Relaxo Footwears Limited (530517) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Relaxo Footwears Limited, hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sumant Kumar from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.

Good afternoon, everyone. On behalf of Motilal Oswal, I would like to welcome you all to Relaxo Footwears Q2 FY '22 Earnings Conference Call. From the management, we have with us today, Mr. Ramesh Dua, Managing Director; Mr. Ritesh Dua, Executive Vice President, Finance; Mr. Gaurav Dua, Executive Vice President, Marketing; Mr. Sushil Batra, CFO; Mr. Vikas Tak, Company Secretary. So we'll begin the call with a brief discussion from the management end. And then we'll -- we can have -- we can open the floor for the Q&A. Over to you, sir. Thank you.

Thank you, Sumant. Good afternoon to everyone. Ladies and gentlemen, thank you very much for attending our earnings call for the quarter 2 FY 2022. We have already shared our earnings, press release and results presentation. Hope you got an opportunity to go through that. I will start with Q2 FY 2022 financial performance followed by H1 FY 2022 financial performance. In Q2 FY 2022, Relaxo booked operating revenue of INR 714 crore as compared to INR 576 crore, which is a growth of 24% year-on-year. EBITDA during the quarter stood at INR 117 crore as compared to INR 127 crore during the corresponding period of previous year. EBITDA decreased mainly due to steep increase in raw material prices, enhancement of marketing, brand promotion and other administrative expenses as compared to corresponding period of last year, wherein raw material prices were extremely low. Other income stood at INR 7 crore as compared to INR 5 crore in the corresponding period in the previous year. The increase is mainly due to higher interest income on investment during the quarter. Our profit after tax was INR 69 crore for the quarter as compared to INR 75 crore during the corresponding period of previous year. For the first half of FY 2022, we registered revenue of INR 1,212 crore as compared to INR 939 crore in the corresponding period of the previous year. EBITDA was at INR 183 crore as compared to INR 184 crore in the corresponding period of the previous year. Our profit after tax was INR 100 crore for the first half of FY 2022 as compared to INR 99 crore during the corresponding period of previous year. At the end of September 30, 2021, we have 400 exclusive brand outlets, which contributed around 6% to our H1 FY 2022 revenues. Exports are also picking up with opening of market and contributing more than 3.5% of revenue in H1 FY 2022. Going forward, we are cautious about the inflationary trend in the raw material prices which has further intensified and has reached elevated levels impacting gross margins. However, we are taking all possible measures to mitigate the -- its impact on margin, including timely price increase. We would continue our effort to grow our presence in untapped and underpenetrated market and focus on strengthening our brands. We can now open the floor for questions. Thank you very much.

[Operator Instructions] The first question is from the line of Tejash Shah from Spark Capital.

Seasons greeting for the team. Sir, my first question pertains to the slide that you have shared in your presentation, the data on realization increase Y-o-Y. It has been a very, very sharp increase and despite that, we have seen kind of margin pressure in the quarter. So first of all, how should we think about this price increase and consumer reaction to that, a? And how should we think about margins based on this price increase going forward?

The way things are, raw material prices are still on the increase. They are yet to stabilize although I hope that in the third quarter continue to stabilize. But now still things are volatile, and we are keeping a watch on it from day-to-day basis, and accordingly, we are revising our prices, but at the same time, naturally, when there is unprecedented increase, there is always a consumer resistance. So we are cautious while increasing our prices. So we have been able to absorb part of the raw material increase in cost. But we have to also be mindful of the competition and take steps appropriately accordingly. We are taking our price increases accordingly from time to time. Already twice, we have increased the price in the past. And third is also being planned and accordingly, we'll keep on acting the way things are turning out to be.

Sure. Sir, how much price increase have we taken so far in the year?

Around 15%.

This is weighted average across portfolio.

Yes, yes.

Okay. And sir, have we -- you spoke about inflation still being high. So have we taken again after reporting this quarter number, have we taken in October, November so far?

In October, yes, we have taken some price increase.

Okay. And are the price increases taken so far protect our margin at current level? Or we need to take further interventions to bring back it to previous levels?

So look, raw material prices have not stabilized so far. So we will have to always keep a note of it, and also we have to keep a note of the market situation. So accordingly, we'll keep on taking appropriate actions.

Sure, sure. Sir, second question pertains to how is demand reacting to these price increases? And how -- what's your read on the demand scenario? Because we are getting very divergent views on rural demand and nonurban demand as well. So just wanted to say, check your sense on what's your read on the demand environment?

Well, it is just for the time being, demand is being affected because people don't want to keep stock of those things. They just want to reduce their inventory in the pipeline because there have been 2 price increases, third also we've taken. So even in the market, there are 2, 3 MRPs floating in the market. So inventory in the pipeline is reducing. So for the time being, there is some effect on the demand that we are witnessing. And I think in the coming time when the price and stock will reduce, then our demand will also improve.

Yes. And sir, last one bookkeeping kind of question. What percentage of our turnover comes from below INR 1,000 MRP as on last year or as on half year basis?

Around 90%.

It's around 90%, yes.

Okay. How do you see, sir, this GST changes which have been made and how do you see that impacting demand going forward?

Well, it is for everybody. It is not for our company. So whatever GST government is proposing, so accordingly, we will take appropriate action on that. But in the short term, we may find some consumer resistance, but after all, it is for everybody.

[Operator Instructions] The next question is from the line of Gaurav Jogani from Axis Capital.

Sir, my first question is with regards to the demand for the open footwear. Last year, we have seen a lot of strong demand for your open footwear, especially led by the rural side. And now the things being normalizing this year, the schools and the offices also opening up. So how do you see the demand pattern changing going ahead?

Yes. Demand of open footwear, there are 2 kinds of things. One is closed footwear, another is open. Open consists of sandals and slippers. Now the demand of what we find that the people who have now started moving outside, outdoor, so those article whether it is sports sandal or it is a sport shoes, they are going up. And meanwhile, the demand of slippers, that has gone down this year. Because last year, everybody was indoor, so those articles were selling more. So that is the change that we are witnessing this year.

Okay. And sir, with your portfolio being tilted more towards the open footwear. So do you see a resulted impact on your volumes or sales to that extent for this year at least?

Yes. Because slipper numbers will definitely be less than what it was earlier demand. So -- and the shoe division is growing more. So that will have some effect.

Sure, sir. And sir, my next question is with regards to sir your margin last year had seen very sharp expansion. I mean it was even higher above the historical average. But what sort of stable margins as a company do you envisage? I mean I understand that there are 2 extremes last year, the margin was impacted -- the margin was expended very high and this year, it's been impacted to RM inflation. But what kind of stable margins going ahead, do you expect for the company?

Yes, you're right. Last year, raw material prices were very, I mean, benign. And this year, it is unprecedented increase. So that is definitely telling upon our margins. So last year, it was unusually high. But this year, what I think around 17% should be all right this year.

Okay. So going ahead 17% margins should be a steady state margin what we can target?

Yes.

Okay. And sir, with regards to you have been telling in the opening remarks that the focus is on increasing the presence in the untapped markets. So any light that you can throw on which all markets have you now expanded to? And how has the mix changed for you over the last 1.5 to 2 years in the product wise segment also wise?

So what we have seen is now South market started performing. Reason because the South was the only market which opened up last. So Kerala being locked down for 1 year and 3 months. Now it has opened up. So we are seeing demand recovery coming from South market more. [indiscernible] has done well, e-commerce is also doing pretty well now.

And sir, what will be the contribution for e-commerce now for your overall sales?

We are doing 10% e-commerce.

Okay. Okay. And sir, in terms of the margin profile, is e-commerce a lower margin channel vis-à-vis be your regular MBO channel to that extent, given there are returns and there is also the e-comm player margin also there. So how do the margin differ between the channels?

No we try to keep it same margin across all the channels, be it e-commerce, modern trade or wholesale. Because otherwise, the goods will flow from one category to another category. So we try to keep the same margin.

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

Yes, sir. Sir, this is just more from a longer-term perspective regarding the kids footwear segment. I mean I just wanted to know your views regarding the long-term prospects of the branded segment of the kids footwear. I've just read certain reports, which indicate like the kids footwear given that the sizes keeps changing, the inclination towards branded wear is low. So I wanted to know your perspective, firstly, on the market and also where does Relaxo stand in this segment? And also any inputs on the margin side?

So presently, whatever category we are in, whether it is our Bahamas Relaxo slippers, Flite or Sparx, in all category, we do make articles which are meant for kids. And we will -- and we are keeping a tap whatever demand or things are changing. Accordingly, we are introducing our article and capturing our demand and supply in the market.

Sure, sir. Just anything on the -- like the long-term growth aspects of the kids wear segment. Any outlook on that front? As a key player, where do you see that market growing in the next 5 years, we can say?

So what we find it is growing at a normal pace, maybe in certain category, high fashion or maybe different category, it may be there. But as far as we are concerned, what we are in, it is a normal kind of a growth that we are witnessing.

[Operator Instructions] The next question is from the line of [ Yash Mehta from Chanakya Capital ].

Yes. Sir, Relaxo has done very well in the value segment over the years. So are there any plans to enter into the premium segment, which has a price of about INR 1,500, INR 2,000? So are -- is Relaxo looking to expand into the premium segment? And what are your views on the premium segment, sir?

We have our article above INR 1,000 in our Sparx brand. And that is what we are doing. And other categories also, whether it is Bahamas. In every category, we have premium articles based on the price segment we are in. So that is accordingly we keep on developing premium articles in every category, whether it is Flite or it is Bahamas or Sparx. In INR 1,000-plus is only shoes are there. There is INR 1,000-plus, that we are also taking care and focusing on that and we will continue to do that.

Okay. And sir, with improving logistics, do you think that the operating cycles will get better over the time?

Can you repeat?

With improving logistics, is it possible that the operating cycle will get better over the time?

Logistics, actually, there is no major change in terms of improvement in logistics. So it's government parameter when they will improve the infrastructure and how the time will be reduced. So it's a long process. So maybe after [ 5, 6 years ] we can say about it, but right now, we are just following whatever is there.

The next question is from the line of Mythili Balakrishnan from Alchemy Capital.

I just had a question around the 4 different brands. Could you just help us understand how each of these brands have performed over the first half of the year?

Can you speak a little loudly, please?

Sorry. I'll just repeat what I said. I just wanted to get a sense of how the 4 brands have performed for us? How has Sparx, Bahamas, Flite and the main Relaxo brand done?

Yes. So if you talk about Sparx's brand, it is doing pretty well because last year, the demand was subdued because it is more of an outdoor category and premium category. So people were not moving out. Now that people started moving out, the Spark brand overall is doing much better than the other brands. Secondly, in Flite, we have 2 categories. One is outdoor and one is home brand, which is we called Flite EVA and Flite PU. So outdoor brands across all 4 categories are doing much better compared to what it was last year.

Got it. And if you could also help us understand like what would be the contribution of each of these 4 brands to the total revenue?

It is around Hawaii segment like Bahamas and Relaxo is around 25%. Rest is almost equal between Flite brand and Sparx brand.

So Hawaii plus Bahamas is 25% and rest is equally shared again between the...

Flite and Sparx.

Flite and Sparx, almost.

Flite and Sparx, okay. Also, just wanted to get a sense from you that in terms of Sparx, especially, we are seeing a lot more advertisement, which is focused on being fit, being outdoors, but a lot more shoe-type advertisement. I just wanted to get a sense from you, is that something that is going to be the next focus for the company in terms of looking at more from a good sports shoe rather than a more sandal kind of a thing which it was earlier?

So it's mixed actually. The sports segment is doing pretty well. Like there is a trend of athleisure. So there is a good trend. So sandals are doing pretty well in South India. People don't prefer too much of covered shoe over there. So it depends upon market also. Shoes is more for North and West and sandal is more for South India. So both -- recently those both sides.

[ Can I ask ] what will be the mix between shoe and sandals?

Sandal is 60%, 40% is shoes.

Got it. And my last question was more on the unorganized/the imports which is coming from China. Have you seen any disruption in them? And is that also some contribution that we can expect for growth going ahead for us?

So I think the freight cost from importing from China has gone up significantly. So over the last 1.5 years, the supply has subdued from China. That is advantage for us.

The next question is from the line of Akhil Parekh from Elara Capital.

Sir, first question is on the price hikes that we have taken and the inflationary environment that we have been talking about. In past con-calls, you had mentioned that there is a shift from unorganized to organized in this COVID time. Do we continue to see this trend given that the inflationary scenario is extremely strong at this point of time?

We are having a good market share but it is very difficult in unorganized markets. To capture the data and try to find out, it is very difficult. As far as we concerned, we can only focus on what we are doing, how we are doing [ authentically ] different markets. So because share of that is totally not captured anywhere, it's very difficult to comment on that.

And not just unorganized, we have been hearing that some of the organized players also have been struggling over the past 8, 10 months. Would it fair to assume that we have gained market share from -- those weaker organized players?

Our market share is improving. But to what extent it is replacing unorganized, it is very difficult to comment.

Okay. Okay. But it is better than so, say, a year or 2 years back?

You can say that, but you can't really be -- you can't calculate because things are not available in the open domain.

Sure. Second question is on the [indiscernible] on the presentation, I actually -- we have mentioned at 7.5 lakh footwear pairs per day, and we have recently commissioned our [indiscernible] Rajasthan capacity to that 1.5 lakh pair and it takes 10 lakh pair per day. Currently, 9 lakh pairs per day [indiscernible]?

No, no, at present, we have declared capacity 10 lakh. In the Board meeting, it was approved. From October, it is 10 lakh, earlier it was 7.5 lakhs.

Okay. So we have added 2.5 lakhs pairs...

Yes. We have added.

Okay. And the plan is already commissioned, the commercial have begun from the company is it?

Yes. It is. It is. Yes. started.

Okay. Sir, last question on the tax [indiscernible] if you can please guide like how much it can [indiscernible].

Can you repeat? Your voice is not clear, actually.

Yes, sir I'll repeat my question. The ad spend as a percent of sales, if you can, please, guide for the entire FY [indiscernible].

About 4%. We are going to do 4% ad spends per percentage of revenue.

The next question is from the line of Vikas Jain from Equirus Securities.

Sir, my first question is with respect to our presence in the southern region or southern part of India. So sir, can you just highlight as to what are the steps that you are taking with respect to expansion of our revenues from South India, mainly focusing on either other distribution expansion or retail outlet addition? What has been the pace over the last, say, 1 year or what was the pace 1 year back and what is the current status as of now? What are the growth plans, mainly in the southern region -- to grow in the southern region. I'll come up with a second question after this.

So in South India, there was a lot of lockdown. The lockdown was extended maximum in southern market, especially Kerala. So now they have started opening up, and we are getting the demand recovery. So talking -- it's just recovery happening from South India. Once the recovery is done, then we start growing. Some markets, we have already started taking steps and appointing distributors, like Tamil Nadu, which we were not...

Sure. If you could just give a ballpark figure as to like what was the revenues in the South probably 1 year or before the COVID time and what are probably at a normalized run rate, what would be the revenues at this quarter or so? Any rough amount?

So 2 years back, it was 10%, fell down to 7% to 8%, and now we are back to 10%.

Sure, sure. Understood. Understood. And with respect to the distribution addition, means how has been the pace? What was it pre-COVID and what is the current status?

So we just started distributor expansion of last 3 months onwards. So it's very early to say anything about that.

Sure, sure. And then last question from my side. Sir, as you mentioned in your opening remarks, the raw material inflation is incrementally hurting us. So any guidance that you want to give for at least for next 1 or 2 quarters what would be a gross margin figure that we can come up with in H2?

Because raw material prices have not stabilized, so margin will continue to remain under pressure. So we are cautious of it and keeping a tab on the market conditions and holding taking our steps.

The next question is from the line of Girish Pai from Nirmal Bang.

Firstly, I wanted to understand the mix of open and closed footwear in the first half of this year. If I recall, last year, it was 85%, 15%, and I think the year prior to that FY '20, it was 80-20. What was it in 1H FY '22?

So if you talk about FY '22, it rose to 90% and 10%, now it is back to 85% and 15%.

So 85% and 15% is 1H, is it?

H1.

H1. Okay. It was 90-10 in FY '21?

Q1, I think. Q1.

Okay. So you're talking about Q1 and Q2?

Yes, yes.

Okay. Sir, the other thing I wanted to ask you is, over the years, I've looked at your presentations and every time I see the 50,000 MBOs as being a standard number that I see in your presentation in terms of your penetration and distribution. So have you not increased your penetration beyond the 50,000 number? Because I've seen your presentation 6 years back, it is still a 50,000 number.

Yes, because of last 1.5 years, we are still able to maintain that because there are a lot of outlets getting closed down. This COVID has created a havoc. We are just maintaining it. Once this raw material prices, COVID outbreak, GST, all this thing gets settled, then we will be able to give you the exact picture, how we -- how fast we are improving.

No, but even pre-COVID I have seen for many years, the number has remained continent about 50,000. Any which way, my next question is...

Yes, yes, yes. Yes, because the outlets are same, but our presence have improved. In terms, like suppose our outlets used to keep 3 brands, now they're keeping 4 brands. So the depth has improved.

Okay. Okay. Sir, you made a claim that you increased market share. When I look at the volumes, it is down Y-o-Y. So is it that the market is down far more than your -- than you have done? I mean when I look at the volumes that you sold in Q2 this year versus the volumes in the year before that, they're down Y-o-Y. Is it that the market's volumes are down much more than you?

No, no. We can't say that. The main is demand of closed footwear this year has increased the overall demand of I mean open footwear has gone down because people are not moving out. So that is the reason. That's all.

Okay. I just have one last question regarding competitive intensity. There are a couple of -- at least 1 IPO, which is on -- at least a couple of IPOs on the cards, Campus and Metro. Are you seeing any increased competitive intensity or competitive moves from either of these players, at least on the Campus' side that you're seeing in the market, which is probably not letting you increase prices more than what you could have otherwise tried to do?

No. The Metro is totally different. We have nothing to do. Campus is only 1 category, sports shoe. But we have our own space, market is big. They have their own space. There's nothing of any alarm or concern.

So when you talk about -- you have to watch the market when you take price hikes, who were you referring to specifically?

No. There are so many brands in the market. And then we have to see consumer behavior also. So all these things we do take in mind and accordingly, we'll take our pricing decisions.

The next question is from the line of [ Divyata from Trident Capital Investments ].

Yes. Sir, my question was more pertaining to your product life cycle. If you could just help us understand from the product launch in terms of the conception to manufacturing, what colors and sizes would you generally push to manufacture? And also the distribution, in which cities would you push more sizes and different colors? And the end product life cycle once the demand tapers off? So if you could please help us understand what is the product life cycle for your various brands?

You're asking about concept to launch?

Yes. From launching to -- say, from conception, like once you decide that you want to launch from product to manufacturing to distribution and to end product life?

See it varies category to category. Sparx takes more time compared to basic Hawaii. So we can't give generalized figure, but Sparx takes maximum time. You can see around 7 to 8 months compared to basic Hawaii, which takes 2 to 3 months.

Got it. Got it. So how do you determine into which colors or which sizes you want to push in which of the geographies, like in which of the regions?

See it depends -- we get data from the marketing department, which state or which region, what preferences they have, which color, what sizes, the size of the feet. So all the data we have. Accordingly, we take the decision.

Okay. And have you extended your technology data? I was going through your past annual report, and there is mention of various IT technologies which you've deployed to understand the market behavior. So have you extended to your retail stores also where you get a sense of what is a fast-moving product or what is a slow-moving product?

We do have SSA, which lies with the sales offices, and we have DMS, which is again software based, and it is at distributor point. So we get data from there only. What sizes are selling, what SQs are doing well, which market performing how? So these 2, we can say this is a technology piece what we use.

Okay. Fine. Fine. And would you put light on your competitors in the West and the Eastern region? We keep hearing that VKC brand is also picking up and on the Western side, VKC and Paragon, would you have some view on them?

The market is quite huge. So we have equal presence if you talk about in Western market coming to Paragon and VKC. So they have some strong states of their own. We do also have our strong states.

Right, right. And the new facility, the addition facility addition that we have taken about, so that will be for any particular brand or particular open or a closed footwear or it will be across like the additional 1.5 lakhs pair per day, which product will be manufactured there?

These are some Hawaii slippers, Bahamas and some Sparx slippers also.

Okay. And the idea of increasing the capacity on the Western side is basically to cater to some newer markets which we are not already present?

No, no, it is overall. We have to overall increase our penetration whether it is south, whether it is west or even some [indiscernible] presented parts of north and east also.

Okay. Okay. Got it, sir. And sir, lastly, you did mention that the demand has not yet picked up. So in next 2, would you see some ramping up of demand, especially of the closed footwear?

No. Now market has opened, by and large, all parts of India, and things are opening up. But as I told there is lot of resistance because of price increases that were happening. The raw materials are going up almost month after month. So there is resistance from consumers, from retailer. And they are liquidating the stocks which are in the pipeline. So that is it.

[Operator Instructions] The next question is from the line of Yusuf Inamdar from Motilal Oswal Financial Services Limited.

Yes. Sir, I have a question -- I have only 1 question from a long-term perspective. Sir, if I look at the competitors, the average selling price of 2 of the largest footwear companies is in the range of INR 500 to INR 600, whereas ours is in the range of INR 125 to INR 150. So can you just tell me like since we are beginning to focus more on closed footwears and high-end products, what could be -- can you just give me any idea of ballpark number? What could be our ASP in the next 3 to 4 years?

No, no. It will increase, but it will increase not at a regular pace in a, what you call, sustained manner, but don't expect it to increase substantially because you should appreciate we are serving masses. And 85% business is for masses, only 15% is the other. So ratio will remain what it is. So it will have some effect, some improvement, that's all.

Yes. Correct, sir. Sir, and one more thing with respect to the number of exclusive brand outlets, which we have is around 400. Sir, is it safe to assume that gradually, we'll be increasing our EBOs? So is it safe to assume that slowly we are moving towards more of a retail model compared to the distribution model, which we had earlier?

No, no. Presently, we are focusing more on multibrand. And this 400 is a kind of our, what you call it, display cum sales model where strategically, we understand the consumer behavior and understand what is the consumer Ice -- Our business contribution from our retail is just 6%. So we'll continue accordingly only.

The next question is from the line of Gaurav Jogani from Axis Capital.

Sir, my first question with regards to the -- what are the key learnings from the COVID times? I mean a lot of retailers we have seen have a cut down on costs and have done process improvements during this COVID times. So if you can highlight 2 or 3 key initiatives that we have taken during COVID times and can have been cost savings going ahead as well?

Cost saving is an ongoing process. We have to always keep the company competitive, efficient. And that is going on. And even in this difficult times at the factory end, we are improving our efficiencies. And that we'll continue to do it. And administration -- but at the same time, we have to -- Last year, we had some cut in marketing and administration expenses. But this year, we have started these expenses and the brand building. Again, we can't keep it always on the low. But as far as manufacturing is concerned, that effort is on.

Sure, sir. Any numbers that you would like to highlight like some percentage of cost that you're permanently able to save now going ahead, say, like INR 10 crores, INR 15 crores or a that will be permanently going ahead as well?

This is only in the marketing and administration last year, we took a cut permanent in our...

Permanent nature, I think I don't see much possibility, but I think consulting, that's what we can say that is the only item which we cut last year, and we are not reinstating.

In manufacturing, we are -- even if we can hold our conversion cost, that is a great achievement. That is what we are trying to hold on to it.

Sure, sir. And sir, one related question to this, I mean a lot of players are now talking about substituting the raw materials with alternative materials, which are cheaper and also better quality also. So any kind of process we think also that we have rolled down that we would like to highlight in terms of the raw material side?

We have to be mindful we have to maintain quality first, other thing afterwards. There is very little possibility of going a little bit of the polymers. But beyond that, people will only sacrify the quality. So we are mindful of it. Accordingly, we are taking cautious moves.

Sure, sure. And sir, one last bit from my end is, over the years, if you take a trend from, say, FY '13 to even FY '20, '21, we have seen that the EBITDA margin expansion has largely been led by gross margin. So gross margin has expanded from around 53.5% in '13 to around 57.5% in FY '21. So what further scope do we see of expansion in the gross margins? Or do we think this is kind of a peak level at this point in time?

No. Gross margin, definitely, there has been an improvement year after year. But this year being a different year, you know prices are touching new heights, and we took some price increase also. It's really tough how much margin we can...

No, no. Sir, not in short term, actually, I'm not talking about the short term, I'm talking about the next 3, 4 years, maybe what kind of gross margin that you can target going ahead, barring these volatile times?

Long term, definitely, we have been adding new product every time. I think 40% churning is in our case. So we had more premium product in each category. So definitely, there is always scope to improve the gross margin. And we can see the, I think, same time in coming years, long term.

The next question is from the line of Ankit Kedia from PhillipCapital.

Sir, you mentioned the e-commerce contribution today is -- has become 10%. With things opening up and the contribution remaining same at double digit, how much of this is coming from closed footwear and Sparx and how much is it from open footwear?

Majority is from Sparx footwear, which is around 85% to 90% and rest is from Bahamas and open footwear.

Sure. And sir, would the ASP difference -- in one of the questions you mentioned that we are not going to price differential, so would the inventory online be similar and fresh inventory or we are liquidating inventory online?

Majority, it is running articles. And very few, maybe you could say less than 10% is the obsolete inventory, which we are pushing. So majority is the regular articles.

Sure. And sir, my second and last question would be, again, on the EBOs. How many of these EBOs are old EBOs currently? And over the next 2 years, what is the plan to expand our EBO count in South market as well?

No, no. For the time being, there is no plan any EBO in South.

Okay. And sir, how many of the EBOs are owned versus franchisees currently?

Majority are owned.

Say, I think around 430 we have our own. And franchise is around 30 and few are mixed model.

The next question is from the line of Ashish Kanodia from AMBIT Capital.

Just on gross margin, I think you said you said change in inventories, my understanding is that had there been no inventory buildup, then the impact on gross margin would had been higher during this quarter. Is that understanding correct?

You are right. Definitely, the increase in inventory definitely impacts the gross margin calculation as far as calculation is concerned. But otherwise, yes, margins have been improving, except this 1, 1.5 year, and especially the 2-quarter journey due to raw material prices. So if you just exclude that part, even then there is improvement in gross margin.

Sure, sir. And secondly, just what is your internal though process in terms of where do you at RM prices, what is the comfortable gross margin where the company would like to operate at? And to reach that kind of a gross margin, what is the kind of price hike we will need to take further?

No, prices of raw material are still on the rise. Things have not stabilized. And we have to keep on watching from time to time rather month-to-month. And we have to then see what is the consumer sentiment, market sentiment and pass on the price increase. So since things are not stabilized, we cannot comment on that, how the things are going to turn out in the coming months.

Okay. And sir, just I see there was a discussion that I can the retailer that the distributors might be liquidating inventories because of COVID and all, so instead of difference between the primary sales and secondary sales? So what I mean to say is when I look at the growth reported by Relaxo, and if we have to compare that with the actual growth, which a retailer or a distributor might have reported, will that growth be higher? And then if that is the case, so as the retailers and distributors start to rebuild the inventory that will ultimately benefit you in subsequent quarters? Is that the right way to look at it?

We have to -- see, once things stabilize the market inventory also -- at the moment, people are cautious in mind. So once things come to normalcy, then we how the things turn out to be.

Okay. And last question is in terms of supply chain in the prices has been higher, but has there been any challenges with the supplier as well? Or is the supply at least on interested?

Supply of raw material you're talking?

Yes, yes.

Yes, some of the raw material even the supply has been an issue. Like but it doesn't mean that we have any obstruction in production, but things have been a difficult. That is why the inflation whenever there is shortage of material, then only people are, I mean, inflation trends become much more adverse particularly when the supply as well also restricted, that has added to the problem.

The next question is from the line of Girish Pai from Nirmal Bang.

Sir, during the course of your commentary, you mentioned that there are 2 or 3 different MRPs in the market. How is -- is this a unique position that you're in as we speak today compared to the last 10 years? And how is this impacting your sales? And how is the distributor response to this?

You are right at the moment because there is a too frequent increase. But there are so many articles. Every article retail never come to 0 stock then only will buy the new article because some of the sizes really come short of the inventory. So he used to buy the new also. So that is why there is a mix up of different MRPs in the market. So it will take some time before things get set right.

Is that responsible for your slower volume growth this quarter?

After all, we told you that people are liquidating their inventing system. Whenever there is a price revision, people want to be a little cautious in buying. So that is we are noticing that the inventory supply chain is getting reduced, distributor sales are better. So his inventory also is trying to be cautious. So everybody want to operate with a minimum inventory.

Okay. Okay. So a more strategic question. Prepandemic, when I look at your ASP and volume growth statistics across, say, 4, 5 years before the pandemic. Your ASPs haven't grown very much. It's been basically volume growth led. Is that your strategic thought process beyond the pandemic? Is that how you would want to grow? Do you want to kind of drive volumes and not focus too much on ASP?

No, we are not focusing on, what you call it, -- yes, we are focused on what category consumer needs, whatever category is trade is requiring, we are offering that trade. Our focus is on building the categories, whether it is Bahamas' brand, whether it is Flite or Sparx. So historically also 85% slippers business also for the company and that always gets according traction in the market also.

Okay. Sir, last question. Your cash flow from operations seems to be quite bad at least when I compare for 1H versus the full year numbers. Anything that will change in the second half for the cash flow from operations number to look better than what it was at the end of September 2021?

Cash flow is bad, I think, from a number point of view, yes, I agree. But if you see the number, there is an increase in inventory. That is the main reason for that. And due to inflation, the inventory which we were carrying, so I think 20% is coming from the inflation and rest in the overall increase volume. So these are the reasons being a special situation. But in coming time, definitely, it will be back to normal and there will be comfortable cash from operations.

[Operator Instructions] The next question is from the line of Mythili Balakrishnan from Alchemy Capital.

Sir, sorry, this is a question which comes possibly at a tangent. But currently, we are in an environment where raw material prices are going up. But at some point, that will turn around and it will start going down. In that time, do we sort of start reducing prices or do we just reduce prices on new SKUs? And -- how do we think about pricing in that kind of a scenario?

It is due to wait and see how the things stabilize. We have to see how the market situation is there at that time. So we have to be mindful of 1 thing. We have to be reasonable with the consumer. And that is what goodwill we have built always.

[Operator Instructions] The next question is from the line of Jignesh Kamani from GMO.

I just want to ensure that we have a very high inventory and as you mentioned, the draw material prices increasing very frequently. So compared to competitor favorable price because of the high, I can say, inventory and the inflation going up?

I don't know what is your question?

Your first end of question, please repeat it?

So we have very high inventory. And as you said, the sale raw material cost is increasing every month. So because of the high inventory probably at a low cost or current courts, will be favorably less compared to our competitor?

Inventory in the raw material that is always favorable when there is a rising trend. But as far as other finished goods is concerned, we have inventory because there were low demand in the open footwear segment. So -- but is the coming time, thing will improve on both fronts.

So if there is price hike, we will get a benefit of that also on the upcoming, right?

There is always a time delay in getting the things because you have to watch coming months also and trend also, and then you have to take appropriate action because they are the unprecedented price increase, entire price increase, we have not been able to pass because otherwise, if it's polymer going up by 100% is something beyond imagination. Keeping all this in view, we take appropriate action.

Understood. Secondly, whenever there is a price hike or expected price is generally dealer or distributors try to increase their stock so that they can get the benefit of the lower priced products. Are we not witnessing that scenario as of now?

No, no. Actually, when we revise the price we revise our price for MRP also. Ultimately, the margin remains same.

Understood.

Rather he is more cautious, let his inventory be lower so that when new price comes is able to pass on to accordingly. Otherwise, if he has an old MRP, sometimes -- he has to push that article first.

But in the old MRP, probably he may be discount offerings to customers much lower, right, compared to new MRP?

That could be at a retail level, I don't know, what kind of discounts they do. When there are 2 prices prevailing then there definitely something you get some advantage also.

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

Thank you all for joining the call. This is all from our side. Looking forward to you joining you again. Thank you very much.

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