Monte Carlo Fashions Limited (MONTECARLO) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q3 FY '20 results call of Monte Carlo Fashions, hosted by Emkay Global Financial Services. We have with us today, Mr. Dinesh Gogna, Director; Mr. Sandeep Jain, Executive Director; and Mr. R. K. Sharma, CFO. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Ashit Desai from Emkay Global. Thank you, and over to you, sir.

Yes, thanks, Faizan. Good afternoon, everyone. We would like to welcome the management of Monte Carlo and thank them for giving us this opportunity. Now handing over the call to the management for opening remarks. Over to you, sir.

Very good afternoon. It's a great pleasure to welcome you all to this earning conference call to discuss our financial performance for the third quarter and the 9 months of financial '20. Thank you, everyone, for sparing your valuable time and joining us here today. We have uploaded our Q3 and 9-month financial results and result presentations on our website as well as on the stock exchange. I believe you may have a chance to go through it. I'll initially share the key financial indicators for the Q3 and 9-month financial '20 and then share the key developments during the quarter. In total, revenue during the quarter stood at INR 403 crore as against INR 375 crore in Q3 financial '19. The revenue and profit during the quarter are adjusted post provisioning future discount of INR 26 crore pertaining to Q4 of financial '20. The company reported gross margin of 42.3% of Q3 financial '20. EBITDA margin during the quarter stood at 26.4%. The company reported profit after tax for the Q3 financial '20 at INR 72.3 crore against INR 75.5 crore in Q3 financial '19. The 9-month performance is as follow: the revenue for 9 months stood at INR 616 crore as against INR 560 crore; and the gross margin is 47.4%; and the EBITDA margin is 21.9%; and the PAT margin is 11.8%. We are positioning Monte Carlo as an old-fashioned brand. Monte Carlo has diversified presence across 4 segments: Woollen, Cotton, Home Textile and Kids. One of the most important trends that we have registered in this segment are the last few, is a gradual shift to lightweight winter wear. Consumer today exhibit a uniform propensity towards lightweight and durable products that can be used as fashionable clothing with a high level of comfort. Today, the winter wear market in India is driven by lightweight products instead of bulky winter wear product. Monte Carlo has witnessed a warm response for their range of products through various channels. Our own portal sales have gradually increased to INR 2.7 crore as of December '19 from INR 1.3 crore as of December '18. The cotton segment share in 9 months this financial year is around 56% of the total revenues. T-shirts, shirts and Cloak & Decker and -- forms a major share in cotton cloth category. Home Furnishing and Kids segment continued to grow at a healthy rate. Home textile share increased to 12.6% in 9 months from 10.1%, and Kids segment share increased 7.1% as against 5.4% in financial '19. One of our key strength has been our wide and growing distribution network with a holistic presence across India. We have a deep presence across India through 2,500-plus multi-brand outlets, 280 EBOs, 506 national chain store outlets and 128 shop-in-shop. Majority of our revenues come from MBO, franchise EBOs, where we primarily sell on preorders and outright basis. By virtue of this business model, there is a no major inventory risk, and we remain adequately protected from the normal hazard of sales in branded apparel business. At Monte Carlo, we believe in stable and disciplined performance, while our focus will be to maximize revenue growth going ahead. Large interest is to build the profitability by maintaining cost control measures and focus on improving return ratios and maintaining a healthy balance sheet position. We can now open the floor for question-and-answer session. Thank you very much.

[Operator Instructions] The first question is from the line of Zaki Abbas Nasser, he's an individual investor.

Sir, can you hear me?

Yes, yes, we can hear you.

Congratulations on a stable set of numbers for a considerably weak quarter in the Consumer segment, as I would understand. I have 2 questions, sir. Number one, how are you satisfied with the stability of your product range, which is slowly panning out in Monte Carlo during the last 3 quarters, sir? Number two is, you said provision for future discount of INR 26.4 crores has been made in Q3.

Yes.

That would -- would that mean that last Q3, it is not -- that provision was not made? That's what I remember. And considering that the last quarter is on similar lines to Q4 last year, the numbers will look far better for the full year?

Yes.

And have we selected to be in the 25% tax category or 33% tax category, sir?

Okay. Thank you. So first, I'll come to the second question, which you asked the INR 26 crore of future provisioning discounts, which we have made into this quarter. So as for the new IND AS, now all the future discounts, whichever goes in the next quarter, we normally take in the quarter where we actually realize the sales from our end. So last year, what happened was, the discount was taken in the fourth quarter. And this year, we have taken future provisioning of INR 26 crore of discount in this quarter. That means, if I compare my quarter as per the last quarter and apple-to-apple, actually, the profit would have grown by INR 26 crore, if we have not taken the provisioning. But as the provisioning had been taken, so in the next quarter, we will not have any discount provisioning. It can be marginal, but it will be significant better -- significantly better as compared to last financial year. If you see the last financial year, in last Q4, we had a loss of INR 26 crore. That was because of the discounts, which is -- the provisioning was not taken in the third quarter in the last financial year. Now as we have taken the provisioning in this quarter, so it means that the loss would be significantly less or it can become positive in the fourth quarter, which will give the -- definitely a better financial position and the profitability as compared to the last year.

And the figures will look much more healthier, sir. And because your CSR spend is also more in last year.

Yes. And secondly, you ask about the tax slab. We are now in 25% bracket. It was 33% bracket last year. And in CSR expense, we have already taken the provision of INR 1.41 crores of CSR expense, which was -- last year, we taken in the fourth quarter. So that would also help us in the fourth quarter.

Yes, sir. Sir, your opinion on the company's stability now, sir? Because the past 5, 6 quarters, you all have been trying to maximize the product mix and trying to make it off season also, like outside winters. How satisfied are you with what has been achieved, sir?

I think as far as the performance of the company is concerned, I think, we have maintained all the guidances, whichever we have given in the beginning of the year till the end of the financial year. Even this year, we have already -- in our Analyst Call also at Mumbai, we have told that we'll be growing 10% as compared to last financial year, even though there was definitely a lot of challenging in the economic environment right now as far as India is concerned. Our GDP is also actually not going up as it was considered in the beginning of the year. So beside -- I think despite all the challenges and the problems, the company has been able to grow 10% as compared to the last year as far as revenue is concerned. And again, the most important thing is that we'll be able to improve or maintain our EBITDA of last year as well. So that shows that as far as the performance is concerned, we are satisfied with the performance of the company.

[Operator Instructions] The next question is from the line of Deepan Shankar from Trustline.

So this provision for -- discount provisioning. So this is included in our raw material cost itself?

Can you please repeat again?

This discount provisioning of INR 26 crores. So if it included in the cost of raw material consumed itself?

Yes, yes. Definitely, yes.

Okay, okay. And sir, are we expecting Q4 numbers to be better than last year because of extended winter also?

Definitely, yes, as -- first reason is the discounts, which is happening right now in quarter 4, most of the discounts have already been considered in third quarter, which was not the case in the Q4 last financial year. And secondly, the sales is also better as compared to last year. So we are very hopeful and sure about the performance of the fourth quarter as compared to last financial year or fourth quarter.

Okay. So did we see the sales extended till Feb of this year?

This has deep -- because of deep winter.

Can you please repeat?

As we witnessed the sales till the February month of this year?

Have you witnessed the sale till February?

No, no. The sales period normally starts from 1st Jan, it ends at around 25th Feb. So this year also, the trend is same. It started around 1st of Jan, it will end around 25th of February. And the sales, which is happening in this quarter is basically more as compared to last year. So that means there should be less stock at the retail outlets and also at the company's premises.

[Operator Instructions] The next question is from the line of [ Mihir Desai ] from Desai Investments.

Sir, my first question would be on the segment -- revenue segment composition. So what I look at it as the component of Home Textiles is being increasing -- on an increasing trend. So I just wanted to ask you that for the future guidance, like what is the peak composition which we are looking at our Home Textile segment? And are we looking to like expand our product portfolio towards Home Textile? Or this would be at this levels only?

See, Home Textile grew more as compared to rest of the categories. So that is why the contribution of Home Textiles in Monte Carlo, in the overall revenues, have been increased. But going forward, we assume the Home Textiles should grow between 25% to 30% or around 25%, I would say, for next financial year because this is one segment why -- the reason for -- why it is growing is because there is a less competition as far as branded players are concerned. We are one of the few brands available in the Home Furnishing segment. So that advantage is, actually, we are getting because of Home Furnishing. And as far as our woollen, cotton and garments range is concerned, I think we have already stated earlier also that we'll be growing double digit easily next few years as we have a strong base of retailer -- strong base of EBOs, MBOs, LFS, online and other channels.

Okay. Sure, sir. And sir, just wanted to -- your view on the provisioning of future discounts which you have made, sir, which is, I think, roughly around INR 26.4 crores in Q3 FY '20. Can you please explain this provisioning, sir?

No, no, no. Actually, the last year, it was of same, which happened in the fourth quarter. So instead of doing again in the fourth quarter, which actually -- if you see the Q4 of last financial year, the company had a loss of INR 26 crore in the fourth quarter. So as far as IND AS provisioning is concerned, now the company takes care of all the future provisioning whichever they are in that quarter where the sales are realized. So that is why this provisioning has been taken, and that will ensure that we should have a very good fourth quarter as compared to last financial year of Q4 fourth quarter.

Understood. Understood, sir. And sir, having said that, that there is a slowdown, which we had seen, the liquidity crunches, which we saw in the market. Sir, we are not experiencing any delays in payments, right? So all payments are -- so basically, we are not experiencing any bad debts kind of a thing, sir?

No, no. Basically, this year, we have realized our payments faster as compared to last year. So as far as Monte Carlo is concerned, we are not experiencing any bad debts or any late payments, and we are basically better as compared to last year as far as our debt reposition is concerned.

Understood, sir. Sir, lastly on industry front, sir. Sir, we have seen that there is a slowdown in China due to the virus. So will that help us? Or will that help Indian government in -- or Indian textile industry, sir? Just wanted your view on that, sir.

I don't think so. Because right now, China is closed because of coronavirus, but actually, they have Chinese New Year holidays. But as we have seen in earlier in SARS case also, they act very fast. So I don't think it is going to go for a longer time. I think they will contain it or -- I think by the end of February or March first week, it should be all right, as for my opinion is concerned.

The next question is from the line of Vivek Ganguly from Nine Rivers Capital.

I have a couple of questions. Just to clarify on the provisioning that we have done. So if you had not done that provisioning, your margin, let's say, your expenses would have been lower by INR 26 crores, is that the way to understand it?

You're right. Yes, you're right.

Absolutely. Okay. Sir, second is, there was a steep jump in depreciation. That is -- so what is -- why does it happen? Because as we understand, there is not a lot of CapEx that is happening?

No, no. This is because of asset liability of showrooms which are on the rent. So as far as IND AS is concerned, we have to take and consider at all the premises where we are paying rent as our assets. So that is where the depreciations have gone up.

Lease rent...

Lease rent has been -- yes, as for the new IND AS is concerned.

So is it to -- that the rent that you all were paying, which was a OpEx for you all is now clubbed in the depreciation? How does -- I'm not very clear on that.

The rent, which we're showing as expenses, our rent expense is actually now -- is shown as a depreciation.

And finance cost.

And the finance cost. And the rent cost has gone down. So basically, this is a new law of IND AS, for which we have to change accordingly.

Okay. And what -- yes? Yes, sir.

The value of your assets have gone up because now it has been must with that.

Okay. And what about the finance cost? There also, we have seen a -- especially on the 9-month comp, we have seen it virtually double. So any particular reason for that? Is it a working capital thing? Or where is it coming?

There are 2 reasons for that. One is definitely IND AS where we have to cover some finance cost also in depreciation case. And second is because of the buyback which we have done, if you would remember, INR 55 crores. So that has gone from the working capital. So that has raise the finance cost.

The next question is from the line of Premal Kamdar from Haitong Securities.

Sir, Premal here. Sir, just wanted to understand your...

Mr. Premal, your voice is breaking.

Yes. Is it better now?

No, sir.

Your voice is not audible.

Mr. Premal, your voice is not...

Can you hear me?

No, sir. We cannot hear you.

Is it audible now?

Now it is audible.

Yes. Yes, sir. Just wanted to understand your take on the MBO channel. So many of your peers have reported that MBO channel is currently going through a liquidity crunch issue and many are now shifting their distribution more towards EBO channel. So -- but for you if I see, our Q3 FY '19 channel mix, it has actually improved from 49% to 53%. So what is the situation over there?

Basically, what we have done is that the bigger MBOs we have converted into SIS, shop-in-shop model. So we have not lost any business in MBOs. Actually, we have increased our business if we combine both our MBOs and SIS. And EBOs, we already opened 25 outlets in this financial year as compared to last year. It was 255, and it has gone up to 280. So I think both the areas have grown in MBOs as well as EBOs.

Okay. So we -- you are not finding any issues with our MBO channel currently?

No, not at all.

Okay. And going forward for FY '21, our CapEx is just around INR 10 crores. So our expansion would be more through MBOs and LFS channels, right?

No, no. CapEx guidance, we have given in the beginning of this year also that it should be around INR 10 crores to INR 15 crores for next 2 years. It shouldn't be more than that because we are a labor intensive industry. So we don't require much to invest as far as any machines are concerned. And what was the second question?

Sir, just going forward [Technical Difficulty] channel where we Would be much more focused on for expansion?

I think EBO is the channel where we'll be focusing more. We would be opening another 25 outlets in the next financial year as well.

Okay. And sir, just wanted -- what is the gross margin -- usual gross margin between cotton offering and a woollen offering? What will be the differential between gross margin between the 2 products?

The woollen gross margins are higher because the manufacturing is in-house, and the cotton margin -- gross margins are lesser because the margin -- it is mostly outsourced.

Combining them.

So -- but if we combine both of them, it will be around 47.4%. And in case of cotton garments, but the PBT is higher at PBT level as far as if we compare with the woollen products.

The next question is from the line of [ Venkat Subramanian ] from Organic Capital.

We are broadly noticing 2 trends. One is a lot of pricing pressure because every neighboring outlet of yours is offering discounts, and therefore, discounts have become a rule of life. And the second is an inability to differentiate because of people's propensity these days to actually do online shopping. Both of this seem to give secular pressure on margins and pricing. Do you have any comments on this?

Thank you for asking this question. But I think as far as we are concerned, we would be improving our margins as compared to last year. Even though there have been discounts from the online channels, there have been discounts on the neighboring shops, but still, we have a very good control on our cost and also a very good control on the discount part also. We were the last company to go on discount sales when everyone else is on discount sales. And we also don't go for to 40% or 50% immediately, at least for 80% of the stocks, which we have in the showrooms as compared to other people who actually started just when they are -- just going to discounts. So I think these all parameters basically helps us improving our margins as well as tackling the competition also. We are also offering the discounts as well as we are not matching those discounts which are being given by other players. So I think because of this strategy, we have been able to not only improve our margins but also to improve our sales as well.

Can you explain the second point that you made? I can understand that you are not bending down on price, how is it that it'll improve sales? Because one will work against the other, right? I mean if your pricing is necessarily very stiff, and if you're not offering discounts, you're not -- you don't want to...

When I say the sale is improved, now what is happening is that in IND AS, whatever discounts we give, we have to minus it from our sales. If I give more discounts, like 50% -- suppose the value is 100% -- INR 100, if I give INR 50 discount, the sale will come down to INR 50, the net realized sales. If I give...

My question is with respect to unit sale messaging. Your unit sales will have to suffer in case you don't bend on your price, right?

No, I'm talking about the revenues, not the unit sales. The revenues actually...

That appreciate, -- that one appreciate, yes.

Yes, yes.

But you're basically saying you will not compromise on price, and you're okay in case growth is compromised a little bit. But what -- it has to be at the cost of growth, right?

No, no. I think you understood me wrong. We have always called for profitable growth. We have always said that we would like to grow, but profitably. Yes, we are not growing 30% to having a cut in our margins. We are growing double digit, maintaining the margins or in this year, definitely, we'll be improving our margins. So if the growth is around 10% to 15%, I think, we have been able to maintain our margins as well and also, we can grow at this level without having a -- any dent in the margins.

Fair enough, sir. In response to a previous question, you said you want to grow the exclusive outlets more than MBOs. Do you have any cutoff expectation with respect to a particular review?

What do you mean by cutoff?

You would want a certain profitability or you would want a certain revenue for an EBO to survive for a certain EBO to be very positive, et cetera?

Yes, yes. Definitely, we normally take around 15% of the expenses of overall sales. If that -- we get any EBOs to open in that particular bracket, we go for that.

And all our stores that are currently operating and the ones that you intend opening will all meet that guideline, is that what you're saying?

Not every outlet meet the guidance. But definitely, our intention is to have all the outlets in this particular range. So there are outlets which are above that. Also, there are outlet which are below that also. But that is the level actually, which helps us maintaining our profitability.

I understood. And lastly, because now the taxability of dividend is at -- in the hands of the recipient at full marginal rate and since your current holding is at 60%, there is an expectation that many companies will cut down on dividend distribution and will probably go for buyback. Do you have a certain -- do you have a clear thinking? Do you want to guide the market?

No, no. Actually, this has not been discussed in the Board yet. So whenever we have a Board meeting, it will be discussed what actions will be taken. But definitely, everything -- as far as last 3 years are concerned, we have been handsomely giving dividend of 100%, 120%. And then last year, we had a buy back without even promoters participating it. So definitely, whatever would have be in the best interest of the company, the company will do in -- company will discuss in the Board meeting.

The next question is from the line of Deepan Shankar from Trustline.

Just want to understand what is the reason behind this woollen sales, which has dropped by 11%?

See, again, the future provisioning has been taken. So that is why the sales have come down. Overall, sales is up around 20% in online this year.

So even adjusting...

260. Okay.

In this Cotton segment and what is the winter, nonwinter kind of split?

It is jackets, sweatshirts, track-suits, lowers, sweatshirts, t-shirts, shirts, denim's & trousers.

No. In terms of revenue, what kind of split they have winter, nonwinter?

I need to check it.

Online sales.

You'd like to -- you're asking about the online sales?

No, no, no. Only that winter, nonwinter or pure cotton kind of split?

So I can give you the figures of the categories, which are in cotton category, you can note it down. The t-shirts contribute approximately, in 9 months I'm talking about, INR 85 crore of sales; denim trouser and shirts contribute around INR 45 crore of sales. Jackets, which are made -- mostly made of cotton and cotton polyester that contributes around INR 128 crore of sales. And then if I talk about the track-suits and other garments and Clock & Decker, they again do around INR 55 crore of sales. We have shawls, thermals and all that, they contribute around INR 35 crore of sales.

INR 35 crore?

Yes.

What was this for previous years?

Pardon?

What was the same thing for previous years?

Previous year, if I see, it was INR 319 crore in last 9 months. This year, it has been around INR 354 crore as compared to last year, if I compare apple-to-apple without taking the future discount provisioning.

Discount provisioning.

Okay. In terms of this cotton splits, you were saying t-shirts and those things. For last 9 months -- last year, 9 months?

Last year, 9 months, it was INR 76 crore.

For t-shirts?

Yes.

But the jacket, how much it was last year?

It was INR 120 crore.

INR 120 crore, okay. And this Kids category, is it more towards woolen or cotton?

Cotton, cotton.

Cotton. Pure cotton only. No jackets, nothing like that.

No, no. That includes jackets, that includes sweatshirts, that includes track-suits, everything.

Okay. So that winter related will be higher proportion?

It should be around 60%.

60% okay.

The next question is from the line of Arjun Sengar from Nippon Mutual Funds.

This was regarding your presentation, Slide #13, where you have given the quarterly results. If I understand correctly, the quarter 3 numbers and the 9-month numbers at the operating EBITDA level is not comparable to the same period last year because of IND AS?

Yes.

So can you give us the comparable number, please?

Okay. Yes, you can just note it down. If I don't take the future provisioning of INR 26 crore, then the operating EBITDA -- then the EBITDA becomes 31.7% as compared to 32%. And the PBT becomes INR 121 crore as compared to INR 114 crore last year. And the PAT becomes INR 92 crore as compared to INR 75 crore.

Right. Also, this is -- but what about the lease rentals and all that have now gone into depreciation and finance cost? Because of this, the EBITDA would look higher, right? That also adjustment will have to be made, right?

Yes, yes, yes. That's also pushing up the EBITDA higher.

So would you have the number after that also -- adjusting for that?

I don't have a number after that also. But one thing which I can assure you is that it's better as compared to last year when we go for a full financial year. Because last year, we had a EBITDA of around 15.7%, and we are hopeful of better as compared to last year in the apple-to-apple comparison, without taking depreciation effect into the revenues.

[Operator Instructions] The next question is from the line of Harshal Mehta from B&K Securities.

I have 2 questions. The first one is our online sales de-grew by 11% y-o-y. So any particular reason for this de-growth? And how do you look at this channel going forward? The second question is, why has our interest cost increased by INR 8 million Q-o-Q, despite decrease in debt by INR 14.4 million?

Okay. I'll come to the first question where the online sales have gone down. It has not gone down because, basically, the future provisioning of INR 26 crore, which as spoke earlier, actually has taken into effect. Otherwise, it is 20% up as compared to last year, if I don't take the future provisioning discounts effect in that. And secondly the finance cost is up because of 2 reasons: One is because the IND AS, where the impact is around INR 3.42 crore because of IND AS by taking the finance cost and depreciation cost; and secondly, is a buyback, which we have done last year. That was INR 55 crore, which the money has actually gone out from the working capital. So that has raised the finance cost.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Once again, thank you very much for sparing your valuable time. And please feel free to write an e-mail or ask any queries, we'll be happy to answer that. Thank you very much.

Thank you. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.

Thank you.