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

Ladies and gentlemen, good day, and welcome to the Q4 and 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 Ms. Devyanshi Dave from Adfactors PR Investor Relations team. Thank you, and over to you, ma'am.

Thank you. A very good afternoon to everyone. A warm welcome to the quarter 4 and 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 include certain forward-looking statements, including those related to the future financials and operating performance, 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 [Audio Gap]

Ladies and gentlemen, the management's line has dropped. I would request you all to stay online while I get them reconnected. Thank you. Ladies and gentlemen, the management is reconnected. Please go ahead, ma'am.

Good afternoon, everyone. Thanks for joining the call. Before we move on to P&L performance, I would like to just highlight progresses made on balance sheet commitments we had set out for ourselves at the beginning of the year. During the year, we reduced our inventory by over INR 200 crores, in volumes approximately 25 lakh pieces. Our cash flows from operating activities improved significantly during the year to INR 292 crores positive versus a minus INR 131 crore last year. The cash generated was utilized to reduce borrowings and also funded some of the businesses like e-commerce and modern trade, where the revenues have increased, it has been invested in the debtors. Our debt during the year was reduced by INR 118 crores. We also got a favorable judgment in the high-value indirect tax litigation. Contingent liability to the tune of INR 357 crores have been taken away. So basically, INR 357 crores of contingent liability is no more existing now. Moving to some macro environment. Luggage industry, as we all know, has been one of the most attractive sectors post COVID. High growth rates, positive travel macros, low entry barriers have attracted multiple new entrants. Most of these new entrants are in the online space backed by large investor funding. High heat competition has fueled price war in our segment, especially in the mid-price segment, heavy discounting initiated by online [Audio Gap] brands and e-commerce platform has also put some pressure on realization, not only for us, but across the industry. Our commitment to reduce slow-moving inventory further added pressure on our average selling price. So, while our value growth has been flat after removing the price support, volume continues to grow in double-digit at 10% for quarter and 11% for full year. Having said that, we are trying to balance our premium portfolio with various new product offerings. We have exciting new launches coming up in our premium and mass premium brands. Barring a few, most of these new launches are now made in India, reducing our dependence on China and also resulting better gross margins. Our commitment towards premiumization is also visible in our recent brand investments for our premium and mass premium offerings. I'm sure all of you must have noticed our high decibel campaign across the country in last 4 weeks. We have included glimpses of the same in our presentation as well. Initial response to these brand activation is definitely quite encouraging. Moving on to the channel-specific performance. E-commerce continued to be the fastest-growing space for us at 40%, both for quarter as well as full year. Focused approach for B2B partnership also resulted in a double-digit growth for this channel. Closure of modern trade stores by partners impacted growth for the channel. Also, our EBOs, we have actually closed nonperforming retail stores to the tune of more than 100. Going forward, we will concentrate on penetrating deeper into top 14 markets in the country to ensure better store level profitability. We are also opening Carlton-exclusive stores to improve our premium mix. Overall, today, we have 404 stores. Traditional channels had growth challenges during the quarter as we focused on reducing channel inventories. In fact, we closed our traditional trade sales on 20th March for the first time in quarter 4 of this year. Multiple planned initiatives to improve our premium mix are underway. Our recent backpack collection received positive response in the market. Backpack was the fastest-growing category for the quarter. Hard luggage was the fastest-growing category, both for quarter as well as for the year. It contributes to 60% of our total portfolio. We've also made headway in travel accessories category during the year. Profitability was definitely a challenge during the year, mainly [Audio Gap] gross margin, which was impacted by downward pressure on selling prices, inventory provisions and netting off of price support from -- for e-commerce channel. Multiple initiatives for improvement in gross margin is underway and will help us improve our gross margins in the coming quarters, starting from quarter 1 itself. Manpower cost optimization with year-on-year and quarter-on-quarter decrease of 16% and 20%, respectively. Our employee benefit expenses as a percentage of revenue now stands at 10% against 12% in last year. Other expenses has reported a sequential increase, mainly on account of performance marketing spends for e-commerce, professional fees and investment towards dealer conferences and product roadshows. Supply chain improvements have started to showcase some benefit starting from March '25. With reduced inventories, we have surrendered 4 lakh pieces -- 4 lakh square feet of space in quarter 4 and another 3 lakh square feet of space we are in the process of surrendering. All this will contribute positively to our margin improvements in the coming quarters. Future outlook. Fundamental demand indicators seems to be positive. There are multiple wedding dates. In fact, this year, the number of weddings is maximum in last 10 years. Even hotels and travel portals are definitely showing better results. So we are very confident that the demand indicators will definitely be in favor of the category. We are steadfast in our transformation journey. Successful result of the same will be showcased in the upcoming quarters, starting with quarter 1. To conclude, I would like to say that the year '24-'25 was a year of big solves across multiple areas, and the results for the same will be visible from the next quarter as we see FY '26 to be a much, much better year for us. With this, I conclude my opening remarks and open the floor for questions.

[Operator Instructions] The first question comes from the line of Jinesh Joshi from PL Capital.

First of all, madam, can you let us know what is the quantum of slow-moving stock that is now left with us? And also out of this INR 700 crores of inventory that we have with us, can you tell us what is the quantum of RM and WIP inventory?

So Jinesh, in fact, if you look from the slow-moving inventories, I would not like to give any absolute value. But has come down considerably over the last year. So the pain has almost reduced to a negligible amount as we stand today. In terms of the WIP, WIP is like what you asked about -- are you talking about the raw material WIP or the capital work in progress?

No, no. I mean, the inventory WIP.

Inventory WIP is not significant.

FG and RM. The split of FG and RM.

So RM will be approximately we are incurring around INR 215-odd crores and the balance will be FG.

Understood. And also, I mean, on the other expense side, while we have given the reasons that it was higher sequentially due to performance marketing and professional fees. Also, we did some dealer conferences. But is it possible to kind of share what is the total quantum of these expenses which were there in this quarter?

These are contributing a substantial amount, Jinesh, we would not like to quantify on this call.

It will be available in our annual report though.

Yes. It will be visible any which way, but I would not like to quantify currently on this.

And some quantifications we have already given in the presentation.

Okay. One last question from my side. This inventory provision of INR 5 crores, I mean, can you explain what is that? And what is the total quantum of inventory that we have that would warrant any kind of future provision, if you can call out that? And lastly, sorry, one more thing, you also mentioned that you have surrendered about 4 lakh square feet of warehousing space and another INR 3 lakhs is in the process of surrendering. So what can be the savings in the warehousing cost also, if you can give some color on that? Yes, that's it from my side.

Okay. So Jinesh, in terms of the provision, it is mixed against the raw material as well as some slow-moving FG. And [indiscernible] future period would not be appropriate to say any amount which will come because our efforts are anyway on an accelerated way to liquidate those kind of slow-moving inventories. But if the need arises, we'll again do a revisit on this provisioning policy and do provision in the best -- considering the liquidation moment. In terms of warehousing, I would say that the impact, if I -- by another INR 3 lakhs will be surrendering it. So in a year time frame, we will be saving another INR 2.5 crores minimum on the warehousing side, considering that next 1 or 2 quarters, I'm talking about. Quarter 4, again, will be a seasonal period. So we'll see at that point of time what we need to commensurate into this.

You mentioned INR 2.5 crores, right, savings? The voice was cracking.

Yes. Additional to what we already surrendered.

Basically that savings what he's talking about is for 3 lakh square feet.

The next question comes from the line of Ritesh Shah from Investec.

Ma'am, first question is you indicated on closure of stores by the modern trade partners. Can you provide some more color over here? That's the first question. And secondly, what is the motivation behind Carlton-exclusive new stores? Basically, if you could help us underline the thought process and the economics?

Yes. So basically, we have closed 133 stores overall, and we have opened 32 stores. The idea is that a lot of these stores are open in Tier 3, Tier 4 cities where the throughput is very low. For example, a store where my cost is INR 5 lakh, if my revenue is INR 2 lakh, I don't think it will ever be able to make profitable. So going forward, the idea is for exclusive stores we will focus on top tier cities where minimum threshold revenue is INR 8 lakh per month. And basis that, this year we are targeting to open 50 stores, 20 in Carlton and balance in V.I.P. Lounge. The idea of opening exclusive Carlton stores is in the top areas, for example, like Bandra, Colaba. Anyways, 50%, 60% of our store revenue was coming from Carlton. And therefore, we thought that it would be a better idea to have a full Carlton assortment across these premium areas, which can give us better premium positioning as well as better revenues.

Great. Ma'am, just to take a step back. Overall, on a distribution standpoint, can you just help us with the numbers on EBO and MBO, specifically if you can break it up between Tier 1, 2 and 3, that would be quite useful.

So exactly breaking up in Tier 1, Tier 2, I don't have immediately, but we'll definitely be able to give you. But total number of stores, as we talk today, it stands at 404.

Sure. Just a follow-up, ma'am. When you say INR 5 lakh of store cost, what all does it include over here?

Everything, so rental plus the store -- salary of the store managers, the light, everything, all the cost...

Operational expenses.

Operating expenditure of that stores, not the cost of product.

Right. And ma'am, would you like to qualify any headline asset turn margin profile or ROCE threshold that we look at, whereas you did give a number of INR 8 lakh minimum revenue. So before we shut down, is there a particular threshold, say, within 2 years, 3 years that is...

So we definitely give 12 months to the store to at least breakeven before we decide to take these calls. Most of these stores, which we are closing are actually existing for 2 to 3 years.

The next question comes from the line of Bhargav from Ambit Asset Management.

Ma'am, my first question is that, obviously we spent a lot in terms of marketing starting April and also a lot of new product launches have been done. So the idea behind this is to get back the GT market share, which has reduced from 21 to 17 and also our modern trade market share where salience of revenue has again reduced from 26 to 23.

Yes. So it's not market share. It's basically the salience. So definitely, yes, off-line salience for the business has to go up. The idea behind spending the money on the brand is to actually showcase and have a change in the perception in the minds of people. Like lot of people didn't know that VIP is as contemporary as any other brand can be. One is that. And also all these new launches, for example, the product on which we have spent on VIP is our first product from the Japanese designer. And it's -- all these are reasonable prices, better margins and also will definitely increase the confidence of the channel partners.

So ma'am, in your opinion, this e-com share, which is at about 31%, do you see this reducing as we get the off-line channel sales back?

It may not reduce, but if the category is growing maybe higher than offline, but we will -- we want to be at 30% at this for FY '26. It should not go up from there, which means that both my channels should grow equally.

But fair to say that 50% plus gross margin can come only on the back of offline [indiscernible] products or even through e-commerce we can...

No, it can come with a better product mix. In fact, in e-commerce as well we are trying to now -- we have just launched Carlton also with Flipkart and Amazon. So definitely, in e-commerce as well we are trying to increase our premium portfolio share.

So net-net, the focus in FY '26 will be to get the gross margin back to 50% type, right?

Yes. Yes. In fact I would say that most of the back-end work is over. It's all about now front-ending, basically selling and therefore getting the benefits.

And this backpack, is it possible to increase the share of revenue maybe to 14%, 15% or -- given the kind of launches we've done?

We are definitely looking at increasing the share, but -- we have done well. So quarter 4, I think we have grown by 23% on our backpack portfolio. And focus is definitely there. And today, as we speak, we have backpack ranging from INR 600 going up to INR 12,500. So we have the entire stack up, and we're definitely looking in FY '26 to expand our distribution as well to make backpack a larger salience in overall category. And the good part on backpack is it's a daily use case. So basically, every person almost changes backpack every year. So this has daily use case as well as higher throughput across the country.

And on modern trade, any development, any inroads we are making on the modern trade front?

We have definitely made some inroads, but I would not like to talk on this call because you know confidentiality is very important. But yes, definitely, some of the larger doors, we have cracked some of the price points, and we are definitely looking at a larger share of business in the year to come.

The next question comes from the line of Tejash Shah from Avendus Spark.

Just starting with clearly, this year, as the year progressed, our priority shifted from growth to repairing balance sheet first. So looking at the current scenario of inventory debt, what are the levels you will be comfortable with to pivot back to growth? And then if you can share the absolute numbers or ratios which you are actually looking to kind of shift focus to growth rather than balance sheet?

So I think most of the large ticket items on balance sheet is done. Now it's all about -- so we have started focusing on growth already, which is visible from our [ visible ] media campaigning, which means we are now looking forward for growth. And the other ratios will all start improving as the business improves. However, on the inventory level, I think we are looking at reducing it further by INR 150 crores. And the same level we want to reduce our debt in this year.

Ma'am second question pertains to this branding spend that you spoke about on VIP. Now in last decade or so we would have done multiple attempts to kind of make look VIP stand-alone brand contemporary. And obviously I don't have data to judge whether it has worked or not. But at the aggregate level, how do you judge ROI on such spends? And when we see some of these brands, even old age or some new age also, would have achieved scale without spending so much on branding. So how do we kind of think about such spends, which we kind of do every 2, 3 years to revive VIP as a brand?

So there are 2 parts to this question. One, do we really need to spend the money on the brand is what you are saying, or? So if we just give discounts and we want to sell, that's one, which we are not creating brand, we are just selling commodity. However, as an organization, we believe that we have brands and therefore it needs to be nurtured to get the right ROI. I can tell you, we have spent on 3 products. We have spent on Lexus in VIP. We have spent on Paradise in Skybag, and we have spent on Gemma in Carlton. In 2 of these 3 cases, we have stocked out already. And one of the case, we have sold 22,000 pieces in 30 days, which means that we have already done the ROI. I'm going to spend in this quarter INR 12 crores to INR 15 crores and I have already earned that money. So which means we've got the ROI. And it's not that we are going to spend like this every month, but this was required for us to also get confidence from our channel partners because for last few years we have not spent. Also, they need to know that, yes, VIP is back. We are still alive. So -- and as earlier also said, I will only spend when I can make money. So which also gives an indication that I'm spending because I'm earning.

Okay. No, my question was largely on VIP stand-alone. Carlton and Skybags fully understand. I was just wondering whether it was moved...

So I have a view that VIP is known to everybody in the country. It's we who have not capitalized this opportunity. And I will definitely -- if I were to choose between which brand to spend more, I will spend more on VIP because I always say that [Foreign Language] And why? We already know that answer, and therefore I have to make sure that by -- in next 12 months people buy VIP. So all my efforts on getting better products, getting technology-driven products will be all around VIP. One more big initiative which we are doing is from 1st July onwards, all my products will be in case of VIP and Skybag, of course, Carlton will come with a tag, find me tag. Every bag will have that. It's again a special feature which nobody else is offering. Nobody else is offering in the world. So all my products will have that.

I genuinely wish you find growth also with this. Ma'am, last one on store expansion. So we are definitely going consolidating phase by shutting stores and we are opening where ROIs can be better. And also, we are cutting down our storage areas or warehouse areas also. So just was wondering, obviously, you have a very tight rope walk over here. But I was just wondering, at one end, we are actually kind of shrinking the growth input parameters. And then we are trying to revive growth also. So then we are expecting very higher productivity from lesser input going forward. So just wanted to understand how are we thinking about this?

Okay. Again, I'll break this into 2 parts. One on warehouse. We were having 63 lakh pieces of inventory when we started on 1st of April '24. Today, as we speak, the number is around 38 lakh. Now because the inventory is reasonable, I would say it has to come down to 30 lakh. And for that, I'm surrendering the warehouse space. So I'm not saying that I'm reducing my input, but I am actually cutting down on inefficiencies. The second, again, on the stores, if my store throughput is less than my cost, I don't think it is viable. And now we are going to open only focusing on 14 top cities. And therefore, throughput will definitely come, which doesn't mean that I'm giving away the area where I was having a store and where I've stopped. What I'm doing is that area will be serviced through MBOs, will be serviced through my VT, will be serviced through my other modern trade partners. I'm not vacating the space. I'm only saying that instead of selling it directly by -- through my exclusive store, how can I service it through an MBO, which will help me reduce my fixed cost. So basically it is all about efficient working and removing inefficiencies.

Very clear. And if I may squeeze in the last one, ma'am, we would have done our inventory planning for this year, I'm assuming a quarter back or 2 quarters back, and we started on a good note this fiscal year. But what is unfortunate events have played out in the last 1 month or so, do you believe that somewhere there's a risk of a slowdown happening in our calculation for the first quarter or first half of this year, which is non-wedding season largely?

First quarter is a big wedding season.

Travel season, yes.

If you're referring to the political this thing, it will have some kind of bearing, but people are just -- what we heard and what we came to know about it is people are just changing the destination to travel, but they have not stopped traveling yet. So we are not seeing any kind of disruptions or larger substantial disruption coming on the way because of this kind of concern. And that's where we stand as of now.

In fact, I have had discussions with 2 or 3 travel -- large travel companies. They said people are just changing the destination. If they were going to Kashmir, instead of that now maybe they are going to South or they are going to Thailand, but people are going.

The next question comes from the line of Prerna Jhunjhunwala from Elara Capital.

Ma'am, just wanted to understand with all these initiatives that you've spoken about, what is the growth that you think is achievable in this year? And how do you see whether we should think about double-digit growth coming in? And how would the volume and pricing play now given that last year was a big price correction year. So do you think we can see price increases or premiumization helping you to gain ASPs at an average level?

Definitely. That's the endeavor. This year, most likely our volume and value growth should match. On the growth front, I would say that whatever is the category growth, we should do 1% or 2% better than that.

Okay. So if the category growth, for example, is around 10%, we should be able to do 12% is where we have...

Yes. That's what I'm saying.

Okay. And it should be equally divided between volume and value is...

Yes. That will be our key focus area.

Okay. Okay. And in terms of hard luggage versus soft luggage, do you see the weight of hard luggage increasing further as the industry trend is moving towards...

No, we don't think so. In fact, maybe a little bit soft luggage should go up because suddenly we have started getting inquiries regarding soft luggage premium portfolio. So, premium consumers are definitely asking for more soft luggage. And we have a few soft luggage product lineup getting launched in next 2 to 3 months.

And visibility from the competition portfolio also suggests that the ratio should tilt slightly towards more on the soft luggage.

Yes. So 3%, 4% more, I think soft luggage will happen.

So what is attracting people to soft luggage? I mean, is there any...

Not attracting. There are certain consumers who are still hooking on to soft luggage because of the ease of opening and also less breakages. So basically, only after you use, you know the pluses and minuses. Hard luggage is definitely prone to more breakages versus soft luggage.