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

Ladies and gentlemen, good morning, and welcome to the Q3 and 9 Months FY '24 Earnings Conference Call of V.I.P. Industries Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Snighter Albuquerque from Adfactors PR's Investor Relations team. Thank you, and over to you.

Thanks, Yashashri. A very good morning to everyone, and welcome to the Q3 and 9 months FY '24 earnings call of V.I.P. Industries Limited. From the senior management, we have with us Ms. Radhika Piramal, Executive Director and Vice Chairperson; Ms. Neetu Kashiramka, Managing Director and Chief Financial Officer. Before we begin the conference call, I would like to mention that some of the statements made during the course of today's call may be forward-looking in nature, including those related to the future financials and operating performances, benefits and synergies of the company's strategy, future opportunities and growth of the market or the company's services. During -- further, I would like to mention that some of the statements made in today's conference maybe -- may involve risks and uncertainties. Thank you. And over to you, Ms. Radhika Piramal.

Thank you so much. Good morning, everybody, and thanks for making time for our call. I hope you would have had a chance to see the investor presentation that we have shared. I will not run through the numbers and that again, Neetu will do that in a minute. I thought I would share some more general remarks about the company. I would like to firstly address the issues head-on. It has been a poor quarter for us. We recognize our underperformance, and we are not meeting our own standards. Having said that, I would like to reassure all our investors that in the quarter gone by, there have been many changes and many inputs, a lot of good work has happened in many different departments and in the company overall. And the output of that in the form of higher sales and better margins is not yet showing, but it will start to show in the current quarter, that is Q4 and then further in Q1, and there will be a sequential improvement as our MD gets more time to make decisions and then implement those decisions and she is taking these decisions at a good pace. Here, I would like to add that Neetu and I personally are an excellent team. I believe that we have very complementary skill sets. And I also want to reassure the investor communities that both of us are extremely committed to our shared common goal that we shared with you all, which is shareholder value creation. So the fact that the quarter's performance is only down standard, and that we -- our share prices have grown the way you would since COVID is a matter of grave concern to everybody at V.I.P. and the main way we are using to tackle this is a combined teamwork between Neetu and myself to make good, fast decisions on a number of different focus areas, which I will outline. And I'm extremely confident that there will be a much better performance in the calendar year 2024. So which are these focus areas? Basically, there are 4. The process of product range, Neetu is going to talk about it in much more detail, and it should be visible improvement in the stores across the country sort of more or less from this month onwards a little bit and then more and more from March and April onwards. So the products are much better. The second focus area for us is premiumization. We all know that currently Aristocrat is the largest brand in our company. But certainly, the company's role is that Skybags of V.I.P. should be the largest brand. We are not meant to be a value company. We are a mid-premium company, and we need to get back to those winning ways. The third area in which there has been a lot of work has been on the leadership team. Neetu will talk about this in more detail. There were some intimations made to the stock exchange towards the end of December, and we are happy to address that. And the fourth and final piece that we are working on with a lot of focus is improving our availability and fill rates as well as the cost of our supply chain. So there's good work happening on all 4 areas. I'll repeat the 4 areas. The first is the product, the second is premiumization, the third is the leadership team and the fourth are fill rates and cost of supply chain. So with that, I'd like to conclude my general remarks and hand over to Neetu. But I would like to reiterate at this time that the top management of V.I.P. as well as the promoters are totally committed to shareholder value creation. In fact, we stand to gain the most as this happens and we are confident of the same in 2024. Thank you, Neetu, and over to you.

Thanks, Radhika. Good morning, everyone. Thank you for joining the call. We announced our third quarter results yesterday. And before we talk about the results, let me just highlight as to what structural areas, some of the things Radhika already spoke, I'll skip that. But what I started with, so it's 4 months now, I visited 20 markets in the last 4 months to understand from my own eyes as to where we are and where is the competition. Good thing, which -- so 2 good things which I observed is our presence is across the length and breadth of the country. However, I think competition is slightly ahead on product from our standpoint. But other thing which I realized is that the brand recall for all our brands is quite good, especially V.I.P. and Skybags, they are well known into the market. And therefore, if we do a product right, I think we can win this game quite fast. And I'm very happy to say that we are launching 37 new ranges between December to March. 5 to 6 are already done and a lot is going to happen between Feb and March. Definitely, if you go and see our stores after -- around March, you'll see a startling difference. Even if you go today, to what it was 4 months back, you will see that difference, visible difference. The other thing, a lot of time I have spent in last 4 months on having the right team to take this organization to the next level. 60% of my team is either new or handling a new portfolio. You must have seen that in the presentation, which has been shared. So a lot of fundamental changes. So I think I spent a lot of time on all these things in the last 4 months. And these changes now will start to follow into the performance. You've already got the presentation. So let me just give a few highlights. I'm not going to talk very detailed on the numbers because everything is available with you. I will maybe give more time for you to ask me questions, and I can answer it in as much detail as you need. So quarter 3 recorded a revenue growth of 4%. However, domestic grew 6%, which means International had an impact. This was mainly because of China coming back and also slowdown in some of the Middle East areas. However, there is one good thing, which has happened because our entire focus was on clearing the pipeline inventory. So our secondary sales for quarter 3 is a growth of 24%. And e-commerce has seen quite a heartening growth, 65%. So I think our decision to accelerate e-commerce growth has helped. We have opened 25 new EBOs during the quarter, mainly through FR route. Last time we had spoken about a few airport stores coming up. I'm happy to inform that 2 stores at the Mumbai Airport are operational and 4 additional in different cities is coming up before March and 10 more in the FY '25. One more good thing happened in quarter 3, V.I.P. has grown double digit. So for the first time after a long, V.I.P has seen a double-digit growth. And this was behind our premium launches. So there were 2 new launches which happened in V.I.P during this quarter, which was a lightweight category, I think that's got a great response, and I'm quite hopeful now that our V.I.P. and Skybags brand growth will start to come in. Aristocrat also grew. And Aristocrat now is on a sustainable growth journey. So entire focus of my team going forward will be on the premiumization. You'll also witness a lot of launches. And because of these premium launches, I think the growth will also start to see. January is also showing some green shoots. We should be -- so we are growing double digit now in January and for the quarter, it should be upward of 15%. ASPs have started to grow. So our realization per piece we saw in quarter 3 has started growing, and we should further see acceleration in quarter 4. And -- so basically, premiumization will be 2 ways, upgrading the existing customer and also adding new customers to our portfolio, which was either buying a competition product or buying something out -- from outside the country. So our product portfolio is going to compete with everybody in the market today. On profitability, one good thing which we have seen last 2 quarters, gross margins are -- have reached where it should be. So we are in the range of 55%, 56% already. And gross margin is actually more difficult than anything else. Once we have received the gross margin right, I think balance should follow. And also with premiumization and ASP improvement, which should further strengthen our position on getting into margin improvement. EBITDA definitely has seen quite a sharp reduction. This is mainly because of increased freight, accelerated investments in e-commerce channel, marketplace activation and professional fees for accelerating the e-comm growth. If I have to talk about the market indicators, all -- everything looks like positive. The air traffic, passenger traffic, hotel occupancy remains positive. And therefore, I am quite confident that starting from quarter 4 our sales numbers should start to increase. So first, you will see growth in sales, followed by profitability. And me and my team can assure you that we are working tirelessly to make this happen. Also understand that all of us have this ESAR program. If we do it right, the V.I.P share price improves and therefore, we also gain. One more thing is that we have extended this program now to second level also. So basically, 50 people have -- are part of this program. Earlier, there were only 11 people for this program. Today, there are 50 people. And therefore, I'm quite confident that together, V.I.P. team will make this company into a next level, just give us some time. And I think your patience will help. In this quarter, quarter 4, I'm assuring that we'll definitely have a double-digit revenue growth and much better starting from quarter 1 FY '25. Also, all the efforts which we have taken, I think the results are not visible in quarter 3, it's invisible, but visibility will start soon. With that, I think I will open the floor for questions.

[Operator Instructions] We have our first question from the line of Jinesh Joshi from Prabhudas Lilladher.

I have a question on our inventory. I mean if I look at 1H, if I remember right, we were at about INR 763 crores. And I believe in this quarter, we have piled up another INR 122 crores. So any reason for not consuming the existing stock, but building more onto it? And also, how should we see the warehousing costs move in the near term because of rising inventory?

So basically, you are right, the inventories have gone up, mainly -- so there is one fundamental change which we are seeing, we've also alluded that into our presentation, that suddenly we are seeing a soft luggage slowdown into the overall market and that is the reason why you see this inventory. However, we already have some plans around how do we take care of reduction in this inventory. Warehousing costs currently whatever it is, I think in next 2 quarters, it should come down because we have plans to reduce our inventory levels. From where it is today, it should be in the range of INR 600 crores.

Sure. And my second question is with respect to our revenue. I mean, in this quarter, is it a grossed up for the performance marketing fee towards e-comm? And if yes, can you share the quantum?

So there is no change in the accounting because in the middle of the year, we didn't want to do that and even auditors did not agree. But going forward, we'll see if we have to do that. But that has not been done.

Got that. One last question...

This is as compared to last quarter.

Got that. Got that. One last question from my side. I think in the PPT, we have mentioned that the other expense was high due to higher freight. So if you can explain the reason behind that. And also, our tax rate was at about 46% in this quarter. So any specific reason for it?

So one, the freight is high because of multiple movements of goods because we want to liquidate this soft-luggage inventory. It has had multiple movements. And tax rate is higher mainly because of deferred tax assets which got created. Because our profits are low, we created a deferred tax asset. However, for the year, it will be around 27%.

We have our next question from the line of Lokesh Maru from Nippon Mutual Fund.

Two questions. One is, are we also selling uppercase in our retail outlets at this point? And why would that be?

No, let me answer that. We are not selling uppercase in our retail stores. We consider uppercase a new competitor in the market.

Why that question but like -- did you see uppercase in our outlet?

Yes, yes. That was a V.I.P. exclusive outlet. Okay. And my next question...

Tell me which outlet?

You send us that detail.

Yes. Please send me an e-mail.

Sure. I will send that offline. Another point is on profitability. It's quite visible that our profitability margin structure has changed now given the freight cost and performance marketing spend, e-comm expenses, et cetera. So that margin has come down to 1.2%, could be -- if you adjust for tax, could be higher than that, obviously. But any guidance on, earlier if our band was 18% to 20%, now it's certainly lower, but how do we proceed with that going forward?

We'll still maintain our guidance of 18% to 20% over next 12 to 18 months. Whatever you are seeing currently is also because the sales growth is lower, and therefore, overhead absorption is not having -- is not happening at the pace at which it should have happened. So you will start seeing improvement starting quarter 1. And in 12 to 18 months, we will get back to whatever promises we have done. So 18% is something which definitely you will see in the next 18 months.

Okay. And ma'am, as our sales grow, would this commission that you have to pay to the e-comm channel, the website, would that be proportionate to sales? Or is it fixed in amount?

It will -- it is as a percentage to revenue; however, last year, we -- it was like first year of our acceleration, therefore, the percentage was high. It will come down as we -- as the growth happens.

We have our next question from the line of Jaiveer Shekhawat from AMBIT Capital.

Neetu, first question is on relation to the resignations that have happened at the management level, especially the middle-level management, especially post Anindya's exit. So one, could you, say -- talk more about your strategy to sort of stem this attrition and have you already found replacements?

Let me take that on. I think Neetu has gone about things in a very organized manner. The change of leadership and so at the MD level happened in August. Neetu has taken time to assess the market, do market visits to assess the team and then in a very calculated and planned manner, there were some resignations in December. And I think all the positions are full at the moment. We are expecting our CFO to join shortly.

Yes. And so this resignations were planned...

To some extent.

Yes. it's not that it happened because...

Mutual convenience of all involved.

Sure. And secondly, when I see your growth, now if I compare it versus the pre-COVID levels, whether you take FY '19 or '20, I think growth has only been around 20, 25 percentage and a large chunk of that has come via higher realization. So you are still growing your volumes in low single digits. So what really explains that and what's your strategy to sort of grow your volumes from here on?

So volumes did grow. So basically, what had happened, value growth is low mainly because of the mix change. And Aristocrat grew faster than the other brands. And Aristocrat price realization is almost 60% of what V.I.P. or -- V.I.P. or Skybags realizes. So volume growth is there. Going forward, I already alluded that we have a strategy for premiumization. And volume growth will happen because this year, we are not taking any price increases because we are at a good gross margins, and we are not taking any price increases. So whatever growth you will see will be in volume terms only.

Right. And last quarter, I think you also alluded about the margin improvement, and we understand it's largely because of the higher inventory that you're carrying -- that you're incurring that additional freight warehousing costs. So one, you did mention about the remark amount that your soft luggage sales are not taking place and you already hold a lot of inventory. So what's your strategy -- exact strategy to sort of liquidate that part?

So I cannot talk about strategy on the call. However, we can meet maybe one-on-one or have a call. I can tell you. However, there is a plan that 50% of my slow-moving inventory, I should reduce by March.

Sure. And lastly, if you could talk about the range of competitive intensity that you are seeing and whether your competitors are sort of resorting to aggressive discounting to push their sales? Is that what are you seeing in the market?

Not so much now.

I will say it's a good, healthy...

Yes. It's a healthy...

It's a competition in the market with 2, 3 larger players and then a number of new entrants. And it makes it exciting to compete in this market that has a lot of potential for growth. I'm not surprised there's a lot of new entrants.

Because in the past, what we have seen is we have, in some quarters held on to our margins and compromised on the growth. So there has always been a growth margin trade-off. So what's your strategy going forward if they had resort to [accounting]?

So with my premiumization strategy, I think the way I look at it is I should have a profitable growth. And with premium strategy, it will automatically happen. So I'll go after profitable growth.

Our brands, V.I.P. and Skybags, are very strong. We have experienced it in the past. If they are not showing the strength in the market right now, they will soon on the basis of stronger product lines, better fill rates and a more focus within the company on our mid-premium brands rather than our value part.

And over the next 12 months, you will definitely see some products which are first in India, then first in overall luggage industry and then something out of the box, I think, just wait and watch.

We have our next question from the line of Manish Poddar from Invesco Asset Management.

I just had two questions. One is, you spoke about product quality and probably not meeting to expectation. Just trying to understand...

Let me -- sorry, let me clarify, not quality, attractiveness of the ranges. That's the product design, not product quality.

Okay. So can you probably double-click and help us understand what are you doing to probably in terms of interventions, not really getting into the broader strategy, but if you can probably help me understand 2, 3 areas where you have taken course correction?

So one, we are investing in the right team. I think design and development innovation is key focus. Manish, you can come to office, I can show you my new ranges. It's all there. Come to office, you can see. I can show you the entire range which is coming up in Feb and March. You yourself will see the difference.

Okay. Okay. And would it be right to say, let's say, when you -- and first you will correct and this inventory amount which you want to get it down in the next quarter, would it be right, let's say, when you look at FY '25, that is the year when you look at probably build up sales again, get the right products at pace and probably margin is not one should focus in FY '25. Is that how one should think about that year?

As I said earlier also that I'll be focusing on a profitable growth. I'm not saying I will reach 18% EBITDA starting quarter 1, but that will be -- you'll see a journey. So sequentially, the margin improvement should be visible. But I focus on both. And revenue, you will start seeing better revenue growth starting from quarter 4.

Just -- I don't want to put in a number, but what I'm trying to understand is, let's say, would internally, you all will be happy with, let's say, 15% growth in, let's say, 16% to 18% margin or would you want 20% growth and 15% margin is what I am trying to understand?

Manish, I think, I need 1 or 2 more quarters to tell this because a lot of things are like moving parts which I'm working on today. So just give me -- I don't want to put any numbers at this point.

We have our next question from the line of Bhavin Rupani from Investec.

My first question is related to your Skybags and V.I.P. Ma'am, we have been saying that our focus is to increase the share of premium and mass product, but the combined share of both the products has been declining continuously. Can you please list down some of the corrective measures that we are taking over here, apart from the new launches that you are supposed to make in the next couple of quarters?

Yes. So as I mentioned that we are looking at realigning our portfolio basis the competition, something which is better than competition, something which is not seen in the travel industry and something out of the box, with that premiumization strategy, which is definitely on V.I.P. and Skybags, you will start seeing. And actually, if you see in this quarter, quarter 3, our V.I.P. has grown high double-digit, 20% after a long, long time, it is showing. And we launched just 2 or 3 ranges in this quarter and that too mid-November, means 45 days of new products has given us that kind of result. So I'm very, very sure that our new product portfolio -- also, we are focusing on V.I.P. because earlier, I think I want to change the perception that V.I.P. is an older brand. I think that's something which I want to change. If you go to our store today also, you see a product which is a Airtron and Air, I think you can feel the difference. You can go to any V.I.P. store launched today. You'll see these new products which are doing fantastic.

Got it, ma'am. And is it possible to quantify what incremental growth in V.I.P. is from the new product in this quarter?

Entire growth is from new products in V.I.P. for this quarter.

Let me just -- so at any given month, typically, new products can be 20% to 30% of our sales because that's the nature of our industry. It's possible that in the last, let's say, 18 months, the frequency of our new product launches was not good enough. Our products are getting dated. That is one basic theme we are getting back to. In any consumer brand, I think the strength of the product assortments really drive growth, it's what attracts the customer. And that is why we are focusing on products. Once again, it's the heart of the business.

Just to add, travel is also becoming part of your -- something which you are carrying, and it is becoming more fashion as compared to earlier it was convenience. And that's why also design, color, innovation makes a lot of difference.

And we acknowledge that our product range was getting a bit faded and dated. We did not do enough -- good enough product development in the first 18 months after COVID, but Neetu has been working extremely hard on this for the last 4, 5 months.

Got it, ma'am. And on Caprese, revenue more or less has been stable over here. What could be the reason over here? And what are the steps that we are taking here as well?

So one, lots to do for me on luggage, which is 95% of the business, and therefore, maybe this got slightly ignored. It will take 2, 3 more quarters for you to see better growth in Caprese.

Got it, ma'am. And I understand your other expenses have increased by almost 7.5% of sales as compared to last year. Is it purely on account of freight cost?

One is freight. And the second, we are doing this accelerated e-comm project with BCG. So that cost is also part of this other expense. It should be over in March.

Got it. Got it, ma'am. And if I can squeeze in one more on incremental capital allocation, what is our current capacity if you can separate it between hard luggage and soft luggage? And what is the incremental capacity we are adding? And by when it will commercialize?

In hard luggage, we have 94% capacity utilization. In soft luggage, it is around 70%. In hard luggage, we are looking at few models whereby we will be doing a distributed manufacturing and it does not require too much of a CapEx at this point in time.

And also some incremental supplies from China.

Yes. And also as a strategy, all my new design, which are something different, are coming from China.

Got it. So what would be the capacity as of now? And any plans to increase over here?

I don't want to put that number. But it is 20% increase from last year on hard luggage. Soft luggage, we have not increased. In fact, we are converting our price capacity into duffels and backpacks, which are large categories, and we have good plans for those 2 categories to grow.

We have our next question from the line of Tejash Shah from Avendus Spark.

First question is based on your extensive market visits that you've done, how would you articulate the core problem statement of constructing the revival plan?

It's all about product, product, product, nothing else and premiumization and fill rates.

Yes, and fill rates.

So right product at the right time to the right consumer, I think that's how I define it. And therefore, my first few months, I've spent more on product. Tejash, [Foreign Language].

And ma'am, anything on Carlton because of the consumer, we have always felt...

Maybe next quarter, year-end, I will do a physical analyst meet. We will show you what we have done, show my product range to see -- so that everybody can see what has happened in the last 6, 7 months.

Sure. And ma'am, secondly, your guidance on 18% margin, considering the challenges that you are handling today, would you say that 18% will be an exit month -- or exit quarter guidance for next year? Or do you think that...

Not next year. I said 12 to 18 months from...

18 months, yes.

Which means, exit of that quarter at the end will be that 18%.

Perfect. And ma'am, looking at the current debt situation and inventory situation, I was just curious what prompted the decision to declare interim dividend because we have a cash requirement in the business to fight or make all these changes.

Understood. I think we took a middle part, which is that we did not increase our borrowing limits in order to fund this dividend. And at the same time, it also reflects our confidence in the future that we did not think this was such a big financial burden or impact on the company. We want to show some confidence, at the same time, take it in a measured way. And we will decide about final dividend basis the final result only. So we'll see whether there should be a final dividend or not.

Got it. And then last, if I may, you were forming your new team, what talent and cultural gap are you actively addressing through your hiring?

Speed of decision-making is our #1 priority, granular detail and understanding of our business, industry and company second, that's it. They're not complicated.

With no baggage.

And no baggage.

So no baggage means are you going outside your industry to hire talent or...

Always have to do that.

Yes.

That is -- but that is common because in our industry, it's a fairly small industry. We all know each other, our competitors fairly well. So we often go outside industry as well as our competitors. It's not unusual.

We have our next question from the line of Shobit Singhal from Anand Rathi.

Ma'am, can you please share the volume growth for this quarter and for 9 months?

I think volume growth for the quarter was negative 4% and 6% growth for 9 months.

Okay. And what is the current store count we have? And what is the target for the year-end and next year?

So we have added 25 stores in the current year, which is taking the overall number to 541.

Okay. And what is the target for the next year?

Target is 600 for the [indiscernible] we are looking at around 600.

Okay. So this is year we will -- and by -- okay, understood.

This year, we should end by 550 stores. Airport stores are coming up...

And next year, so you are saying we will be adding only 40 stores?

We'll be adding 50 stores, so 550 and then 600, so 50 stores.

Okay. Understood. And all will be on the franchisee, right?

80% franchisee because certain places, large malls, they don't give it to the -- other than the manufacturer or the brand company.

The next question is from the line of Shirish Pardeshi from Centrum Broking.

I have one fundamental question. Over 4 months, you have walked the journey, and there is a lot of scope and there is work which is done, which Radhika alluded in the beginning. So task force members have become from 11 to 50. I was more curious in your weekly, monthly, quarterly review, what are the things that are discussed and what are the top 3 priorities the management is concerned about? I mean though, Neetu you said that the product is one of the things which you're focusing. But I was more curious what are the things -- what are the parameters we are measuring the performance of the team?