Campus Activewear Limited (CAMPUS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Campus Activewear Limited Q3 FY '23 Earnings Conference Call. [Operator Instructions] Before we proceed with 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 would cause future results, performance or achievement to differ significantly from what is being expressed or implied by such forward-looking statements. The Campus Activewear management is represented today by Mr. Raman Chawla, CFO; and Mr. Piyush Singh, Chief Strategy Officer. I now hand the conference over to Mr. Piyush Singh, Chief Strategy Officer, for his opening remarks. Thank you, and over to you, sir.

Thanks, Mike. Welcome, and thanks, everyone, for joining our third quarter of FY '23 earnings call today. Our CEO, Mr. Nikhil Aggarwal is under the weather due to viral fever and would not be able to join today's call. We apologize for this inadvertent change on his behalf and wish him a speedy recovery. Now we are very delighted to share that our quarterly performance has not only maintained our progress on the growth trajectory and demonstrated a material uptick in our profitability trend, vis-à-vis, last quarter, despite inflationary macro environment and transient demand contraction in rural and semi-urban areas, which is still not out of the woods in our opinion. We are very bullish on the long-term growth and profitability prospects of both the sports and athleisure industry in general and Campus group in specific. There's been a sustained improvement in our year-to-date financials for FY '23, exhibiting marked improvement in our top line and profitable growth across all our revenue streams compared to the same period last year, which was actually supported by pent-up demand tailwinds last year with markets opening after second official lockdown in India on account of COVID-19. Now coming to the quarter, during quarter 3 FY '23, we sold more than 7 million pairs at an aggregate level, thereby clocking net income of INR 466 crores and a year-on-year growth of almost 7.5% versus quarter 3 last year, where the top line was INR 433 crores. While Trade distribution has degrown by 13.5% on account of higher base and lower primary uptake on account of channel partners, taking a cautiously optimistic view on account of slower-than-expected demand recovery especially in Tier 2 and 3 cities in semi-urban centers. Our direct-to-consumer channels have delivered robust growth to file up more than 46% on a Y-o-Y basis versus quarter 3 FY '22, supported by sustained secondary consumption by end consumers. With sales of 7 million pairs in quarter 3 FY '23, we registered our Y-o-Y volumetric growth of roughly 6% in comparison to quarter 3 last year. Not only volume, quarterly ASP has also grown at 1.5% from INR 657 in Q3 FY '22 to INR 669 per pair in quarter 3 FY '23 despite a challenging inflationary environment. Now our balance sheet demonstrates the position of strength with robust return ratios, such as ROCE and ROE at 27% and 25%, respectively. On a year-to-date basis, all our distribution channels, category cohorts and pricing segments have demonstrated robust growth both in terms of volume and value, despite the challenging operating environment impacted by supply chain disruption and inflationary trends. Business by segments, our sales trends have exhibited sustained premiumization, until YTD 9-month FY '23, vis-à-vis FY '22 full year, wherein sales contribution from selling premium and premium categories, have increased from 64% in FY '22 full year to 72.5% in 9 months FY '23. Similarly, on a category basis, revenue mix across men, women and kids have improved from 84% for men, vis-à-vis, 16% for other categories in FY '22 full year to 80/20 in 9 months YTD FY '23. On a trailing 12-month basis, revenue from operations have increased by 25% year-on-year to INR 1,489 crores in TTM 9 months FY '23 as compared to FY '22, full year revenue at INR 1,194 crores. Similarly, our trailing 12 months EBITDA for 9 months FY '23 stood at INR 278 crores compared to FY '22 full year EBITDA at INR 278 crores -- at INR 244 crores, demonstrating a 14% year-on-year growth. Now TTM FY '23, 9 month EBITDA margin should at 18.5% -- 18.7%, vis-à-vis 20.4% in FY '22. This marks a material improvement in our margin profile vis-à-vis last quarter. On the supply chain front, while prices have softened a bit for a few input raw materials, we continue to stay cautious on the uncertain inflationary environment in the near, medium term, ensuring raw material and semi-finished goods availability above everything else to maximize sales potential in the coming quarters. We continue to maintain a close watch on all our input costs and are confident of restoring the trend line growth trajectory and margin profiles in the near to medium term. I will now hand over the mic to our CFO, Mr. Raman Chawla, to take you through more details on quarter 3 FY 2023 performance.

Thanks so much, Piyush. Good afternoon, everyone, and welcome to the quarter 3 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, which is essential for sustained growth and margin recovery. Revenue from operations increased by 7.5% year-on-year to INR 466 crores during the quarter for both channels, trade distribution and D2C exhibiting profitability in this quarter despite industry degrowth in mass and mass premium segment across the debt consumption cohorts across India. EBITDA during the quarter was at INR 92.8 crores as compared to INR 93.3 crores in similar quarter -- quarter 3 FY '22. Our EBITDA margin stood at 19.9% for this quarter versus 21.5% in quarter 3 FY '22. Our net profit during the quarter stood at INR 48.3 crores as compared to INR 54.7 crores in quarter 3 FY '22. Our quarter 3 FY '23 sales volumes registered a 7 million pairs as against 6.6 million pairs in FY '22 quarter 3, thereby generating a 6% year-on-year volume growth, while FY -- quarter 3 FY '23 aggregated ASP stood at INR 669 per pair versus INR 657 per year in quarter 3 FY '22, whereby resulting almost 1.5% year-on-year ASP growth. Balance sheet side, our net debt has increased marginally from INR 174 crores at FY '22 and to INR 187 crores as of 31st of December '22. Our net debt-to-EBITDA ratio is constant at 0.7x in FY '22 and in TTM 9 months for FY '23. Similarly, our return on capital employed has been maintained at about 27% in TTM 9 months FY '23, and we've managed to deliver a robust return on equity of 25% in the TTM 9 months FY '23. With this, I'll conclude and hand it over to the operator for question and answers. Thank you.

[Operator Instructions] We have the first question from the line of Ankit Kedia from PhillipCapital.

I just wanted to understand the underlying demand in the trade distribution channel. We have seen a 14% decline in revenue this quarter. So what has happened in the north market? Last quarter, we had 7% growth. So is there any -- because of the pricing action we've seen that decline? Or is it because of the primary and secondary mismatch?

Yes. Ankit, thanks for your question. So Ankit, the demand contraction is not only because of macro factors. It's also by virtue of a higher base last year wherein we saw a lot of pent-up demand coming our way in quarter 3 FY '22. So on that higher base, we have seen slight contraction in some of the select cohorts like Uttar Pradesh and parts of North India because these markets are still sluggish in terms of their overall recovery, especially in Tier 2, Tier 3 markets. That said, we are seeing a relatively positive trend line in terms of their recovery, but believe that it will take another quarter for us to kind of maintain this. There's been no adverse pricing action that the company has taken on the existing portfolio so far. And we have maintained this approach because of the sluggishness and demand in these markets. The channel has been slightly more sensitive to this aspect. And that's why we have kind of curtailed from any pricing increase in our existing portfolio.

I've seen in the month of December, there were some price cuts taking in select SKUs by you guys. In the quarter 2 con call, you alluded that end of the quarter or early January, there could be some price increases actually, driven by the inflation. So today, as we said, what are we looking at the price increase, price cuts or this 1.5% ASP increase, this is on back of premiumization and mix change and not due to any pricing action?

So Ankit, just to clarify this. We have not taken any price increase on the legacy portfolio, while the newer introductions that we have done in the market are with a pricing action. That said, the newer portfolio takes some time to settle in and kind of expand its reach and acceptability amongst the secondary and the tertiary markets out there. As far as pricing cut is concerned, there has been a pricing cut on a couple of styles only, which were slow moving styles and that has negligible impact on our top line or our ASPs, so far.

And just to add, this is Raman here. This discount is pretty much normal on a quarter-to-quarter. There has been no exceptional discounts, which have been given and which ultimately impacts our margin or our profitability.

[Operator Instructions] We have the next question from the line of Harsh Yogesh Shah from InCred Capital.

Sir, on the distribution front, in the, let's say, the Western markets, are we seeing any growth there or even the Western markets has been subdued in terms of distribution sales?

So we have seen a very robust growth profile in our Western territory, which happens to be our emerging market portfolio. For example, in states like Maharashtra, we have seen -- on a like-to-like basis, we have seen a quarterly growth north of 40% for us, which has largely, I mean, compensated for the contraction in growth across the Northern markets. So the growth profile, as you said, is slightly different in Western markets compared to some of the Northern markets.

Okay. And sir, in the Northern markets, have we lost any shelf space to, let's say, other categories or other brands?

Well, we don't believe so because the market at large has contracted in line with the channel, taking a cautiously optimistic approach, we believe we have rather gained market share in these territories rather than losing market share. The market on an overall basis has degrown quite a bit to the tune of 20%, 25% in these select cohorts.

Okay. Okay. And sir, what was the e-commerce growth, the D2C growth for the current quarter? I just missed that number.

Yes. So D2C growth put together is north of 46%. If we have to split, e-commerce growth is 41% on a year-on-year basis, and our D2C off-line growth is around 75%.

[Operator Instructions] We have the next question from the line of Tejas Shah from Spark Capital.

Just wanted some more insight from you on consumer sentiment in general and then for our category, in particular. So we have seen in athleisure segment, which was beneficial for opening up last year or early part of the post-COVID period. We are seeing some deceleration in some of the results that we have seen so far. So just wanted to know if we keep the market share or footprint expansion aside, how are you dealing consumer sentiment from the same cohort of consumer that you were catering earlier?

To answer your question, across the various subcategories within the athleisure segment, we believe sports and athleisure footwear segment is the least impacted. That said, the channel at large has taken a cautiously optimistic approach. While the tide is turning, we believe quarter 4 to be in line with the performance that we have seen in quarter 3. Maybe some operating leverage will kick in. But the channel is taking some more time to open up. That said, we don't see any drop -- any significant drop in the secondary offtake of our product, which is kind of substantiated and triangulated by the robust growth that we have witnessed across our B2C portfolio, which is roughly 46%, 47% of our overall top line. There are select cohorts which have been adversely impacted by macro and we are just expecting that macro turn to reverse. On a long-term basis, we maintain a very bullish outlook on this entire segment and the way franchise has kind of harness market share so far. So our long-term prospects, in our view, are very, very bullish, so far as the segment is concerned.

Yes. And the way last quarter has played out for the retailers in general where October was good and November and December has been kind of difficult period depending upon which categories we talk about. Most of the retailers actually ended up post -- the value post-festive season, more inventory than they initially budgeted for. So how do you see the competitive landscape, especially in terms of aggressive pricing or discounts going ahead in the coming quarter and perhaps a quarter after that?

There's been a couple of factors. It's not the slowdown in demand. So there are 3 key drivers for our category and especially the segment that we operate in, which is still aspirational for 90% of the country. This is the advent of winter and the advent of festive season and the advent of marriages. Now festive season was there in October, which led to a robust secondary and tertiary offtake by the retailers and the end consumers. However, the entire winter season got delayed by a good 15, 20 days, especially in the northern part of the country. And the impact was largely visible in early January till early February. Similarly, only a small part of the marriage season was kind of aligned in second half of November until late December, and the rest of the season is expected to resume so far as marriages are concerned in -- as we speak in this part of February. So all these factors have a cumulative impact on the tertiary offtake that happens in these markets across the segment that we operate in. While there was a transient slowdown in early November, we saw the markets rebound so far as the tertiary uptakes are concerned because of -- driven by all these factors. So on a very near-term basis, we believe that quarter 4 should give you a positive hope, a positive twist in terms of rebound of the market. Channel as such, once we take a cautiously optimistic approach in terms of demand and outlook takes some bit to reverse. But the good part is given secondary uptakes are not impacted to that extent, we believe that turnaround to happen sooner than later.

Sure. And then what was the full price sale in 3Q for us? What proportion?

So while we don't report that number, but we can certainly connect offline to give you some flavor around that basis. To answer the discounts, discounts have not increased in this quarter or in YTD 9 months as compared to similar period last year.

We have the next question from the line of early Aliasgar Shakir from Motilal Oswal.

I wanted to, first of all, just understand how the RM prices are trending. And when do we see that seeing benefit, if at all, they have been calling off? And how do we plan to -- I mean, use that? Do we plan to pass on some of the benefits, if at all, there are any cool-off or that should help us improve our margin -- gross margin?

So Ali, before we get into the current pricing trends, we like to maintain that. We -- as we have mentioned in our previous quarterly earnings update calls that we had maintained strategic levels of inventory just to ensure availability at the right time because we believe that availability of the merchandise is paramount in uncertain times where supply chain fluctuations are plenty. So on account of these fluctuations in RM prices, especially EVA resins and packaging materials, we had kind of maintained inventory levels to ensure availability throughout the year for the merchandise. The good part is while we have seen almost 0.5% of margin contraction on a year-on-year basis in quarter 3, this is on account of consumption of higher-priced raw material that we had kind of maintained in order to ensure availability of the product because this gives us a once-in-a-lifetime opportunity to gain more market share and more shelf space in the relevant market. Now so far as current pricing trend is concerned, while EVA resin prices have kind of stabilized, packaging material is still going through a lot of variability. And these 2 are the key raw material components for us so far as consumption is concerned. We are actually working on long-term engagement or long-term associations so far as packaging material sourcing is concerned. So some very good work is ongoing internally, and we'll update the investor community as and when we make some material breakthrough in that aspect. Now so far as this goodness is concerned, we would first try to recoup the lost margin in absolute sense before we pass on any benefit to the channel or to the end consumer to answer your question.

Understood. This is very useful in detail. Just if you could quantify a little bit. So EVA and other raw materials, you mentioned has stabilized. Have they come down? And we typically have a nearly 4 to 5 months of inventory, if I'm not mistaken. Had it gone up? And from when should we see benefit of that coming? That's point number one. And point number 2 is this packaging material, correct me if I'm wrong, it's close to about 1/3 contribution of our total raw material. So how much of that should offset the benefit of all any EVA. So I'm just trying to understand, basically not in fourth quarter, if at all, and should we see some basically benefit of raw material in FY '24?

So Ali, just to answer your question directionally, our overall inventory levels have come down materially in quarter 3, which was expected compared to last quarter. We -- and the improvement is holistic across all inventory cohorts, including raw materials, semifinished goods and finished goods inventory. Just to give you some directional quantum, it has come down by more than INR 50 crores in absolute sales in this quarter alone. In terms of pricing, while EVA prices have kind of stabilized, we still see a lot of fluctuation happening across packaging material and adhesives. All these 3 input materials put together contribute roughly 30% to 35% of our raw material cost. We believe that it will take another quarter or a couple of quarters for packaging material prices to also kind of stabilize. But then it's dependent on a larger macro outlook and we are just hoping for things to stabilize.

Understood. Understood. And just to reconfirm the online. You mentioned overall D2C, including online offline, both has grown 46% in this quarter on Y-o-Y. Is that correct?

Yes, that's correct.

Okay. Against the overall Y-o-Y growth of about 7%, right? So then to that extent, offline would have degrown in probably nearly around 25% level. That's a fair assumption, right?

No. It's 13.5% degrowth in MBO, 41% in D2C online and 75% of D2C offline. The mix is almost 54% in MBOs versus 46% in the other 2 categories put together.

Okay. And this online also includes nearly about INR 30 crores of the spillover that we spoke in the last quarter from 2Q to 3Q?

So that spillover was roughly INR 25 crores. INR 15 crores was on account of online and INR 10 crores was on account of offline.

Got it. So if I exclude that, it's about 2% kind of growth. Understood. And where do we expect our margins to stabilize in the long term, given there are multiple levers. One, as you mentioned, gross margin depending upon how the raw material prices move. And then we've been a little aggressive in the past related to our ad spend. So in a relatively medium to long term, where do we expect our margins to stabilize at an EBITDA level?

So Ali, before we get into the margin profile, I would like to correct you on the growth profile piece. In the absolute sense, the e-commerce business in this quarter has ended at INR 181 crores. Last quarter numbers you already have with you, that was roughly INR 140 crores. Our MBO business is INR 245 crores, and our EBO business is at INR 36 crores.

Got it. Sure. And if you could answer the question related to margin.

Yes. So we believe that we should be back in the same trend line that we have exhibited in FY '22 in the next couple of quarters on a TTM basis. And we expect our -- I mean, while we don't give any directional outlook on EBITDA margin, we believe that we'll be maintaining a very healthy EBITDA profile in the near medium term, north of 20%.

[Operator Instructions] We have the next question from the line of Bharat Dhyani from Moneycontrol Pro.

And while the weakness in the demand has lead to -- because of slow down and obviously, you also highlighted that quarter 3, there was a pent-up demand factor as well. So what's your top line? What's your volume growth assumption for the next fiscal and the medium term? And what is the ASP growth that we are validating per year over the next -- over the medium term?

So Bharat, while we refrain from giving any concrete outlook on the near medium term, we believe that directionally we'll maintain the same growth profile and margin profile in the medium term. As already mentioned, we maintained a very bullish outlook on the overall industry and our own performance and the franchise in the -- not only in the near medium term, but also in the long term, we believe that the prospects are very, very good. And we'll keep on demonstrating healthy growth profile as well as a very profitable bottom line.