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

Good evening, ladies and gentlemen. A very warm welcome to the VIP Industries Limited Q2 and H1 FY '22 Earnings Conference Call. From 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 Mr. Anindya Dutta, Managing Director, VIP Industries Limited. Thank you, and over to you.

Thank you. Good evening, everyone. Thank you for taking time out this evening to join us on this call to discuss the VIP Q2 results. At the outset, we had really a good quarter 2 with a revenue of INR 337 crore. And more importantly, a very sharp recovery from the disruptions of the previous quarter due to the second wave. We saw a recovery of 80%, and this recovery is measured against our base of 2019-20 numbers. In fact, the quarter gone has been our largest revenue quarter in the last 7 quarters, including quarter 4 of 2019-20. We saw the business environment increasingly becoming better within the quarter and as the COVID cases came down sharply. Our key barometer of our -- for the airline passenger traffic data also saw a similar level of pickup. Airline passenger traffic saw a 60% recovery of the same, compared to the same quarter 2019. However, international travel and schools, colleges predominantly remain closed and continued online, and we didn't have that demand. While the demand opened up, we faced 2 key challenges. One, we saw a sharp inflationary pressure building up in our raw materials. And this is also coming from the high ocean freight that we all know have scaled up later at abnormally high level. Also, we had constrained supplies coming from the disruption in Bangladesh that happened with a lag of almost 4 to 6 weeks after what we saw in India. So the Bangladesh disruption continued way into August to the mid of the quarter. However, we had good and tight control on our fixed cost and all other [ offsets ], and that resulted into an overall good results. I like you would have all received the presentation. Our quarter 2 revenue from operations was INR 335 crore and INR 421 crore in quarter 1 of this financial year. The gross margin was at 47% after netting of other income as compared to 51% in the sequential quarter. This has happened largely due to the inflation as I spoke about in the raw material cost and ocean freight and also due to some unfavorable mix. EBITDA at 14%, INR 49 crore. This compares to 12% in sequential quarter and minus 60% over the same quarter last year. Overall profit for the period stands at INR 19 crore as against INR 3 crore of quarter 1 and a loss of INR 35 crore on the same quarter of the previous year. A little bit more details about our revenue concept in terms of channels, we experienced good scale up across all channels. E-commerce, with the tailwind of some of the organic shifts that we have been experiencing, that happened from other channels was also back with the tested project. Over the last few quarters, our work on the fundamentals of the channel in terms of assortment, promotions and performance marketing has been [indiscernible]. Our traditionally strong hold channels, general trade and modern trade also scaled up well within the quarter. And we witnessed our distribution in terms of number of those to have come back to 2019 levels. The retail channel, which is our exclusive business outlets was continued to be challenged because this is where we had shut during the pandemic period, a large number of our stores and this channel will start scaling back as and when we open back the number of stores that we had shut. Also, the institutional business was suboptimal largely coming from our supply constraint. Going forward, I believe the environment would be conducive for good demand, with hopefully, COVID numbers continue to be ranged basis the vaccination drive that has happened in the country, and the overall sentiment looks very positive. We are significantly increasing our investment in creating supplies for Alstom. We are expanding our Bangladesh factoring plant and we have invested roughly about INR 15 crore. We are planning to invest roughly about INR 15 crore to INR 20 crore in the coming time to expand capacities there, as well as we would be investing in our India supply changer in our own manufacturing to increase capacities. Also, we would now start aggressively investing beyond creating demand and generating preference for our brand. And this not only will be seen in the promotions and advertising that we do, but also in the kind of new products that we are launching in the market today. The biggest challenge that will remain in front of us right now is to tackle the huge amount of inflation that we are foreseeing in the coming quarters. Overall, with the demand situation coming back, we are quite positive about the business going forward. Thank you, and I can now open the forum for questions.

[Operator Instructions] The first question is from the line of Karan Kanna from AMBIT Capital.

And my first question is on your -- as far as the raw material inflation is concerned, will it be possible to quantify now that almost 47% of your revenues being manufactured at the hard luggage facility, whether it be possible to quantify the split between PVPC and ABS at your Nasik manufacturing facility. And secondly, to counter this inflationary trend, what sort of price is have you taken in the last 2 to 3 months?

Let me just jump in here. Radhika speaking. Thank you all for attending. Karan, I hear the first question asking details for us to be able to answer in this forum and will discuss Anindya, please to take the second question.

Yes. Thanks, Radhika. So the price increase for the quarter on quarter has been very little. The new products that we have launched has been priced in line with what we expect the raw material prices to be going up for. But on our base product range, we would be taking a price increase in the coming quarters.

Sure. Secondly, later, in the last call, you mentioned that you were fairly positive that once the business returns to complete normalcy. The company can expect 20% kind of an aspirational EBITDA margin to sustain. You already at 80% in second quarter. And as you mentioned, you're quite confident on the recovery aspect, as far as the next few months are concerned. In that context, is it possible to get some sense on what sort of a sustainable EBITDA margin should be -- the company's EBITDA margin in the next few months in the context of the inflation that rating on the raw material side?

So mostly, Karan, we will be definitely taking care of the inflationary pressure. So the price increase, which is lined up, which will happen in a month from now. So definitely, our aspiration to reach what number we had talked about. But this all depends on the demand context and the raw material pressures.

Karan, if I may just add to that because now based on our own manufacturing, which is more live business, then importing and procuring well ahead in time. The volatility of the raw material situation would have an effect on the overall margin and the results of the company. So the aspiration and ambition remains there, and we will do everything to get to that. However, we are right now not able to fully confidently comment on what kind of volatile raw material situation we would have, both in terms of price and also in terms of up supply quantum and also under serious challenge right now.

I'll just add to that, I assume we've had 20% EBITDA, we did not imagine the inflation would be so as sharp as it is, I mean, that was the fact. I think it was not expected to be this much. So as Anindya said, it remains the aspiration, but we have some way format.

Sure. And on your balance sheet, I'm looking at the 3 receivables, this has gone up from INR 148 crores to INR 256 crores as of 30th September. So any particular reason why there's a sharp increase on the receivables front?

That is mainly because of the scale. If you calculate number of day-wise, it has come down by 6 days.

Okay. And lastly, on the backpacks, would it be possible to understand if there's any recovery that you're seeing on that category, given what you're seeing as far as schools and colleges, gradually, there is some sort of opening of that' s happening on and that' s it?

So Karan, what we are seeing in the last couple of months is quite encouraging because while fully school and colleges has not opened up, there has been some sporadic in some states, some classes and then some schools have opened. And movement that has happened, we have started to see the throughput happening of this category. So as things become better going forward, I think it will just all fall in place going forward.

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

Ma'am, I wanted to understand the capacity expansion plan in -- because as mentioned earlier, our capacities were enough for the COVID level of sale. So the current capacity expansion that you are posing, is it taking into account that we reach the COVID level of sales much sooner now and it will be sustainable going forward?

If I was to understand your question better, are you talking about our capacities? Our own manufacturing capacity is in line with the pre-COVID numbers. And we weren't there, and that's the plan to build our own manufacturing up to the level of pre-COVID numbers. And that's something that work in progress. The investments that we spoke about is all to increase our own manufacturing capacity. Having said that, we have enough avenues of sourcing, whether it is in India or the S1 supply of China, to bring in the suppliers that is needed for the demand going forward.

And just to add to that, I think this question is also about the mark forecast and how PPIs the demand coming back and how quickly will reach people then. I think the demand resumption has been a bit happily faster than expected to have great news. So it's too early to say when we cross pre-COVID numbers. But what we can say is after the terrible second wave, this demand assumption will be much faster than we expected. So suppose there's no variance, there is no COVID, which so far has not been, then since we're looking better than we expected on the demand side and much worse than we expected on the margin side.

That's great. And second, just wanted to understand on the demand side only, on the different type of product ranges, for example, in the mass segment as well as in the premium segment, how is the demand panning up? And how are you projecting your pace to -- how well you are prepared to take care of any divergence there?

So the demand typically is coming back into the mass premium and the premium segment. The large part of the demand increase happened in the previous quarters, in the value segment. While that continues there, the demand on the mass premium and premium is also coming back. But the recovery rate in the higher -- in the premium segment is far lesser than the recovery that we are seeing or the growth that we are seeing in the value segment. That continues as a phenomena now as we speak.

Okay. And my last question is on how are we looking at paying a distribution network growth as you mentioned about in your [indiscernible], could you give some more color on that?

Sure. So we look at it from a channel point of view, the role of general trade is to build accessibility. And there, we would be going forward on a fast pace, increasing our distribution, both in the towns that we cover and also go down COPs data into smaller towns to increase distribution. But that's a midterm to a long-term plan. In terms of channels, right, exclusive business outlets where we had shut down company run stores and also a lot of franchisee stores that shut down during the pandemic due to profitability issues, a lot of it is coming back. And in the next 2 quarters, we plan to aggressively try and take back our total number of retail stores for excusive business outlets, very close to the 2019 numbers. And definitely, in the subsequent year, we would aim to take it even far ahead of the 2019 numbers.

Okay. Any number that you would like to highlight on the distribution expansion, number of distributors, Asian dealers, et cetera?

I can talk about retail stores. We have about 500 of them. We would be having -- we shut down about 150 shutdown, inclusive of our old retail stores or franchisee stores. And we would try and get it back to about a 460 odd number by the end of this year. That's one of the targets that the team has taken on.

[Operator Instructions] The next question is from the line of [ Bhargav M ] from Kotak Mutual Fund.

My first question is on the state of reopening the EBO. So what we understand is that the EBO is a shutdown, were not contributing significantly to the overall revenue. It's about in single digits. So now that we are planning to again open EBO back to 2019 levels, how should we look at just in terms of overall revenue contribution, and alongside that, the profitable contribution as well?

Thank you for asking that question. You're right, from an EBO point of view, our strategy is to open to franchisee roof. We are not encouraging our own investment and opening our company-run stores, so that's one. Majority part of the -- now opening will happen through a franchisee rule where we believe the retail operations to be run by a partner who's more suited to do it, and we continue to run the business of brands and creating demand. So did that answer your question?

Yes, sure, understood. Sir, I mean, in terms of the stores becoming profitable, what are we doing? I mean, because any of the stores were sort of loss making. So are we looking at different locations in term of opening up? Or how should we look at it?

Yes. So when the profitability question comes more for our companies and stores, and with COVID, we have shut down all the fundamentally loss-making store. And what we have now are again on a fundamental basis, a profitable store. So all revenue increase would increase their profitability going forward. Also, the rent reductions and all that that we did in a lot of places, we were able to bring down the cost on a long run basis in terms of renegotiation of rents that would also help to drive profitability of the companies and stores going forward. In terms of the franchisee stores, it is selection of the right partner who has the best knowledge of the local in which the store is coming up and is able to manage the cost, and therefore, it's profitability and our profitability there is about the price that we sell to the franchisee. So there, our profitabilities is kind of given, and we assess the franchisee to our possibility to make them profitable by investing in the revenue growth of that store.

My second question is you mentioned that there was some supply chain, the adoption from Bangladesh. So was there any sales loss on account of the supply chain dilution? And if yes, what are we doing going forward to ensure that we don't have a loss given that the demand from that we're seeing could be stronger?

Yes. So to answer the first question, the disruption from Bompay supplies happened because of the second wave, which happened in Bangladesh in July and August more, the peak was more in June, and it came down in July and August. So there was a lag of 4 to 6 weeks between peak and Bangladesh peak, and therefore, there was a national shut down there and the factories had disruption. So it kind of was a temporary disruption in quarter to beginning part of the quarter 2, which resulted in supply disruption downstream. We would have lost some opportunities of getting sales because of because of that disruption. Going forward, after that, from August, September onwards, the manufacturing is at full swing, and we don't see disruption from Bangladesh causing. Unless there is another way or another event like that happens, we don't see a problem on a steady state coming in supplies.

And my last question is that, is it possible to quantify what could be the increase in revenue from the incremental capital investments, which you are making both in India as well as in Bangladesh, what is the other asset turns on this incremental investment?

No, I think that's too detailed for this conversation right now.

So Bhargav, the basic purpose of increasing the capacities is to have our own dependence and not depend on an external party. So that's the whole point. Also is supposed today, we are doing an outsourcing. If you do involve, you'll make more money. So that's how we're. Today, I start to think about spending. It will take 3 to 6 months for the capacities to get build up. So we have to get ready for the next year. That's the whole plan.

Just one last question. Also the total inventory of about INR 330-odd crores, the composition is broadly the same as in the first quarter or the data inventory still by inventory of backpack is coming up?

Yes, backpack inventory has started coming up. This also contributes more of raw material than haptically, because we are getting ready for the next quarter.

The next question is from the line of Jinesh Joshi from Prabhudas Lilladher.

Madam, each question you highlighted that the majority of the entry on the balance sheet pertains to the raw material inventory. And considering that, we are facing RM cost inflation, is it fair to assume that our gross margins in the next quarter can be higher than 47%, which we reported in this quarter because we have already sourced our inventory, and the situation will be favorable for that?

See, most of the inventory is not RM, I said the mix is favorable towards RM. Also, whatever we have procured is at a high price only, because it already hit us, right, inflation. Further increase, there might be some gap, but our endeavor is to definitely have better margins close to 50%. We'll have to wait and see how much price increase we can take, how the market is. Depending on that, the gross margin will depend. But yes, definitely, we have an ambitious to reach 50% for the next 2 quarters.

Okay. And this INR 320 crores of inventory with the 50% gross margin it can essentially support the INR 600 crores kind of a top line. So essentially, our reliance on more sourcing for the next 2 quarters is lower, right? Is that the right way to think?

No. The INR 300 crores is not raw material inventory. That is finished good plus raw material. There is a certain proportion between them. So therefore, that does not conflict into a INR 600 crores, then there is a raw material that needs to be procured for coming quarter and the quarter after that.

Okay. And one last question from my side. In the last call, we had stated that we plan to launch some 20 to 25 new products, and majorly, 1/3 of them would be from the value in the mask category. So how has been the response to the new launches? If you can just shed some light on that?

So 1 week, we have launched the set of products that we had planned to do in quarter 2, and a lot of it is also planned in quarter 3. All of them has been received extremely well in the market. And this strategy is paying up for us to regenerate demand versus that. So it's working for us.

Okay. And these launches, were they in the luggage segment? Or were they in the backpack business?

This was predominantly in the luggage segment, because in the backpack segment, we are carrying some inventory from the past as we spoke in the previous meetings. And once that inventory is exhaust, we are going to come up with a completely new range in the subsequent, hopefully, in the start of the next financial year.

The next question is from the line of Ronak Vora from OHM Advisors (sic) [ AUM Advisors ].

Just a quest on the cost side. How much would be our cost savings due to COVID which wouldn't come back, back into our P&L?

So we had saved INR 180 crores in the COVID year, and 50% of this is sustainable and 50% of this will come back when the business is back.

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

I have 2 questions. So first is, given the fact that we have seen such a big amount of e-commerce ramp up happening in the country, any thoughts of launching e-commerce specific or a D2C brand within budgets only for e-commerce? That's the first question. And the second question is, given Future was one of the largest customer, and we had very lumpy revenues there, with some clarity likely not much there, should one really assume normalization of those INR 300 crores bulk revenues coming back for us?

To answer your second question, we're also looking forward to that and share the same sentiment, because as things normalizes in one of our largest customers, we have no reason not to believe that we should be able to get back to the similar revenues that we had in the past.

And just one question. So we essentially lost about INR 300 crores, INR 350 crores of revenue, so we are at 80%, 85% of pre-COVID assuming 0 revenues from them, right? So in some sense at that time will be normalized, you would be about pre-COVID any which ways.

It has not become 0 for sure. It has reduced higher than -- or its recovery is lower than other channels. But all the stores are functional, and our business continues with them at a suboptimal level compared to what we think can happen in those stores and in with the banner.

And on the Internet specific brand?

Yes. On your e-commerce question. So well, that could be a strategy that we could look at an exclusive brand, but mostly, I think the costs of e-commerce is to really look at the consumer demand profile had to create our offerings in line with that. We were doing well there, and we continue to invest behind the demand that is coming up in e-commerce through our current brands and mostly through the portfolio that we are building under the current brands. So the same brand architecture and is taken forward in e-commerce, and we are mostly trusting on the right mix that we need to develop for e-commerce there.

Got it. And has there been any case in this quarter or what are you seeing right now where you're running short of inventory for certain SKUs, where demand is far higher than supply? Are you seeing those kind of situations happening currently?

Yes. I spoke about that in the quarter that has gone by, we have faced several supply situations. And the cause of that was Bangladesh disruption, as I spoke about it. While there is no formal thread across any specific SKU or a range, but the production that happens in Bangladesh, that range had issues in the previous quarter in terms of supplies. But that's got corrected now for the coming quarters.

Got it. And one final question, if I may squeeze in. On exports, if you can just let us know any progress on that side? Or if it continues to be slightly slow earning?

So the export business continues, but there is no major thrust that we are doing in that side right now, largely coming from our supply side and the idea would be to first fulfill the demand that is there in India, and in the near future in the domestic business before we start looking outside.

And for Caprese, we plan to launch the Caprese into other channels and much more wider rollout, any update on that?

So the Caprese is the focus on e-commerce is the highest right now from Caprese channel point of view, Caprese brand point of view, but yes, we do play it in other channels as well. In the near future, we would like to go deeper into the e-commerce business with Caprese before we take it across many channels.

The next question is from the line of Gautam Bafna from Wisdom Torch.

I believe demand is stronger in hard target segment in our case. So how much capacity do we have in for hard luggage in-house? And what is the current capacity utilization there over there?

So you're right, the demand is in favor of hard luggage, and that's a welcome thing for us because that's been our stronghold in the past. As I spoke about in Bangladesh, we intend to initiate or legate manufacturing as well in the near future. So today, in Bangladesh, in the past, we were doing largely soft luggage in Bangladesh, but in the future, we are investing to create both molding as well as assembly of hard luggage in Bangladesh. So that's where we will expand. We are also looking at avenues of expanding hard luggage manufacturing within our market facility to further create headroom in hard luggage.

Sir, my question was regarding the existing capacity and capacity utilization level, if you can throw in light?

So existing capacity is 100% utilized right now.

Sure. During the COVID wave, the unorganized sector was hardly impacted. So do we see any recovery in that segment? Digitally unorganized, they're recovering back, I don't know there is a competition or we are still hardly impacted?

Difficult to say right now, I think the unorganized sector would not go away completely, but there would be, I'm expecting the unorganized sector to have more challenge than the organized sector in the coming few quarters, coming largely from supplies and the import situation from China. So to that extent, they would have higher headwinds than the organized sector, and that could be favorable for players like us.

Sure. And my last question regarding raw material. Are we making any shift from polycarbonate to polypropylene to improve on our costing point?