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

Ladies and gentlemen, good day, and welcome to the Q2 and H1 FY '25 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. Pratik Patil from Adfactors PR Investor Relations team. Thank you, and over to you, sir.

Thank you, Steve. A very good afternoon to everyone, and welcome to the Q2 and H1 FY '25 Earnings Call of V.I.P. Industries Limited. From the senior management, we have with us Ms. Neetu Kashiramka, Managing Director; and Mr. Manish Desai, 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 of the company's services. Further, I would like to mention that some of the statements made in today's conference call may involve risks and uncertainties. Thank you, and over to you, Ms. Neetu Kashiramka.

Good afternoon, everyone. Thanks for joining the call. We just announced our second quarter results yesterday. So before we get into the revenue and profitability, I would like to give you 2, 3 highlights, which are the positives for the quarter and H1. So basically, in past 6 months, we have been able to reduce our inventory by INR 174 crores. Also, our market share has improved. So 2 quarters ago, our market share between the 3 organized players had reached 36%. Today, it stands at 40%. And for this quarter, we are yet to get the numbers, but I'm quite confident that even this quarter, we will gain some market share. Moving on to quarter 2 P&L performance. While revenue value growth remained flat, volume growth stands at 18% for the quarter. And for H1, it is at 14.4%. Moving to quarter 2 P&L performance. So overall, revenue growth for the quarter was muted, mainly due to low uptake from the traditional channels due to aggressive pricing by e-commerce during Big Billion Day and GOAT sales. If you have to talk about channel-wise performance, e-commerce continued to do a good performance at 54% growth. Offline channel, as I said, was under pressure, institution again, showed a 40% plus growth for quarter 2 and similar for H1 as well. International business mainly suffered due to underperformance of key countries in Asia and GCC. So our major sale actually in the international market is to these 2 continents and therefore their growth is under pressure and so for us. Value segment continued its growth trajectory, which was driven by e-commerce sales. Lower end continues to grow better, however, 50% of the portfolio still is premium and mid-premium. Carlton actually showed good growth. So premiumization agenda on the back of Carlton is showing a positive response. VIP also grew. Skybags is a brand which did not show a positive growth, mainly on account of lower mix of backpack. In case of ladies handbag, Kiara collection did well. And now we are going ahead in ladies handbag with GT expansion. I think going forward, this will definitely show good growth. Hard luggage again continued to be the fastest-growing category, contributing to over 60% of the organization overall revenue. If you look at gross margin, I think this is where the major pressure was. However, sequentially, it grew by 80 bps. But if you look at year-on-year, there is a dip of 1,000 basis points, mainly on account of brand mix and channel mix, also coupled with soft luggage inventory reduction, and lower production in Bangladesh. And EBITDA got impacted due to lower GC and other expenses was higher, mainly account of warehousing costs because of high inventory. I understand that the transformation journey as we spoke is showing slow visible improvements in spite of a lot of work happening across each area. I'm quite confident that results of these initiatives will start to be visible starting quarter 3 and more so improving our profitability for H2 as promised earlier as well. If I have to talk about demand indicators, it looks fine with festival around and also upcoming wedding dates, which also looks to be very strong in quarter 3 and a part in quarter 4. We are steadfast in our transformation journey, successful results of which will start showcasing in the upcoming quarters. Bangladesh factory is now running full fledge, and from quarter 3 onwards, it will also start showing profits. New launches of backpack for the new upcoming season is also on track, and hopefully, this will start giving better results to our revenues. Some of the initiatives to also launch some products in VIP and Skybags will start to increase gross margins. The multiple initiatives, which are happening across each area specifically to improve our gross margins, I think it will start to see in quarter 3 onwards. With this, I conclude my opening remarks and open the floor for questions.

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

Ma'am, first question is as you called out in your opening remarks also, we have clearly made good progress in gaining market share. But it does come at the cost of profitability? Even in this quarter on y-o-y basis there is a sizeable shrinkage. So how do you plan to manage this balance between kind of gaining market share versus going back to our gross margin profitability?

So 2 things. One, we have taken certain calls for selling at a lower price mainly because we were stuck with new stocks. It's not that we want to do this on an ongoing basis. Second, our trust on VIP brand will start to increase. So that is the another initiative which we are doing, so that our margins can improve. So the gross margin difference between Aristocrat and the VIP is more than 800 basis points. So slowly, you will see that our focus is more on VIP versus Aristocrat, especially in offline channel.

So ma'am, if I have to narrow down the problem statement, there is a certain proportion of slow-moving inventory, which we are liquidating at slightly lesser margins. And that inventory is largely pertaining to Aristocrat and Alfa and once that is done away with, margins should revert back. Is that the right understanding?

Yes, you're perfectly right. And this -- as I had promised, our gross margin should definitely be around 50%.

Okay. So there is one visible change in our mix is also channel-led margin shrinkage, which is definitely online and institutional businesses are now having higher saliency. So do you see that fourth quarter where the economics of this channel will change? Or their contribution in the overall revenue will change or go down, hence, will margins will go back to normal level?

So it's a mix of both. Quarter 2 generally is a high e-com quarter because all these Big Billion Days and GOAT is schedule here. And quarter 2 is always high on e-commerce. However, H2 will be -- as a percentage of overall saliency, e-commerce share will come down in quarter 3, quarter 4. But we are also having initiatives whereby our e-commerce margin has to improve, and that's also some work in progress.

Okay. And ma'am, this pressure on pricing, are we the source or are we responding to competitive pressure because we had some slow-moving inventory. Hence, we are cutting prices that is dragging down margins for the industry? Or we are responding to some competitive pressure?

I think we are doing this for our soft luggage liquidation. However, in the other area, which is hard luggage also, there is a pricing pressure, which is we are reacting to multiple things. It's not only one thing. But see, there is also a lot of B2C players which are coming into the market, right, and starting to sell. Now, all these players have enough money to burn, which we don't have. So that's where we are a little bit playing on the pricing.

Just to add what MD said, where the competition becomes intense, price is the one point which plays a larger role in minds of the consumers, and it impacts the most to the organized and the incumbent players. So this is the outcome of that, what we are seeing. But I'm sure that over a period of time, the industry or the players may see a consolidation and things comes to a level playing field among the remaining players in the industry.

Also, as I told you, we want to focus more on VIP. So even if I reduce a little bit price on VIP, that is better because my realization will be higher, and profitability will be higher.

No, ma'am, my question was largely around that with 40% plus market share, the pricing discipline should come from us. And the D2C players that you called out, I still think that there'll be less than 5% market share overall. So to respond -- and then most of those players are actually very -- at different price point, perhaps competing with Carlton and likes on the price point. So I was just wondering that, in fact, just to -- we also picked up from media, news that one of the competitors also kind of indicated that the market leader is kind of very aggressive on pricing and that's shrinking the profit pool. So I was just trying to understand that once we are done with this whole pressure on slow-moving inventory, should we think that -- should we build a very normal margin expansion for us and the industry at large?

Yes. You're right, that is what we'll be doing.

Okay. And ma'am, last one, you also called out inventory holding costs for last 4, 5 quarters that is a drag on overheads. So we have done a phenomenal job on reducing inventory in last 3, 4 quarters. So have we reached to a stage of inventory where the holding cost will go back to the normal level? Or it is -- it's still at the higher end?

One more quarter to get to the normal level.

The next question is from the line of Jinesh Joshi from PL Capital.

Madam, I have a question on our channel mix. So if I look at e-com with the 45% share, we have done really well in this quarter. But if I look at our share of GT and MT at about 11% and 18%, it is at a 5-year low. And you mentioned in your opening commentary that aggressive pricing in online is impacting our offtake in the offline trade. So just wanted to understand the thought process behind this move because essentially, this has created a channel conflicted theme. So what's the thought process behind such kind of aggressive pricing in the online channel? And how do you plan to resolve this?

So one, aggressive pricing on the e-commerce channel is not done by us. It is done by the portals. So 2, 3 things we are doing. We are going to give additional warranty for offline players. Second, we are also looking at having a pricing guardrail, especially for VIP brand on online portal. Otherwise, we don't sell to the online portal the VIP product. So these are 2 big initiatives which we have taken to reduce this conflict -- channel conflict. And -- so the share is actually reduced because last 15 days, they almost did not buy because of this. And then we met everybody, we have sent letters and we have made these 2 changes with which they started buying from the first week of October.

But Madam, if the portal is governing the price. And if it is discounting heavily, then obviously, your brand equity takes a big hit. So what are our thoughts on that? And I mean, do we have some plan in place that from 3Q onwards, this will not...

It will be a pricing guardrail for VIP and Skybags, which is our premium brand. They cannot sell below particular MOP. A similar thing which had happened some 3, 4 years back in the mobile industry, I think that's where we are heading towards. And we are already in talks with them to give this to us in writing before we sell going forward.

And furthermore to add, quarter 2 as earlier said, it's a e-comm-led quarter. That's why you're seeing the higher share of business. If I look into the YTD H1, it is hovering around 30% to 35%, in line with the industry presence have in the e-commerce portals. We would like to maintain those kind of revenue share. And our objective is to have all channels working in our favor, not growing at the cost of the others.

Got that. One last question from my side. So if I look at our inventory liquidation in this quarter, it was at about INR 40 crores, and this is lower than what it was in the previous quarter. Now given the pileup that we have, especially on the soft luggage side, can you quantify what is the current slow-moving SL inventory on the balance sheet. And by when can we expect the full liquidation to happen?

So the entire liquidation as said, we need 1 -- or maybe 1 more quarter to look into it. In terms of the overall inventory, INR 50 crores got reduced in this quarter too, especially. Largely, we have to manufacture some of the items because of the e-com specific SKUs, otherwise, my liquidation would have been much on a higher side.

But can you quantify what is the slow-moving SL quantum currently that we have?

SL quantum in terms of the value numbers or the -- volume-wise, we are getting around almost 5 lakh units of the soft luggage upright. And if I take the backpack and duffle also to some part of it, maybe around -- put together all units will come around 7 lakh to 8 lakh units together.

Sir, I want the value number, sorry. Because if I remember right, that quantum was INR 300 crores sometime back. And in the last quarter, we did a liquidation of about INR 80 crores, so what is the current quantum?

So current quantum would be somewhere in the range of INR 180-odd crores, I will re-confirm to you once we progress on the call. Just give me a minute.

Sure. And in that context, I mean especially our debt levels, which is at about INR 500 crores, given we have about INR 180 crores, which is yet to be liquidated, and this would mean that the working capital requirements will be high. Will we still be able to reduce our debt by about INR 250 crores that we had stated in our earlier call?

So if you recollect earlier conversation, we planned for INR 100-odd crores of reduction. And out of that, we already done INR 35 crores. So we are on the track. And hopefully, we'll meet our targets. We hopefully to go exceed the INR 100 crores, but INR 100 crores is given what we are targeting right now, and we'll...

Okay. So we should at about INR 400 crores in terms of debt by end of FY '25?

Yes. If I net off the investments, what you see in the balance sheet, it will again further give me enough cushion for me to play around all this.

Sure, sure. And all the best.

And I'll come back to you on the numbers in 2 minutes...

Yes, that INR 180 crores, if you can clarify, I mean, when you could.

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

Just 2 questions. In the beginning, you mentioned that 18% volume growth in Q2. Can you quantify the number of pieces we have sold? And specific question here is that if I look at the contribution from -- the e-commerce is 45% at this time. So what is the volume contribution from e-commerce and modern trade?

Overall sale volume is 44 lakhs.

It's a 4.4 million units on the overall volume for the quarter 2, registering a growth of around 18%. And if I were to go on because average selling price between MT and e-comm largely remains the same. So it goes as per the revenue growth or the revenue mix we have in terms of the volume as well.

So you're seeing similar numbers for volume also?

Slightly, I said -- because my MT has -- didn't do so well, it has slightly a degrowth, whereas e-comm has given a growth of 45%.

Okay. The second question on the overall momentum, as Neetu, you mentioned that second half to be -- saliency for e-commerce will be lower, but then in that respect, how the second half volume growth and the revenue growth looks like for you?

So basically, today, if you see our volume growth is 18% versus the value growth of 0. In case of second half, I'm confident that our volume growth and value growth difference should not be 18%, but it should be around 8% to 10% -- between 8% to 10%.

And if that is true or if it happens, what kind of margin -- gross margin -- you already mentioned that you will maintain at...

I mentioned that quarter 4 gross margin should be 50%.

Okay. No, I'm coming on the operating margin because right now, when you look at the margins are collapsed, I'm sorry using this word. But then what are the things that at the back end you are doing. So at least if you believe that 50% mark you have achieved in terms of revolutionizing the entire -- the front end and the back end. What kind of operating margin we should build in, in second half?

So are you talking about the gross margin or the EBITDA margin?

No, gross, Neetu already clarified 50%, but I'm talking about EBITDA.

EBITDA margin of 12% for the quarter 4.

Second half, I said Neetu.

So second, as we speak, it's a journey we have to progress. So probably from the 0% of EBITDA margin will move around 3% to 4% to -- via quarter 3, and you'll find a significant jump getting into the quarter 4. Because by then, most of the initiatives that we started, giving the results out of it.

So therefore the follow-up here is that what are the drivers? What are the top 2, 3 things which will help you to achieve this number?

So one, improvement in realization then -- which will in turn also add to the gross margin. So gross margin improvement of 5%, which we spoke about. Then every line item in the cost we have already worked upon and everything to come into the P&L it takes 3 to 4 months. So that is where it is. So warehousing, people, then what is the other big one?

Yes, the fixed cost -- fixed overheads and the other cost -- direct costs.

Each and every line actually.

Okay. The last question from my side on the depreciation and interest cost. What number we should be factoring? Because even this quarter, we have seen that depreciation has increased almost 24% and similar number, double-digit growth, in the interest cost. So you know the numbers well, you are seeing that INR 100 crore reduction, which will happen in debt. But what is the interest cost we should build in for the full year and depreciation cost?

So chief, interest cost comprises of 2 factors. One thing is my fund-based borrowing which I'm doing from bank. And other thing includes in some of my structured way of financing I'm doing on vendors as well as from the customer side. On a bank borrowing side, definitely, you'll find a good amount of reduction happening. And in terms of the structured finance, it [indiscernible] so you can assume the same level of interest going in quarter 3. Quarter 4, you will find a reduction of almost 10% to 12% than what you have seen today in the overall value.

And in terms of depreciation?

Depreciation should remain as because we are expanding on our stores, but I'm sure we are taking certain calls on -- based on the same sales store growth of the existing [ CRM. ] So you should find the same number, hardly leaving aside INR 5 crores to INR 6 crores, maybe exit March for that matter or exit quarter 4 on a higher side.

So just to confirm what you said that if that is the number which you are building. So we'll be able to maintain the profitability what we delivered in FY '24? Or we will still book some loss at the quarter?