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

Good evening, ladies and gentlemen. A very warm welcome to the VIP Industries Limited Q3 and 9M FY '23 Earnings Conference Call. From the senior management, we have with us today 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, sir.

Good evening, everyone. Thank you for taking out time and joining the call. I would -- I'm assuming all of you have received a copy of the presentation and would have -- would have had the time to glance through it. I'm just going to take you through some of the highlights that I have mentioned in the presentation. At the outset, I'm quite happy to announce a good set of results. Our growth continued to be at a high. We had a 32% revenue growth over last year. And even when we compare it with base, it is quite impressive at 22%. Quarter 1 saw just a 5% growth, thereafter in quarter 2, we scaled it up to 25%, and we now continue to be at 20% plus. In fact, the volume growth on the business has been also quite good, 25% year-on-year and almost 18% over base. And just a call out here, this kind of volume growth is happening on a completely altered supply chain at VIP. The revenue performance that I spoke about, if you would have noticed, it's quite well rounded. It's good across brands and channels. Talking about brand first. You would have seen some exciting launches that happened in our portfolio during this quarter. Skybags did a FIFA collection, which did very well. In VIP, we had a Highlander, which is a rugged hard luggage. In Carlton, we launched a couple of soft luggage, premium soft luggage range. And icing on the cake was our launch in Caprese with a range of products by Manish Malhotra. Not only the launches, the activations have been very strong. FIFA was activated with advertisements using endorsers as Kartik Aaryan and many other celebrities. You would have seen some of these activations in Mumbai. We tried to go quite high decibel on it. In fact, the Manish Malhotra launch was far bigger than just the volume, but it was more to drive the imagery on the brand. And I would believe that's just the beginning, we would have much more coming up on Caprese as we go ahead. Overall, at VIP, premium portfolios have started to kick in as we had gone into very high on driving the value portfolio. That was one key point on Q3. When I talk about channels, once again, all channel has played its role in the growth. In fact, not only the revenue growth, but also adding the strategic element and the task that each of the channel has to do. General trade is leading us into driving penetration and accessibility. It increased its town penetration by 80 more towns in this quarter. Now we stand at about 942 towns. We are aiming to be in every town, which is 50,000 plus population. Equally, in EBOs, we have come back to a number of 443 EBOs. This does not include the 42 we have under fit-out right now. Hopefully, we will cross the mark, 500, which we have taken the target for the year before March 31. Pre-COVID, this was -- the highest store count was 485. Modern trade, another call out. We had some challenge and pressure during -– in this -- in quarter 1 because of the Future Group issue that had kicked in. It's still there. But the good news is modern trade is moving beyond its expected numbers in the year and also above with base without Future Group. And in addition to that, by the end of December, a large part of the Future Group stores that got shut has started coming up, just to give you some broad numbers, 279 Big Bazaars that used to be there, today has come up as Smart Bazaars in terms of 235 in numbers, right? So almost 3/4 of what stores used to be there has come in, and therefore, that's going to hopefully help us in the coming quarters. We were strong in these stores, and we should continue our dominance and our relationship with the stores and channels. Along with modern trade, e-commerce has also fired well. Although this is here where we don't think that we have reached our full potential or we are ahead of what our expectation is, so there is a lot that's going on and would continue to happen on e-commerce. On a side note, we also have launched our direct-to-consumer Caprese website, and this has kicked in about 4 weeks back, so we are live and we are -- we have started to get good, we would say green shoots at least on the whole D2C business on Caprese. International business is also doing quite well in its own way. Our strategy of going deeper in our high potential market seems to be working. And the growth that we are seeing is largely coming from lesser number of countries, but far more deeper. For example, as of now, in UAE, we are starting to get double-digit market share in chains like Carrefour and LuLu. So that's why on channels if you briefly talk about our category performance, well, hard luggage continues to dominate in the recent past, but we have started seeing some early change of that in terms of soft luggage coming up. And with our supplies picking up in soft luggage, I think that's quite promising. Backpack, in particular, is doing -- is looking quite well for us in quarter 3 as well. Net-net, overall good revenue growth, and highlight here would be as I started by saying this is completely on a remodeled supply chain, and I would like to give you some numbers there. Currently, 73% of our volumes in quarter 3 was supplied by our own manufacturing facility in India and Bangladesh. In a way this has been the highest-ever ratio reported in any quarter. Our capacities as of right now has increased 65%, our own manufacturing capacities have increased 65% since pandemic. And this year, we seem to be -- we would be investing almost INR 100 crore in this financial year only to increase our capacities. Not everything of this has been spent, but in terms of actioning the spend and increasing the capacity is underway. This is almost equally split between India and Bangladesh in terms of INR 50 crore each. We would have added almost 200,000 square feet of manufacturing space in this year alone. All this is leading to good gross margin, sequential improvement of almost 1.3% and Y-o-Y improvement of 0.5%. This is largely happening on account of raw material prices and thankfully ocean freight. Overall, in terms of our pricing and realization, we've been positive. In terms of overall expenditure, fixed cost expenditure, I think it has been in line with our increased revenue, increased business. Advertisement expenditure increase is a conscious decision, and I think that's an investment that's going very well into our brands and for our future. Overall, EBITDA margin flow through from above has been lower. One large reason other than increasing in advertisement is the provision we did on the Future Group doubtful debt. That's almost taking out 1% out of the EBITDA. The provision we took was of INR 6 crores. Lastly, I think we expect positive demand environment to continue in the coming quarter or the going quarter. We hopefully would continue on our growth trajectory to end the financial year on a good note. And I note in terms of concerns, there is the COVID situation in China, which erupted suddenly. We have high dependence on China. However, it seems like it is passing off quickly. Our teams are working on mitigating the risk. And quarter 4 is more about, not just quarter 4 but also preparing for a very big quarter 1. So that's underway. With this, thank you. I conclude my opening remarks, and I open the floor for questions.

[Operator Instructions] First question is from the line of Karan Khanna from AMBIT Capital.

So Anindya, my first question is on your gross margins. So I think they continue to lag as against your expectation of 50% to 55% range, which you've highlighted in the past. So is it fair to assume that the majority benefit because of cooling off in raw material prices is yet to play out in your margins?

Yes, Karan. The answer is yes.

So -- and second, as a follow-up, what I wanted to understand is that, so you have 443 EBOs today. Can you help us understand the split between VIP and Carlton EBOs?

VIP and Carton EBOs is not part of our strategy. We are not doing a Carlton EBOs separately. We had done a few more as an experiment. I can tell you the strategic bit, which is company-owned and franchisee, which is what we are driving. So 443 is – the split is 160 and 283.

160 and 283. So you think that there is room for perhaps improvement or cost efficiency is there, and both VIP and Carlton EBOs perhaps can be clubbed in one in certain geographies where you have both the EBOs in the same location?

Karan, there are extremely few. So therefore that's not something that we are looking at in terms of separately. There are a few that we have done, Carlton and maybe yes, there could be opportunities. But we are talking in the order of magnitude of single-digit numbers.

So what I'm trying to understand is that despite roughly perhaps 10 percentage differential in gross margin versus your nearest domestic competitor, I think your EBITDA margins are largely in line with your competitors. So in light of this, perhaps what are the initiatives which you could take to further drive cost efficiencies?

Yes. So I think we are benchmarking our business and our P&L from that point of view. Revenue growth is absolutely important. Investing behind that growth in a more sure-footed manner, which is building our supply chain and strengthening that is absolutely important. We have a mix of brands and other than the value brands, the other brand needs to be advertised both in the form of brand-building advertising as well as transaction building advertising, which is more e-commerce. So I think one is in relation to competition, one is in relation to what is the right thing for the business. And I think this is poised in the right direction. I think as the scale goes up, some of these ratios will start playing up better, and that's what in the long run one is looking for.

Sure. Sir, my second question is on the e-commerce vertical. So we've seen that last quarter e-commerce was 22% in terms of revenue contribution, this quarter, it's 13%. So I understand there's some seasonality also in this, but can you help us understand if that -- there has been market share -- any change in the market share in the e-commerce segment?

So to answer the first question, you're right, there is a strong seasonality, seasonality in the sense that maybe more property and -- retail property driven. So the big days and all that are really big for e-commerce. So it's not only for one company, I think for overall fashion, for a larger -- same quarter of larger sector or industry, the quarter 2 is far bigger in the year as far as e-commerce is concerned. So e-commerce overall gains salience in overall market during quarter 2, for luggage industry. So to that extent, if you have more share in a gaining -- in a sector which is gaining salience, you may tend to lose overall share, but it is -- if it is for that quarter, it would even out over a period of time.

Sure. And then last question is for Neetu. If you can help us understand what's the balance receivable from the Future Group. And what was the deferred tax income that was credited to the P&L, if you could explain that and the lower current tax rate during third quarter?

Yes. So the lower tax rate is on account of the receipt of dividend from Bangladesh, which we are in turn giving it back to our investor – shareholders, and therefore we get the tax benefit. And that's why the effective tax rate is going to be around 18% to 19% for the year.

Sure. And on your Future Group any guidance?

We have around INR 12 crores of exposure for them.

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

My first question is a generic one. So if you can touch upon the overall demand environment, specific observations, if you have any on subtrends premium versus mass and then metro versus non-metro. And last one, how the seasonality playing as in -- and most of the categories we are hearing that December -- by the time December came third quarter had a very tough time. So if you can touch upon the subtrends as well.

So Tejash on the demand part, I think till the -- as they say, fingers crossed, we are looking good. The demand seems to be good throughout the quarter 3. And it's getting driven by the same cost that has driven the industry in the past. There is increased amount of travel, outing. There is more expenditure on weddings. We are also seeing things like a backpack and all that is slowly possibly getting more years around kind of purchase and there is repeat happening. So overall, the demand seems good for the industry. And hopefully, it seems like, at least in the near future, while there are talks about various -- while one is reading in the news and seeing there are questions getting raised in the other sectors, I don't see it right now for our industry in the immediate short term. In terms of geographies, yes, there is a tad higher demand in Tier 2, Tier 3 and downward cities. It's more -- it's very measurable on my business, but qualitatively, we can getting a sense of that. Maybe that's also coming from the unorganized shift to organize, having a better play there or a bigger play there, a bit more dominance of unorganized in Tier 2 and down pop strata cities. Did that answer your question? That was the last question on that [ piece ].

And just expanding on the [indiscernible] has been one of the key drivers [indiscernible].

Your voice is breaking actually.

Is this better, hello? Yes. So just expanding it [indiscernible] wanted to know with China opening up, are you seeing or are you picking up any early trends of unorganized also bouncing back with China sourcing also getting sorted as we go on?

Honestly, not seeing a trend, but yes, keeping a watch out for that because, yes, that could be a possibility. It's not a major jump, but it will start fueling what was not fueled so well. So keeping a watch out, but no early signs right now.

Sure. And last one with the volatility that we have seen in margins in the recent past. How should we go for penciling margins for this year? And if you can give some color for the next year as well, what would the guidance around margins?

So as I said, I can't give you a definitive number, but it seems in the right track. I think the fundamentals that I've been talking about and what is there on the presentation is -- continues to be pointing towards a better margin environment going forward in the coming year -- the overall commodity and raw material prices are softening. The ocean freight is down, is much more than before. So it may not have kicked in into the business as of now, but it will -- as we go ahead. So on one side, the tailwind is prices coming down. On the other side, the headwind is also the mix and the value category growing and the unorganized sector pushing the growth further. So there will be some kind of a set of happening. And it's difficult to predict that part because the volatility is more there and margin is a result of that. What's happening is we are pretty sure clear that we will want to have a good balance between margin and share, right, and not trading off one for the other. And therefore, we will have to pick and choose our battles depending on how the environment is. So anywhere between 52% -- 53% is what we would try and keep the ship on is how I stand committed.

Sure. And the last one, mainly a clarification. And you said that tax rate for this year will be 18%. And did I hear it correct?

Yes, you are right.

And then it will normalize by next year?

No, it will be in the range of 18% to 20%. Because we'll continue to do this.

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

Congratulations on a good performance. My first question is on the Caprese brand. So just wanted to know what price points are we sort of targeting when we are looking at significantly scaling up this brand and also which channel will we be targeting to sort of scale up with that.

Yes, I think it's a very pertinent question because this is something that we are starting off now. So somewhere the Caprese brands may have been going towards, let's say, a price point of INR 1,000 and below. We are definitely looking at the mid-premium and slightly above range. So anywhere between INR 2,000 to INR 4,000 range is what will be the mid-part of what the brand should have once we get enough scale. And we'll also do enough which is above INR 5,000 as well. So I wouldn't say we are shifting from a [ bigger A to B ]. We're just repositioning ourselves to what the brand started out with, which is where there is a -- there is a larger void, where there is a play of green design and great brands and therefore, there is a value creation happening. So that will be let's say sweet spot would be about INR 2,500 to INR 3,000 if I was to narrow it down somewhat. That's on the brand and the pricing. In terms of channel, we're going to -- we're looking at more direct-to-consumer involve form to begin with as we create penetration. So it's not only the e-commerce portals, but that's why we started experimenting with -- not experimenting. We have launched our D2C website, and we've done all the preparation in terms of back end to enable a scale up. So that will be another key go-to-market tool. We could also be looking at. And then there are some pilots going on where we are looking at exclusive experience stores, which will be in malls where we would bring in the Caprese premium experience to the consumers. But as I said, at the parent stage, if it works commercially, that's something that we could scale up in a big way in the coming future.

Secondly, just wanted to know in terms of what has been the progress in terms of backward integration. So we were looking at manufacturing trolleys and wheels subsequently to further make ourselves more competitive. So where are we in terms of our game plan?

I can't dilute the concrete stuff right now, but that's something that's on. There are a couple of pilots that has happened on that in terms of understanding of what model will work. But you will see me talking about it or rather doing it in the coming financial year, right? I think we are more focused on making sure that [ as availability ] and the whole supply chain was usually stressed in terms of first scaling up to the demand. And with every going quarter, I think the demand is higher than what we expected. And so therefore, that has been the big focus. But as we scale, as we cross that peak in the coming quarter, which is quarter 1. These are some of the priorities that will be taken out in a big way.

And lastly, on the e-commerce bit, I believe, we are #3 in terms of market share on the e-commerce side, which is lower as compared to offline. So any key learnings from some of our competitors where we can sort of take cue and sort of implement them to increase our market share? Or we want to continue to dominate offline and be third or the second largest player on the online platform.

So one, I think # 3 is not something that I see it as. But you're right that there is no definitive data to corroborate that. But one thing is share that we do not have our fair share, whatever I have shared in the other 4 channels. I have -- I don't have that, and I definitely don't have leadership in e-commerce. So whether it is #2 or #3 is not so important. I think what you're asking, and the answer is that everything we are doing is to make sure that we strive and get first to a majority share, to a leadership market share and then to aspire for a fair share within that channel.

So what are we doing to sort of boost up because essentially, we believe some of our competitors are spending a lot to acquire traffic. So are we going to go into that direction? Or we sort of focus more on product launches to create a differentiation?

No, I think we're doing all that is required, as I said. So therefore, if there is spend, and it's all about the intensity of spend and not about whether one is doing that a lot. So within the portals like Amazon, on Flipkart, are you spending more on performance marketing. So it would have noticed us feeding our brands through thematic advertising and other digital mediums, right? But you've not seen, let's say, competition doing too much of advertising in other mediums, let's say, till about quarter 3. And possibly, most of that was getting into e-commerce. We are looking at that -- or rather, we have kind of made our plans to balance it out slightly more in favor of e-commerce going forward. So we will increase our intensity of spend in e-commerce. Then the other part is portfolio and pricing as well. So there is many -- so that is continuously happening. The pivots are the same. I think the continuity and the intensity is important. And as we are going, we're continuously increasing that. So it's not about starting something. It's more about increasing the intensity over Q3.

The next question is from the line of Manish Poddar from Motilal Oswal AMC.

Actually just wanted to understand 3 further questions. One is, if I look at the manufacturing. So now 73% is by own manufacturing. What is the target, let's say, for FY '24-FY '25?

So this 73% is what is the -- what -- what sales have happened, how 73% of that has been manufactured in-house, right? So in terms of pure sourcing, we are looking at an in-house split of about 60% in the coming year, right? And roughly about 20%, 25% will be, let's say, outsource within India and maybe have about 10% to 15% at the outer limit. This is including Caprese from China. That's a rough breakup, but it's not a limiting thing. So I think depending on what playing more commercial sense, the splits can get altered.

And so would it be right understanding, let's say, if I look at the delta change in manufacturing from pre-COVID till now, that large part of this which even if you are saving at least what duty arbitrage is there. A large part of that has got deteriorated by the mix of higher share of Aristocrat. Is that how it is?

Yes, and also the fact that this is the time that the ocean trade and the inflation was very high.

But would the larger part be the mix part rather than the inflation part? That is what I'm trying to [ listen at ] because if I do the rough maths for the margins...

Maybe 70% mix and 30% other factors?

But we can examine this closely and we come back, but this is our immediate or intuitive judgment to you.

Okay. Just 2 more questions. One is on this future retail stores, or let's say, now under the new entity. So how many stores are we reaching now? Because you said 2/3 of your reaching out 3/4 of the stores. And I think earlier we were doing, I think, 400-odd stores. So how many stores do you reach – how?

No, we reach to everything that is open. What I was telling you is that under the banner of Reliance, out of the 279 Big Bazaars, Smart Bazaars, which is the Reliance banner is 235 stores and at each of the 235. As and when they are opening the stores, they intend to open all the 279 back.

Okay. So effectively from the beginning of the year, which was about 45 stores, now you're reaching to 235 stores.

You're right.

Okay. And just one booking. Neetu, I am just insurance, the balance meant. When is that expected to come across?

Hopefully in this quarter.

Okay. So there is no, let's say, continuity or anything like that? It's just the timing of the difference.

Yes. So it's last leg.

The next question is from the line of [ Tushar Sarda ] from Athena Investments.

On congratulations on a good set of numbers. I wanted to know when you increase your manufacturing, how much can gross margin expand because you will have other manufacturing costs, which will come and sit in the P&L, right? So just on the material side, the expansion should be a lot more.

Yes. So therefore, the comparison is versus not manufacturing and buying from China. So the labor cost advantage and the duty arbitrage, the duty arbitrage is largest. So it is more compared to our earlier supply chain that we were buying from China. Today, we bring in the raw material, make it in Bangladesh and bring it in India. The duty is not there. So there's a 15% advantage in the raw material part of it, which is like you see about 50% of our business, right? So that definitely is advantage. Now there is a labor cost advantage, which could be offsetting with increase in freight or other areas. Right, so straight away, there is this advantage that is there in manufacturing at least.

So I mean, what kind of gross margin will you target, I'm assuming that since you set up the facility, you will prefer to manufacture yourself given all other things are under cost in China really come down.

So like-to-like basis, if the raw material prices are paying for both China and Bangladesh, we will have a 3% to 4% benefit if all the other factors remain the same.

So what kind of gross margin one would look at, say, 3 years down the road, when things are normal -- right now, impression is distorting all the numbers.

Did you say 3?

Yes, 2, 3 years down the road when things are normalized?