FSN E-Commerce Ventures Limited (NYKAA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to FSN E-Commerce Q3 FY '23 Earnings Conference Call hosted by Nomura Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kapil Singh from Nomura. Thank you, and over to you.

Hi. Good evening, everyone. On behalf of Nomura Securities India, I'd like to welcome you to this earnings call. On the call with me from FSN E-commerce Ventures, we have Ms. Falguni Nayar, Executive Chairperson, MD and CEO; Mr. Anchit Nayar, Executive Director and CEO, Beauty E-commerce; Ms. Adwaita Nayar, Executive Director, Co-Founder, CEO, Fashion; Mr. P. Ganesh, CFO; Ms. Sunita Sachdev, VP, Investor Relations and Strategy. . With that, I hand over the call to Ms. Falguni for opening remarks.

Thank you, Kapil. Good evening, everyone, and thank you for joining us on the call today. It is always a pleasure to interact with all of you. Before I start the presentation, I would like to take the opportunity to introduce you to a new addition to Nykaa family. It gives us immense pleasure to introduce our new CFO, Mr. P. Ganesh. Ganesh comes with 27 years of diverse industry experience in domestic and international markets. He joined us from TAFE Group. Prior to working with TAFE Group, Ganesh has held leadership position in senior management roles in India and overseas and has been associated with Godrej Group, Glen Pharma as well as Pidilite.

Thank you, Falguni, for the warm welcome, and good evening, everyone.

Thank you, Ganesh. I will also begin with a short presentation, and we'll be happy to take questions later. I wanted to share the results with you with an important backdrop. As retailers, we are very close to the consumption moment. And to put things in context is the seasonality in festive season and has been called out by most retailers. This has impacted quarter 3 '23 when you compare with quarter 3 of '22 when the entire -- when the entire festive season was in quarter 3. What this means is that for this year, we had only 34 days of sales in quarter 3 compared to previous year when it was 42 days. And that was because Navratri is an important festival was in the quarter 2 of this year compared to earlier years when it was in quarter 3. So this like-for-like comparison has impacted certain growth in sales that I wanted to bring it out right at the moment. As we move forward, I wanted to say that the GMV for the quarter has come out at INR 27.9 billion, which is a 37% year-on-year growth and revenue has grown 33% and stands at INR 14.6 billion. Our gross profit at INR 6.4 billion for the quarter is about 25% year-on-year growth. And our EBITDA grew to INR 782 million, which is a 13% year-on-year increase. Profit before tax stands at INR 12.7 million (sic) [ INR 127 million ] and profit after tax is at INR 85 million. We can get into the details of the gross margin as well as the composition of the EBITDA growth and PBT as we go through this presentation. With that, I recommend that we move to Slide 6. So here, I wanted to show the 9-month period where our GMV has seen a healthy growth of 42% year-on-year and stands at INR 72.9 billion and the revenues grew at 37% and is at INR 38.4 billion. The profit also grew at 40% year-on-year at INR 17 billion for 9-month period and EBITDA grew at 49% year-on-year with INR 1.8 billion. Profit after tax is at INR 29.8 million and profit before taxes at INR 29.8 million (sic) [ INR 298 million ] and profit after tax is at INR 187 million. Talking a little bit about various businesses and composition of the GMV growth. The Beauty GMV grew at 26% on a year-on-year basis, while the Fashion GMV has grown at 50% on a year-on-year basis. Both .com and the retail businesses saw good consumer demand and some of the consumers balance retargeting of demand has happened from online to offline, but that seems to have stabilized now. It was more pronounced in the last quarter for which we are talking about the results where customers look like enthused about stepping out, and we saw a growth in all our businesses. Our new business delivered a INR 1.7 billion in GMV contribution, growing at 254% year-on-year, which we believe is a strong growth. These are early-stage businesses, but we are already rightsizing the inputs to keep the goal of our profitable growth. Moving forward on Slide 8, what you can see is that at Nykaa, we have created multiple engines of growth. Looking at the GMV contribution from 3 business verticals, you can clearly see that our desire to diversify and address larger TAM was the right thing to do. Fashion already contributes more than 1/4 of our consolidated GMV. And for a business that's less than 4 years old, it is commendable. At the NSV level, Fashion contributes 14.6% of quarter 3 NSV versus 14% a year ago. On the other segment, which include eB2B, Nykaa Man, and International, we also scaled up significantly, led by the SuperStore, which is our eB2B business, and that now contributes 6% of GMV, which is more than double what it was last year. Our unique transacting customer in the next slide continue to grow and for Beauty, Fashion, and Other vertical. So for Beauty, we are at about 9.6 million unique transacting customers on a trailing 12-month basis. For Fashion, the number is 2.4 million [ TAM ] customers. And in the case of Other business, that number is 0.5 million, quite significant considering those are mainly the shopkeepers and other businesses that are customers there. We already believe that we are transacting with 1/10 of the online shoppers in India at a very healthy AOV level as well as at a very healthy gross consumption level, which we will continue to penetrate further. I also want to highlight that we have retail customers, which were another additional 0.5 million, up from 0.3 million a year ago. With that, I would like to hand over to Anchit to walk us through the BPC performance for the quarter. [ Jackie ] I'll continue this -- Why don't I continue for a bit till Anchit can join in? I think he was in a meeting.

Sorry [indiscernible] Sorry about that. I had a hard time unmuting myself, but I'm now on the call. So thank you, everybody, for joining the call. I will pick up the slide deck from [Technical Difficulty]

Anchit, we cannot hear you.

Yes, we are not able to hear him. Ma'am, maybe you can continue.

Yes. I'll start till he can join.

Am I audible?

Yes, yes.

Can you hear me now?

Yes, we are able to hear you.

Okay. So let me first start with a little update on the BPC industry in terms of the market size and the growth that we project over the next 5 years. These numbers have been updated by us in partnership with Redseer. So I'll kick it off on Slide 11. According to Redseer estimates, the India BPC market was a $19 billion market in 2022, and it's expected to grow at a CAGR of 10% over the next 5 years to reach a market size of $31 billion by 2027. Within that, online BPC is expected to grow at a much faster rate with a CAGR of 29%, followed by organized retail, which is expected to grow at roughly 14%. The online BPC penetration stood at about 15% in 2022, making it a $3 billion market, and it is expected to grow at 29% and account for 1/3 of the overall BPC market by 2027, which will put it at roughly a $10 billion market by 2027. In the interest of time, I'll move forward to the next slide, there is some commentary on what the key growth drivers are of the BPC industry, which I will allow you to read on your own time. So coming to Slide 12, commenting on our growth strategy. We are focused around 5 core value propositions. First and foremost is driving customer acquisition and retention. We are focused on acquiring and retaining customers and we'll be evolving and rapidly growing BPC space. Over the years, Nykaa has strived to create a loyal repeat customer base, and that is evident in the repeat versus new customer mix -- revenue mix, which we show on a month-on-month basis. Second, we deeply value our relationships with our brand partners, both international and domestic, and we have always prioritized and sought to maintain a very symbiotic relationship with them on an ongoing basis. Third, is we continue to penetrate across the value chain and channels to further drive consumption and to truly grow the overall B2C market in the country. We have invested across the verticals to help serve our customers better, and this reflects in the launch of our eB2B business as well as our expansion of our physical retail footprint. Fourth, our house of brand strategy continues to evolve. We understand the gaps that exist in the Indian BPC market, and that has enabled us to develop our own house of brand across [ market premium segment ], keeping in mind that the Indian requirement is diverse across price points and consumption behavior. Fifth is the consumer connect. We are a director -- we are a consumer-focused business, and the consumer lies at the heart of every decision that we take. Nykaa has always tried to be in the forefront of consumer engagement. And we have always focused on creating multiple content streams to help increase awareness among consumers, enabling them to make better purchase decisions. Moving on to the next slide, Slide 13. I want to highlight certain key performance indicators that we track at the Nykaa level regularly. The first is our total visits were up 13% to 250 million for the quarter, while our monthly average unique visitors were up 22% year-on-year. This reflects strong -- a very strong cohort of customers that we are attracting. We delivered a very strong order book of vivid conversion of 3.8% in Q3 FY '23 versus 3.4% in Q3 FY '22, 40% -- 40 basis point improvement and our AOV has continue to sustain at INR 1,958 in the quarter ended December '22. Third, our GMV contribution from existing customers was 76% versus 74% last year, signifying better customer retention and loyalty, which helps drive the premiumization trend in the country. Our TTM customer base increased to 9.6 million in Q3, which was a 27% growth year-over-year. Coming to category growth, we are actively widening our offering, which helps us drive penetration with a significant depth and [indiscernible] category offering. If I look at our makeup category, that category has grown 12% year-over-year. Skincare category has grown 37% year-over-year, and health care has grown at 39%. Our other categories, which include Bath & Body, health and wellness, mom and baby, fragrances; and then appliances, have each grown at a healthy clip year-over-year. Coming to Slide 15. We always maintain a deep and symbiotic relationship with our brand partners. And as of December 31, we had over 3,000 brands retailing on the platform. Of the top 100 brands, we have a diversified offering across both FMCG brands, international brands, direct-to-consumer brands and luxury brands. And this is just the indicative of the diversification that we have managed to achieve in our core .com business. As you are aware, we host our largest flagship sale event of the year in November, which is in Q3, that is called the Pink Friday sale event and that has continued to grow from strength to strength. This year, our Pink Friday sales registered a 40% growth like-for-like GMV with a 22% growth in underlying visits. We have seen strong performance across festive sales and we achieved almost 4 million unique visitors every day during the Navratri and Diwali sales as well. Coming to Slide 16, we remain committed to our core position as the guardians and as the creators of the Beauty ecosystem in the country, and we have facilitated this with marquee events this quarter, including the Nykaa Femina Beauty Awards. This is our flagship beauty awards event, which we host on an annual basis. It was not conducted the last 2 years because of COVID. This year, we hosted it once again with fantastic turnout with over 400 brand partners in attendance as well as multiple celebrities. In addition, this quarter, we launched a partnership with the Estee Lauder Group of Companies to launch an incubator program called Beauty & You, where we partner to identify and support the next generation of beauty entrepreneurs with a non-equity grant. Third, we were the partner-of-choice for Priyanka Chopra's much awaited brand launch Anomaly in the country. This brand was launched exclusively on Nykaa and it was -- and it generated significant coverage given the celebrity status of Priyanka Chopra. Coming to Slide 17. In order to help improve our customer experience, we have invested across physical stores, distribution channel as well as fulfillment centers, to help us be closer to the customer and to increase the customer delight. As of Q3 FY '23, we had 135 beauty and personal care stores across 56 cities, which achieved a GMV of INR 165 crores for the quarter ended -- quarter ended December '22. Our physical stores now contribute to 8.6% of our total BPC GMV versus 8.2% last year. We distribute our own Beauty brands across almost 2,400 plus general trade stores and 150 modern trade stores. We've also increased our fulfillment capacity. And at the end of the quarter, we have now 37 fulfillment centers, which have a total capacity of 1.2 million square feet set across 15 cities in the country. This regionalization strategy when it comes to our fulfillment has allowed us to improve the order fulfillment from within the state and as well as within the region. Now very few orders are being shipped across state borders, and this has made it possible for us to bring down our fulfillment costs, which you will see in the P&L in later slides. Coming to Slide 18. Talking a little bit about our house of brands. Our owned brand achieved a total GMV of INR 224 crores, which is now -- which now accounts for almost 11.8% of our total BPC GMV. Our own brands GMV saw 29% growth year-over-year in Q3. Talking a little bit about the B2B business. We now serve almost 4,000 retailers plus through eB2B app SuperStore, which is a new business in which we are investing heavily. The subsequent slide, Slides 19 and 20 are just some images of the key launches -- our key product launches, which we had across each of our owned brands in Q3. Coming to Slide 21. We actively engage with our customer and our platform. And this quarter, there have been some updates which we'd like to share with you. We revamped our loyalty program, which is now called Prive 2.0 and it is a pure royalty program to be more in line with best practice globally. Second, we are now streaming personalized content on the Nykaa stream, which is our on-app video feature and this has helped us to drive awareness for consumption of beauty as well as education. We also invested in creating an educative content series known as the Bridal Series for the wedding season, which has achieved a reach of almost 15 million. With that, I want to thank everyone for joining this call, and I will now invite Adwaita to discuss the Fashion business' performance for the quarter went by.

Thanks, Anchit. Hi, everyone and looking forward to discussing our Fashion business for the quarter. To begin with, we remain extremely excited by the share size of the fashion market. The fashion industry is 4x larger than the beauty industry. And according to Redseer, the fashion market was USD 77 billion in 2022, expected to grow at a CAGR of 14% to reach a market size of USD 147 billion by 2027. On that, online fashion is expected to grow at a much faster rate than the other sectors at a CAGR of 27% and it will eventually be by 2027 of USD 49 billion. The online penetration for fashion has been at about 19% in 2022 and is expected to be 33% of the total fashion market by 2027. Next, this slide now shows our focus areas for the business. And in the subsequent slides, I'll talk about each of these in depth. We're touching upon these 5 here. The first is customer acquisition and retention, and that is a key focus. We're working on this via a strongly differentiated value proposition and focus initiatives across marketing and products; second, building engaging and deep relationships with domestic and international brands and creating a comprehensive product [indiscernible]. Our third focus is investing and scaling multiple operating models to make plans available to customers while driving down inventory risk. The fourth, continuing to build our own portfolio of owned brands, which are independent and consumer-first brands; and finally, fifth, investing in innovative ways of connecting with our customers led by experiential events and customer-facing technology. Moving on, we will be [ double click ] into our key performance indicators. First, we can see that our total visits are up 19% to 137 million for the quarter, while our monthly average unique visitors are up 18% year-on-year to 19.4 million. Our AOV has held steady year-on-year with quarter 3 AOV at MRP at INR 4,570 and its selling price that is after discounts is at INR 2,526. Finally, we're quite happy with how our order to business conversion of 1% has held up. This is up from 0.8% a year ago. A large part of this improvement is the result of both product assortment mean better, but also in a large part, user attracting much better quality traffic through marketing, which has been a focus for the last 9 months. Moving on. Our trailing 12-month customer base has increased to 2.4 million for the quarter, and that's a 50% growth year-on-year. Our GMV has grown at 50% year-on-year to INR 724 crores. Sequentially, strong growth of 21% quarter-on-quarter. We're feeling good with the acceleration of the growth and do believe that our focused approach to building differentiation in our assortment is now working in our [ people ]. Finally, the chart at the bottom left shows the mix across women, men, home and kids, women being about 70% of the business. And we do believe that the latter 3 that is men, kids, home and others represent opportunities that we can choose to double click and accelerate at the appropriate time in the future. On the next slide, we're going to talk about assortments. We now have 2,700 brands on our platform as of the end of December 2022, and this is up from 1,540 brands a year ago. There is a significant onboarding in the last 12 months, allowing us to present far more choice to consumer. The initial concerns have come across categories and types of brands, both local and international. However, with even rapid onboarding, the focus for us is the team remains [ duration ]. We are convinced that being tightly created in terms of trend and quality is the core of our differentiation and will ultimately be our right to win. We have taken advantage of the past quarter of the festive season and have worked to strengthen our saree portfolio adding brands like Kalki and Unnati And we do believe that sarees are going to present a great growth engine for the months to come. In Q3, we have also doubled down on a property called Global Store in which we're bringing the world's best fashion in India. It is hit its stride and we offer over 600 brands. This particular property has contributed about 17% of the Western Wear GMV. And I think this is striking because a couple of months ago, this property simply didn't exist. Hidden Gems, another property, which I've spoken about in the past as well, which includes emerging Indian designers and labels across the country, continues to be called out actively by the customers and now contribute 7% of our total GMV. And finally, new season collection, which is another element to be truly fashion forward, have contributed about 17% of the GMV for the third quarter. Moving on. A highlight of this past quarter has been this partnership that we launched with Revolve. As many of you know, Revolve is the most worthy fashion platform in the U.S. And with this partnership, we have launched Revolve on Nykaa Fashion. Through this, we're able to offer the customer more than 600 international brands. I believe that what makes the partnership unique is a unique B2B2C technology that we have developed. And as for this integration, we now connect seamlessly with Revolve architecture. We reflect our catalog availability and pricing on our site with minimal manual effort. We don't pull any inventory and rather push orders and do pick up on a daily basis and for the customer it's a hassle-free experience. The flow chart shows the [ bridge for ] journey that we've built out. And I do believe that the technology we've built here can be useful in the future as well as we try partnerships with international companies. Next, a key focus for us over the last couple of years as we've been building Nykaa Fashion, have been to develop a strong and flexible back end. While the majority of our business is driven by marketplace, we've built the tech and operations capabilities in-house to also cater the inventory models and other hybrid models. On the Marketplace side, that is the first component and the largest part of our business. We have built capabilities to pick up inventory from both multiple warehouses and multiple stores. And as we speak, we're in the process of building capabilities to integrate with franchise stores as well. All of this will give us a lot more availability when it comes to assortment without actually having to put inventory risk. The second is the B2B2C technology, which I've already described on the prior slide with regard to Revolve. As I mentioned, it can be replicated as we onboard more [indiscernible]. And finally, the third, which is our inventory-based model, we do have the capabilities to run this as well. And however, less than 20% of our business runs on warehouses. So we have ramped up our warehouses as well to support the growth in this business. Moving on. In quarter 3, the owned brand GMV stood at INR 90 crores, which was a 120% -- sorry, a 122% year-on-year growth. Our owned brand GMV contributed 12.4% to the overall GMV of Fashion and an even higher percent if we were to look at it after discount. Also from the GMV of INR 90 crores, 50% of that is actually contributed by the sale of these brands on third-party platforms. In the past, I have mentioned that these brands do sell on third-party platforms. And that is all part of our vision to actually have stand-alone consumer-facing brands that are well known and provided to the customer at multiple platforms. In the third quarter, there are 2 brands in particular that have hit significant size and scale. Up on the right, we mentioned Twenty Dresses, which is now at INR 190 crores GMV annualized and Nykd, which is at INR 80 crore GMV annualized. Please try to also [indiscernible] the under [indiscernible] saree segment, and we have launched a brand called Nyri. We also focus on distribution when it comes to some of these brands. And as you can see, we have added 14 MBOs (sic) [ 24 MBOs ] for Twenty Dresses and RSVP taking the total count of physical presence for the brand to 62. Nykd by Nykaa, our lingerie brand, which I have again spoken about in the past is the brand that we remain extremely excited about. It is now present in 750 general trade outlets and has opened 2 EBOs with plan to add a couple more this quarter. Moving on. We'll just flip through these slides, but this will give you a sense of the type of brands and the type of products we're creating. We're actually generating a huge number of new products every quarter and we have built our capabilities in-house to support this level of growth. Moving on. Finally, we're going to talk about how we're trying to stay engaged with our customer. This quarter, we conducted physical events. We did do an event called the Global Store Fiesta, where we highlighted our global portfolio, and we did a very large [ screen event ] in Delhi called First in Fashion where we enabled brands to show their new season merchandise. Finally, we do believe that Fashion is the ultimate discovery problem statement, and there's a long-dear nature of fashion [ that credit ] strong discovery feature. How do you show the right product to the right person at the right time. We've made good progress in this regard, and we launched Hyper-personalize, which is on the home page. We continue to refine our recommendation engines and features at every leg of the [indiscernible] and is all the [indiscernible] product discovery into Nykaa platform. With that, thank you, everyone, and I'd like to request Falguni to take you through the eB2B business.

Starting with the eB2B business. I just want to point out that we are very pleased to see -- I mean, as you are all aware, that with B2B business, we wanted to enter the large part of the unorganized market, which is currently being serviced by [indiscernible] distributors. And I think there was a need for a specialist organized distributor like ourselves who would focus only on the beauty category. And to our many of the beauty brands, we would offer now being able to sell their brands online, being able to sell them in our stores and also sell it to retailers from where it would onward move on to the consumers. So I think the business model was right as the disruption model, where being focused on beauty category, we would do the right thing in terms of enabling retailers in specialists where beauty was a big sale and enabling them with a number of all-in-one store, super service on delivery, a lot of flexibility, ability to increase their earnings and also empower them with data and many more things that we can bring to a structured tech platform. So with that, we introduced the SuperStore business. Moving on. I just want to say that from the business perspective, the transacting retailers has grown nicely to about 92,415 in this quarter, up from a very small number of 4,153 in a quarter or a year ago. So almost 22x growth in transacting retailers and telling us that this is something which clearly there is -- I mean, there is a place for this business. Also, the activation rate of registered retailers as high as 69%. From the brand listed perspective, again, the number of brands on the platform has increased from 31 to 185, large range of national brands are coming in. This has grown by 6x again telling us that from both sides, from the viewer side, which in the case of retailer and also brand partners that we service there is a clear need for this business. From the number of city perspective, we now service about 652 cities, again, an 8x growth from 82 (sic) [ 88 ] a year ago. And the orders that the business saw was about 216,000 orders, which again was 25x from a year ago quarter. So clearly, the business has proven itself from size and scale and [indiscernible] We continue to build it in a manner which is the right unit economics. So can we move to the next slide? So yes, with that, I hand over on the financial performance to Ganesh.

Thank you, Falguni. Good evening, everyone. I would like to take you through our quarter 3 FY '23 financial updates. As you can see on Slide #39, our revenues grew by 33% Y-o-Y during the quarter. Our gross margin was at 43.4% during the quarter. We achieved an EBITDA of 5.3%, benefiting from our operating cost leverage. Our PBT margin was 0.9% during the quarter. We had an incremental impact of INR 66 million due to Ind AS lease cost accounting, some of which we'll tell [indiscernible] in greater than detail in subsequent slides. So moving on to the next slide. I'd like to bring your focus on this slide and as we can see, we have improved our operating costs over the year. Operating expense as a percentage of revenue was 38% in quarter 3 FY '23 versus 40% in the same quarter last year. Digitalization of our fulfillment centers has a [indiscernible] similarly a regionalization of our marketing expenses has also helped us reduce costs. Fulfillment expense as a percentage of revenue was 8.8% during the quarter versus 10.6% in quarter 3 FY '23, which is an improvement of 137 basis points (sic) [ 178 basis points ] Y-o-Y. Marketing cost as a percentage of revenue was 11.2% during the quarter versus 13.7% in quarter 3 last year, which is an improvement of 241 basis points (sic) [ 242 basis points ] Y-o-Y. We saw a small increase in employee costs as we did [ having higher ] of close to INR 100 crores of our new initiatives. Employee cost as a percentage of revenue of 8.7% during the quarter, was 8.5% in quarter 3 FY '22 a growth of 23 basis points Y-o-Y. Moving on to the next slide. Here you'll see the waterfall, which will give a better understanding of our EBITDA margin change Y-o-Y. Gross margins, as you can see, has declined by 293 basis points during the quarter. And this has been predominantly due to seasonality leases. And as you have seen subsequently, on a 9-month basis, gross margins are expanded 79 basis points. If we were to look at gross margins on a trailing 12-month basis, gross margins have expanded by 116 basis points. Coming back to quarter 3, among other reasons, which has resulted in lower margins during the quarter has also been the strong growth coming in from our eB2B business, which comes with lower gross margins. The strategic mode that the business provides remains key to our commitment to the segment while also providing an excellent India-wide distribution solution to our brand partners. . Fulfillment cost improvement, you can see as about 178 basis points through rationalize -- regionalization strategy and marketing efficiency achieved through better order to visit conversion as [ 242 ] basis points. Selling and distribution profit has increased due to offline distribution of our owned brands and employee costs are being placed through the investment into view initiatives and investments also into the technology function. Other expense increase has been primarily due to investment in infrastructure. Moving on to the next slide. Here, the waterfall explains the movement from EBITDA margin to PBT margin, which gives a lot more color on the investments that we have been making and its impact by way of depreciation lease accounting. As we can see, depreciation increased Y-o-Y on account of incremental CapEx in retail stores, warehouses as well as office space. This cost increase has been due to additional retail stores, warehouses and offices as we ramp up infrastructure. Interest on borrowings during the quarter increased on account of incremental borrowing which was paid to fulfill working capital requirement are [indiscernible]. Lease costs as per Ind AS was higher versus cash lease cost. These are incremental impact of INR 66 million in quarter 3 FY '23 due to the [indiscernible] impact versus INR 46 million in quarter 3 FY '22. Moving to the next slide. Here you see our vertical performance, which gives you a good insight into the economic background business. I want to bring your focus to the bottom part of the table, where the cost items are calculated on NSV as the 3 business verticals are comparable at NSV -- on NSV basis. As you can see, gross margin for the BPC business was 45.4% during the quarter versus 47.5% in quarter 3 FY '22. Similarly, for Fashion business, gross margin was at 43.5% this quarter versus 48.4% in quarter 3 FY '22. And other gross margin from the 25.5% this quarter versus 31.7% in quarter 3 FY '22. We also saw improvement in our fulfillment expenses across businesses. For BPC it was at 8.6% versus 10.7% last year. For Fashion it was at 10.3% this quarter versus 11.6% for the same quarter last year. And for others, it was at 9.9% versus 12.3% in the previous year. We have also improved our marketing expenses. And as you can see, for BPC it was 7.9% versus 9.7% in quarter 3 FY '22 and for Fashion, it was at 25.6% this quarter versus 30.9% FY '22. We have been investing behind selling and distribution expenses and for BPC it was at 3% during the quarter versus 3.2% in quarter 3 FY '22. For Fashion, it has been at 6.7% during the quarter versus 3.3% in the corresponding quarter last year. And for others, it has been at 16.4% versus 5.8% in the corresponding quarter last year. Contribution margins have been maintained at 20.2% during the quarter. BPC [indiscernible] for 25.9% during the quarter. For Fashion, the margins coming in at 0.9% and others coming in at minus 12.6%. Moving on. Here you'll see the vertical performance for our businesses for the 9 months ended December 2022. As we have demonstrated improved contributions. After investing in customer acquisition and [indiscernible] of new businesses that are deepening up, gross margin for 9 months has improved at 45.1% during the quarter versus 44.4% in quarter 3 FY '22. BPC gross margin standing at 46.3%, Fashion gross margin at 44.5% and other contributing 25.3%. Contribution margin has been proved to 20.3% in quarter 3 FY '22 was a 17.9% in quarter 3 FY '22. BPC for 9-month period standing at 25.9%, for fashion, it was 2% during the 9-month period and, others it was at minus 22.1% during the 9-month period. Moving to the next slide. Here we have our income statement as FSN E-Commerce Ventures as a company where you can see that our revenue grew by 33% Y-o-Y to reach INR 14,628 million during the quarter. Our EBITDA margin was at 5.3% in the quarter versus 6.3% during the same quarter last year. And our PBT margins came in at 0.9% and PAT margin was at 0.6% during the quarter. All in all, I believe that we have continued to improve our scale efficiencies in a challenging macro environment. Thank you, everyone, for joining on this call. I would now like to request Kapil, kindly initiate the Q&A session.

[Operator Instructions] First question is from the line of Sachin Salgaonkar from Bank of America.

I have 3 questions. First question, Falguni I wanted to understand any particular reason for the slowdown in growth apart from the seasonality what you guys indicated. And we are hearing about consumer slowdown across the board. So I just also wanted to understand your thoughts on the impact of that on cosmetics and fashion.

I think clearly seasonal -- I mean, sorry, the fact that about age days of sale was less than [indiscernible] sales than it was in the second quarter compared to third quarter for the previous year, that would take away at least 3% or so in terms of the growth. So that clearly was 1 differentiator. And I think in addition to that, we do believe that -- in terms of this third quarter of this financial year, it was quite strong, but as the margin may be slightly impacted in terms of consumption because of what's going on in terms of discretionary spend. But like you can see that we've grown nicely and we've acquired customers nicely. So I wouldn't call it that this was a difficult quarter at all. But in such difficult environment, I think it does shave over here a little bit from the top in terms of consumption. I think there could be slight down trading from certain types of brand to slightly cheaper brands, but nothing in a very meaningful way that will be of concern. But it does feel that at some level, some amount of growth was shaved off the top.

Got it. Second question is on the gross margins. Again, they were down both on...

[indiscernible] Sorry, more for the festive Diwali rather than our [indiscernible]

Second question on gross margins. It was clearly down both on cosmetics and fashion. And I do see some comments saying that there were higher brand discounts as well as consumer downgrades. So again, I mean both for revenue as well as gross margins, do we see this likely to continue with an impact and see further pressure on margins going ahead?

Not really. We do feel that the previous quarter, our margins were at a very highly -- previous comparable quarter a year ago the margins -- the gross margins were at a very, very healthy rate. And hence, we are guiding everyone to look at it on a 9-month basis. And you can see that on a 9-month basis, there is no erosion of gross margin. And in fact, there is only improvement in Beauty and flat in Fashion. And even on the B2B business, clearly, the other business includes both the SuperStore business where we've been guiding that the gross profit margin is at around 15% compared to this overall mix, which has certain other new businesses like Dot & Key and [indiscernible] Man. So it's very difficult to judge from this. So I would think -- I would say a lot of it is a mix issue and more of a category mix issue also in some ways and some ways not really -- I keep saying that we don't have 1 cement plant where the raw materials going in and final good price is determining the margin. We are working with 2,000 brands in both Beauty and in Fashion where the mix of the brands, the margins, the advertising income and many other things can vary. And sometimes there could be a certain differences from quarter-to-quarter. I think Nykaa also needs to learn [indiscernible] basis.

I guess I just add over here that if you want to look at gross margins on a trailing 12 months basis, you can see an improvement of 116 basis points. So that also give us directions and effects in that over a period of time margins are [indiscernible].

Got it. And my last question is any broad sense you could give us in terms of the mix of GMV between, let's say, online, offline, eB2B right now? Or where we could see that mix, let's say, in the medium-term?

Yes, online, offline we've been giving the numbers, I think online in spite of growing our stores quite aggressively to now a very large number. Our online, we have been seeing that our online sales still account -- sorry, our client sales in Beauty is still accountable at the 10% of our total sales which is about 8.6% for this quarter and 8.1% on a 9-month basis. We will continue to roll out more stores, and that could be -- you should expect another 50 more stores for the next year. But I think e-commerce will also continue to grow. So that's on the physical store picture. As far as B2B is concerned, I think, like you saw, I think the way we treat that business is that we do feel and you tell me whether this is wrong but we do feel that B2B business in Beauty is very strategic and will give us a huge advantage in the long run to be involved from entire -- when a brand -- international brand comes into India. We have their distributors, not just for day-to-day e-com sales, we do their physical sales even if they go to other modern trade channels, we handle that and we also handle general trade. And besides makeup, which sometimes can manage our narrow distribution, most of the skin care and hair care do need wide distribution. So I think this GMV distribution, which has been a key to success of FMCG companies, we have never offered it to third party. And what we are trying to do here is build a third-party [indiscernible] distribution platform that is so all our brands, our private label brands can serve our import brand, and it will also be available to third-party brands to benefit from. So we think this is a disruptor business. It can grow very fast in terms of revenues that we can service. So orders and revenues will grow very fast. However, the inherent structure of this business will be about, say, 15% gross margin to start with in the long run it can -- 10% to 25%. If we add other values like technology and data but in the short-term, it started about 15%. And we have to manage the fulfillment costs below that. Right now, we are managing the fulfill -- we are trying to work on unit economic segment allow us to manage fulfillment costs in a healthy territory. And selling and distribution expenses, which is feet-on-street to build the retailer engagement is what replaces the marketing cost. So I think we can, at some point, do a more detailed presentation on unit economics. Maybe be a plan for it at the end of the financial year after the March results but the plan is to have a really clear unit economics that will give confidence to everybody that we are on the right track to build the right business for the long-term. And in others, that is the [indiscernible] that moves the needle. Others are very small, not very small but small [indiscernible].

The next question is from the line of Vijit Jain from Citigroup.

My question is within the BPC business, Anchit called out makeup grew 12% Y-o-Y. Other categories obviously grew faster. Is that also seasonally driven because this is usually a seasonally strong quarter for makeup in general, right? That's my first question. Hello?

Maybe I can comment. So look, I think there's 2 things to keep in mind. One is that last -- if you remember last Q3, it was the -- really a standout quarter for makeup in the sense that makeup buying had been subdued due to the pandemic for a couple of quarters before that. So we saw finally, in Q3 last year, return to social events, weddings and generally people getting back to the office. So we saw an improvement in makeup consumption. So I think makeup was coming off from a slightly high base and that's why you see this 12%, 13% growth versus the overall growth of 26%, 27%. And as I said, other categories are going to grow a lot faster. So I think that's the main reason. I think the second thing is we are -- there is a big focus from us to expand the customers. The width of the assortment that the customer is buying on our platform and makeup and skin care, the 2 dominant categories that we're really investing behind growing hair care, fragrance, appliances and others, which we think longer term will increase the basket size and therefore the average order value to the customers as well.

Also Anchit [indiscernible] I'd like to point out is that a lot of the data that we're giving on growth is online, and there is a fair amount of uptick in offline sales growth, I think offline sales growth throughout this year has been very robust and offline, a lot of makeup and buying in skin care sold in our offline stores.

Correct. The next question is...

[indiscernible] Yes, go ahead.

Okay. My next question is for owned brands. I noticed you mentioned the revenue run rate for a couple of brands on both BPC and Fashion. My question is, is there a threshold revenue run rate at which you think they'll start generating positive cash flows or target ROCs for you? I would imagine given your own distribution platform, it would be lower than for other D2C companies, but is there a threshold for that?

Yes. So our Beauty brands are all profitable. They are profitable and they contribute to positive EBITDA after giving all the retailer margins on a arm's length basis. So we do believe that Beauty has always been very profitable for us. So the right annual GMV run rate at which the brand becomes significant is about like how INR 100 crore revenue run rate when the brand can start -- before the -- that you can afford investing in the brand from a marketing perspective. So it becomes an interesting point. And that's why we started reporting the brands which are above INR 100 crore revenue run rate. So that's kind of [indiscernible] Dot & Key that is 59% owned by us. And a couple of our other brands are also very close to INR 100 crores in the Beauty category. On the Fashion also, while all of the fashion brands together, most of the old fashion brands together are close to breakeven levels. And many -- at least 2 of them are now trending towards the INR 100 crore revenue run rate. So Twenty Dresses which is something we had acquired a couple of years ago, 4, 5 years ago, and we've really built it out to now almost INR 190 crores revenue run rate and Nykd is also now trending close to INR 100 crores. So for both these now we have strategies for knowing MBOs, EBOs we are selling Nykd through general trades. So all that means that now we are handling it like beyond the D2C brand and investing in the future. We are very excited about [indiscernible].

The next question is from the line of Manoj Menon from ICICI Securities.

Just a couple of [indiscernible] questions. One, when I look at your...

Manoj, your voice is breaking up in between. Are you on handset mode?

I am, actually. I'll just speak as close to the mic as possible. Is it better?

Yes.

Just take a step back 3, 5 years back when there was subended capital availability, a lot of D2C brands [indiscernible] market, et cetera versus back [indiscernible] last few years versus, let's say, the investment winter we are going through currently. Two questions now. And if you could break up the Beauty growth in terms of, let's say, the same-store growth contract in online versus, let's say, the new brands coming in? And some color on that? And how does that, let's say, translate that into revenue, for example. I assume that you will charge a listing fee or, let's say, the new brand coming to you probably have a knock at your lower for a long period of time, quantitative and qualitatively. Just some color and -- so I'm trying to understand is your growth [indiscernible] could have been far better had they been a tailwind. So what's the growth sort of bit the tailwind without the tailwind [indiscernible]?

I think what you're trying assess is an extremely complex information for a large platform with 2,500 brands. Their top 20 brands, top 50 brands can change very rapidly over 3 months in annual, but definitely over a 1-year scenario. So we had a very dynamic -- really -- platform that is really doing very, very well. So if I were to tell you our top 100 brands, 22 of those are international brands, 17 are FMCG brands, 30 to our direct-to-consumer brands, which is clearly a very recent phenomenon over the last 2, 3 years. You see so many D2C brands set up in the top 100 brands. But we must remember that we are backed by a lot of investment in marketing, and they are all operating at negative profits or negative EBITDA, whereas the traditional international brands and FMCG brands are not doing that. They are investing within their internal profitability, if I may say so. Then there are 10 luxe brands in our top 100 brands and 7 global brands. So it's a very dynamic platform with lots happening. What you have to remember is that we get a 1 billion more plus visits on our platform from 25 million unique visitors every month. There are more than 10 million [indiscernible] sales. On 1 day alone, there were more than 10 million visits. So we are a must platform for any brand that wants to launch and build their brand in the country because of the cohort -- customer cohort that we already have and how dynamic we are in terms of being able to activate those customers towards all of our brands. Each of our brand even the most largest brands, like, say, some of the largest brands, MAC [indiscernible], Lakme and Meybelline, they also get more than 50%, 60% -- 60% plus of new customers through us every year. So it's a very, very dynamic platform that keeps adding customers to [indiscernible].

Understood. Falguni, thanks for the clarifications or some comments about eB2B a little earlier was very helpful. But 1 follow-up on the eB2B is essentially that in general, there is an investor perception that given the MRP regime, which is very unique to India, there is only so much, let's say, distribution margins, which is very finite, which is available for any player however differentiated the offering may be. So is it fair to assume that eB2B for you from a profitability point of view at scale is a reasonably long gestation? Now the other point is that because you are 1 of the unique players who's got the end-to-end capability, it also means that it is a very high entry-barrier business. So how do we look at this let's say, from a 3-, 5-year sustainable meaningful profitability metrics point of view?

To be honest in all of the distributors for big companies like into [ Hindustan Unilever ] or P&G or all of them, and they all have thousands of distributors throughout the country. And all of them are from small [indiscernible] shops, we are not going to lose money on behalf of the company itself. So in my opinion, in the eB2B business is done right, and especially in our industry where the distributor-cum-retailer margins are not small. I do feel that you can really add value and especially through that, you add data in terms of what the retailer should stop, the flexibility to allow them to buy a mix more frequently rather than by the minimum sizes that others may ask. So there's a lot of advantages a shopkeeper has by dealing with people like us, ourselves. So I don't think -- I think the main thing is the business is to remember that it's a B2B business and not a B2C business. And hence, in the long run, fulfillment costs and marketing costs need to reflect that and the overhead structure needs to reflect that. And if one doesn't do that, then it can be quite a dragging phenomenon. So where we are is that we have set up almost 11 to 15 warehouses, which take us closer to the customer. We are going to do more business where we will stay within 200 to 300-kilometer areas of our fulfillment center. We will not jump in anywhere and everywhere. I think it's a business that we are doing very smartly where we will service shopkeepers in a certain -- there will be a fulfillment center and a certain per kilometer rates of that we will focus on selling. So I think if you do it right with the right unit economics, I think it can work. And the power it gives and barriers it creates for entry for future and power it gives to build brands in India is going to be very valuable in the long run.

Understood. And if I may, just quickly, please allow me to relay an important conversation point with investors over the last few months at least. Just some comments about how do you think about capital allocation in general? This question has essentially come -- had come up in the last, let's say, 6 months post your [ GCC foray ] et cetera. While I completely understand the disclosures you have done about the market opportunity there, this is just sort of a hanging question about incremental capital allocation, how do you see that over the next 3 years?

So first of all, for us, the beauty online clients to consolidated Beauty business is very important. And in our opinion, we should never under invest in that, and we will continue to acquire customers for the Beauty business, both online, offline. And also, we would like to build private label brands in beauty and become say, a consumer company like Estee Lauder or L'Oreal coming out of India. So that is #1 priority towards investment, and I don't think we would deprive this business of any amount of investment. Investment in inventory and warehouses will be needed for -- sell stores will be needed to continue to support it. But at any point, you can pull back on those investments and continue to grow online. So -- and customer acquisition is another big investment we make. So I think this business has seen a huge amount of investment in customer acquisition, investment in fulfillment center, investment in stores and investment that we've done in terms of the [ link ] tech capabilities towards this business. So I think there's a fair amount of investment going in there. And this business is not deprive of that. But yes, the profitability of this business is being used to build new businesses, including fashion. So you can see that the profitability, like if you see at the EBITDA level, the EBITDA gross profit of BPC would have been INR 523 crores. And that -- some of that has funded or sale contribution profit is INR 298 crores, and some of that has funded investment in Fashion and B2B. So yes, we're taking the profitability of this business to expand our TAM and invest in Fashion. In Fashion, we are very clear that as the equation between new and returning customers builds up and it keeps improving with every passing year. Our fashion is just a fore player of the business. But as the situation improves, we are confident that we should be able to bring down the marketing costs from current levels to just about [ 15 ] mid-teens to late teens, and that itself will be very profitable. And on the B2B business, it's literally first year. We are very happy with the scale and the retention and reactivation numbers. And we do believe that we need another year of [indiscernible] investment before we can talk about being profitable. But none of it will be massive losses. So like contribution margin, this would be only minus -- even this year, it was only minus 12.6% negative and next year will be lower. So like I said, path to profitability is clearly in our mind, and we will -- at the moment, we are only investing in these 3, 4 businesses. So Beauty like I already spelled out, Fashion we're also winning from private label brands, but investment is [indiscernible] INR 4 crores, INR 5 crores in those. And we have at fashion platform itself. We've been investing but it will turn profitable over time, and our B2B business where we are investing will become profitable. I think GCC we see are very -- I talk about it that in India, we have customers, but we struggled with the wallet. And in GCC, the customers have the wallet. So I think it can potentially be a very profitable business, but we will be very measured. And I think it's a market that will have a lot more dominance of physical retail compared to e-commerce. So the mix will be a little different, like mix could be 50-50 and also the fact that the physical retail in those markets can actually turn profitable very quickly compared to India.

The next question is from the line of Manish Adukia from Goldman Sachs.

My first question is on the Fashion business. So, Falguni, on the first question you'd mentioned that some impact [indiscernible] growth discretionary spend impact. Now in the Fashion business, when we look at this quarter, growth actually accelerated during the quarter. So can you actually talk about the difference in dynamics between the Fashion and the BPC growth during the quarter? And a related question, when we look at one of the explanation in the slides around gross margin impact and where you mentioned consumer downgrades as one of the reasons, just trying to understand what you mean by consumer downgrades because AOVs have moved up in the quarter, both quarter-on-quarter and Y-o-Y. So if you can just explain what do you mean by consumer downgrade?

All right. I think consumer sometimes -- and I mean none of these are like -- what you have to remember is that the 2,500 brands with lots of trends playing around, so none of those are like a dominant long-term trend. So we do expect that, in general, in the industry, there is premiumization and customers are buying more premium products. They're buying more luxury products. But if you look at it, at least last 1 year, there has been some amount of popular -- I mean customers are down trending at least in certain categories from luxury brands to more and more into the premium and mass brands. So there is some amount of that going on. I think it would be short-lived and it can change. But, yes, there was some amount of inflationary pressure, which is making% customers hold back or choose a slightly lower category of the product.

I think just coming in on the gross margin side of the question, at least I think we definitely want to draw the attention to slide 44 where we show the 9 months consol -- show the 9-month numbers because if that is quite clear, we have to just [indiscernible]. But from that it's quite clear that if you look at both the businesses, BPC and Fashion, on a 9-month basis, there is an improvement on both. So Fashion has gone from 43.7% gross margin and NSV to 44.5% and Beauty has gone from 44.7% to 46.3%. So we would encourage folks to look at the 9 months numbers, and there's no sort of plan to deteriorate margins at all.

Sure. And my second set of...

In Fashion, we have a lot of imported brands. Now we are doing business in Singapore. We are doing business in a number of imported brands like Tiger and all of that, you can see. So there are a lot of mix changes that happened from quarter to quarter while we are trying to make sure that we try and manage all this in a more uniform manner, but please appreciate that the current mix changes that happen, new launches that happen and the impact it can have sometime in the near term.

Sure. My second question, again, just talking on the Fashion business. So clearly, I mean, 50% of Y-o-Y growth in this quarter, AOV is still holding up quite well at around INR 4,000-odd. Just trying to understand, I mean, do you think this kind of a growth rate could sustain with the kind of AOVs that you have? Or do you think to keep growth rate, you have to compromise a little bit on AOV. And I look at your point earlier, I mean, you called out gross margins for the business. Clearly, across both BPC and Fashion gross margins are currently comparable but there's obviously a fairly large differentiation in the contribution margin. So everything let's say 3 years out, do you think given contribution margin for these 2 businesses could be comparable?