V.I.P. Industries Limited (507880) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. A very warm welcome to the VIP Industries Limited Q1 FY 2022 Earnings Conference Call. From the senior management, we have with us today, Ms. Radhika Piramal, Executive Vice Chairman; Mr. Anindya Dutta, Managing Director; and Ms. Neetu Kashiramka, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Radhika Piramal, Executive Vice Chairman, VIP Industries Limited. Thank you, and over to you, ma'am.

Thank you, Madhur. Thank you, everybody, for attending our call today. At the outset, let me say that it was a disappointing quarter. Understandable within the second wave, but we had a very disappointing quarter. Originally, we have budgeted for higher revenues before the second wave. We have started end of March, 1st of April with more optimism than what happened in April and May. So [indiscernible] and Q1, as we all know, is one of the largest quarters for both sales and profits in the luggage and travel industry. Having said that, having had a disappointing start to the year, there were some bright spots within Q1 that I would just like to emphasize. The first is that our new Managing Director, Mr. Anindya Dutta, joined our company on the 1st of February and he has really settled in quickly and well understood our industry and is taking positive actions on many fronts. The main which you can see is the improvement in our gross margins, which is the other silver lining. So with that, despite the very low revenues, we were able to turn a small profit. And with these gross margins, it gives me the confidence that as and when the demand resumes, as we think it will, that has also been a pleasant surprise with sort of how quickly the demand resumption has come back since the end of the second wave. So assuming the demand comes back, we can actually look forward to a much better Q2, 3, 4 with the gross margin profile that we have. So those are my very high-level comments. Overall, a disappointing quarter in terms of our initial hopes, understandable in terms of the second wave but a much better gross margin profile to see out the rest of the year. And with that, let me hand over to Anindya and Neetu, who will give you a much more [ detailed ] overview of Q1. Thank you. Anindya and Neetu, please go ahead.

Thank you, Radhika. Good evening, everyone. Thank you for taking out time and joining this conference call for our Q1 results. As Radhika said, the wave 2 did really hit us very, very hard. The impact was far worse than the wave 1 from a larger society and a country point of view. However, from a business point of view, while the impact was catastrophic while the pandemic was at its peak, but the silver lining is the recovery was much sharper. The different parts of the country, depending on the intensity of the pandemic, had very different intensity of lockdowns, and there is some base level demand that continued. We also saw the airline passenger traffic demand dip significantly, but it was -- it showed much better resilience than the previous year, the similar time when wave 1 had hit. Our revenues were in line with the demand that the industry did see, and our supply chain was able to meet the demand comparatively better than the immediate past. The fundamental developments in our supply chain, which are largely a higher proportion of own manufacturing, correction in pricing, correction in the channel mix and product mix, all that put together has started to show up in our gross margins. And with continued strong control on our fixed costs, in the quarter, we were able to get our head above the water, and profits are back to positive zone. Just reiterating some of the numbers that you would have in the presentation. Our income from operations was INR 222 crores against INR 58 crores of Q1 of the previous financial year and INR 259 crore of the Q4, just the previous quarter of last year. Gross margin was at 51%, this is after netting off other income, as compared to 44% in the previous quarter. So there is a 700 basis point increase in gross margin. The EBITDA was at INR 27 crores and at 12%, it compares better than the sequential previous quarter, which was at 8% and a minus 3% of quarter 1 of previous financial year. Overall, profit for the period stands at INR 3 crores as against a loss of INR 4 crores in quarter 4 FY '21 and a loss of INR 51 crores in the previous year same quarter. Going forward, we are quite optimistic on the demand. We feel, as a country and as a business, we have learned to deal with the pandemic. There is a lot of talk about a wave 3 coming, but we would believe that it will be -- even if it comes, it will be managed better and it will have a sharper -- even sharper recovery. We are striving to continue the progress and consolidate on all the projects that we have built, we are -- that are underway to build operational efficiencies across the supply chain. We are also progressing well on the development work on all the channel fronts that we are -- we have been undertaking. In the coming quarters, we would also increase our aggression on demand-driving activations. We have a slew of new launches that are underway right now. And we are also increasing our investments in digital marketing and all other demand-generating activations. With that, I would like to throw the group open for questions, and we'd be happy to take the questions as it comes.

[Operator Instructions] The first question is from the line of Jinesh Joshi from Prabhudas Lilladher.

I have a question on the revenue side. Now I understand that most city channels would have struggled in 1Q due to localized lockdowns as modern trade and retail trade were operating on restricted timings. Even e-com for that matter, the sales for nonessential items was bad for some time period. But despite this operating environment, our sales are only 15% lower than 4Q of FY '21. So I just wanted to know which channel actually did well for us this time around?

Okay. So first of all, the localized part of the lockdown is what helped. So it was not uniform across the country. And therefore, there were parts of the country where general trade, modern trade was working and it was at different points of time. So the challenge was to meet the demand where the demand is occurring during the quarter, and I think we did quite fine from that point of view. We saw almost a better traction across channels compared to the previous quarter or previous lockdown situations during the wave 1. But however, within that, relatively e-commerce, which was leading the charts in terms of able to sell during this pandemic continued to play for us even in quarter 1 of this year.

Okay. And sir, as far as demand for a mass product is concerned, it can be strong in the near to medium term. And in the opening remarks, you also mentioned that some launches are planned. So if you can talk a bit more on that front? And also from a strategy standpoint, what steps are we taking to compete effectively in this segment of the market?

Sorry, can you be -- repeat the question once again, please?

My question was on the mass products segment where demand can be strong in the near to medium term. So are we planning any new launches? Or are we planning to expand our SKU in that segment? And also from a strategy standpoint, what steps are we taking to compete in this segment, which is hypercompetitive in nature?

Okay. So yes, you're right, in the mass segment is what was getting a lot of tailwind during the constrained demand situation, largely coming from possibly more purposeful travel and a purposeful need. And therefore, the entry-level price points were getting a little bit higher demand tailwind than others. So keeping in mind, we had done in the past, and we continue to launch new products in the value segment, that's playing up. And largely, it is fueled by e-commerce also. So we have out of the almost 20 to 25 new launches that we have, a good 1/3 of them are in the -- products are in the value range. So that play, we are strengthening further. In terms of an overall strategy, we -- while the value segment is important, our stronghold is the mass premium and premium. So we're not neglecting that. In fact, we feel going forward, as demand comes back to its normal levels, which means that all key drivers of demand starts playing up, which is weddings, which is more leisure holidays, more international travel, when that happens, what -- where we are very strong on the premium and the mass premium segment, we will continue to come back -- we'll come back and play the hard game there. And some of our new launches are also in the mass premium and in the premium zone that we have launched. And that is under the umbrella of VIP and Skybags. So we intend get back to what we were very strong at before and play that aggressively while we do not compromise on the value segment.

Sure, sir. One last question. I just wanted to know whether there was any low-cost inventory liquidation that led to gross margin expansion in this quarter?

Gross margin expansion? Did you -- sorry, did I get it? Gross margin expansion, you said?

Yes. Yes. 51%. And historically, I mean, if I look at FY '21, we were far lower. So was there any low-cost inventory liquidation, which happened?

On the contrary, if you were doing a lot of liquidation, gross margin would be lower. So therefore, this is not -- it's not the case. While there is always a little bit of liquidation that we need to do whenever there is a very volatile situation of demand, but proportionately, that has gone down. And that was -- has been a very conscious attempt to make sure that our discounting and our liquidation related discounting lowers down in the future. We have a lot of bad effect in the previous quarters because of which our gross margins got impacted. And in the quarter 1 and going forward, we would have lesser contribution of liquidation and discount sales.

The next question is from the line of Tejash Shah from Spark Capital.

My first question pertains to gross margin recovery. You spoke about that we made certain interventions to go back to pre-COVID level. So if you could speak about some of the steps that you would have taken to correct it so sharply on Q-o-Q basis and even on annual and prepandemic basis as well.

Right. Thank you, Tejash. So yes, the recovery is what we were working on, and that's our rightful gross margin, where we are there now. What led to this was one which I was talking about, where we reduced the amount of discounts that we were selling our products on prior to this quarter. That led to a good part of the recovery inclusive of the -- along with this, there has been price increases that we took, which was partially covering though the RM and the commodity price increase that has happened. So that's also helped, which we couldn't do in the previous quarter, which we did and did in this quarter helped to take the GCs up. More importantly, the underlying benefit of manufacturing in Bangladesh and our own manufacturing has started to play up. While it has not reached to its full potential, because even in Bangladesh, we didn't have continuous production, there were huge disruptions in quarter 1 in Bangladesh. But the fundamental advantage of own manufacturing and Bangladesh has started to show up during this quarter. So these 2, 3 factors have led to the come back to the gross margins that we wanted to.

So does this mean that as Bangladesh had increases from here on, 50% will be at least the base in the postpandemic era.

Yes, it will be. So it will be in this range.

Second question pertains to, in your opening remarks, I mean you spoke about you're hopeful of demand recovery despite having a very challenging quarter. So does this mean that July or early signs that you're getting from your [indiscernible] is very encouraging, and that's why you mentioned that coming?

No. I think let me just chime in here. This is Radhika. We'll comment on July when it comes to our Q2 results. Thank you.

Qualitatively, Radhika, which will help. I mean I'm not...

We do not comment on July, I understand.

Sure, no worries. Lastly, do we have any live exposure to Future Retail Group and any provision made on that account?

So yes, we do have exposure on Future. We have been [indiscernible], and we have made adequate provision what we feel is required. And yes, there was a charge in this quarter as well on that account.

The next question is from the line of Bhargav from Kotak Mutual Fund.

First of all, congratulations for a very strong gross margin. To start with, on the Bangladesh bit, is it possible to quantify what percentage of sourcing, especially the soft luggage, is now from Bangladesh. And you mentioned that there were certain COVID disruptions. So essentially, what would be the run rate that we can expect this to increase during the subsequent quarters?

Sorry I -- he'll have to repeat the question. We are not able to follow what he's saying.

Poorly audible, actually.

Yes, can you hear me now?

Yes.

Yes.

So my first question is that how much of the sourcing was from Bangladesh in the first quarter? And what run rate do you expect this to improve in the forthcoming quarters?

Okay. So we carry some inventory always. So for the quarter 1, specifically, we haven't had any imports from China, specifically for this. Even if it is, it was a very thin slice. So to the extent whatever we sold was either from the inventory that you are carrying prior to that or whatever was manufactured in Bangladesh. And going forward, as I've said in the past that almost 90% our production of our sales will come from own production, which includes India, which is in Nasik and in Bangladesh, in the Bangladesh factories.

Okay. So this 90% in-house production, how much would that be in this particular quarter? Is it possible to quantify?

We are almost there since there is hardly any China imports.

Okay. Secondly, in the presentation, you mentioned that 61% of the share is of soft luggage. And this is where possibly the cost savings will be when you sort of source from Bangladesh. So in your opinion, will this be the trend in the near term where the share of soft luggage will continue to remain high?

Yes, it looks like that. This has been the kind of proportion in fact between hard and soft. On a different note, from a consumption point of view, hard luggage seems to be getting better traction in the last few quarters, largely owing to pandemic. So the soft luggage to hard luggage share has been roughly there at about 65-35 in the past, and we assume that from a overall consumption point of view, the ratio would more or less remain same. If at all, it may change for a few percentage point in favor of hard luggage.

Okay. And my last question is that you mentioned that you will take some steps in terms of demand generation. So does that also mean that you will relook at hiring a few of the sales force, those who were laid off last year because that would also be very critical from a demand generation perspective.

So we -- from sales force, that impacts demand generation, we haven't had much of a shaving there, and it is directly linked cost. So at best, it will be a promoter who stands in our stores to sell while we had some reduction during the peak of the pandemic last year, but a good 20%, 30% of whatever we reduce. One, we reduced a thinner slice and whatever we reduced had come back. And in fact, it won't go back to the same proportion because I believe that there are many efficiencies there we can achieve. But we're not going to shy away from putting investments to drive demand going forward. But we're going to be very watchful about the efficiency of that investment that we put in.

The next question is from the line of Amandeep Singh from AMBIT Capital.

So firstly, in terms of recovery, the 1Q was at around 37% of pre-COVID. But will it be possible to indicate month-wise stack-up of recovery of 1Q versus the pre-COVID number?

Within the quarter?

Yes. Like April, May and June was xx, yy, zz percent of the pre-COVID, will it be possible to share that?

We can't share monthly numbers, but what we can share is the first 15 days of April was very good. From 15th April to 15th May, it was negligible. And then after 15th May, started improving.

It's not very relevant because the demand plays up in the offtake from the shelf, and our sales is more selling into the trade. So it is not reflective of how really the demand happened on a weekly basis or a monthly basis.

Sure. That's helpful. So just as a follow-up of that, now with a few of the states announcing partial opening of schools, so what are your channel partners saying about on-ground uptake in backpacks demand, if any, or still it's early days?

You're right. It still seems like early days, but you're equally right that there is some bit of [ movement ] there, where there seems to be -- there could be an impending demand coming. But right now, states are more talking about it, very few schools have opened. And people are also going to be very watchful about getting into this fully. So I think it's too early to even comment on whether a demand from a school and therefore, backpacks will come in the near future.

And secondly, when we speak about 90% of the demand catering from in-house manufacturing, so is it fair to assume that now even VIP and Skybags brand would be manufactured in Bangladesh versus only economy brands earlier?

You're absolutely right. We can't go to 90% without having VIP and Skybags range getting produced in-house.

Okay. And finally, we have been also speaking about the increase in OEM opportunities if any. And now is there any update on it? Or are you seeing China coming back as a supplier for global luggage brands? Any thoughts on that?

No. Once again, I spoke about that in the previous call. It's too early, and there are many other centers in the world opening up for taking if China drops. So it is going to remain competitive. But at the right time when we have catered enough to the India demand and we've got everything streamlined, we would look at opportunities which are in the OEM zone or on the OEM area.

The next question is from the line of Niket Shah from Motilal Oswal.

Congrats on a very good gross margin number. Just 2 questions. One on, if you can let me know your market share on the e-commerce side and on the backpack side because most of your peer sets are very weak in backpack unlike you guys were very strong in backpack. So just if you can help me with the market share number.

So backpack category currently is at a very, very low demand level. And therefore, market shares are not something that is extremely relevant.

Maybe pre-COVID level would be very helpful as well.

No. Unfortunately, I won't have it ready for you to share that with you. But if you have -- beyond the number, if you have a question, which I could help you with...

Just on the e-commerce part of it, on the market share on e-commerce, that will be great.

No, I'm sorry, e-commerce backpack specific number on market share, I would not have -- not like to share with you.