roughly 55% to 60% of our revenues. Once the market takes complete full throttle base in terms of offtake at the end consumer level, that is the time when we typically take a price increase. Even if you say track record, we have essentially taken price increase in the month of December, January, but historical benchmarks are not -- should not be taken as marked in stone so far as this year is concerned. Nevertheless, that said, there are 2 very important levers which leads to margin expansion in the second half of the year, which is enhanced volume as well as [indiscernible] price increase. At the same time, if the operating leverage will also start kicking in into these quarters because most of our fix costs, as you can see, are very much front-loaded in that sense.

Okay. And my last question, if I may. Can you just comment a little bit around the long-term A&P spend as well? As we get into newer markets, do you see that there will be a need to strengthen some of the A&P spend?

I mean, very valid question. You'll remember that 6 months back, we had given guidance that the -- whatever operating leverage we have generated, 1.5%, let's say, 2% of that, we have reinvested in our A&P side because our long-term objective is to strengthen the brand and own the customer mind share. Despite softness in the market and generating 22% revenue growth, we have sustained on these investments because we know that these investments are for the long term, and they'll be revenue and margin accretive in the subsequent quarters; not just for this year, but for the years to come. So we are still maintaining that trend line of 6%, 6.5% of the A&P spend. Some of the A&P spend was front ended in the way, as I mentioned, that a bulk of it for this quarter happened in the month of September. For the month of September, we have spent roughly around INR 30 crores for the month -- for the quarter, we have spent around INR 30 crores in A&P spend. Half of which was targeted in the month of September, both on the online side and the off-line side, but the entire goodness would be realized in the subsequent months. For example, whatever billboards we had done, whatever printing ads were done to our retail needs that we did as part of this spend, the goodness and the uptake happened in the second half of September or last week of September, followed by the early weeks of October. Similarly, the entire online spend that we have done towards the preparation of the Great India Festival, which ran for 2 years, 2 months and the Big Billion Day which ran throughout September and October, majority of its goodness is yet to be realized in the month of -- or rather quarter realized in the month of October. So in that sense, some bit of our advertisement spends were front-ended in this quarter, while the goodness has kind of rolled over to quarter 3.

[Operator Instructions] We move to the next question from the line of [ Elias Kashaki ] from Motilal Oswal.

You did speak about the online growth that we have seen, which has been pretty strong, despite the competition. If you could just share some more color. In the last few quarters, we have noticed some of the players have got reasonable fee funding and is it correct that there's a lot of competition that has started over there in terms of price-led competition? I mean I just wanted some color from you in terms of has the competitive intensity gone up? Are you seeing any impact because of that in your business?

[ Eli ], great question. See, the way we have structured our e-commerce business, it's based on very robust fundamentals and not to add more English numbers, the way we have structured the business is across 3 or 4 verticals of our pay marketplace, managed marketplace and our value addition and online to off-line pieces. While there are some smaller players, we have recently received some bit of equity investment. And that's only because of the opening up of the sector and the insight that people have started getting into the sector once we got listed, and there were other players who were already listed in the space. That has not really caused any dent in our market share or in our position on the e-commerce side specifically. Rather, over the last 6 months, we have accrued market share. We have accretively gained both market share and margin share in our respective P&L and balance sheet over the last 6 months which is reflective of in the kind of growth that we have demonstrated. Last quarter, we did 150% growth on a year-on-year basis. And this quarter, on an aggregate level -- this quarter on a year-on-year basis, we have still maintained that momentum. Even on a large base, we continued at a 40% growth on a year-on-year basis. On an aggregate level, the growth is still above 100% on first half of this year versus first half of last year. And that said, we have still maintained our ASP growth even in the online channel. So on an overall basis, not only we have done revenue growth, but we have also done margin accretion in this channel on a year-on-year basis, Besides the increasing operation.

Got it. So this is very interesting. Any reason you see what has helped us? Is it any increase in SKUs, any new launches or any -- you said price action is not taken. So what has led to this?

So there are 2 reasons behind, 2 prominent reasons. One is the enhanced brand pull and the way we have designed our customer journeys and the way we handled our customers throughout the online and the omnichannel experience. And second is that we have deepened our partnerships with our strategic partnerships in the platform. So we are not just a seller on the platform. we have increased our level of engagement with these partners. So as you can see that this year also, we ran a very successful third edition of Global Giri 3.0. We launched some top-of-the-line SKUs specifically on Flipkart and Amazon and Nykaa and [indiscernible]. We had Campus [indiscernible] and similarly, we appoint newer properties with other fashion verticals. And there are multiple other strategies and multiple other focus to play right now, which are still in the work site, which we are not disclosing to the public at line, but everything is focused on enhancing our partnership and strategic engagement levels with the platform and not just stay as a seller out there.

Understood. This is very helpful. Just last question on your expenses. So you did mention that we have front-loaded our spends. So the kind of increase we saw in this quarter in other expenses, which, as you mentioned, was predominantly because of the increase in A&P spend and that we have front-loaded. Should we expect Q3, Q4 now accordingly to kind of see relatively much lower increase? Or there should be some kind of adjustment because of this factor?

Yes, [ Eli ]. This is correct. We should see some normalization there as most of the cost has been frontloaded in H1. So for second half, anyways, there are these other factors at play where we generated a lot of operating leverage, thanks to the costs being frontloaded. So certainly, this should bring in better profitability. And better margin accretion.

Maybe more color around this, [ Eli ]. If you can see on a quarter-on-quarter basis, our expenses have increased by roughly INR 30 crores. So INR 15 crore increase is on back of our enhanced A&P spend, which goes towards long-term brand building and some bit of it is candled in the month of September. Goodness is slowing in the month of October and November and subsequent months around that when the season actually kicks in. The other big expense is around retail store expansion. So if you recollect, last September, our retail store count was around 50. Out of which 38 stores were COCO and 3 were FOCO. Now our retail store count has gone up to 150 at the end of September 30, 2022. The entire business has grown at a clip of 100% year-on-year despite being the early vintage of the stores. Now most of these stores in the initial part of the year was COCOs. And hence, most of the expense in terms of rolling out retail stores is front loaded in that sense. Now as these stores gain more maturity, our margin profile would further increase and we will see a normalization of these retail store expenses as well.

Understood. This is very helpful. Just to clarify the number here, if we have about 6% to 6.5% kind of ad spend this year, it would be somewhere about approximately between INR 90 crores to INR 100-odd crores which would last year have been about INR 70-odd crores. So is my understanding correct that H1 this year, we did about INR 45 crores against probably something close to around, what, INR 20-odd crores so we've doubled. And now the coming quarter, therefore, the increase will be much lower against the INR 40 crores last year. It could be something like approximately INR 40 crores, INR 45 crores itself.

Yes, your understanding is correct. We have roughly done around INR 50 crores on a sales of INR 670 crores, So hence, the front loading. The remaining part of the year is expected to generate another 55% of -- 55% to 60% of our revenues. The balance to go is roughly close to INR 40 crores to INR 45 crores. And hence, this expense would get meaningfully normalized.

The next question is from the line of [ Akshay Daga ] from Fidelity.

Just a couple of questions around the demand environment. Could you just sort of recap first on what was the growth seen ex online. So if you're -- if we take our MBO EBOs of channels, what is the growth over there? That's question one.

Sure. [ Akshay ], here's to say. I'll give you a breakup across all 3 channels. In our MBO, trade distribution network in this quarter on a year-on-year basis, we have grown at a rate of 8%. The entire growth is driven by ASP, which is our sales mix. In the e-commerce channel on a year-on-year basis, this quarter was as same quarter last year. We have grown at a rate of 40%. And in our own retail network and key accounts, we have grown at a rate of 92% year-on-year.

So if I think about sales growth, at MBO, I mean saying MBO channels, et cetera, are not growing or by about 8%, 9%. Was there like through the quarter, a slowdown that you saw that was pretty evenly how it was read out? I'm just sort of looking at your growth. Like you said, on our full year performance in e-commerce has been very credible. So if I had to pick a hole, I would say MBO is the channel where you've grown a little slow. So I just wanted to get your perspective on why there was a little bit of a slowdown over there? And how are you thinking about growth in that sort of segment for the rest of the year?

So certainly, actually, the growth in the MBO has been slower than expected, and we understand that because there has been remarkable softness in the market, especially in the Hindi-speaking belt where we have -- where we sort of dominate the market in a big way. So it's impacted the MBO growth, which has been more than been made up by the other channels. But going forward as well, we have a very robust plan in place where, of course, while macros will certainly help. But at the same time, we have taken a lot of actions within the channel itself in order to make sure that every counter, the service levels have gone up significantly, along with order fulfillment and coverage of all the counters in a meaningful way in order to ensure that the growth sort of normalizes and comes back to its budgeted level in the distribution piece.

And just to add to it, even in the trade distribution side, while the industry has degrown because of the softness, we have still maintained this growth because of the network diversification that we have managed to achieve in terms of our enhanced footprint in Western India and parts of Southern India. So while there was some bit of softness in the speaking well especially in the state of UP and Bihar, we were largely able to offset it and kind of do some retail sales, especially in the states of Gujarat, Maharashtra, AP and Telangana.

Not to look for the guidance, but just directionally, have you seen in UP and Bihar, demand pick up into October, November. Not really looking for a number, just trying to understand directional trends on demands.

Directionally, you are bang on because there are 3 main levers which leads to kind of enhanced sales in the second half of the year, especially in the Indian festival. These 3 levers are the festival, see, the onset of the festival season; second, the onset of winter; and third is the onset of marriage season, weddings. So this time, the wedding season, muhurat, starts with 24th of November, and it goes 'til 20th of December, which is the peak of third quarter. And then it restores again in kind of kicks back again, in the quarter 4. Now onset of winter is slightly delayed this time, but we are expecting another week or so. The winter would also be added full might. And these 2 factors, along with the festive activities around in the second half of the year has traditionally led to an enhanced demand and enhanced sales and consumer uptake in the subsequent quarters of the year.

My second sort of set of questions, sir, around pricing strategy. So your presentation talks about 5% higher ASP growth. Now e-commerce is growing faster and that's higher realization business. So there is some mix impact on channel as well. So like-for-like, it would seem that your realization growth will be low single digits. I don't know if there is a mix impact within the shoes that you're selling in MBO, EBO, et cetera, or that's the headline price increase that you've taken? And in a year where channel inflation is high, just love to get your thoughts on the reluctance to take maybe another 4%, 5% price hike right now.

Interesting question. I'll take your last question first in terms of when is the right time to take a price increase. See, we have seen that a few of our competitors took a price increase and then had to do a rollback. We are very cognizant of how the market reacts, especially in the mid-premium segment. So for us, paramount is to maintain our growth trajectory and to keep on gaining more and more shelf space and market share, because once you have kind of established yourself in the network, both online and offline, it's easier for you to get the margins back. So long as you are not doing a discounted sale. What is competing here is if you look at all our channel splits and our growth profile, all the channels are growing holistically and not on the back of a discounted sales, which is kind of angulated with the help of ASP growth that we have demonstrated. The more competing fact is that our entire trade distribution network has grown purely on the back of sales mix and ASP growth in a softer market where volume kind of stayed muted or kind of the volume growth was missing for the time being. So far as our overall ASP impact is concerned, you will be surprised that e-commerce channel for now is holding its ASP despite our enhancement across women and kids category. And the entire sales largely is driven by volume growth for now. The entire ASP growth, or the premiumization, is led by both our trade distribution as well as our own retail, so which are very comforting levers for us for now because these levers actually give you that pricing power even in a difficult market. Had it been on the back of discounted sales and margin loss because of additional discounting, we would have limited number of options to take that price increase. And if -- I mean just to recap that entire thing, what we have mentioned to Jignesh also from GMO, the overall price increase that we need to take at an opportune time in order to offset this entire transient hit of raw material inflation, which is now pulling down is not more than INR 100, which, I mean, we believe we have the pricing power, but we are just being mindful of how the market behaves, especially in the offline side. So we believe once demand uptake starts in the peak of winters, we’ll get a more opportune window to kind of exercise this option.

Okay. Very clear. So then just the last question from my side. Sorry I ask too many questions. It's the last question, was in terms of margin stand. We continue to focus on top line growth. Q3 could see some transitory impact of inflation as well. We should think about margin normalization and by normalization, I'm thinking more like the 20%, 21% margins that you did last year, by Q4 or early next year. Would that be the right way to think about margin?

It's a little premature to comment on that. Directionally, we'll be kind of rolling over in the next fiscal year to kind of regain our margin to price. We believe we would start seeing that normalization impact because [ opportune stations ] started softening a bit, and operating leverage would start kicking in, in a meaningful way because quarter 3 is a meaningful quarter for us. By quarter 4, I mean, it is premature so also directionally, yes, we'll see margin reversal happening in a meaningful way in the second half of the year. Line of sight still stays the same where we were operating in the last fiscal. And all our endeavors are towards holding the fort on that front. So whatever compression we have seen in quarter 2, we can kind of comment on that, that this is transient in nature, and part of the goodness would be reflective in the subsequent quarter, which is quarter 3. And at the same time, we have been mindful of our operating leverage and working towards all the normalization effort that we can take internally to kind of offset this impact.

The next question is from the line of [ Agrilwari ] from Centrum Broking.

My first question is on the EBOs. I think you mentioned that we have expanded our EBO reach from 50 to 150-odd stores in the last 1 year. So what kind of geographies we are looking at for EBO expansion? And how different is the product portfolio in EBO channel versus say, MBO and online channel?

Yes. So our EBO footprint is largely driven with the fact that the rollout is happening for premiumization of our distribution network, which you'll witness in our quarter 2 numbers as well. As I mentioned already, whatever growth we have generated in quarter 2 in our [indiscernible] distribution network is largely on the back of ASP premiumization, which again has happened because of our EBO rollout strategy. So these EBOs are getting rolled out into the markets where we already have a meaningful brand presence and primary collection. So from an overall transaction perspective, we are kind of evenly distributed on a pan-India level now. Our 150 stores are largely present across -- say 25, 30 stores are based out of Delhi and there are another 20, 22 stores are based out of UP; 10 stores are based out of Bihar; Gujarat has almost 30 stores now; Maharashtra has another 20, 25 stores. And we are increasing our footprint very rapidly in the states of AP, Telangana, MP, Jharkhand there's been 1 as well as state of [indiscernible] added and even Karnataka to the fact. As on date, our store count is 180. And by the end of this calendar year, we the store count account to reach to 200.

With the mix of...

In terms of you can say product profile, the product profile is highly premium in our stores, and that has led to a higher ASP realization in our stores. our stores essentially keep -- so long as [indiscernible], which is 80% of portfolio, our stores essentially start at a price point of 1,500 MRP and goes as high as 3,500 MRP. So the product profile is very, very unique so far as our stores are concerned. But that product, you will also find on e-commerce. We try and maintain price parity across all our channels in order to offer an omnichannel experience to our customers.

I'd just like to add that the number of stores are marginally now higher in terms of FOCO stores, franchisee and franchisee-operated, then COCOs, so the focus is now on increasing our franchisee-owned stores going forward.

[Operator Instructions] We move to the next question from the line of Ankit Kedia from PhillipCapital.

2 quick questions from my side. One, could you just quantify the volume decline you are seeing in UP, Bihar and the kind of volume growth you are seeing in Western South market? Just to get a color on how intense is the pressure we are seeing in those markets? Second question is regarding the ASP. Could you share the difference in ASP between online and trade distribution now? And while I understand that the trade distribution demand is weak, so price increase could be difficult, but what is stopping you to take the price increase in the online market, given that the product is very premium, you don't sell it offline to [ bear ], it would be more easy for you to take a price increase on the median business.

Yes. So Ankit, Piyush this side. I would like to take your question first, and then I'll address the question around volume decline and volume enhancement. So, so far as our portfolio strategy is concerned, we don't do a vertical split in terms of segregation of portfolio across distribution, online and our own retail. We rather do a horizontal season split. So at a given point in time, all our products would be available across all channels. So taking a price increase only across 1 channel and not across the other channels is actually not very customer experience friendly that we have seen. What we have done instead is we have taken selective price increases in terms of new exclusive launches, especially during the month of September when we did that exclusive global [ free ] campaign and the launch of our casual ranges. So while the volume is still missing, the response was very encouraging even on a higher-priced product portfolio. The entire portfolio was priced at 19.99 and above and was exclusively available on the D2C network and the sell-throughs were very, very encouraging from that aspect. While it's just a small step in that direction, we are meaningfully working in this regard, where exclusivity, special drops and collaboration become a meaningful part of our volume contribution and hence, it kind of gives us a hedge against any kind of inflationary impact in the traditional networks. Now so far as your other question is concerned around the volume decline. The volume decline in UP and Bihar was close to 7% during the first half of the year, which kind of was offset by the data by Gujarat, Maharashtra and AP, Telangana. We had 8% to 8.5% of volume increase was seen on a slightly smaller basis. So far, the volume of it was there. Your last question was around the ASP differential. So the ASP differential is roughly so that it will now be 15% between our trade distribution and our online channel and it stays as such. And it was roughly the same even at the end of April '22.

The next question is from the line of from [ Harsh ] from [ Miraculous ]. [Operator Instructions]

My first question was around inventory. So while our top line for the last 3, 4 quarters is largely just on similar trends. However, our inventory from Q4 to Q2 has increased from INR 350 crores to INR 500 crores. And it's quite a bit of a meaningful jump. So what explains this?

Yes. So this is largely in line with what we had planned because we -- this is all front-ended inventory. We build up the inventory for the season for the second half. As second half of the year contributes to about 55% to 60% of the overall revenue, we -- this is the normal trend that we see every year in terms of the inventory buildup mostly during quarter 2.

Okay. Okay. And regarding the category of sports shoes, especially from the price range of INR 500 to INR 2,000. So we are growing at a very healthy rate. However, at what rate is this category itself growing in India, at a pan-India basis?

So as the category itself, it's growing at a rate of around 15% to 18%. I mean, barring these couple of hiccups around demand softness and all, on a holistic level at a CAGR basis, we can easily assume that the overall category, including unorganized and organized players, is growing somewhere between 15% to 18% as of now. And the industry size is close to INR 12.5 crores.

Okay. Thousand.

INR 12,500 crores. My bad.

The next question is from the line of [ Ramakrishnan ] from Equity Intelligence Private Limited.

So could you give me a breakup of sneakers and chappals. So we have an average realization of around INR 600. And I think earlier, one of the answers, you said that INR 1,200 is the price, and we also take a price increase of INR 100 for the margin correction. And the second thing is this on the e-commerce, what is the return? Because the other guys were talking about 20% return. So what kind of return and breakup of your online -- your own online through and the e-commerce sales?

Okay. Let me answer your first question first. So in terms of the -- you're looking at the MRP, our ASPs are a factory in nature, are naturalization, right? So that's approximately 50% in the case of trade distribution and slightly more in the case of the other channels. So that's why our ASP trend at about 600-odd level versus the MRP of 1,200 months. So in order to offset the inflationary impact, we need to take an MRP increase of INR 100 at INR 1,200, which will translate to roughly INR 50 on the ex factory levels in terms of our ASP increase.

[ Mr. Ramakrishnan ], if I may give you an illustration very quickly. So on an average level, as Nikhil mentioned, an MRP is INR 1,200. Our cost to MRP multiplier on a branded level is somewhere close to 4 to 4.2x. So that means the cost of manufacturing that shoe, which I sell it at an average MRP of INR 1,200 is close to INR 300. Now because of this raw material inflation and increase in minimum wages across our plants on -- in back-to-back months, the cost of processing has gone up by almost INR 5. And our raw material inflation has led to an increase in raw material costs by another INR 20, which means my cost has gone up from INR 300 to INR 325. If I need to maintain the same margin profile, I need to increase my MRP from INR 1,200 to INR 1,300 so that whatever realization I get, which is incremental realization of INR 50, I'll be able to offset not only the increased input and conversion cost, but I'll be able to maintain my material margin at an additional 25 months. So that's how the illustration goes.

Okay. Yes, the breakup, I asked for the breakup of basically sneakers and chappals as well as the return on e-commerce.

90% of our portfolio is sneakers and [ court shoes ]. Only 10% is open [indiscernible], which is not only flip flop, we don't do very basic Hawaii chappals. We start with the flip flops, slip-ons, which are most premium in nature.

Yes. Like starting at INR 499, INR 599, which is all premium range.

The next question is from the line of [ Justil Valia ] from Clockwise Capital.

So I went to our showroom, I think in beginning of September, it was now during online -- the big online sales events. And I checked the prices of your premium production, which are at around INR 2,000. Now I checked the price on Amazon as well. All of them are available on Amazon at around 30% to 40% discount. Now my first question is what's your strategy on pricing in off-line and online channels on a long-term basis? And if this is the kind of discount, which is going to continue on e-commerce, then it doesn't make sense for consumers to buy off-line. Hence, your -- the investments that you are doing in your off-line channel, whether it's on expanding distribution or your EBOs, there could be suboptimal returns in future?

So great question, and I'll take this up. See, the thing is what -- how we are actually segregating the portfolio. As I've already mentioned, we don't do a vertical split because that is suboptimal insofar as our spend is concerned. So what we have done is we have picked our own retail and our trade distribution on the back of freshness. Now this change is something that we have incorporated over the last 1 year or so, so whatever shoes you must have seen over there must be part of the phased-out portfolio that we kind of take out from our stores because September is the month when we do our autumn-winter launch in stores and across our trade distribution. How we try and maintain this is, whenever we launch a new season, the launch is also not needed, and the phasing out is also not needed because you have to kind of phase out the inventory, the physical inventory which is lying there at the stores and make it available online and elsewhere at a slightly higher discounts and discounts are not at all funded by us. These are transient and funded by the platforms only during the event. So what we do is once we launch a certain product, specifically if we are doing a spring/summer launch and an autumn/winter launch, what we ensure is during the next 3 to 4 months, which is the kind of the freshness phase of the product, we maintain price parity across all channels. So whatever fresh launches we do in the month of September, you will see that whether you go and find the product online or you find that product in a store or to a trade distribution, the maximum discount cap is 10%, and that kicks in after the second month of the launch. In the initial month, there is absolutely no discount, and we only trend on freshness. And this is the kind of discipline that we are trying to implement across all our channels. While we'll -- I mean, we are mindful that it's only the first year and there is some vertical inventory, vertical season sizes, which are still hot-selling across all channels. So this will take some time for kind of a portfolio segregation perspective on a horizontal spread level. The strategy is very, very clear across all channels. During the current season and season minus 1, we are trending on freshness and for legacy seasons and for SMU manufacturing and special collapse, we are kind of doing that value proposition in collaboration with the platforms, which might lead to some bit of discounting for a few days. Despite whatever portfolio discount we have seen on an [indiscernible] basis, our overall aggregate discount on our e-commerce channel has stayed within the realms of 17%, 18% and as they were [ closed ] threshold of 20% so far.

Got it, sir. So basically, that means that there will be exclusivity of SKUs available off-line and online only during the launch phase. After that, broadly, when the SKU gets announced...

We refresh our portfolio every 6 months. So in every refresh, we introduce 150 to 200 new designs. So whatever is the current season offering, you will hardly find that on discount. And within 6 months, we kind of refresh because for running the stores, be it MBO stores or be it our own stores, you need that freshness because freshness is the only hook which kind of attracts the customer in.

The next question is from the line of [ Adithya ] from [ Stallions ] Asset.

Just wanted to understand then what will be your margin looking like, let's say, for FY '23? Because the CCI margin has actually increased, let's say, from FY [indiscernible] have it a premium share of D2C by in our revenues, which were incrementally higher in terms of margin. But if I see your margin at Q1 and Q2. And these are kind of margins where we have actually reached 20% for FY '23. So do you think that it will be at least 18% margin for FY '23? Is that something that you can drive for?

Sorry, your voice is kind of getting phased out in between. So while we can hear that you have requested for some margin outlook for the balance of the year, but we couldn't really understand the balance of your question.

Yes. So I'm just talking about outlook for margins for FY '23. Because if I see your margins have increased every year including increasing share of D2C, which is incrementally higher margins, so what kind of margins are you looking for FY '23 because D2C growth has not slowed down. The growth in online then was 44% and then you're guiding for now [ 123 ] stores. What kind of margin are you looking at for FY '23?

We are not giving any specific guidance around our margin profile. All we can say is directionally, we are heading towards the best part of our year in the -- which is the second half of the year, so far as volume, delivery, top line growth as well as margin enhancement is concerned. Right now, we are looking at an opportune time to kind of offset the raw material inflation that we have seen in order to normalize as [ a legacy ] margin structure of FY '22. And we are confident that with the right steps in place, we should be able to do it in the balance of the year.

So have you taken any price increase in Q3 as of yet?

No, not yet.

Not yet. We are -- I mean, we are still 5 months -- I mean, 5 months are still there on a year-to-go basis. So we'll look at the opportune time because for us, paramount thing is to ensure that we continue our growth momentum, we keep on gaining more and more market share.

Because the marriage season already starts on the 24th of November...

[ Mr. Shirma ], kindly request you to please…

It's just a follow-up. It's just a follow-up. It wasn't an additional question. Yes, because the marriage season starts on the 24th of November, goes on to 28th of December, it's a very big season, at least in the North. So any price increase would have actually helped you to increase margins in Q3 because half of the quarter is already done for, right?

Yes. See, I mean like Piyush mentioned earlier, a couple of competitors tried doing that in the season and they had to reverse the decision. So…

So it has to be a very well thought through strategy and there are multiple other variables. There are multiple other levers available at play for us to not just ensure the growth but also to recoup margin. So we -- I mean, directionally, these are the levers like a good season on marriage and the onset of winter, but there is no hard spec or hard correlation between when we should take a price increase vis-à-vis the onset of these levers. So as we mentioned, we are very watchful of the market dynamics and the kind of demand profile that we are seeing all across country. And specific cohorts in core markets, we'll do the same at an opportune time.

We'll take the last question from the line of [ Harsh Shah ] from Intra Capital.

What is the proportion of discounted sales for us in second quarter? And how has it trended compared to historical levels?

We were just discussing here. So the counter sales have not exactly gone up versus last year. We can come back to you with exact numbers.

But you can -- maybe we triangulate this from the fact that despite a tough quarter for the industry, we have still managed to grow our ASPs by 5%, which is actually a full year trend line of ASP growth.

And margin contraction essentially led by the raw material increase in the conversion cost increase, it's not so much by the accounts.

Okay. Okay. And sir, just 1 clarification. What we said is that the INR 20 crores, INR 25 crores e-commerce sales, right? So on a like-to-like basis, that should have been recorded in 2Q, right, if we compare it with last year, which will flow for us in 3Q. Is that right, sir?

So that sales last year was part of our quarter 3 numbers any which way because the major festivals, the flagship festival started on 30th of September and went to the balance of October. This year, they started on 23rd of September and kind of followed through in the month of October. So the first flagship event happened in the first week itself and majority of its sales got rolled over. While on a BAU level, this is a normal phenomenon first quarter, but what we are mentioning here is the incremental sales that happens once a year, depending on when the event happens.

Ladies and gentlemen, that was the last question for today's Campus Activewear FY '23 Con Call. On behalf of Campus Activewear Limited, that concludes this conference. Thank you for joining us. And in case of any further queries, please reach out to Campus Activewear's Investor Relations team at ird.campusshoes.com. You may now disconnect your lines. Thank you.