Iris Clothings Limited (IRISDOREME) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Iris Clothings Limited Q3 and 9 Months FY '25 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Abhishek Bhatt from E&Y investor relations. Thank you. And over to you.

Thank you. Good morning, everyone. On behalf of Iris Clothing Limited, I welcome you all to the company's quarter 3 and 9-month FY '25 Earnings Conference Call. The results and investor presentation are available in our filings with the exchange. To discuss the business performance during the quarter and outlook, we have with us today Mr. Santosh Ladha, Managing Director; Mr. Harshvardhan Sarda, business head; and Mr. Niraj Agarwal, Chief Financial Officer of Iris Clothings Limited. Before we proceed with the call, a disclaimer. Please do note that anything said on this call during the course of the interaction and in our collaterals which reflects the outlook towards the future or which [ should be ] interpreted as a certain forward-looking statement must be viewed in conjunction with the risks the company faces and may not be updated from time to time. More details are provided at the end of the investor presentation and other filings that can be found on our website, www.irisclothings.in. Should you have any queries or need any further information at the end of this call, you can reach out to us at our e-mail addresses mentioned in the company collaterals. With that, I would like to hand over the call to Mr. Harsh. Thanks. And over to you, sir.

Thank you, Abhishek. Good morning. And thank you all for joining us on today's call to discuss our performance for Q3 FY '25. I'm grateful for the opportunity to share with you our performance over the past quarter and share our plans for the coming years. On the operational performance, during Q3 FY '25, the company experienced a strong performance relative to the same period in the previous year. Our B2B segment, which is a major contributor to the overall business, has been growing at a good pace. We successfully added 4 new distributors in Q3 FY '25, aggregating to a total addition of [ 13 ] new distributors during 9 months FY '25. This has expanded our network to over 177 distributors. Our strategic focus has been on deepening our relationships with distributors rather than merely expanding our network in breadth alone. On the broader portfolio end, we have continued to increase our focus on the infant wear category; and expanded our product range to include infant sets, cord sets, nightwear and fresh designs in the Disney apparel line as well. These new offerings have been carefully crafted to meet our customers' changing needs and have been positively received in the market. With these updates to the infant wear category, we aim to raise its share from the current 10%. After years of dedicated effort to build our DOREME brand and create a strong brand recall, we are now advancing towards significant growth by focusing on and expanding our direct-to-consumer segment. In our pursuit to strengthen our D2C presence, we have already made progress by opening 5 new exclusive brand outlets during the first 9 months of FY '25, taking our total count of stores to 7. This approach is in line with our grasp of market trends and our dedication to our strategic expansion plan. Looking ahead, Iris Clothings is starting a clear path for expansion in the D2C segment, along with the distributor segment. We plan to open around 100 stores in the next few years and are making significant investments in assembling a robust team for our retail division. It will play a crucial role in elevating our brand DOREME to new heights. In addition to expanding our retail footprint, we are also continuously updating and diversifying our product portfolio to enhance our merchandise offerings to our consumers. With a solid foundation and a strong brand reputation, we are enthusiastic about the opportunities that lie before us. We are confident in our ability to meet and exceed our aspirational targets. We believe that our efforts will continue to bear fruit as we move forward. I will now hand over the call to Niraj Agarwal, our Chief Financial Officer, who will walk us through the Q3 and the 9 months FY '25 financial numbers. Thank you. And over to you, Niraj.

Thank you, Harsh. Thank you all for joining us today. I am pleased to share that we have delivered robust performance in Q3 and 9 months FY '25. Talking about the key financial highlights for Q3 FY '25. Our total income witnessed a remarkable increase of 42.1% year-on-year, reaching INR 33.4 crores, up from INR 23.5 crores in Q3 FY '24. Consolidated income during 9 months FY '25 stood at INR 106.2 crores, a significant growth of 33% year-on-year against INR 79.8 crores reported in 9 months FY '24, while our EBITDA for the quarter was INR 6.1 crores, as against INR 5.4 crores in Q3 FY '24, with an EBITDA margin of 18.1%. EBITDA for 9 months FY '25 stood at INR 20.1 crores, as compared to INR 19.3 crores in 9 months FY '24, with an EBITDA margin of 18.9%. Additionally, profit after tax for the quarter was INR 2.4 crores, as against INR 2 crores in Q3 FY '24, a substantial growth of 20% year-on-year. During 9 months FY '25, the net profit was INR 8.6 crores compared to INR 8.7 crores in 9 months FY '24, with a PAT margin of 8.1%. [indiscernible] summarize our financial performance. We remained focused in driving operational excellence and capitalize on growth opportunities. With this, we can now open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of [ Midhat Samit from Samit Financials ].

Congratulations on a great set of results. I have a few queries. So first is regarding you see, Q3, we see, is a seasonally sort of a weak quarter for us. So is there some strategy to launch any festive wear products or a special dedicated line? Because Q3 usually, for other retailers or consumer segment, is dominated by festivities. So is there any thought pattern on that line?

[ Samit ], thank you for the question. So I understand what you mean that we should launch a festive wear collection, but so -- and one of the major reasons for Q3 being slightly weaker is because of the seasonal change. So all the winter wear products which usually sells at a retailer's set during the months of November, December, January -- and since our major sales are through distributors, our distributors buy it from us by September because that is when they forward it to retailers. So as we move towards D2C a little more, Q3 will start becoming stronger for us in the longer term.

Okay. So as you are mentioning, we are moving, focusing more on D2C. Is there any number or part which have [indiscernible] strategic target; or 3-year, 5-year vision to reach a certain number of revenue or profitability in the D2C segment?

Absolutely. We are very, very focused, with a very specific plan, to grow the entire [ business ] as a whole. For D2C specifically, we have set certain targets, which you can find in our investor presentation. We are [ opening to ] target roughly around 100 stores over the next few years initially; and with a larger, ambitious plan of over 400 stores in the next 5 to 6 years.

Yes, right. I've been through your presentation. I'd like to -- appreciate the presentation [indiscernible] very in depth on that [ info ]. Just one more query [ I would understand ] [indiscernible] since we are a majorly consumer-facing business, especially with kids of -- who have a very high rate of growth compared to [ other line of ] clothing and we must be having a very wide range of SKUs. And so roughly what's the broad range of SKU we have?

Yes. So we have the entire range of SKUs for -- basically to cater to kids from the age of 0 to 16, with multiple categories inside. So I -- if I have to give a rough number on the number of SKUs, we will be somewhere around 1,000 SKUs for the whole year.

Okay. And roughly, what is the inventory days we maintain on that [ side ]?

So overall working capital days that we will be maintaining by the end of this year would be around 190 days.

The next question is from the line of [ Bharat Sharma ] from Equirus Capital.

So my question is on the brand outlets, as the company is planning to open new brand outlets in quarter 4. So have we secured any location for these new outlets? And where will be the company's focus on opening on these outlets, whether in the Eastern region? Or are we looking to expand in Mumbai...

So the next set of outlets that we are planning is primarily in 4 cities of the South. So primarily Bangalore, Chennai, Hyderabad and Bombay, along with Kolkata. These are the 5 cities that we want to open the first few set of outlets for our company.

[Operator Instructions] The next question is from the line of [ Navin Kumar ], an individual investor.

So my first question is are there any plans for direct online sales for the customers, to align with other players in the retail industry.

So if we talk about it, we are already present on marketplace like FirstCry. We have a very strong presence on FirstCry already. And we have our own D2C channel which we launched a year ago. We're not really expanding the D2C channels right now by spending aggressively on advertising that, but we are figuring out a stronger strategy to launch the D2C very, very strongly. So I think, over the next few quarters, you will find some results on that segment, but we have a very strong presence already online on marketplaces like FirstCry.

Okay, okay. My second question is how has been the growth in the newer categories which we have launched during H1 FY '25.

I think we have seen decent growth in the infant wear category specifically, the 0 to 2 years segment, since we are adding a few new product categories in that segment every quarter. That is every season actually. That is what is driving a good percentage of growth for us also. I think new product categories overall are being accepted quite well into the market.

The next question is from the line of [ Jia Mehta from Asendo Capital Market ].

So I have a couple of questions. My first question is how the demand situation at our EBOs and whether -- the first 2 outlets which we opened in Kolkata last year. So have they reached at breakeven?

[ Jia ], thank you for your question. Yes. So the first 2 outlets, we have definitely reached breakeven at an annual level. And we see the demand in the EBO segment growing, but then again retail is very dependent on season, specifically in the Eastern region because the Durga Puja season is much stronger than the rest of the season. So we are identifying those demand points and trying to play along that, but we are very confident that the demand overall for this segment especially for our brand will be very strong as we open more stores and have more presence across the places that we are targeting.

Okay, okay, okay. My second question is in terms of product development. Are we looking to broaden our accessories range? Or will we continue to concentrate on our core kids wear offerings, considering the high pricing nature of accessories?

We want to continue to focus primarily on the clothing segment because that is where our forte, that is where the brand has been built on, but having said that, we are very, very keen on adding new accessories. So we are adding bags and certain other accessory categories as well because at the EBO levels we need the entire set for the consumer to have an overall experience at the store with the merchandise. So correctly pointed out, we are definitely adding accessories, but it will not become a major part of our collection. We still want to remain primarily an apparel brand.

The next question is from the line of [ Kruttika from Mirae Asset ].

First question would be on the store additions. So in the previous call, you had indicated that you will be opening 10 EBOs in the second half and -- whereas in this quarter, there have been more addition. So what has changed materially in this quarter? So why this change in store additions? That is what...

So Q3 -- thank you for your question. Q3 specifically was a conscious call from our end to not open stores because it is always a change in season in the regions that we are targeting in. So what we are doing is we will be launching a few stores this quarter, maybe not the 10 number, but then again we'll be somewhere around, close to that number.

So around 5 in this quarter, in Q4.

Yes, yes, I'm sure.

Okay. And the remaining -- the target that you have mentioned in the PPT for the next few years remains the same. So there's no change in that...

Yes, yes. That will remain the same.

Okay, okay, okay, all right. And in terms of your capacity utilization for the 9 months, what has been the capacity utilization for the 9 months of this year...

You see, capacity utilization, currently we are somewhere around the 84%, 85% number. So we have an installed capacity of around 33,000 per day, and currently we are using around 28,000 pieces per day.

Okay, okay. And we had targeted to take it to 37,000 by this year-end. So is it expected to take place in Q4, or will that now go in FY '26?

Q4, we'll slightly enhance it, maybe to -- up till 35,000 pieces per day, but yes, major expansion will come over the next year.

Okay, so by FY '26 end. Is it that we are targeting?

So with the current -- apart from a greenfield expansion that we are planning later, we will take this capacity to around 38,000 to 40,000 pieces.

38,000 by, we can say, FY '26 end.

Yes. March '26 is what I'm talking about.

Yes, right, okay. And the next phase, for FY '27, we are further adding, I think, some capacity, right? So by FY '27 end, what would be our capacity?

Before FY '27, we are planning a greenfield expansion at the factory level as well. So I think that will enhance the capacity quite a bit, but then again that's something which is still in the works. We'll let you know as we have more information...

All right, all right. And just one clarification: Which are the 5 cities that you mentioned for the EBO expansion currently?

So primarily Bangalore, Hyderabad, Chennai and Bombay and Kolkata, [ in and around ].

[Operator Instructions] The next question is a follow-up question. It's from the line of [ Midhat Samit from Samit Financial ].

I would like to ask a few broad-based questions to the management. So as we are about to roll out a massive expansion strategy which involves a lot of store fronts both on the company owned and franchise -- EBO model -- so what is our major strategy on this front? Because I mentioned you -- I heard you mention a few cities, but are we keeping in mind what are the population growth metrics in those cities? And what is the competitive intensity in those cities? Or which brands are already strong incumbents? And what is our right to win in these situations?

Absolutely. We are very, very focused on that strategy. We have built multiple models on those by doing a competitor analysis in terms of which city. Apart from that, since we have been in the industry for almost 20 years now, we have a lot of insights. We have over -- we have presence in over 1,000 retailers in a city like Bombay. In Bangalore, we are present in over 700 retailers, similarly for Chennai. So since we already have a very strong presence in the retail sector in these cities, we have insight on what the products are, what the competitors are. So deriving all of that, that is how we have come to these 5 cities, but then again it is a strategy which will always -- it will enhance. And it will evolve over time because it cannot be a fixed-fixed strategy. However, being said that, this is what -- the overall strategy that we have defined from our experiences along with market research that our teams did that we did ourselves. It is a very well-thought-out strategy.

Yes, of course. We have a very rich legacy and a successful track record, so we are all excited by what comes next. And one more question, if I may: We have recently seen a macro change in the industry given by political circumstance in one of our neighboring countries. A lot of players in the industry have made various commentaries on it. And majorly, it has been advantageous to India. So is there any tailwind from that front?

So since we are not doing a lot of white label manufacturing currently, it is not entirely an advantage that we are seeing for our company in particular, but we are very, very keenly looking at opportunities. As something comes along, we are definitely eager to grab onto those opportunities as well.

Great. Just one last question from my end, like -- I understand our margins are usually a mix of product pricing and product mix as well. And our EBITDA margins have been in a broad range of, say, 17% to 23%. If you could just give some guidance or target range as to what is the aspiration. I understand this is all based on some circumstances not in your control, but...

Absolutely on point because it's a varied product mix that we deal with, but then again, having said that, we aspire to be in the range of 19% to 20% for this year specifically for EBITDA.

Of course. Say, could you give a further broader range for, say...

[ It will -- enhances by ] a couple basis points but not beyond that. I think 22% EBITDA would be a good number, a good aspirational number for us currently.

Okay. I'm saying, over a 3-year period, can we envisage a 20% rate? That is doable...

Yes, yes, for sure.

[Operator Instructions] The next question is from the line of Resha Mehta from GreenEdge Wealth.

So firstly, I just wanted to understand. So currently who is our customer segment? Is it the kids, like, in the 0- to 5-year age group, or beyond? So if you could specify the age group.

So currently the age group for the kids from 2 to 8 years caters to around 60% of our overall revenue. So which is -- that is the major segment. Infant is around 10% currently, which we are enhancing to around 13% to 15% over the years.

Okay, but I believe we have just launched infant wear, right? And that's already 10% of our revenues. Is...

Yes, absolutely. That is with very good growth. We had launched infant wear. It's been a couple of years since we launched and we have seen significant growth in that.

Sorry. When have we launched infant wear?

It's been almost 2 years back since we launched.

Okay, okay, all right. And would you say that the competition is higher in the infant wear versus the kids wear? Or would it be the other way around?

So it is very varied since our competition is very regional currently because, the markets that we operate in, there are not a lot of national players who are there across all the geographies that we cater to. So it is slightly different for a city like Delhi or slightly different for Bombay. So it depends on where I'm competing in. That is where -- so it's specific competition would not be very [ advisable from us ].

Okay. And I think [ Samit ] has mentioned that infant wear has higher margins versus kids wear. So what would be the margin gap between infant wear and kids wear?

I think it will be around 3% to 4% at the EBITDA level for infant and kids wear, but then again it depends a lot on the product mix, how the infant wear product mix comes up.

Okay, okay. You said at the EBITDA level, right?

Yes.

And at the gross margin level, what would that difference be, similar?

Yes, somewhere around the similar [ level ].

Right. And your gross margins have been very volatile. So in the last 4 quarters, if I just see, it ranged from anywhere between 41% to 50%. So how do we read this volatility in the gross margins? Are there any elements of seasonality or product mix, et cetera which happened quarter-on-quarter?

There is definitely a seasonality from summer's to winter's wear. We have 3 major seasons that we operate in. We have one big summer season. We have one pre-winter season and the main winter season, so I think seasonality is one reason why the gross margins primarily vary, because the raw materials change quite a bit for -- especially, the fabric changes for a winter wear fabric instead -- for a winter wear instead of a summer wear. So that is where the majority of -- raw material fabric is where majority of the gross margin changes happen.

So typically, ideally, I mean, from a full year basis, what would be your target gross margin?

For -- target gross margin would be somewhere around the 45% range for us.

45%, okay, okay. And EBITDA margins, like you mentioned to the previous participant, would be around 20%, right?

Yes, absolutely.

Right. And I think we were planning a preferential of 100 crores. So is that fundraise complete? Or...

It's in the process. It's still in conversation.

Right, right. And what would be the operating cash flow generated for the last 9 months?

I will have to check that number. I'll get back to you on that...

Sure, sure, okay, okay. And do you think that there is scope for this EBITDA margin to go beyond 20%, considering that now from a premiumization standpoint we have this Disney collaboration? Then also the infant wear mix is expected to increase, right, which is higher margin. Like you said, it has 3, 4 percentage points higher margins versus your -- the rest of your portfolio. So would you say there is a scope for 20% to go up? Or would you say that you would instead like to reinvest in your business since we are growing at a very rapid scale?

Exactly. So I think the 20% number is something that we would want to be at, maybe enhance it by a couple basis points, but that's about it. We don't want to improve the margins drastically as well because we would rather reinvest in the business with -- we are planning a major expansion going ahead, so I think it will make sense for us.

So when you say major expansion, this would be basically the capacity expansion that you're talking about since we are at around 80%, 85% utilization levels, right?

Yes, yes.

And what kind of capacity expansion are we looking at? Or would that be subject to the fundraise that we're able to kind of pull off?

We are planning the capacity expansion, like, irrespective of the fundraise, but then we are planning a greenfield expansion which would take the capacity to almost double of what the current is. And with it, over a period of next 4 years, it will grow up to almost 3x of the current capacity.

And why would you say that we would want to retain the manufacturing also at our end? So currently all of our products are manufactured in house. Or is there an element of outsourcing too?

Almost all our products are manufactured in house.

And why would we have the philosophy of doing everything in house and not kind of outsourcing it? Because if we look at...

Right. So manufacturing is where our USP of the brand has been built on. Our primary USP of the brand has been product, just like product excellence is what has driven our brand for the last 15 years. We work on a very small sales team, with -- majority of our sales is through word-of-mouth marketing from our distributors, from our retailers. And all of that is primarily because of the product excellence that we have, so retaining that is where the USP of the company eventually lies. We would want to definitely maintain that at our end.

The next question is from the line of Avinash from Parami Financial Services.

Am I audible?

Yes, Avinash. Thank you.

Yes. So first thing is what we sell is we sell 100%, you said, under our brand DOREME. Do we manufacture, out of this 27,000, 28,000 pieces per day, for somebody else also?

No. Primarily it is our own brand.

When you say primarily: 95%, it is yours.

Yes, somewhere around those, that number.

Okay. And is it possible to get, in terms of number of pieces, how much we manufactured in the 9 months period?

The overall number, we will have to -- I don't have the data readily available for the number of pieces for 9 months with me, but we can definitely take this conversation outside and do this.

[Operator Instructions] Next question is from the line of [ Akansha Parag ], an individual investor.

So I have 2 questions. May I know, what is our distributor target for FY 2025? And what is the contribution of top 10 cities?

So overall distributor target would be somewhere around 185 for this year. And if I have to say in terms of states: So Gujarat, Maharashtra and Punjab and Rajasthan contribute around 30% of our overall revenue.

Okay. And do we plan to have an omnichannel presence by FY '26? I mean direct online sales to our customers, to align with other players in the retail industry.

So as I said, we already are selling online through FirstCry. We have a very, very strong presence on FirstCry. So we are already omnichannel in -- per se. Along with that, we also have our own website where we are doing some business, not aggressively advertising that site yet, but we already have a very strong presence. We have almost 8% of our revenue coming in from online from FirstCry.

[Operator Instructions] The next question is from the line of [ Manoj Agarwal ], an individual investor.

I just want to ask a question that -- what is your business outlook and strategy on the B2B segment [ you're upholding ] going forward?

We are very, very confident on growing the B2B distributor segment, where we are expanding our presence, deepening our presence in Maharashtra where we are already strong at. Along with that, we have targeted UP for the next -- for this year and next year, where we want to improve our distributor presence across cities in Uttar Pradesh, Uttarakhand, Himachal Pradesh region particularly as well. So I think B2B segment is something that we have built the company on. And we want to strongly grow it as well going forward.

[Operator Instructions] The next question is from the line of Resha Mehta from GreenEdge Wealth.

Just last one, on the exports bit. So are we exporting currently? If yes, what are the margins in the export market? And are all of those white label, or are they under our own brands?

So primarily all our exports are under our own brand. We have around 3% coming in from exports this year as of now. And most of it is in our own brands, with margins remaining similar to the domestic [ market ] margin there.

And would the working capital kind of be a little bit worse off than our domestic market?

No. It remains similar. It's almost in similar margins, not very, very different. So for exports, it's just a different distributor for us. That's about it, like that's how they operate at.

And we are exporting to how many countries?

We are exposing to around 7 countries as of now.

Got it. So you said working capital and margins are broadly similar to our company averages, right?

Yes, yes, yes.

As there are no further questions from the participants, I now hand the conference over to the management for closing comment.

Thank you once again for your trust in us and for being a part of our journey. We look forward to sharing our successes with you in the next earnings call. In case you have any other queries post this call or anything remains unanswered, you may please connect to our IR team at Ernst & Young. Thank you. Thank you, everyone.

On behalf of Iris Clothings, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.