Raymond Limited (RAYMOND) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Raymond Limited Q3 FY '20 Results Conference Call, hosted by Antique Stock Broking. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhijeet Kundu from Antique Stock Broking. Thank you, and over to you, sir.

Thanks. On behalf of Antique Stock Broking, I would like to welcome all the participants in the investor call of Raymond Limited. I have with me Mr. J. Mukund, who is the Head of Investor Relations of Raymond Limited. Without taking further time, I would like to hand over the call to Mr. Mukund. Over to Mukund.

Thank you, Abhijeet. Good evening, everyone, and thank you for joining us for 3Q FY '20 earnings Conference call. I hope all of you would have received a copy of our results presentation. I would like to urge you to go through this along with the disclaimer slides. Today, we have with us Mr. Sanjay Bahl, Group CFO; Sanjay Behl, CEO of Lifestyle Business; Mr. K Mukund Raj, CEO of Real Estate Business; Mr. Vipin Agarwal, President, Corporate; and Mr. Bibek Agarwala, CFO of Lifestyle Business. I will now hand over the call to our group CFO, who will give you the summary of the results before we open up for Q&A. Over to you, Sanjay.

Good evening, ladies and gentlemen. Thank you for joining us today on this earnings call to discuss our results of third quarter financial year '19, '20. At first, let me briefly discuss the prevailing market conditions in the third quarter for the industry as a whole. It was a quarter with continued sluggishness, subdued consumer sentiments and liquidity concerns in the trade channels. Domestic consumption remained impacted due to muted rural spend sentiments and low urban demand and liquidity concerns continued to affect the trade channels, impacting the ability to buy additional merchandise coupled with stock buildup. Generally, third quarter is marked by retail uptake driven by festivities and the onset of the wedding season. However, this time, there were multiple footfall dampeners, including weak consumer sentiment, sociopolitical unrest and aggressive online sales. The end of season sales started in mid-December across the industry with aggressive offerings. Retailers had possibly built up a huge inventory position in anticipation of a stronger festive sales resulting into increased discounts to destock the inventory. Overall, the quarter was moderate with weak macroeconomic factors and liquidity concerns, coupled with moderate consumer sentiment. Now coming to our quarterly financial results. As we are all aware, Raymond has seamlessly transitioned into Ind-As with effect from April 1, 2019. While the reporting for third quarter is based on Ind-As 116 basis. However, for the ease of reference for comparison with earlier quarters, pre-Ind-As 116 financials have been provided in the investor presentation. Coming to our quarterly performance. Our revenue grew by 11.5%. And the EBITDA margin came in lower at 9.6%. The net profit was INR 196 crores versus INR 38 crores in the previous year. However, the current quarter included a onetime land sale impact of INR 160 crores. During the quarter, we closed the transaction of sale of 20 acres of land of our associate company, JKIT, in which Raymond Limited holds 47.66%. The onetime land sale profit impact of INR 160 crore is the united share, which has been reported in the consolidated third quarter financials. Overall, revenue was at INR 1,903 crores, up by 11.5%, mainly driven by growth in branded apparel, garmenting and the real estate business. At the profitability level, the EBITDA margin came in lower at 9.6% versus 10.9% in the previous year. This is mainly due to higher discounted sales and adverse product mix in branded apparel, lower capacity utilization in the auto components business. The positive contributors to the margins were the branded textile business where the margins improved, led by lower wool costs in suitings and improved performance in B2C shirting due to top line growth and better product mix. The interest cost is lower by INR 5 crores in the third quarter. The interest cost in third quarter last year, includes a onetime provision of INR 9 crores on potential interest on deferment of the ULC statutory repayment related to the land. Excluding this onetime provision, the interest cost came in higher by INR 4 crores, mainly due to higher average borrowings during the quarter. We received INR 350 crores from the land sale and debt reduction happened in the second fortnight of December month. Hence, the related interest cost savings is negligible in the third quarter. The annual interest savings of INR 25 crores will start reflecting from the fourth quarter financial year '19/'20 onwards. Now let me highlight the business initiatives which were undertaken during the quarter. In the Mini TRS, we have always stated our -- the intention of asset-light expansion approach in the core textile and apparel business, and with regard to Mini TRS, we opened 8 Mini TRS under the franchise route during the quarter. Overall till date, we have opened 362 mini TRS stores in 600-plus towns, including 250-plus new towns in Tier 3, Tier 4 and Tier 5 towns. During the quarter, we have added 9 more franchise-based tailoring hubs, taking the total number of tailoring hubs to 71, with a total conversion capacity of 2.4 million meters of fabric per annum. This is in line with the stated strategy of facilitating quality tailoring services through tailoring hub, which tailors the customers' requirements in a quality-controlled environment. Now we get to the performance of each segment. In the Branded Textile segment, we saw a moderate growth of 2% due to continued impact of consumption slowdown in the quarter affected by sluggish and subdued consumer sentiment and also impact of lower exports. The suiting business grew by 1%, mainly led by growth in domestic business driven by the price hike in the worsted wool portfolio and increase sales in combo packs. However, the domestic volume growth was impacted by a continued lower offtake in the wholesale channel on account of lower secondary sales and lower institutional sales. In the B2C shirting business, top line grew in quarter 3 by 10%, driven by growth in our TRS channel. The EBITDA margin at 17% improved significantly from 14.8% in the previous year mainly due to benefit from lower wool prices and improved performance from B2C shirting, higher top line as well as a better product mix and the channel mix. Our branded apparel segment grew by 23% with strong double-digit growth across all the 4 power brands. Strong growth in Parx and Raymond ready-to-wear, supported by growth in Park Avenue and ColorPlus. The channel growth was driven by the MBO channel, along with strong performance in LFS channel growth. The same-store sales growth was high at 8.6%, mainly driven by better product mix in Raymond ready-to-wear and Park Avenue EBOs, driven by the wedding and the winter season. The EBITDA margins were low -- lower at 0.3% versus 2.2% in the previous year, mainly due to the impacts of higher discounted sales and the adverse channel mix. Also during the quarter, the growth in MBO channel, which was high at 93%, the high top line growth in the third quarter was driven by the primary sales growth in the MBOs. The higher primary sales were driven by large growth in orders for the second half of the year placed in the Autumn/Winter '19 season bookings, which started in January '19. Due to weak macroeconomic factors and lower consumer sentiment, this had an adverse impact on the secondary and tertiary sales. This has resulted in accumulation of inventory at a channel level and consequently, resulting in increase in receivables in the third quarter. We have extended support to channel partners for liquidation of excess inventory, which has impacted the profitability in the third quarter. Also, we have sharpened now the current Autumn/Winter '20 season booking model, and are in the process of reducing the inventory lead times to enable faster responses to the now subdued market conditions. These initiatives will have a short-term impact on channel sales and margins in the fourth quarter, but will ensure that the growth and stability of the network in the longer term. In the High Value Cotton Shirting segment, we saw a growth of 5%, driven by fabric and yarn sales. The EBITDA margins are stable at 13.9%. Our Garmenting segment has grown by 29%, driven by higher exports to U.S. and Japan markets. Our Ethiopian operations regained momentum with improved capacity utilization during the quarter. EBITDA margins were stable at 3.8% despite sales growth, mainly due to increase in minimum wages and higher freight costs. The revision of minimum wage cost was applicable retrospectively from April 2019. And the business had to absorb an impact of INR 4.5 crores for the 9 months. In the auto component business, the top line de-grew by 36% due to the overall sectoral slowdown. EBITDA margins were lower at 14.6% versus 21.8% in the previous year, mainly due to the lower capacity utilization. Our tools and hardware business sales were at INR 103 crore, up by 3% over the previous year, mainly due to better offtake in the Latin America and African market. EBITDA margins came in higher at 12.3% versus 11.8% in the previous year. This was also benefited by lower steel prices. The real estate business has seen a good response from customers, even when the overall real estate market continues to be sluggish. Within the 10 months of launch, we have received 900 bookings with booking value of INR 920 crores in the 6 towers, which we have launched having a total inventory of 1,530 units. During the quarter, we also launched 1 BHK flat in one of the 10 towers in the existing projects, and the total bookings for the quarter was 171 units for 1 BHK flats. Construction of 3 flats has been completed in 3 towers, and the fourth tower construction has commenced. Overall, the progress is in line with our target schedule. The real estate business has contributed INR 43 crores to the top line and INR 2 crores to our EBITDA for the quarter. The customer collection during the quarter was INR 69 crores and till date, the collections have been INR 200 crores. Coming to the balance sheet and the cash flow. Despite facing liquidity challenges in the market, we have been able to maintain our free cash flow and operating cash flow in the quarter as compared to the previous year. For the quarter, our operating cash flow was INR 180 crores and free cash flow was INR 81 crores. Gross debt has reduced by INR 415 crores during the quarter as compared to the September '19 position. On a year-on-year basis, it has reduced by INR 189 crores from INR 2,610 crores in the third quarter financial year '19 to INR 2,420 crores in the third quarter current year. Our net debt levels has accordingly reduced to INR 1,946 crores in the third quarter from INR 2,195 crores in the previous year. Net debt-to-equity is significantly lower at 0.7x versus 1.1x in the previous year. The average interest cost increased by 44 basis points to 8.58% versus 8.14% in the previous year. The increase was mainly due to increase in market interest rates, replacement of commercial paper, short-term commercial papers with higher interest long-term loans. On the working capital front, net working capital days remains the same at 102 days, excluding our real estate business. Coming to CapEx. The CapEx spend was INR 32 crores during the quarter, mainly as replacement CapEx and suiting plants. Also, we have added a MTM line in the Garmenting business related to international MTM solutions and also IT CapEx for implementation of SAP4HANA. On the demerger update. In November 2019, we had announced the demerger of Lifestyle Business into a separate entity. The scheme of demerger has been filed with the stock exchanges. We expect the regulatory process to take 6 to 9 months for closure. Coming to the outlook for the fourth quarter. In the fourth quarter, we are experiencing and we -- continued lower consumer sentiments and liquidity concerns in the trade channel. The aggressive discount offerings continue in the current end of season sale in January as well. From a Raymond perspective, our focus remains on improving operating cash flows and protecting the operating margins in a tough challenging business environment. Continued focus on improving the working capital management remains a top priority. We are currently working towards better collaboration among channel partners, improving inventory management, the stronger control which will help us in optimizing working capital and improving cash flows and reducing our debt. Accordingly, in the fourth quarter, in Branded Textile segment, wholesale channel is expected to remain impacted due to destocking of inventory. In the Branded Apparel segment, the MBO channel correction as stated earlier, would have a short-term impact on top line growth and EBITDA margins. However, in line with the third quarter growth momentum, we expect uptick to continue in our TRS and EBO network, driven by the continued wedding season. For fourth quarter guidance, we expect the top line to be stable as compared to the previous year. The consolidated EBITDA margins are expected to be in line with the third quarter. Branded Textile EBITDA margins are expected to improve by around 50 basis points over the previous year, driven by the benefit of the price hike and the lower wool prices. The Branded Apparel EBITDA margins are expected to be in line with third quarter due to continued impact of the trade channel stock correction. Also due to lower capacity utilization of Auto Components, the EBITDA margin in the auto business will be impacted. On a full year basis, the top line growth is expected to be in mid-single digits, driven by growth in Branded Apparel and Real Estate. Branded Textile is expected to have stable revenues on an annual basis. The EBITDA margins are expected to be lower by 100 basis points over the previous year, mainly due to the channel stock corrections in the B2C businesses and the low -- the impact of the low capacity utilization in the Auto Components business. As the economy in general is showing the signs of muted growth in the short term along with weak consumer sentiments, we stay invested in our core fundamentals, and focused on improving our operating cash flow and protecting our operating margins. Thank you. And we are now open for your questions.

[Operator Instructions] First question is from the line of [ Puneet Kabra ].

The first question is on the Garmenting business. Recently, one of the competitors has notified that the Ministry of Textile has withdrawn the merchant exports from India scheme with retrospective effect. Can you throw some light on what will be the impact of that on our Garmenting business? And whether that is provided for in Q3, or it will come as a one-off in Q4?

No. We have not provided anything as of now because this is an internal gazette. There is no notification has been issued so far on this. However, as on, we have also reached out to various apparel promotion counsel and their CEO also. So we are awaiting clarification. So as of now, nothing has been considered in our accounts. So once we received the notification, then we'll be able to give you a further input on that.

Okay. The second question is on the Apparel business. So we understand that we had few bookings, which happened in the January trade fair, and we have to undergo the stock correction. But do you think that the bookings that happened subsequently for the spring trade fair in August were moderated and this correction will finish in Q4? Or you think it will prolong and go into the next financial year as well?

[ Puneet ], part of SS '20, which has just started in January, correction was already taken in the booking cycle of July, August. And another part was also further taken a correction in November, December post Diwali. So we've had 2 such correction in SS '20. But that only takes care of our ability to have a healthy pipeline from January to June. So that does take care of that. However, there is a slowing pipeline, which is coming from the last AW'19 as well as SS '19 stocks. So this current -- this season, which has just kind of got over and a season before. That correction will not get over in 3 months alone. And part of that correction will continue in quarter 1 of next year. Majority of the intensity of correction will -- we'll try to see that this quarter takes care of it. But if the -- secondary continues to be as subdued as we have seen in the last couple of quarters, then the prolonging of some level of correction effort will continue and spill over into quarter 1 and maybe part of that could go into the rest of the calendar year. What we have done as we are growing every step now. Currently, we are in the process of booking our Autumn/Winter '20 stocks. So a very significant level of correction has already been taken into that. So it is a de bleed right now but that bleed will continue to keep going down as we go progressively into the quarter. And it may actually completely disappear as the secondary sales and the OpEx go up. But that is a very big if at this current environment. And we don't foresee any significant uptick or trigger happening for consumer sentiment to move up in the next 2 or 3 quarters.

Okay. Sanjay, just one more question on the apparel related. So earlier, you have indicated that we are aspiring for a double-digit or a high single-digit margin. Given the economic environment and given the correction that we are undergoing right now, when do you think that scenario is now likely? And how far is it pushed out?

[ Puneet ], it's very difficult. Very difficult question, really, to answer it. But you're right, we had indicated that, and we've got this unprecedented hit because of excessive amount of discounting that we have had to do because of lower consumer sentiment and then additional inventory which got stuck in the channel. So my sense is that we've got pushed back at least by a year, if not 6 quarters on to our ambition to reach a double-digit kind of operating margin. So what we were attempting to do in 2020 end or 2021 is at least getting pushed up by -- back by a year. So next year, you would see a significant improvement happening if the correction -- most of the correction gets over in the next 6 months or so. And then we will get into our recovery path. But we don't want to carry something which is very obvious sitting on our hands as a problem into the next few quarters. And actually, we want to play a little more moderate game because we don't see any trigger, whether it is in the industry level, market level, economy level that is coming, which will give me a confidence to give you a guidance that, yes, we are probably 4 weeks -- 4 quarters away or 6 quarters away from double digit. So I have to say that you will see progressive improvement after 1 or 2 quarters of shock, or whatever correction we have to build in. Post that you'll start seeing a significant improvement but double-digit at this point of time, I don't have a sight on that. I have a sight on single digit, high single digit. I don't have a sight on double digit, right.

And last question. On demerger, and this is for Sanjay Bahl sir. There is -- I think our scheme of arrangement is with effect from 1st April, 2020. And in that context, what I wanted to understand is, if we have any noncore asset monetization, be it land sale or anything else that happened after 1st April, is it fair to assume that those profits will -- can only be used for reducing the debt in the existing company and not in the new Lifestyle company?

See, the process for demerger is expected to take over about 6 to 9 months. So it's going to extend into the next fiscal year. If there is any land sale, hypothetically speaking, which happens that land sale is going to happen in Raymond Limited. So if it happens -- so the land business will continue to be part of the Raymond Limited entity. So the proceeds will rest with Raymond Limited.

So that will in effect then reduce -- so any landfill, say, that happens hypothetically even in the month of April, those proceeds will eventually reduce the net debt of the Lifestyle company?

No. The Raymond Limited because the proceeds will rest with Raymond Limited.

Okay. Yes. So it will be with Raymond Limited. So is it fair to state that after 1st April, debt reduction, if any, in the Lifestyle company will have to be only out of the operating cash flows?

Will be through the free cash flows, yes.

That's fair to assume, yes.

[Operator Instructions] The next question is from the line of Dikshit Mittal from Subhkam Ventures.

Sir, my question is on wool prices. How are they trending currently? And have you seen any further softening as compared to last quarter?

Yes. So the wool prices are anywhere between 10% to 12% lower than last year. That's been the average at this point in time. It's been pretty stable in the last -- about 3 to 6 months has been pretty stable. And we don't expect actually much of a decline to happen. So from, let's say, November, still about, let's say, March, our estimate is pretty much the similar prices will continue. And that's about 10% to 15% lower than last year. In next year, our forecast is that they may actually go up marginally over the current base, which is already a lower base. But still the prices that we saw in 2019, which had fee, we expect 2021 to be a little softer on those prices. So there may be a -- 5% to 7% more than this year. But definitely they will still be lower than 2019 prices. You have any other question there on wool?

Yes, sir. Yes sir. On this point, you mentioned in your guidance that you expect around 50 bps margin improvement in the Branded Textile on a Y-o-Y basis. So that will lead to a sequential decline in margins. But historically, if we see Q4 is the strongest quarter for you in terms of margins in this segment. So just wanted to understand why will the margins fall sequentially in next quarters?

So it really won't lead to a sequential decline because let me -- what are the current margins?

Higher than the previous year.

Yes. If you see higher than the...

At this point.

So last year, quarter 4...

Higher than that.

Was at 15.9 basis -- 15.9%. This year, the guidance is 50 basis points more than 15.9%. So the guidance is on 16.4% to 16.5% in quarter 4 alone. At this point of time, our margins are already running marginally ahead of last year on a YTD basis. So additional quarter 4 accreditation will actually give you a only a little higher margin for garment textile.

Yes. No sir, I'm saying quarter-on-quarter, like this quarter, we did 17%. And Q4, your guidance is 16.5%. But historically, what we see is Q4 is the largest in terms of the margin performance out of all the 4. So we're expecting that maybe we can grow 17% in Q4. So I just wanted to -- the guidance conservative guidance, or is the wool prices...

Yes. It is a little conservative from your sequential quarter perspective, what you're saying. Quarter-on-quarter comparable, it is higher, but you're right. If the same trend continues like we saw last year in terms of that. Last year, the only upside that we saw was, given there was a consumer sentiment, which was still on ascend. And we had seen a good strong ASP growth off our suiting mix in quarter 4. So this quarter, we still expect, despite the subdued consumer sentiment that margins will be up. If there is a little bit of a last year kind of a trend and consumer sentiment picks up because even this quarter is very heavy on wedding, which has already started last week. So if we continue because weddings are continued till May. So there is no reason for us to see if there is going to be any dramatic change. So 16.5% could -- with a little bit of a push in optics could actually start looking closer to 17% also. But we would like to maintain our guidance at 16.5%, but we'll see at where we end up at the end of this quarter.

Okay, sir. And sir, in this Branded Apparel, you mentioned the inventory buildup. So which channel has seen the maximum buildup in inventory?

So almost 75% to 80% of buildup which has happened is in multi-brand store channel. So while they -- the stores only contribute to about 22% to 23% of our sale, about 75% buildup has happened on multi-brand channel because that's a primary channel in which there is made to order. So if they book an order, as Sanjay had explained in his opening remarks, in January, February of last year, they had given us orders for July to December. So those are the stocks that we've made because orders had to be supplied. And that is where the inventory and the receivables is getting stuck. Most of our other channels are secondary-based channels. So only consumer optics is reported as revenue. So there, it automatically gets adjusted, and there is a little bit closer to market and flexibility that we have in controlling our inventories there. So this is largely, multi-brand stores.

And MBOs, you sell on a outright sale basis, right? There is no...

Which is outright. You're right. Absolutely. Yes.

Okay. So since this channel contributes only 20% of the revenues, so even if there is some de-growth going into Q4 because of destocking, so overall, I think apparel should still grow in double digits, or is shopping...

Yes, it will. And that is right because this channel does -- is not the entire contribution, still could be close to a double-digit growth in apparel at a top line level, that will happen. However, given that this channel is taking a very strong kind of a correction getting built in, in quarter 3, you've seen partly but also massively in quarter 4. In terms of overall operating margins, we will have a year which will be lower than last year.

Okay. And sir, lastly, on a cash flow perspective. So the full year, will we see a positive free cash flow for this year? Or I mean after like working capital and CapEx?

We are looking at positive cash flows in quarter 4, given that we had INR 81 crores free cash flows in quarter 3, we expect quarter 4 with the inventory correction and receivable correction that we are doing and low CapEx. We expect quarter 4 also to be positive. However, the full year, we will still be negative as far as the full year is concerned.

Okay. And sir, the cash flow that you shared in the presentation, it is after working capital and capital expenditure, right?

Yes.

The next question is from the line of Prerna Jhunjhunwala from B&K Securities.

Congratulations on a good set of results. I just want to check what is the extent of increase in receivables on a quarter-on-quarter basis because of this huge increase in MBO channel?

Yes. So overall, if you think in terms of Lifestyle business, the total, which is particularly a major business where receivables have gone up. We have seen a INR 230 crore increase versus...

Margin.

So we've seen about a INR 375 crore increase, total at lifestyle level. Yes.

INR 370 crores. Okay.

Of which 200 -- which is comparable to December to December. Yes, INR 370 crore increase in receivables. INR 215 crore out of that is in Apparel, INR 175 crore out of that INR 215 crore is in multi-brand store.

INR 100 crore?

INR 175 crores.

Okay. In what?

In multi-brand channel.

In multi-brand channel. Okay. So sir, this multi-brand channel, will it continue to -- so will you continue to supply them? How are you going to manage this receivable increase in multi-brand? Will you continue to supply at least small quantities? Or -- how are you planning if the consumer sentiments continue to remain subdued?

So we'll have to cut down on our supplies, which is what the plan is. We will significantly cut down on supplies, but the only challenge here is that they're sitting on largely Autumn/Winter stock, and we're getting into a summer season. And then the merchandise is very different for winters and different for summers. So some supply, which is very summer-specific orders. And some of those multi-brand stores, which are reasonably okay on receivables will have to be supplied so that the basic continuity -- business continuity remains. Having said that, there will be a significant correction or discount sharing, which will have to be done on the build-up inventory so that even the old inventory gets liquidated over the next 6 to 8 weeks, which is the impact that you're going to see in quarter 4. So it will be lower in words -- lower dispatches, higher collection, combination of all 3 will have to be done, 3 levers will have to be done over the next 3 months very intensely. But maybe that flows over to 6 months. We'll have to see how our collection and dispatch effort goes, and then really see as to where we land up. But at this point of time, there is a significant cut down on dispatches to multi-brand. And there is a significant additional incentive on liquidating the current inventory, which is sitting there, so that we can get the collections back in place. So you would see close to about INR 70 crores of collection or additional or receivable reduction that is happening purely just on this channel in the next 3 months.

Okay. Good. Can you just help me with the days increase in receivables in this Lifestyle business, December over December?

NWC has not really gone up. It's actually at the overall level. There is not -- at a group level, excluding real estate and net working capital remains the same on number of days. So our health in receivables in all other channels, whether it's Raymond shops, large format retail, EBO remains good. It's only this channel, which has gone up. So overall, if you see at a NWC level, it is not really any different in number of days.

The next question is from the line of [ Prashant Hazaliwala ], individual investor.

I have a question regarding our Ethnix brand, it's just launched. And I would like to know how is the response with this brand?

Pardon? Ethnix?

Ethnix. Yes. What kind of response do you have got? And what kind of -- which you can like give me like turnover for last quarter on Ethnix brand?

Turnover. Turnover, we don't give. Segmental? Okay. So overall, Ethnix, just to give you a broad sense there, we have about 22 exclusive brand stores, which we've started over the next 3 months. Most of them are meeting the initial benchmark we had in terms of revenue per square feet or our cost per square feet. Footfall that we had to really get in these Ethnix channels there. So we would see a significant growth in Ethnix going forward, even including this quarter and next quarter. But that's on a reasonably low base because for us, the commercial launch of Ethnix has really happened in the last one season or so. Before that, it was largely a proof-of-concept with very minimal seeping into the market. The real commitment on retail investment on Ethnix started only 3 months back with the season starting. And with these 22 stores that we've really set it up over the last 3 to 6 months, we are very bullish in terms of continuing to invest in our Ethnix portfolio.

So how is the response, sir? Responses that last -- almost you have spent 9 months and last 3 months are the peak like time of the securities and then marriage season?

Response has been very good. If you see the number of footfalls versus the initial metric, yes, walking into our Raymond shops and exclusive Ethnix shops, the conversion that we are getting inside a shop, the pricing that we are able to charge. For example, our discounting is under 10%. Actually, it's close to 5% compared to market discounting, which is high -- which, again, is a proof-of-concept of a very strong product with hardly any discounting there. We have a very large -- all the 22 stores that I talk about exclusive, everything is franchise store. So the entire capital investment is on the back of confidence of this product doing well, the franchises have invested in opening exclusive stores for us. So various metrics we take with the consumer conversion, our pricing, discounting, capital investment by franchisee. If you put together all the metrics there and then take a holistic view of the outcome, the initial response to Ethnix over the last 6 to 9 months has been meeting our expectations. And it's -- we are going to continue to, as I say, stay invested in this.

Okay. And with all this cleanup, which is going on currently, right, in your every brand, right, so what kind of -- what kind of operating margin we are expecting for next year? Not this quarter, but the next year, FY '21? Can we see significant like 2% kind of jump on the EBITDA margin or?

Which products or -- are they specific?

No. Overall. Overall. Overall margins.

At a Lifestyle group level, you’re saying?

Yes. Lifestyle group level, yes.

So Lifestyle, at this point in time, you're getting close to about anywhere between 14% to 15% kind of Branded Textile margins. That's the current range that we are laying. Last year was close to about 14%. This year is going to be a little more than that, about 14.5% to 15%. We expect these margins over the next 1 to 2 years to remain at this level to marginal improvement. So there will -- there could be a little upside actually on the Branded Textile margin is what we foresee. Apparel, which has been a bit of a challenge and got a little setback this year. We don't see that bouncing back in an immediate term. So we expect that margins to bounce back at best to 5% to 6% next year. And then we'll have to see as to whether they can go even further up, as I told, to a single high digit, at least over the next 6 to 8 quarters. In Garmenting, the current margins are trending at about 4% to 5%. We expect exit margins to jump up to about 6% to 8% on back of MTM, global MTM operations that we are doing and Ethiopia is stabilizing. So we expect them to jump up to 6% to 8% and then stay at that level for about the next 4 quarters. So you will have an upside on textiles, maybe as -- versus this year an upside on apparel, but nowhere near to FY '19 kind of margins where we got last quarter, 7%, 8% margin. So there is some makeup to be done there. In Garmenting, there could be an upside of 2% to 3% next year.

All right. So what kind of -- like, if I'm taking Raymond Lifestyle so what kind of free cash flow you guys embedded last quarter? If you can give that figure for Raymond Lifestyle only?

Yes, see, I think as I said, first half of the year because of the increase in working capital that we had, which build-up of inventory and receivables. These cash flows are negative. However, if you look at the second half of the year, it is going to be positive. With the pipeline correction that we are doing now, we are hopeful that in next year as we get into the next fiscal year, the cash flows for the whole year are going to be positive. Free cash flow for the group as a whole and largely led by Lifestyle. So Lifestyle, we clearly expect positive free cash flows in financial year 2021.

All right. One more suggestion like -- you guys are making a lot of -- now advertisement is like it's on every channel and everywhere. But the models type, I don't understand why you select such a disappointing -- like the -- they don't look like cheerful kind of face. So I don't have any idea about the models. What kind of models we should select or but when you see them, you should feel good. That is what my idea is, right? But this models like some kind of -- some Ethnix models are like they don't look like cheerful. They look -- I don't know. So if you can improve on this. Or you can explain why we have this kind of models, so?

I think, yes, it's a subjective view, as you said that everybody has a -- but it's a feedback that we'll take on board, and we'll share with the marketing team and see if we can look at cheering them up a little more.

Yes. Yes. Something is -- if you see them, like it's simple. Like when you see them, you should...

Your feedback is well noted. I think I have taken a record of that. And I'll definitely share it with my marketing team and maybe in the next advertising campaign we do, we look forward to your feedback.

The next question is from the line of Chetan Phalke from Alpha Invesco.

So what are our gross margins in Branded Textile and Branded Apparel for the quarter?

So we actually don't report the gross margin. I think operating margins get reported. But there is a upsurge of gross margins when it comes to textile, if you want to know the delta, we've had actually a growth in gross margin, both in suiting of about 1.2%, in shirting of about 2.7%. So there is a part of the reason why operating margins are looking up is because our gross margins have gone up. The reason why suiting gross margins went up largely was on 2 accounts. One is the wool price softening over last year same quarter. Second is the price increase that we took is taking a full effect in quarter 3, and then it will continue to go on in quarter 4. In shirting, it's a combination of better product mix and the price increases that we've taken. So these are the reasons why our gross margins in textiles have gone up from 1.2% in suiting, 2.7% in shirting. Our gross margins in apparel have actually dropped and dropped quite significantly over the last quarter-on-quarter. And that's largely because we had to account for all the discounting, which has gone up. So if you want to understand the quantum of discounting. The discounting in quarter 3 went up from 52% last year in quarter 3 to 66% this year. Though the quantum of -- the extent of discounting came down and the intensity of discounting came down from 32% to 21%. But still, 66% of the stock in these 3 months got discounted. And we saw the largest EOSS in the industry of about 80 days. And then it started again in December. So 21% average discounting on 66% of stock led to a reasonable drop, significant drop in gross margin of Apparel and on top of it, there was some correction for MBO channel, which also had to be built in and impacted our gross margins. So one business, huge upside on gross margin. Other business, there was a drop in gross margin.

Okay. And can you just indicate the ballpark negative delta we had in the gross margins in apparel?

About 4.5% to 5%.

Okay. Okay. And when it comes to EOSS I mean...

You can see that EBITDA has not dropped. So which means that OpEx, we were able to then up it by 3% savings, so that we can restrict the overall drop in EBITDA margins to 188 bps there. So there was a huge saving on OpEx or huge cut on OpEx optimization there to basically mitigate the extent of the gross margin drop.

Okay. And what is our EOSS y-to-date? For the quarter, you just mentioned the number, 66% but how is it for the year till now?

So overall, if you can say, YTD, we have had an average discounting of -- 21% has been the discounting rate on about 67% of stock during EOSS.

Okay. Okay. And how is this number compared to last year? Any...

So last year, it was 54% of stock discounted but was discounted at 29% rate.

Okay. Okay. So the quantum has gone but the discounting has come down?

Discounting has come down. Yes, that's where we've been able to control.

Okay. And how do we fare on this particular metric against our competitors, like, let's say, ABFRL or others let's...

I think, as far as competitors, I think they will also declare the numbers. So I don't know, the last quarter numbers for these competitors there. But it will take a first half indicator. We were a little -- were better than Arvind, and we were a little, I think lower than Madura. But ballpark, I think all of them are pretty much in the similar region. And then there is a huge brand-to-brand difference, depending on the strength of brand, within brands as well as competitive brands. So some of the stronger brands will have much lower discounting and weaker brands will have much higher discounting. Also channel mix has a large role to play with. So if you have a large online then the overall discounting does go up there. So it is very difficult to have a common metric and then compare. But overall, ballpark, I think all 3 players, I think the big listed players are in the same region, plus/minus 4% or 5% up and down.

Okay. And in apparel, growth is pretty much on track. We are very happy with the growth. But if we compare with the leaders in the industry, then we are still few, not just below them. So when can we catch up with them? Any guidance on that front?

Yes. So I think it depends on what we are going for. And there are 2 things is the way you need to see it. I think, one, you see the overall revenue of Branded Apparel leader versus comparing it with us, but that overall revenue is made up of many more brands and many more verticals. So for example, in the case, Madura, there is also Pantaloons there. That's not at all comparable with us because we don't have any of our own retail, which is comparable to that. They have brands in categories that we don't really represent in womenswear. In some of the categories like innerwear, they are going, and we don't have any presence there. So for a like-to-like comparison, if you see, at the brand level, that will be a more, I think, a comparable way to look at these strengths of each of the players in the market. So that's the way we are looking at it. So we are comparing ourselves. So I'm saying that we have 4 brands; Raymond, Park Avenue, Parx and ColorPlus. How do we rank amongst the top 10 brands in India? Apparel brands in India. It's just -- then a choice, whether you want to inorganically keep adding more brands and keep increasing your revenue. Second is, is revenue the only metric to grow? And that, we believe, is only one of the many vectors on which we would like to evaluate our overall market leadership. But very important market leadership criteria that we are currently looking in the context of the environment we are in is return on capital as well as cash flow. So -- and in some of the earlier, I think, questions were addressed on free cash flows and the metric, which is the overall holistic metric. So I think it's about profitability, cash and revenue growth. All 3 of them in a balanced way is our basic kind of a premise on which we would like, the overall growth of branded appeal to be done. So if you say, how much time will it take? Honestly, it's not a relevant benchmark at this point of time for an operative team because we're not going behind market leadership on revenue alone. There are other parameters that we are looking at which is largely a more profitable, sustainable growth with a reasonably good ROC, healthy ROC. That's the metric that we are chasing.

Okay. Okay. Yes. And since we are aggressively expanding our growth footprint as well, of course, most of it is via the TRS franchise route. How do we see the rental market setting up across Tier 1, Tier 2, Tier 3 markets? And also amongst our existing stores, are you seeing any rental renegotiations technically at a lower price, higher price?

Yes. So what we do is every year, we -- whatever rentals are coming for renegotiation. We try to renegotiate the price, and we have seen the market having softened in the last 3 to 5 years. Commercial rentals have actually marginally softened, and they have softened even more so in Tier 1 and Tier 2 term relative to Tier 3, Tier 4. So there is a softening, which has happened there. Having said that, there's still a very wide disparity between rental rates in Tier 1A location, Tier 1C location, Tier 3A location, Tier 3C locations. So there are very, very differential rentals. The way it works ranges from INR 80 a square feet, right up to INR 200 a square feet. Depends on which location, which city, which tier market we go. But overall, at a holistic level, we've seen some softening of rates. And every year, we do manage to successfully renegotiate a few of our rentals down. We've been able to do that.

The next question is from the line of Rahul Dani from Karma Capital.

Sir, can you confirm the gross debt number for the Lifestyle business and the Raymond Limited business some?

Yes. So I think that allocation, we had -- we will be doing it subsequently as we've done -- we get into specific debt allocation because from 1st of April, the accounting is going to be between the 2 entities. So we had given very broad indications earlier when we had the demerger announcement. So coming to specifics, we will do it closer to the point in time as the -- different as the demerger comes into effect.

So just to confirm, so you had sir, 75/25 is split revenue Lifestyle and Raymond Limited?

Broadly, yes.

Broadly, in that zone. Yes.

And same applies for working capital and cash as well?

See the working capital will move with the business. So Raymond Lifestyle business is today, 25% to 25.5% on turnover, so the Lifestyle business is the net working capital. And it will remain within that range. And that's the working capital, which will move with the business. On the debt reduction, INR 415 crores has happened in Raymond Limited.

So working capital, about INR 1,700 crore out of INR 2,000 crore is Lifestyle. So 85% of our working capital will move with the Lifestyle. And the balance INR 300 crore will be with the rest of the business.

At the end of fourth quarter is when we will get a picture on the free cash flow and the net debt position there. And then the allocations will happen based on the business-specific working capital and business-specific flows.

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

Sir, this is a question regarding your Branded Apparel segment. So as you mentioned in your presentation, your same-store sales growth or your EBOs is 8.6%. So this, of course, for you to have 8.6% SSG growth, the secondary sales has to be good for that actually. But for the MBO segment, there has been an inventory pile up because of low secondary sales. So I just wanted to reconcile why is there such a big difference in the secondary sales between your EBOs and the MBO segment. Is it that your MBO segment is focused on some of the slower moving brands like ColorPlus? Or is there any other reason for that? Or is it that this 8.6% SSG growth number is distorted by some newer stores, which are showing very high growth. Just wanted some color on this.

Yes. So I think the difference is really -- one is primary sales, one is secondary sales. So EBO as you said is -- lower secondary sales is whatever we sell gets reported as revenue. So if 8% is increase in -- L2L stores is reported as revenue and that's what it is. Whereas in MBO channel, if you see, our growth is 93% in this quarter, which basically means they were confirmed orders and we put that. So even if we have a 30% secondary sales growth. Still, there is a inventory buildup versus the orders that were placed. So this -- we have no -- we have an indication of secondary sales growth, we had built up the stock with about 15% to 20% expectation of same-store sales growth in multi-brand stores in January. And if it comes down at 8%, which is equal to EBO, if there is still a secondary, there's still a strong buildup which has happened. So when we say it's a lower secondary sales growth in EBO, it is a relative context of where -- what really went into building up the stock in the channel versus what it landed up to. So that's really the reconfiguration.

Understood. Understood. So going forward, how can we make the planning more streamlined so that imbalances are no longer there to the extent that they are right now? Is there something that can be changed in the processes to make it more lean going forward?

Yes. So I think this is -- you're asking a good question because this has really been a struggle that industry has been going through. This is the whole -- the way supply chain is configured in terms of fabric inward, Garmenting conversion, lead times, warehousing, logistics, intermediaries in the sales channel and eventually the consumption. So the cycle actually works at about a 8- to 9-month kind of lead time. And the question that you're asking is can we bring it down to 6 months, 3 months and become a little more responsive in the market. There are many levers. It's not that there are none. There a lot of levers and some players have established doing this. One of the levers is to really move from 2-cycle booking to 4-cycle booking. So instead of moving from a very conventional autumn/winter spring/summer, is to go for spring, summer, autumn and winter. So make it really break this for 4 -- 2 alphabets into 4 alphabets, and then a 4-cycle booking. That is one of the levers as to what we are looking at. Second lever is to improve the never out of stock and take that out of made to orders. So for example, if we have a perennial product or a never out-of-stock product like a blue shirt or a white shirt, which is not dependent on the booking cycle of a January or a July, then you just do an estimate algorithm based on your last 2 or 3 years sales, put a modest growth target or whatever has been the growth basis your forecast. And instead of making it in January or February your order booking basis that, you pretty much make equal quantity and be very closer to market basis, the response of the market or go as close to replenishment-based production as you can. So I think this is just 2 initiatives I said. And then there are 3 or 4 more initiatives, which are also possible. So I think combination of each of these initiatives as a business model change is what we are now evaluating, in fact, been actively evaluating for some time now and reconfiguring the whole supply chain. Also, there is -- as I told you, supply side initiatives. There are demand side initiatives as to how quickly can you pick up, what gets sold today into planning cycle tomorrow and not really have a lag in that. And that means overhauling of the entire point-of-sale system, our IT architecture. And we are investing in SAP4HANA, which is currently being configured. And in the next 6 to 9 months, Raymond would have completely upgraded its IT infrastructure from sourcing to point-of-sale to SAP4 plus Microsoft kind of packages, end-to-end supply chain. So there are supply and demand side initiatives, everything has to work together seamlessly for us to be able to change the model. And I think it will take us 6 to 9 months before we demonstrate a tangible ability to have moved into the direction that you are asking.

I think you also -- just to add that what has been witnessed in the second half of the year has been quite unprecedented in terms of the consumer sentiments as well. Because as we got into the second half of the year, the expectation from trade as well as business was that there were some green shoots that we saw in boosting the consumer sentiments in the rural side, better monsoons, et cetera and all. Now the sentiments have only gone weaker. And the -- and this is not helped in terms of secondary sales side. So the -- of the optimism, there was a conservative optimism, which has not materialized in the second half of the year.

Sure. Also, on this 8.6% SSG, how much of it has materialized because of a very good winter? Just to get a sense of that how much of a role has the strong winter played in this kind of growth?

I think there is a role, but I think it's a role, which is a little deferred. Most of the real winter impact will happen and we're seeing early signs, and I know what you're talking about extreme winter in parts of North India and East India and that definitely helped us in month of December and is helping us as we speak in January. But I think largely, this is also to do with the better merchandise and sharper product lines in our EBOs. What we've been able to do is to dramatically drop our SKUs, sharpen our portfolio, reprice them in terms of becoming -- also there is a sharper product proposition, I think, there has been a bigger reason. But yes, there is always going to be some uptilting because of weddings, because of weather, and there is some bounty of that also, which has got it.

[Operator Instructions] The next question is from the line of Vaishnavi Mandhaniya from Anand Rathi.

Yes. Actually I had a similar question on step forward. So basically, in terms of our lead time, which you said was around 8 to 9 months. And we are only working at like in the apparel segment that's like a 2-cycle model while you have peers like ABFRL and Madura. Basically, who have shifted to like a 12-season model.

Yes. So we are also watching them, and we are learning from the industry. I understand that there are attempts to move to even beyond 4 season. But there is no tested, validated model at this point of time. We've also seen in one of our brands, we've taken this entire business model and tried to land our product from idea to shelf in 6 weeks or so. We have met with part success there. So yes, I take your point that like our competitors are doing. Various industry models are there for us to learn from and get inspired from. We are also very actively working to change the overall model to make sure that our number of rotations gradually move up over the next 4 to 6 quarters upwards from where we are today from maybe 2.5, 3 turns that we do to 3.5 to 4 turns. So we are also trying to do that.

The next question is from the line of Khushboo Dadia from Capgrow Capital.

Hello. Hello?

Please ask your question, please.

Yes. Actually I just wanted if you can provide projection or investment capital, segment wise?

Well, which investment segment wise?

All segments.

You wanted the capital invested, we can do that offline then. I think we are...

No. No. No. The return you have or -- translating on investment capital.

Yes. So textile segment is about 30%. That's the current ROC. Apparel is about 10%. And Garmenting would be 8%?

Yes.

8% or so. 7% to 8%.

The next question is from the line of [ Puneet Kabra ], individual Investor.

Yes, just a quick question on SAP HANA implementation. So based on my past experience, some of these large ERP implementation also caused some amount of disruption in the supplies sale, inventory buildup, everything else. So in this environment, when macros are weak and we already are going to do stock corrections, et cetera, are we covered enough in terms of the implementation is not going to cause any disruptions over the next 9 months or we have provided that, that maybe some hit because of the ERP implementation at work.

So just for information, we are already in SAP. So we are currently at SAP ECC. So basically, what has happened. We are just going to the next version of SAP. So we are doing the groundwork from the last 6 months, our base architecture is already ready. Now at this point of time, we are doing as-is and to-be processes. We are cognizant of the fact that, yes, there is a disrupt, but we have taken a full precaution of that, so we have kept system processes ready so that it does not impact business. And there could be here and there a 1-week or 2-week disruption at the type of migration but it will be taken care of.

So [ Puneet ], we have already implemented this. We are live on Garmenting already. We went live in December. And now we're sitting in third week of January, and we have been running our operations pretty smoothly because there has been a year's prework, which was done. We have partners like...

PwC.

PwC on board. We have SAP directly working with us, the SAP global team there. And there is a dedicated team, which has been taken off the business. The best and the most profession high-performance management people have been taken off and have been full-time put on working for pursuit -- for working for SAP implementation across all our businesses. So yes, while this is point well made, [ Puneet ]. And I think, yes, there are enough examples where this has risked the business in terms of some business disruption, we are well aware of it. We acknowledge it, and we have done -- we are doing our best to put our homework in terms of right people, right processes, and we may run a parallel system for about 2 or 3 months before it gets fully stable. So there are those options plan B, plan C mitigations are thought through. So there is at least adequate amount of preparation from our side is there. And hopefully, I think our execution, which has already been proven in one life business, I think, will continue and give us reasonably good results moving forward.

We have the last question from the line of [ Sharan S ], individual investor.

I just wanted to understand on the Garmenting segment, for the Ethiopian facility, what would be the EBITDA margin compared to the Indian facility?

At this point of time, this year, because we've had the first 4 or 5 months of lower production, lower capacity utilization on account of civil unrest, this year, EBITDA will be negative. But next year, going forward, we're looking at a 4% to 5% EBITDA-positive operations. And at a cash level, we are starting to breakeven, next year.

Okay. But what would be the targeted EBITDA from the Ethiopian facility because, I mean, since we are trying to move out of -- since the wage hike and all in the Indian facilities, Ethiopian option would be a good one.

So at a stable level, fully utilized capacity. On a stable level, we can look at about 8% to 10% EBITDA margins coming out of the facility.

Okay. And -- yes. Sir, and what would be -- I just missed your comments on the EMEAs rollback. Can you -- and its impact on our company. So can you just throw some color on that?

So there is no -- see, there is an internal gazette has been issued at this time. On 14th of January, there is a gazette, internal gazette but there is no formal notification on this gazette. We have connected also with the federation of export organizations. They are also internally evaluating. So once the notification comes, obviously, we'll also intimate accordingly.

Okay. But what is your view on this? And then if it is -- officially, you will get the notification on an industry perspective?

At this time, we believe that it's unlikely because there is actually the overall apparel exports out of the country has got impacted, if you see the last 3 or 4 figures actually has declined. So it is very unlikely that the incentive, which has been given to the industry to promote and reduce the deficit -- the ForEx deficit in the country that export -- apparel is a very large contributor to the overall export. About $40 billion equivalent of export comes from apparel, textile apparel industry there. So we believe it's unlikely that it will be -- in the current environment, it will be notified in a hurry.

Sir, we also have [ Puneet Kabra ]. He came back in the queue.

I think I got that bit, Sanjay sir, on the SAP implementation. Just one last question on luxury cotton shirting. Is this -- this business has done well despite the slowdown and everything else. But being B2B in nature, do we see some lag that will come into this business, starting Q4? Or we think this business will be able to hold and maintain its performance even going into Q4 and say, Q1 next year?

I believe, [ Puneet ], that this business is still -- our capacity is still much smaller than the overall industry requirement there. So we are only about 24 million, 25 million in Kolhapur and about 4 million in Amravati. So you're looking at a 28 million meter capacity that B2B Raymond has compared to the overall industry requirement, which is very large, including internal Raymond business growing. So between our in-home requirement and the overall market, which continues to grow I don't see any drop that could happen suddenly, because of the market slowdown or a lag effect happening. If we were the -- in 50% or 60% of captive capacity, then those issues will definitely start with a lag showing some impact. That's one. The second thing is, I also do not see a huge uprise or uptake in terms of growth there, positive because this is the capacity that we pretty much committed. We don't have any other CapEx coming up. In brownfield expansion or greenfield expansion, for sure, there is none in the next 1 year and no brownfield expansion beyond the existing capacity. So we have to now make more efficiency out of the existing capacity there. So you can pretty much expect a stable, predictable growth in this business at the current rate margins that we are extracting.

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

Thank you, everyone, for taking your time out and participating in this call. In case you have any further questions, please connect with me and the IR team. Thank you.

Thank you. On behalf of Antique Stock Broking, we conclude this conference. Thank you for joining us, and you may now disconnect your lines.