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

Welcome to the Q2 FY '21 Earnings Conference Call of Monte Carlo Fashions Limited, hosted by Emkay Global Financial Services. We have with us today Mr. Dinesh Gogna, Director; and Mr. Sandeep Jain, Executive Director. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Devanshu Bansal from Emkay Global. Thank you, and over to you, sir.

Good afternoon, everyone. I would like to welcome the management team of Monte Carlo Fashions Limited on behalf of Emkay Global Financial Services and thank them for giving us this opportunity.

Dev and the the management team includes now Mr. Rishabh Oswal also. He also Executive Director. He just joined.

Sure, sir. Welcome, sir.

Mr. Rishabh Oswal.

Mr. Rishabh, welcome to the call.

Thank you.

I would now hand over the call to the management team for their 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 second quarter and the half year of financial '21. Thank you all for sparing your valuable time in joining us here today. Before sharing the recent developments and strategy undertaken for growth, let me provide the key financial indicators reported during the Q2 of financial '21. Revenue in the quarter stands at INR 98.2 crore as compared to INR 152 crore in Q2 of financial '20. The company reported gross margins of 60.4% in Q2 financial year '21. Operating EBITDA margin during the quarter stood at 15.2% as compared to 13.2% in Q2 financial '20. The cotton segment now contributes around 41.7% of total revenues as reported in Q2 of financial '21. The T-shirt, shirts, denim jackets forms a major share in cottons product category. Home textile segment continued to grow at a healthy rate. Home textile segment contributed approximately 35.2% in Q2 of financial '21. The company's performance during the quarter was encouraging. With the lifting of lockdown in most parts of the country, the company was able to operate this manufacturing facility at to Ludhiana successfully. The company remained focused on stimulating the consumer demand with various strategic tie-ups. While maintaining the focus on restoring the lost ground due to COVID-related disruptions, our operational profitability and the cash flow stabilized during the quarter while we maintained strict control on the operating costs. 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, 25 EBOs and 279 national chain store outlets and 146 shop in shop. Majority of our revenues comes from MBOs and franchise EBOs, where we primarily sell on pre-order and outright basis. By virtue of this business model, there is no major inventory risk, and we remain adequately protected from the normal result sales -- discount sales in the branded apparel business. We have strategically right for increased revenue contribution from online sales and happy to share that the increased traction from this channel, online sales from Q2 financial '21 stood at INR 7 crore against INR 6.7 crore during the same period last financial year. As far as our growth strategy, we are building our pan-India presence with current emphasis on western and southern region. We have already made an encouraging beginning towards this goal to increase the retail Monte Carlo product to the end user. We also have a strategic tie up with Ajio, FirstCry, Tata Cliq along with our existing tie-ups with Amazon, Paytm, Flipkart and others. Monte Carlo continued to enjoy a comfortable net cash position, and its medium-term liquidity needs are well covered. With adequate banking limits in place, its ability to service debt and financial obligations on time remains unaffected, Monte Carlo has zero reliance on exports and has a presence in domestic market across India with an extensive distribution network. The good credit terms with our suppliers help us to operate the business smoothly. We know major CapEx is planned for this -- for the next 2 financial years, thereby, positive operating leverage expected as the production gains scale. We're strongly focused on optimizing asset utilization, quality, efficiencies and relationships. Before we open the floor for question-and-answer session, I would like to wish everyone a very happy and a prosperous Dipawali. If you have any questions or queries still unanswered, you can reach to our Investor Relations team at Dickenson World. We now open the floor for a question-and-answer session. Thank you very much.

[Operator Instructions] The first question is from the line of [ Zakir Naseer ] from -- an individual investor.

Wishing all of at Monte Carlo also a very happy Dipawali and let us hope this year is great for the country. Sir, my first question would be, sir, since it's already 1.5 months into your prime season. I mean this is a quarter where Monte Carlo does most of its top line and bottom line. How is it looking? Sir, do you think it can compare with the previous winter for you? Point #2. One thing I noticed is that in this current 3 months, the purchase of stock in trade is quite down, so majority of the sales would be from our own manufacturing. Is that correct, sir?

Yes. First to come back to the first question, which is you asked about how this winter season is going as compared to last financial year? See, well, if we see the sales of approval and if we compare with the last year, we have reached almost 90% of pre-COVID sales as we did in last year. So that is the status of EBOs. As far as MBOs and SIS are concerned, still, we have to get this data from that channel. But we believe that they have also at par what we achieved in our retail outlets. And your second question was on manufacturing will contribute more or the outsourced manufacturing? Yes, this year, definitely, I think there will be a little more contribution from the own manufacturing as digit number one, where we make sweaters, basically, we don't say -- we don't see much fall as compared to the last year's level. But definitely, in the case of the goods which are manufactured outside like the jackets, where there have been labor shortages, and we have also reduced production as compared to last year. So there will be proportionately -- the in-house manufacturing will be more as compared to last year's level. So the season has started well for us, and of course, there has been less fear in the minds of consumer as compared to the last quarter, where people are not venturing out of their homes, and they were not going for shopping, and they were not like going on high streets where we have most of the stores located as far as EBOs are concerned. So we are very positive to begin in this quarter.

You expecting the winter quarter to be at least 90% of last year kind of touch the...

No. I have told you the October sales had been 90% of last year October sales. So November and December sales are still to come, and we believe if the second wave doesn't hit us very badly, I think we should have the same levels in November and December as well.

The next question is from the line of Gautam Gupta from Nine Rivers Capital.

Great to see us emerging, I think, from the worst of the COVID patch. I think things are going exactly the way you are envisaged in the previous quarter -- previous couple of quarters ago. My question since we have Rishabh on the call as well, my question will be on the e-commerce side of things. We're still quite small in terms of sales, and obviously, we are growing and investing a lot in that. It would be good to get a broad road map for e-commerce. I'm not looking for guidance or targets, but more in terms of where do we size the opportunity in the long run? Where do -- and where are we in terms of our reach in terms of cataloging, visibility? Where are we? When do we want to get there? So just to fill up there broad picture on e-commerce side.

Okay. I would ask Rishabh to answer this question.

So thank you for the question. During the lockdown, as already mentioned in the opening sweet, we maintained the sales figures of last year. And this year, in the winter, we are targeting a 25% growth in the online sales segment while doubling our own website sales. So the key focus for this year is focusing on our own website, where we enjoy extra margins also. So that is the way going forward. Also, all our advertisements focus has been shifted towards e-commerce sales, so we are focusing more on social media and Google adverts to direct more customers to our own website.

So if I ask...

Sorry, I would like to add one more thing. As we see, it's only the online channel which has grown in this financial year, otherwise all other channels have been down if we compare this year's growth, positive figure.

So, Rishabh mentioned that we are focusing more on our own website, which is fantastic. If I look at H1, bulk of, how much of the sales would be our side versus third party? [indiscernible] yearly.

We currently don't have the exact figures for our own website, per se, but we...

But do you think it is less than half? I mean if the numbers are small, I don't need the exact number. Are we around half, less than half? Or maybe we can come back later if you don't have that.

Yes. I think it's better we come back later.

Fair enough. fair enough. Sir, we said 25% growth is what we are seeing this year and doubling our own website sales is our aspiration. But from a longer perspective, maybe a 3- , 4-year perspective, do we still look at something like -- again, I don't want guidance so I'm not going to hold youto it, but I just want to understand the aspiration of where you size the market. I mean is it a 25% CAGR in terms of the market size or is it a 50% CAGR as you know? Is it something that we can double in 3 years like 4x or 5x? In terms of the size of opportunity where Monte Carlo is a brand, which is not a mass market brand. It's not a discounting brand. It has a strategy on brand value. So from that point of view, I want to understand where you see the market opportunity in online? And I remember a few years ago, research say the online market is lower discounting low cost and maybe the opportunity for Monte as a brand is not that big, is that changing?

So I think to answer that question, if we see the discounting percentage in the online segment for our brand Monte Carlo, it's almost at par with the offline channels with an increase of 3% to 4%. And when we sell-through third-party websites like Myntra and Jabong, we have clauses written in our agreement, but our ability to control the discounting, it's still dependent on them so that is why the shift in focus towards our own website. And also, we have started developing some special merchandise only for the online segment in order to avoid the clashes with the discounting when it comes to the offline channels. So in the next 3 years, I think we should be able to contribute 10% to 12% of the company's turnover from the online channel.

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

A couple of my questions are highly general in nature. Now that actually people find less and less reasons to go out, do you see [indiscernible] the branded apparel per se? And two, when Rishabh mentioned that about aspirationally, we need to -- we would have about 10% to 12% of company's revenue coming from here, that's almost about eightfold growth. So if you can kind of expand on what kind of strategy that we have to get that goal? And I have a few more questions later.

So I think answering your first question, where you mentioned that people are getting less and less out of their homes. I think it was actually very true when it was -- we were in last quarter and from March to September. Definitely, people were having fear in their mind and they were restricting themselves to the homes. But as we have stepped in to October, and we have seen the COVID cases are coming down from approximately 1 lakh cases to almost 50,000 cases. So there has been a revenge traveling also. People are just fed up sitting at home and they just want to go out of their homes and go for shopping, go for some holidays also. We have seen even the hotels and nearby places in northern region and Himachal and all, they're fully booked. So as the COVID cases have come down, people are just moving out of their homes and the walk-in in the malls have increased almost three to four fold as compared to September, if we compare in particularly some of the malls. So I think this is a phenomena, we will keep on going up because we were restricted to the homes for such a long time, so people will move definitely out. Unless and until there is, again, a crisis of increased COVID cases which, fortunately, we are not expecting right now. Of course, in India, it's been in happening in Europe and U.S. and other countries. But you never know about how this moves -- how this happens in the next 15, 20 days. And secondly, as you rightly mentioned that we are targeting a 10% to 12% of online sales, as Rishabh has rightly mentioned, in next few years. The reason being is that people are getting more and more habitual of purchasing online as compared to the past. Because earlier, some of these people who are not actually buying online have actually gone online because they were not having any other options. Earlier, they used to go to the shopping. So this phenomena, I think, will keep on happening. And will keep on growing and that phenomena will definitely help a brand like us to increase our sales in online channel as well as we have a loyal customer which are not only purchasing online, but -- not only purchasing offline, but they are moving to online as well when they know that it's difficult to move out of the houses.

We have no doubt that that's a direction that market is taking. But in -- as much as we don't discount at all because I'm noticing your presence in many of the popular sites, we have held on to our price point. So given our reservation about discounting, how do we get to that 10% to 12%? We know that is the direction the market is taking. But how we get to about INR 60 crores, INR 70 crores of current revenue -- in current gross terms or it can even grow higher later? How will we get there? That's really the question.

See, why we are mentioning this thing is that the percentage of discounting in overall sales is actually growing every year. Earlier, there have been a -- fresh percentage is approximately 60% of the sales. But now the fresh percentages have gone down to almost 40% of the sales. So 60% of the sales is happening basically in the discounting end of the season sales. So at that time, the offline and online channels are offering the same discounts. So people have the option of purchasing online as well as offline. So people who just want to sit at home and order. So that will definitely push the online sales in discounting season as compared to offline sales. So that's the reason which you mentioned that in the coming few years, we will see definitely the increase online sales even if it comes from a discount as far as the whole total channel is concerned.

Fair enough, sir. I just have a couple of bookkeeping questions. Our home textiles seem to have gotten to a fairly significant portion of our revenues. How do we envisage on a near-normal kind of a trajectory? What portion would you see home textiles going up to or maintaining? And two, I noticed that in east, we have grown pretty well actually this quarter. And thirdly, your cotton percentage has kind of actually dropped. So on these three accounts, can you kind of guide us as to what the steady-state will be?

See, home textiles, as we mentioned, I think in last year also that it is one segment where the competition is relatively less as compared to the garments. So that's the reason it's not that much affected from the competition as our other garments are. So home textile contributes -- last year, I think it contributed to almost around 12% of the revenues. And this year, it will increase. The reason being is that as the other revenue is coming down in garments -- but in case of home textiles, the fall will not be that much. We anticipate the fall around 25% in case of our other Monte Carlo garments in this financial year because of less production because of COVID. But in case of home textiles, we see a fall of only 10% to 15%. So definitely, the growth will be much more in the coming years as well. The another reason why the home textile is not dropping this year -- the reason is that because home textile is normally, in India, and particularly in the northern region, it's normally being taken in the gifting sales also. So as we as -- beginning of the wedding seasons, people normally gift blankets in, in our case, Monte Carlo blankets in the weddings and other also as well, and that is mainly for in the rural region, not in the urban, mainly in the rural region. And the rural sales are not that much affected if we compare with the urban sales. So that is another reason it has not dropped as such the other Monte Carlo houses.

The next question is from the line of [ Devander Pande ] from DB Financial Advisory.

So I have recently started to track this company. So I just wanted to understand what is our blended average realizations as of now? And how the trajectory has been in the last 3 to 5 years?

I can let you know the NRV for this year as well as the last year.

Hello?

Yes, just hold for a moment.

Yes, sure.

See, if we see the net realized winter sales of Autumn/Winter '19, it was approximately 50.53% for MBOs, if you compare to MRP sales, it was around 49.29% in case of EBOs, and 46.78% in case of online. And it is mostly similar in Autumn/Winter '18 also, where we have little lesser sales in NRV in online, which is 43.8%, but in MBOs and EBOs, it is almost equal.

Sorry. Sorry, sir, I didn't get your answer. I was referring to average realization per piece for you, blended average utilization.

Okay, just a moment. Okay, in case of -- if we talk about the men's sweater, the average realization in September '19 was 1,453. And this year, it is 1,523 events. Women, it was 1,432 and this year, it is 1,379. And in case of Cloak & Decker, which is our economy segment, it was 776 in September '19, and it is 679 this financial year.

And what would be the difference between -- just the ballpark number, the difference between average realizations through our own shops and through the online channel? Or would it be the same?

It's almost 4% as discounted. It is more in online channels as compared to offline channels.

Okay. Okay. And what would be the trajectory going forward? Do you see this growing? Or do you see the average realizations remaining at this level, but the number of pieces growing?

No, in case of online, I think the average realization will go up as we have seen the trend that given the fresh sales are contributing now more as compared to discount sales as people are becoming used to buy online also. So I think the realization in online channels will improve going forward. And I see that the realizations in the offline channels should remain same.

The next question is from the line of Vikas Khemani from Carnelian.

Sir, the key thing, which I wanted to get a sense around -- I mean one is obviously is COVID and but our bigger problem is larger, if you see from last 2014, '15, 16, our sales have just remained quite stagnant, okay? I mean they've not -- I mean we were around 550 -- around in the range of INR 500 crores to INR 600 crores and after almost 5, 6 years, despite having such a strong brand, product recall, and the growth has just not come by, whereas most product categories have grown. And so what's your take -- how are you sort of -- are you at all planning to address that problem? Or what's your overall take on that? That's one of the reasons why the company has taken such a beating on the market cap despite having such a good consumer-oriented company and strong return ratios. But the growth seems to be elusive despite all being right.

I think there is a little misunderstanding as per as understanding the revenues are concerned. If we see the revenues in, i.e, '16, '17 and '17, '18, it was around INR 575 crores. In '18, '19, it was INR 655 crores and in financial, last financial, it was INR 724 crores. The reason in last 3 years, why the revenues have not grown proportionately as compared to 2014, '15 and '15, '16 because at that time, the discounts were considered as an expense. And now we are actually reducing the discount part on the overall sales. So if we include the discounts as expense, the sale will proportionately go up from 2014, '15 level and '15, '16 level because after that, we -- method have changed. So we now -- as of now, we are reducing all our discounts from the net -- from the total sales. But earlier, we used to put that as expense. So the revenue used to look up. So that is the reason that if you see the growth from 2014/'15 and till 2019/'20, it's not showing as that much. But if we compare the growth of '17/'18 and '18/'19 and '19/'20, which is on the same method. In '17, '18, the turnover was INR 575 crores. It's grown around 11% to INR 655 crores. Again, I think, grown around 13% to INR 724 crores if we compare to last week. Even though economy was not growing very well in last 2 financial year also, if you see the Indian economy was growing only at just 5% of GDP, even outperforming the economy almost by double the rate.

Okay. So going forward, what's -- and how do you see the growth coming back? What's your sense on the growth? What are the categories you think? I mean if you can give some -- this is nothing over the quarterly means. Obviously, the December quarter, I'm assuming will be much better than the current quarter being the peak quarter. But in terms of trajectory, one has to say, what will be your major growth drivers? And how are you planning? Can you share some of the strategy on that?

Yes, I think the major growth drivers going forward definitely will be our SIS, EBOs and online channels and modern retail, where we are penetrating and increasing our presence year by year. And definitely, in the geographical expansion also, we are increasing our presence in west right now, where we are opening our exclusive outlets, almost -- I think this will be adding around 3 outlets more in western region. And then we are putting a lot of emphasis on the Northern Eastern region also, where we are opening our exclusive stores and increasing our parent in MBOs. Definitely, we are a little weak in southern region as we have not been able to penetrate that much in southern region. And the growth will definitely come from the existing categories. And also the newer categories, which we have added over the years, like Cloak & Decker economy segment and also our accessories, which are increasing every year. And definitely, the home textile segment, which is growing almost double-digit from last 4, 5 years. So it's basically growth in the existing categories, growth coming from the newer categories and also from the geographical expansion. Cloak & Decker In terms of your distribution reach, I think EBOs you give 2,500-plus number. So I think for last in your presentation also it says the same number per se. Is that the number not to be monitored? Or why is that? It remains for the number of 2,500 plus, plus, plus for 4 quarters? So is that -- I mean just -- I was curious to know...

2,900.

Yes, total sales points as of now, if we compare with the September '19, it was 2,929, and it is 2,895 in September '20, which includes our EBOs, LFS sale points, textiles, distribution network and MBOs. So sales points are almost like the constant.

Okay. What I was trying to understand, your MBOs and distributor number, which you gave in your presentation, for last 2, 3 years, you just say 2,500 plus, plus, plus. So is that is not a focused channel or from a -- because if you are increasing your reach in other geographies and all, should that number not be monitored and going up?

Actually, we are closing some of our smaller MBOs because they are not able to survive because of the increasing competition, and we're increasing our presence in the larger MBOs. So some of the numbers have still gone down, even though we have increased numbers in western and southern region. But some of the MBOs have closed down in the northern eastern region, which are not able to compete with the larger MBOs. So there's another reason that's almost constant in last 2 years. EBOs have improved. If you see the EBOs, it was -- last year, it was 272 in September '19. But this year, it has increased to 287. So we have opened 15 EBOs in last 1 year as compared to last year.

And in terms of our online sales still, which seems to be very, very sort of insignificant part of the overall story, whereas I think that channel is the future and seems to be working very well for other brands and also. What's the plan on that?

We -- again, I would say the same thing that we never dependent on the discounts around the year. If you see other brands, they have a policy where they keep on giving discounts even in the fresh season also, which we do not want to give. That is why the sales are a little less in online sales. Our intention is not only to increase our online sales, but to maintain our brand equity as well. We don't want to fool our customers to have a different pricing policy at all our channels. We just want to keep the same pricing at all the channels just to make people purchase at any of the channels of the preferred choice. So that is the reason it has not grown as much as other brands have grown, but we are confident as the people are moving to fresh sales also in online buying, the fresh merchandise also. So in the coming 2, 3 years, as Rishabh has rightly mentioned, we are on track to achieve around 8% to 10% of total sales -- online sales as compared to total sales.

Sir, because in many companies, I understand that totally that there's a pricing difference, but many companies have launched -- because there's a very different set of customers which goes online, which probably may not be available offline. And many customers -- many companies have kind of addressed it through a very unique product line for online apart from whatever they have offline. And that's how they kind of balance between the pricing difference of offline [Foreign Language] that is not available in offline. So are you kind of thinking of those lines -- on those lines? Or it's just a product line will be same with respect to the channel?

To see customer understands the pricing because when he goes to buy any brand, he has a certain rise in his mind. I just cannot reduce the price for the online sweaters and keep the high price at offline sweaters, that is not possible at all. Because customer has a perception of a Monte Carlo brand to purchase a sweater at approximately -- if you compare around INR 3,500, if u have in mind. So I just cannot reduce my brand equity and introduce something at a lesser price and make him purchase at the online sales. Our intention is just to make people aspire for the brand. So whether they go to any channel, so they should have the same pricing -- they should have the same pricing point. And if we want to want to -- willing a -- want to buy a brand, which is like they have some aspirations in their mind. So they will go to any preferred channel, look at price, and they will purchase it. You would like to add something? Mr. Rishabh will like to add something in this time.

So I think as you mentioned, like I also mentioned during my first answer, we are also working on these lines. We've produced some products for the -- exclusively for our online channel. But over there, also, we try to maintain the same discount that we are offering in the offline channels. So as Mr. Sandeep rightly said, people have started buying products at full price now on -- through the online channel, which was previously dependent only on discount sales. So even -- so if you see a first half of this year, the realization of our online channel has gone up by 6% to 7% in terms of MRP. So -- and we've also shifted our focus to marketplace model where all the products are kept in 1 specific warehouse and shown to all the portals, where we are able to minimize the inventory to achieve that desired sales. Also, I don't have the current geographical sales-wise value with me right now. But our sales in Western area of the country has also gone up, and therefore, we are tying up and opening up a warehouse in west of India also as of now. So going forward, I think the online -- we'll be able to maintain the same discounts and grow at a better rate than the company as far as online is concerned.

The next question is from the line of Riddhima Chandak from Roha Asset Managers.

Sir, my question is on the EBO COCO operator and FOFO operated. So in FY '18, our total EBO for FOFO was approx 214, whereas in FY '20, it is approx 241, and the revenue contribution in FY '18 was 35%, whereas in FY '20 was 32%. Sir, stores count is increasing in FOFO, whereas revenue is decreasing? And same in the EBO COCO, 21 stores in FY '18 whereas 37 stores in FY '20. And revenue contribution was just increased by 1% from 7% to 8%. So what is the reason behind that? And in the current year, we almost opened 6 stores, including some stores are shutting down and some are newly opened. So what is the strategy behind our EBO? And what would be the SSG growth going forward after the COVID passes on. Currently, it may not be so good. So what is the strategy behind this?

See, I think if we compare the financial '18 and financial '19, definitely, there have not been any growth as far as the EBOs are concerned, if I see like-to-like, we have grown only at 1% in case of EBOs because there have been slowdown in the economy. In the last quarter itself, we lost a sale of approximately INR 11 crores in that case because of the lockdown happened in various parts of the country. So I think going forward, we see, even in this financial year, I don't think we'll have any growth in EBOs because we lost 4 precious months from April to almost August, we didn't have much sales and the sales are just coming up. So -- but the next financial year, we are very confident because we are opening -- we are finding the opportunities which were available in the market, and we have opened 6 outlets also. So I think going forward, once we have -- this crisis is over, definitely, demand will be more as compared to this financial year. And we intend to grow almost at 15% to 20% as compared to this financial year in case of our next financial year EBO sales.

Okay. And you said that we will not do any CapEx in the current year. So if that also include that, like in the quarter 4, you just stated -- you stated in that quarter was CapEx of approx INR 10 crores to INR 15 crores, which includes some debottlenecking and modernization. And it also includes some machinery for the mask manufacturing which you imported from China, which -- and the value was approx INR 3 crores to INR 3.5 crores. So what is the clarity on that part?

So you're right. We imported a few machines for making mask as it was a need of the hour at that point of time. And we also did a sale of around INR 2.1 crores in masks. And we also earned around INR 90 lakh of profit out of that sales. So that INR 2 crores to INR 3.5 crores was basically for masks. And we also purchased a warehouse for our textile division, which we incurred around INR 9 crores. So the total CapEx this year, we projected, was around INR 12 crores to INR 15 crores a year, and we'll land in that only. But for the next 2 financial year, we don't see much CapEx, and we see in the line of the normal cap of around INR 10 crores.

Okay. And so then on the -- this winter, we are basically. So earlier, some smaller brands were not able to produce, and there were some supply chain issues. And so this will give our company to chance to sell more in the city like especially Ludhiana. So what is the current availability -- current status of the supply and demand, specifically for the winter and for the overall company's portfolio?

See, as we have seen that there have been lockdown and the production could not be started before July itself. Workers have gone back to their homes. So by the time they came back and the production started and everything is normalized, we were almost in mid-June or end June. So I think it's for same for everyone in Ludhiana. If you see the smaller hosieries as well, even every one, they have cut down their production around 40% to 50%. But fortunately, in case of Monte Carlo, I think we'll be reaching around 80% to 85% of our sweater production as we did in last year. So that is a great achievement as we have been able to do it in spite of we have lesser workers in spite that there have been a lot of issues in transportation and logistics, but we have been able to maintain our production. Even in case of our outsourced production also, we'll be reaching around 75% to 80% of the levels, which I think in industry, as far as Ludhiana is concerned, we'll be doing only 55% to 60%. So we are better placed as far as production levels are concerned as compared to Ludhiana industry. But definitely, we have less 20% to 25% as compared to last year's level as there have been disruptions in the production in the initial 2, 3 months. But we are hopeful, as the guidance we have given in the beginning of the year, we'll be doing around 75% to 80% of the sales, which we did in last financial year despite all the disruptions we have faced in production and sales. And one good thing, I think, which I would like to share is that because the supply side is now heavily constraints, but the demand is actually coming up in this festive season as the wedding season have also started. So we hope to have a lesser stock in our warehouses by the end of December -- this financial year as compared to -- considerably less, I would say that as compared to last financial year because of the less production. But the demand is actually, in October, has come up. And in November, we have seen it is picking up, but everything depends on definitely how we have the last 50 to 20 days as far as the second wave of corona is concerned. Right now, it seems very positive. We are confident in Ludhiana and in Punjab in various other states where we are operating, we are not seeing much crisis as far as COVID is concerned. But you never know as no one was expecting in Europe and U.S. also, and it has hit them very badly. But if we -- the phenomena keeps on going like as of today, we will have almost better margins, I would say, compared to last financial during this quarter.

Okay. So on this woolen side, so in the first half, we almost clogged almost 11 -- our revenue contribution of proven 11.9%, right? So I assume that as you stated guidance of 25% to 80%, but I assume more than that almost to the 100% of [indiscernible] because FY '20 contribution was about approx 22.3%, right? So -- and in terms of our value, FY '20 -- in terms of volume, FY '20 volume was a drop nearly to 12 lakh pieces. So what is currently on that side, right, in terms of volume? And yes.

I think the volume will grow by 15% to 20% as compared to last year's level, and it would be around 25% in case of cotton segment. So in the woolen, the drop will be lesser, but in the cotton segment, it will be more. So the volume drop, overall, we will see around 20% of total financial year.

Okay. Okay. And just one last question. On our cost side, what would be your advertising cost negotiation? Like you save almost INR 15 crores in the last quarter, almost. In quarter 4, or qyarter 1. So what would be the guidance for the advertising and salary cuts? And also, there are some -- earlier, there were some delayed payments from some of our vendors. So is there any default or on -- you also gave some credit for the 2 to 3 months so any clarity on that? Yes, that's it from me.

I think the advertising will be saving a lot in this financial year. There are 2 reasons for that. We used to hold trade shows for our retail bookings twice in a year where we used to spend almost around INR 4.5 crores to INR 5 crores expense, but that has been cut down, and we are doing virtual booking and door-to-door bookings. So that expense has actually have come down a lot. And so that was one part for business promotion expenses. And secondly, advertisement expense, which was around 3% to 4% last year will come down to 1% to 2% because we are reducing our dependence on codings and also on some of the print media, but we are increasing our spend on digital and social media spend, where people are looking up these days as and when the lockdown has started. So definitely, there will be a reduction in the advertisement expense. In the percentage terms, we expect it to be around 1% to 2% of total revenues in this financial year as compared to 3% to 4% of last year's revenues.

Okay. And some delayed payments as you have given some credit of 2 to 3 months. What is the status on that side?

See the payment position has actually improved as compared to last year. So we have put a lot of focus on the recovery of payments rather than promoting the sales. So that has helped us like improving our working capital also. At the same time, the debt has also gone down.

Okay. Just one last question. On our home textile portfolio, which contributed significantly during the quarter, so -- and on the -- on our MC healthcare, what would be your long-term lookout on these 2 segments? How much revenue contribution we are expecting to contribute in our total portfolio from this -- as we invested also in the healthcare segment.

Okay. First, I come to home textiles. Home textile contributed almost, I think, around 12% in last financial year. But this year, I think the contribution from the home textile should be around 80% to 20% of the total sales because home textile sales is not decreasing, but the overall sales have decreased. So the home textile contribution will improve around 18% to 20%. And now when it come to healthcare. See healthcare, the sales depends on definitely the COVID crisis is because the demand of mask actually have gone down as compared to last quarter. And everyone is actually manufacturing masks now and almost 800 machines have come up in India in the last 2 months. So the price has considerably reduced, and the demand has also gone down a lot. So I'm not very optimistic about the healthcare division, and we expect lesser sales in this quarter as compared to last quarter unless and until -- which I don't want that the COVID cases goes up, which is not our interest and your interest as well. So what we see as the health care division should have very lesser sales as compared to last quarter because of very less demand in masks now.

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

First of all, I just wanted to understand what are the key drivers behind the gross margin improvement of 600 bps to 50%, 60.5% kind of margins?

The reason being is we cut down in the expenditures. So we have cut down on the -- if you see in the presentation, we have cut down on advertising. We have cut down on the even salary of our. We have cut down on the other expenses as well. So all these things, I think, have helped us to improve the gross margins.

On the raw material side, sir, I'm asking on the raw material to -- the raw material cost has come down as compared to sales. Even though our autumn sales and also winter sales have come down drastically over the year-on-year. Still, we have seen some gross margin improvement, but not on EBITDA margin, but on gross margin.

The gross margin have improved, you have rightly said because of autumn sales going down because in woolens, we have higher gross margins. So the autumn sales have actually gone down in this quarter and the woolen have actually going up proportionately as compared to last quarter. So that is why the gross margins have improved.

Okay. Okay. And also higher inventories also at INR 313 crore. So this is mainly to catch up to Q3 sales itself or something else we are talking up?

The higher inventory reason is that we have not been able to sell or complete summer inventory in this financial year. We have to hold our summer inventory. So in that case, inventory has gone up in case of summer. In winter, it is almost same.

Okay. Okay. So do we foresee any inventory write-off from the summer people sale?

Not at all because what we did is that we have saved some of our inventory to be relaunched in the next summers. It's basically -- which will be -- in this financial year in winter also it has gone because there were some shirts, trousers and denims, which we didn't sell in summer. So they are going in September and October this financial year because we have to hold the inventory as the lockdown has happened. So some of the inventory has been hold up. So -- but we don't see any write-down in any inventory even in winter as in summers also.

The next question is from the line of Apurva Mehta from AM Investment.

Yes, I just wanted to ask that this -- when you were talking that the overall productivity of the Middle East more or less. So going ahead, we will see less discounting of the newer products because normally [indiscernible] say we have to discount it heavily and sold our products. So can we assume that the discounting will be much lesser and you will having less inventory also for that?

Yes. We will have, I think, if we compare to the last season, we should have a less discounting because the merchandise available with us is not that much. So I think we will have more sales at the lesser stock available in the stores, which will improve our fresh sales. And secondly, because the production is less as compared to last year and the both -- as I have clearly told you that the volume is almost 20% less as compared to last year. So there will be less in inventory at the store level at the end of this financial year. We are very confident about that.

So that will help us to improve our margins substantially this year because we are not going to have number of advertising expense or lot of cost-cutting is there. So -- and the discounting will not be there, and we will have some improvement on the realization also. So even -- if at all we reach 90% of sales, but the margins will go up even maybe 200, 300 bps point?

See, because the sales are down 20%. So the best thing -- I think what we are doing right now is there, we are curtailing our expenditure in all the years. So our intention is to maintain or better the margins as compared to last year, but definitely when the sales is down, it affects the margins as well.

But Q3 will be definitely seeing will be far better than -- you must be envisaging far better sales and margins in Q3.

See right now, it appears that Q3 should be better as of now. But again, I told you that there are uncertainties in the market about the COVID and all. If it doesn't hit us badly in the second wave. And I don't think that we could be doing better as compared to second quarter as well as compared to last quarter or last financial year also.

And going forward, when we were talking about marketing and advertising expense and your paid show and everything. Do you think this will be a structural shift on that side that we will be doing more of marketing expense on the online and on the social media, and there will bena virtual paid shows, which will help us to conduct that. Is there a structural shift, which can happen? Do you think so?

See, as we have seen that after lockdown, people are looking more on the social media and the digital channels. So intentionally, we have increased our spend on the digital media and social media. And I think this trend will continue for this financial year. And we'll see, as we go ahead, how to keep this trend in the next financial year. If we see that there have been more response in the digital media and social media, we'll definitely keep on increasing our spend in this and reducing our spend on other channels.

Okay. And one more question. Last time, when you are looking at lot of companies there that focus just on the EBO sites. So are we also looking at that there a lot of [indiscernible] more and more kind of EBOs and expanding the EBO presence. So do you see that...

The question, your voice is not clear at all.

A lot of things that we are looking at that people have started focusing on the EBO channels. A lot of brands have started shifting on the EBO channel. So are we seeing that our company is also focusing on the EBO more?[indiscernible]

See we are focusing definitely on the EBOs because there have been some issues with MBO channels as a smaller MBOs are not able to compete with the larger MBOs as well as they are not able to cut down their expenditure because they don't have much income also. So I think to grow in some of the regions, we need to open more EBOs so that we can tap the potential which is available in that particular area. So that is why 6 EBOs have been opened in the last 2 months also. And we have a plan to open another 7 to 8 EBOs in next 3 to 4 months.

Because what I was meaning is that lot of companies are doing very adherence on the EBOs, like we are adding 50, 100 EBOs a quarter kind of thing.

See, basically, we are a company which want to complement all our channels rather to compete all our channels. So we don't not that my LFS should compete with my APO. My APO should compete with my EBO. So we open the EBO where we see there has been decreasing sales in MBOs or there are no MBOs. We open our MBOs where we see that the EBOs we cannot open. So we would like all our channels to complement each other rather than compete with each other, otherwise we'll hurt the overall brand sales.

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

Just of my previous questions as well where this directed at this. We are wondering whether there's been a structural disruption in the apparel game altogether. But from all the discussions that we have heard, you don't seem to perceive that. Does that then mean that some of the aspirational guidances that you gave, which is like getting to INR 1,000 crores in about a couple of years, growing 15% top line, retaining about 11%, 11.5% kind of pretax profit margins, et cetera, do you think another none of them are threatened? Or you think we are on course?

I think we were pretty much on course before this crisis happened because it -- if you see in the last financial year also, we have grown more percent in spite of the economy slowing down, slowing down in spite of the GDP growth has come down to 4% to 5%. So I think in this financial year, it is definitely something which has never been seen by anyone. And because of COVID, we are reducing, again, our guidance to 75% of last year's sales because of less production because of no manufacturing happened in last -- from April to almost June. But I don't see any deviation as far as our target of growing around 10% to 15% every year. We are on on course to achieve that guidance. And I would say that in the next financial year, definitely, the growth would be much more because almost the sales will be down by 25%. We already achieved INR 725 crore in financial '20. So you can assume that the growth of next financial year should be much more as the economy will be opened up, and we are in a good position because we have cut down our expenses. Some of the advantages we will get from the lockdown is that we have cut down our expenses. This is still going to continue for us that would help us in improving our margins. And there are some other things which we learned in this particular period, which was not there in last financial year. So that would help us, and we have better players as compared to other brands because these are not that much affected as we were dependent mostly on the third quarter. So in the third quarter, still we'll be doing better as compared to other brands who are affected in the first and second quarter as well. So I think Monte Carlo is better placed to achieve the guidance which we have given 2 years back. And again, it depends everything on the -- how this crisis ends and how this country's economy grows up in next 2 to 3 financial years and how the policies of the government shapes up in coming times. But we are confident about it.

No, Sanjay, my question is not with respect to what happened before. Post-COVID, we are wondering whether we are actually looking at a completely new world and with respect to how branded apparels will get consumed, or will get sold at [indiscernible]. So in that context, are we still rewiring our sales? Or is there a need to do that? Or the existing strategies are good enough to get us there?

I think Rishabh has clearly mentioned that our focus is shifting to online because after lockdown, people have actually developed the habit of purchasing online, which was not there earlier. Earlier, it was some of the population, which was going online. But now I think almost 70% to 80% of the people have owned online and purchase the things. So we are shifting our focus definitely, restructuring ourselves to make available on all the websites, which are there in India as well as our own website. So that is one change, which the company has done. And secondly, we have seen that the trend of clothing is also changing. People are looking more at casual clothing once the lockdown started. We see the [indiscernible] we are the leather we are range has ticked up. So we are putting much focus on those kind of apparels also, which can help people to stay at home and work from home, the winter is coming up. So I think there have been some changes which have been made by our design department as well. There are some changes which have been made by marketing department, how to control, by sitting at one place to all the outlets everywhere in India we have. And thirdly, again, the shifting of our focus on the online channels where the sales are picking up. So these things will definitely help us in growing ourselves and next, I think, 2, 3 financial years.

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

So thank you to everyone. And I think we have answered all your queries. But still, if any queries unanswered, so you can definitely mail us to our Company Secretary and our Finance Controller. And I wish you all a very happy and a prosperous new year. 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 line.

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