V-Mart Retail Limited (VMART) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of V-Mart Retail hosted by Motilal Oswal Financial Services. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Aliasgar Shakir from Motilal Oswal Financial Services. Thank you, and over to you, sir.

Yes. Thank you, Stephen. Good morning, everyone. On behalf of Motilal Oswal, we welcome you to Q3 FY '22 Earnings Conference Call of V-Mart Retail Limited. On the call, we have with us Mr. Lalit Agarwal, Chairman and Managing Director; and Mr. Anand Agarwal, the CFO of the company. Let me hand over the floor to Mr. Lalit Agarwal for his opening remarks, post which we will open the floor for Q&A. Thank you, and over to you, Lalit Ji.

Good morning, everyone. Welcome to the conference call. Thank you for being here. Thank you, Ali, for hosting us and very, very good times. The sun is once again shining bright. We could see a clear sky. We could really -- we hope things move in the right direction. Especially, in the northern part of India, we are able to see a very, very beautiful little chill as well as good sunshine, which gives us a very good hope also that the good times are back, and we would expect much more coming from what was so to call squeezed in this last 2 years because of all the external environment. So we hope the economy is recovering. The consumption is coming back. We are seeing that happening. We really got a little excited in the last quarter as well. We saw in the consumption space, so there is some -- both the sides we are able to see. On one side, we are definitely able to see all those people who did not consume for last 1, 1.5 years since the first COVID hit in the March. They all remained in the country. They never went out. The tourism went low. People who used to shop outside did not shop outside. People who used to come out to shopping in the malls and the street, they didn't come out. So most of the people remained home. Most of the people who could have worked from home, worked from home, and that also impacted the consumption. But yes, in the last quarter, I think the fear came out and people, largely learned people is what I thought, and people who are in this, what we call, the urban centers and the bigger cities, they all came out to shop. They all came out. We could hear things. We could hear news on long queues in the malls and long queues outside the shopping complexes. And that came in because till quarter 2, we did not see that coming out very much in open. In Q3, a large part of that came out. Compared to that, in the rural or in the semi-urban side, which is tier-2, tier-3 town, we saw things as similar because even Q2, people came out because the fear factor came -- went down right in the month of July and August. And people were already there to consume. So people came out slowly, but still there is some kind of impact which we could see even on their income, on their potentiality to spend. Inflation is definitely hurting their pockets. There is a lower spending as well we could watch in the smaller part of the economy or in the lower part of the economy and also in the smaller town, which is visible, especially, I could see those kind of customer segment who earn between INR 20,000 to INR 40,000. There is a small dip in the kind of consumption that they would have done and they could do. So that's what we are noticing. We are also seeing differentiated news coming in from both the competitive world as well as our own world. And we are seeing people who have large part of operations in the bigger cities in malls has been benefited in this particular quarter. There is a good benefit coming in, in this particular quarter from them because of the similar thought process because their consumer came back in heavy numbers. They all consumed within India. They all -- the consumption all accumulated here. There's long due pending consumption, which came in. So very, very good and celebrating news for most of our retailer friends, and things have been good on those lines. Even we experienced similarly in certain stores, which are more in urban centers as well as some southern India Unlimited stores that we have in the malls as well. So primarily, what I want to convey is, things are coming back to normal. We are looking at better side of the consumption. There is definitely -- still there is some pressure, and the pressure is getting escalated because of the inflation. There is an inflation in our raw material prices. Our cost of products, our ASPs have gone up, some from -- due to inflation, others due to selection. So there is a rise in the average selling price of the product in the industry. So there is one good thing, which happened that GST, which was supposed to get from 5% to 12%, at the last moment, the government took a very good call and thanks to the establishment for that. They did not go ahead with the GST rate increase, and it was curbed at 5% below INR 1,000 of ASP of product. So that is a good boom and that's the benefit that we got. But yes, our new merchandise that we were ordered came in with those kind of extra MRP, and we still wait because there is another meeting going to come in, in the next quarter. So otherwise, cotton prices continue to rise. Overall, commodity prices continue to rise. Overall, there is a rise in the fuel prices, energy prices. Job market, employment market is very, very tight. We can see a very huge churn in that particular side. Particularly in V-Mart, we did not notice so much of churn, but still the pressure is there. There's a huge demand for both the corporate side of the employees as well as the front-end side of employees, and that's good news for the economy. That's a very, very good news for the economy. That means that business is back to normal, that means people are investing more money into the business, and that will definitely mean a much more better year for us coming forward. We are focusing very, very sharply on both the sides, on our existing store, on our new acquisition that we had in the South India Unlimited space. We are -- we only acquired 4 months back. We are slowly and gradually taking control of the operations, understanding about the customer segment. We still continue the same brand. Our fresh range of merchandise, which is V-Mart merchandise has started getting launched on the shop floor on those lines. So we should see some results coming in, in the coming quarters. And we should also -- there'll be a lot of learning that we will have from there. We are also focusing similarly and heavily on the online space, in the e-commerce channels, both in vmartretail.com as well as we have launched ourselves in the Amazon and Myntra, where we -- our products are placed and we started selling there as well. So as of now, the investment is happening in that particular space, acquiring those digital customers or sustaining that platform, building that tech, investing on the tech, investing in the people to manage those tech. There is a fixed cost, which is there. And we also continue to consolidate our operations in our existing territories. There are stores which are doing great, but there are few stores which were struggling to become profitable. And we have taken some calls on certain of those stores. Maybe we would plan to close down some 7 to 8 stores in this particular quarter. So that we don't carry on stores, which are not able to come up. So that's our -- and that has been our principle always that every store, which is EBITDA positive is something that we'll continue. We'll work with those stores for 1 year or 6 months, and if those doesn't perform, we'll try to not get merit to those properties. So that's what we are doing. We continue to open our new stores. We have our plans in place. Some plans got diluted because of the COVID situation in the year past. Omicron, we came out of Omicron very well. Definitely, there was an impact, which got created towards the end of December and the full of January. There was some impact in footfalls. A lot of -- government brought in lot of regulations wherein normal operations were hindered, weekend operations were hindered, evening operations were hindered. But still, this time, thankfully, the government and all the administration did not take any extreme measures. We definitely expect things to normalize and it has normalized now. As we are in February, things have normalized almost 95% of our locations. We are getting -- the business is getting back to normal and the operations are getting back to normal. We are able to receive footfalls now in the stores as well. Apart from that, I think one of the biggest states where we operate, Uttar Pradesh is undergoing election. We are very excited about it. Because of the elections, there has been a lot of growth activities, which have gone in Uttar Pradesh in the last year, and that should continue. A lot of spending by political parties is supposed to happen during this election period. A lot of activity will also disrupt some businesses in the current period because we all know that whenever there is election going on, there are rallies and there are political disturbance which also gets created and religious disturbance gets created. There may be some disturbance in particular territories. But otherwise, the economy is going to become better for Uttar Pradesh. People are going to spend more. They'll get more money and they'll spend more. Overall, we expect Uttar Pradesh business to go up in the coming years. And that's what our expectation is. But yes, overall, the business will come back, and then we should expect -- we are working towards the growth in the coming quarters, and we will see that coming in this particular quarter. I mean, we should expect a good Holi also coming in, in the month of March. This particular quarter may not be a great, but otherwise, we expect the forecast forward year should be better and the best year in the last 3, 4 years is what we expect to happen. Anyway, we will take your questions, but I will first of all hand over to Anand for giving you the insights into the numbers. Anand, please.

Thank you, Lalit, and good morning, everybody. It's been a very good quarter, good festive demand, and I would say a very strong consumer pent-up. But first let me take you through some of the financial highlights from the quarter and then we can open the house for questions. So quarter 3, as we all know, is historically the biggest quarter for us. And as it is a congregation of strong festive period, Durga Puja, Dussehra, Diwali and Chhath. The biggest festivals in all our markets, a vibrant marriage season and also it starts the onset of winters. So despite a late start and a weak [ puja ] in October, we saw very strong November due to a very high level of pent-up demand and a strong Diwali and marriage seasons. November, in fact, became the highest sales month for us ever with the South region also contributing very heavily in the overall growth. With almost no COVID-related restrictions and the heightened trust of customers in the safe and hygienic environment at V-Mart stores, the customer footfalls also recovered almost to pre-COVID levels. While at an overall quarter basis, the footfall recovery for the V-Mart business was around 85% while it remained only 57% for the southern region. As Lalit also mentioned in his opening remarks, the initial part of the quarter did not see a lot of footfalls in the malls, but I think in the latter part, we saw very strong footfalls coming in, in the bigger towns. So while at an overall level, the quarter sales grew by 47% year-on-year. But on a comparable basis, excluding the contribution of these 74 Unlimited stores, the sales grew by 23% year-on-year. Unlimited business contributed to 17% of the total sales mix with quarter 3 also being the biggest quarter for the South and West regions. The total sales for V-Mart, excluding Unlimited also exceeded pre-COVID levels by 4%, while the L2L or the SSG still remained at minus 9% for the V-Mart business. The average selling price for the quarter grew by 12%, while the average bill size also grew by a healthy 13%, reflecting the impact of price increase, which was put in to mitigate the impact of the cotton yarn price increase and also the higher ASP mix that we got from the Unlimited base. On the margin side, the gross profit for the quarter improved by 30 basis points despite the significant increase in cotton yarn prices and its impact on product costing. This was made possible by passing on the full impact of the price increase on to the consumer and also lower discounting. Coming on to expenses. This has definitely been one of the most challenging quarter with a full-blown impact of very high inflationary pressures, whether it was on the raw material side or manpower costs or any other cost. There were very limited savings on rentals as there were no material COVID concession available in the current year as compared to last year. Similarly, the people cost also went up significantly as we filled in all vacant positions from last year to prepare for normal sales. And also at an overall level, we started preparing for a full normal future time. Higher marketing spend, coupled with a higher cost base inherited in Unlimited also impacted the total expense and, therefore, the total cost went up by 76% for the quarter. This compares also to a very low cost base of last year in the same quarter, where we had significantly cut down on all costs, including travel, rental, low hiring and all other discretionary costs. On a go-forward basis, the Unlimited business will still have slightly disproportionate cost structure, especially since the rental alone, there are almost twice the V-Mart average. But we are aiming to normalize this in the coming quarters by increasing the productivity in terms of sales throughput and also through opening up new stores at the lower V-Mart cost structures in the coming quarters, which should help us bring the overall cost percentage down in a phased manner for the south business also. As of now, all cost structures are fully back to pre-COVID level of operations with no COVID-related savings available. As a net result of the sales growing by 47%, margins increasing by 30 basis points and the total expenses going up by [ 36%, ] the quarter ended with an increase in EBITDA by 30%. On the cash flow side, we remain very comfortable on the overall cash position. No major CapEx in the quarter apart from opening of 9 new stores and some other store refurbishments. All the future major CapEx items remains the same, new store expansion, which are expected to be in the region of 10 to 12 stores in this quarter and then probably 50 to 55 stores for the next year. And then again, in the next year, we will start construction on the new warehouse site, which should entail some big-ticket CapEx. On the inventory side, at INR 546 crores, we remain in a very, very comfortable range. This includes INR 109 crores of stocks in the south Unlimited business and INR 437 crores for rest of India. Inventory days came in at 74 for the quarter, while the full year number still looks optically high at 111 days due to lower throughput in the COVID impacted first and second quarters. The online business continues to grow, although still on a small base with availability on vmartretail.com, iOS, Android and now also on Amazon and Myntra. The contribution mix from online has grown to roughly around 1.5%, but we continue to build this business towards a 5% revenue mix in the coming 2 to 3 years, aided by hyper local delivery and lower cost to service nearby customers. The online business, as of now, still requires investments as the setup costs, cataloging cost, apart from the marketing cost and the logistics, which remains traditionally higher, especially given the low ASPs of our product. But we continue to remain very bullish on this channel and shall keep investing to make it a meaningful part of our overall business within the next 2 years. This business still entails a fixed expense of roughly around INR 1.5 crores per month. On the new store expansion plans, we remain optimistic to keep expanding. So far this year, we have opened 25 new stores, acquired 74 stores and closed down 4 stores, and thus stand at a net value of 374 stores as of December end. For the current quarter, we should be looking to open at least 10 to 12 more stores while we may close down around 6 to 7 more stores, one out of which is in South India. Similar new store happening -- new store opening activity should also start pretty soon in South India. Coming to the last part on Unlimited integration, things have been progressing as per plan and all stores were operational under the V-Mart billing systems right from 1st September without any challenges. The early signs in the last 4 months look very positive. The team in South India remains very strong and is ensuring a very speedy recovery on sales and also the transition. We continue to strengthen the product offering in the Unlimited ecosystem by filling in gaps of missing categories and also sharpening the product pricing by combining the product offerings for both the brands and geographies. The Unlimited business is already profitable, although at a slightly lower scale as compared to V-Mart, owing to the high operating cost structures, but we are targeting to bring the profitability at 7% to 8% EBITDA level in the next 2 years as part of our phased progression plan. We shall be sharing more details on the Unlimited P&L structures as the business completes at least 1 year of full business cycle. But till then, I think we should be patient and just bear with us to make this transition much, much more successful. So that's all from my side, and I now request Ali to open the house for questions. Thank you.

[Operator Instructions] The first question is from the line of Bharat Chhoda from ICICI Securities.

Sir, I had a query regarding our ASPs. Like ASP has gone up by 10% to 12% and the recovery has also been like around 4% positive. And has this impacted our volumes due to the high inflation? And how do we look at the scenario going forward?

So the recovery definitely is in -- while you are comparing 2 different numbers for 2 different financial years, so the ASPs have gone up from previous year. But yes, your point remains absolutely valid. There is a slight impact on volumes. But so far, it is not very stark. For the coming seasons and the coming year, our estimation is that the inflationary pressures will continue to remain, and we should not rule out any further price increases and thereby, our estimation is that the ASPs might go up still a bit further from here. As of now, there is no very major or material impact on the volumes, but we are building in a slight decline in the volumes for the next year from a planning perspective.

Okay. And sir, on the Unlimited brand, are we planning to open more stores for the Unlimited brand? And what is the current level that we are making on the EBITDA for the Unlimited?

So yes, we are already scouting for properties in South India, and there is a plan to open at least 5 to 10 stores in the next 12 months in South India. My guess is that in the first quarter itself, we should see some store openings in southern and western regions. What is your second point on the question?

Sir, it was regarding what is the current EBITDA margin that we are making for the Unlimited brand and our outlook on that?

So as of now, actually, because it's just been 4 months and these last 3, 4 months have been pretty good as far as the business cycle or the seasonal cycle for that business is concerned, so we have not currently disclose the profitability numbers. Suffice to say that this business remains profitable, and we are hoping to reach EBITDA level of at least 5% to 6% in the next financial year.

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

Strong set of numbers. So I have 3 questions. First is that, we have seen a footfall, which has gone up, but conversion rates have come down. So any qualitative comment how this is -- one should look at in our core markets like UP, Bihar. Because Lalit Ji did say that there were lot of activities around Diwali and we have seen, but doesn't come with the numbers?

Yes. Shirish, so you're absolutely right, and what you see is also right because now this time, you will have to all see with one more lens, because we have this Unlimited business also integrated in this business. And everything that we are seeing is definitely along with Unlimited. So if we see the conversion as well as the ASP, the ASPs are high because the Unlimited ASP -- the Unlimited business' original ASP is right now at a high level, which is impacting the overall ASP of our business, plus the conversion, right now, there is also very low, so that is also impacting us. Anyway, we have seen both a drop in the footfall and a little drop in the conversion, but our average bill value has gone up. And our UPT, which is a unit per transaction has also gone up. So people have bought a little more. They did not do multiple billings, they did not come multiple number of times. That's what has churn up.

Okay. My second question is that traditionally, we have a very high saliency coming from the quarter 3. And I think the numbers are very impressive; however, has not reflected into the gross margin. And the gross margin has improved only 30 basis points despite we have taken some price increases. So how one should look at, I mean, in the medium to long term, I mean, if you can help me to understand what is the quantum of price increase we have taken, and also -- which would have gone in the month of January or February? And how we should look at the gross margin for the company in the next 2 to 3 quarters?

So Shirish, you are absolutely right. And as our policy are, we have not focused very highly on the gross margin side, and we never do that. But as of now, in these period, our focus is also because you have not seen a very healthy period in the last 1.5 years and there has been a lot of closures. So there is definitely also a pressure that would have come on the inventory, and we did not want our ability to get aged. So we have taken a very conscious call in also diluting and then discounting and liquidating inventory, which are not required. So we have taken all those measured calls because the freshness of the inventory has to be also maintained. So that's the important piece that we have done because all those inventory, which was bought in 2019 Diwali and after the Diwali or Dussehra, those inventories because we did not get a very ample chance to sell in 2020 year. That is why those inventories were also something, which were there in the back and we've started discounting -- we gave a lot of discounts on those inventory as well. And we should see a healthy margin because whatever price increase that we have done, we have not encashed anything extra. We have not taken anything as a part of our margin piece. We only increased the prices to the level so that our cost of raw material prices increase could have been more. That's the overall thing that we did.

One quick follow-up, Lalit Ji. what is the USS contribution in this quarter?

USS contribution changes?

You said that you have done some discounting. So what is that portion which you would have achieved from that?

I think slightly above normal, but primarily it is normal. See we did not do a lot of discounting, but yes, we had to liquidate. So we had to give some deep discounting on those so that we don't end up having those inventory with us. That's the whole process.

Okay. My next question is on Unlimited. Anand Ji, I know it's too early to ask financials. But particularly from the modeling perspective, what we note from the financial result that you said that you have now taken over 64 stores agreement. Does that mean that we will close 10 stores in Unlimited? And maybe if you can, if not EBITDA, at least tell us what is the gross margin? This is purely from the modeling purpose because almost 17% contribution has come in this quarter from Unlimited stores. And for full year, it is about 12%. So it is an important piece.

Shirish, I mean, I would request everyone. The fundamental, I'll just give you a small brief. The fundamental gross margin that we have in Unlimited is right now a little higher. We are operating at almost 8% higher gross margin in Unlimited versus V-Mart. And similarly, the cost is almost 11% to 12% higher, 12% or more higher than the V-Mart cost that we have. So overall, if you understand, the EBITDA would be almost 4% to 5%, 4% less than our V-Mart EBITDA, 4% to 5% less than our V-Mart EBITDA. That's the model that we would make it further.

That's really helpful Lalit Ji. My last question is on, you earlier were holding a position of Chairman and Managing Director, but what we see in the latest announcement, Mr. Moondhra is now appointed as a Chairman and now you have become MD. What is the thought process? Is that you are not comfortable and you want to have a quick hands-on for turnaround of Unlimited stores? I mean, give me some understanding what is it that you feel that you need to be in charge of the company?

So Mr. Pardeshi, at least, let me relax for some moment, man. Common, in fact, what a good opportunity. And if I'm able to hand over to someone, please let me relax.

No, no, no, I understand. So...

See, the point of view is very clear that we want to create our organization as the best governance organization, and that should be the best governance Board. To look at those perspectives, we have always relied on bringing in the best governance practices. And the best governance practices suggest that one person should not hold 2 chairs. And because I'm in the help of my business, I am the CEO, I am the managing director. So I have to look at the operational and the business aspects. So we definitely wanted to have a separate seat available and I thought having it with an independent director, making our Board a little more dynamic and more better is always a good thing. And that makes me more focused on my areas of managing as a managing director on the business operation. And it also gives us a very good transparency at the Board level and much more better Board environment. So that is how we've taken the right call, and we believe this is a very good thing that we have done.

Next question is from the line of Ankit Kedia from Phillip Capital.

Sir, I have 3 questions. My first question is, Anand Ji, in your opening remarks, you mentioned 50 to 55 new store addition for next year. Isn't that below our guidance of 20% to 25% space addition, which we normally talk of?

So Ankit, so that number is right now pegged at 50 to 55 and there would be -- there might be some more additions that we will look at, looking at the South India territory and there may be 5 or 10 stores, which might also come up there. But yes, you are right, our original estimates usually work around 20%, and we have not given up that. But these are numbers that we are -- we can say with more certainty and with more conviction that these are definitely that the sites on which work is happening or will happen.

So this 50, 55 is purely for North and the 5% to 10%, which you have guided for Unlimited in next 2 years will be addition to that or this 50, 55 includes that?

So as of now, it should be a total of around 60. That is what we are looking at, and if there is more we will definitely keep everybody updated.

Sure. My second question is regarding rebranding of Unlimited. With the new stores now on cards in Unlimited, would the new stores be on V-Mart branding and slowly next 6 months, the old stores will also be rebranded to V-Mart given that the inventory of V-Mart is now also in the system or that is still some time away?

So Ankit, let me take this question. We are still in the process of understanding the customer, understanding the brand strength of Unlimited right now in that market. We are not taking a hasty decision because anyway there is a lot of disturbance because of COVID, which has happened to the market, and we don't want to give another jerk to that brand. So we have appointed a marketing agency to understand and take some customer survey, do some one-on-one with a lot of customers and give us those feedback and then only we'll go ahead. Till that time, whatever stores open in those states, we'll go ahead with the similar name, which is Unlimited.

And my last question is regarding competition. With raw material price inflation nearly 15% to 20%, do you think organized players like us are in a stronger footprint compared to unorganized players who would face challenges in vendor payments or buying -- procuring raw material in bulk or getting these stitched? So we are better off compared to competition in unorganized and market share gains could be much higher for us in the medium term?

Ankit, that is always the case, that will always happen. Whenever there are swings in the market, whenever there is not a consistent approach in the market and whenever these things occur, there the manufacturers tend to take more benefits or the manufacturer is not capable enough to delivering the right products. So in that case, all those unorganized mom-and-pop shop, which -- whose potentiality to buy or impact the vendor is very low, get squeezed and then gets difficult -- in a difficult position. Today is the sellers market. Today is the manufacturers market is what I will call out for because there is too many things happening in this industry. There are too many players which have jumped into this industry. I also want everyone to get aware of this, that both from B2B as well as B2C online as well as offline, there is a lot of activity which is happening in the market, which -- whether they are making profits or whether they are able to create a business for themselves or not, but they are definitely disrupting the market on the suppliers and the manufacturing side. So there is some amount of pressure, which is getting built on the market, on the sellers. And that is definitely going to all those little less capable retailers or sellers who may not be able to negotiate well with the suppliers. So that this is a very, very dynamic situation. And we give them the best of hope. We will support wherever we could. But still, I think there's definitely going to be difficult times for the unorganized players.

The next question is from the line of Percy Panthaki from IIFL.

You mentioned that the cost for Unlimited is higher by about 7% to 12%. So just wanted to understand the reason for that. Why is the cost higher? And is it -- in which particular line item, is it higher?

Percy, so the costs are typically higher more on the rental side. I think, the average rentals that V-Mart is used to is roughly around INR 35 to INR 37 per square feet. While on an average, the per square feet rental on an average in Unlimited business is roughly around INR 60 to INR 65. So that is a straight 100% jump. And apart from that, I think the other -- in terms of the running and administrative costs, whether it is in terms of manpower or per unit manpower cost or even the establishment cost is also on the higher side. Given the fact that some of these stores are also in malls, there is a higher overhead in terms of CAM and other stuff, which takes the overall cost structure a bit high. But having said that, I think the bigger point that we are working on is not really to bring down the cost, but to increase the throughput, which is the sales per square feet, which currently is at -- even pre-COVID times, it was roughly around 50% of what V-Mart used to achieve. And that is where is the big opportunity area. So our thought and plan is to increase that throughput by at least 20%, 30% and thereby mitigate the cost pressure.

Understood. Secondly, just a question on the price increases. Out of the 47% sales growth that you've done this quarter, how much of it can be attributed to price increases?

So price increase, Percy, would have been in the range of around 7% to 10%. So while it is not across every line item, every product, but yes, it would be safe to assume roughly around 8% to 10% impact coming in because of the MRP increases.

Okay. And given that the pricing might have happened during the quarter and would not have fully affected all 3 months, do you think there is basically a spillover impact into Q4? I mean you have taken the pricing, let's say, in November, December and it will come fully in Q4. So this 8% to 10% price increase would work out to how much in Q4 on account of that?

As of now, it should remain pretty much same. So we had roughly around 10%. So we can look at a slightly increased number of 12% or 13% or maybe more in quarter 4. But also, we must understand that the price increase should have some negative impact on the quantity or the volume.

Understood. Understood. And you mentioned earlier that you are budgeting a slight decline in the margins for FY '23. Was that with reference to gross margin or EBITDA margin?

We're not -- I did not mention anything on the margin side that we are planning a decline. But definitely, there will be pressure as far as the cost structures are concerned because we are seeing a very high inflationary trend. And so far, we have already taken 7% to 8%, 10% price increase, and there is a limit up to which the customer can also sustain that level of price increase if it continues to keep rising. So there should be pressure. But as of now, we are not building in any decrease in the margin because our thought has been that whatever is the broader pricing, we will pass it back to the customer.

Understood. So basically, your high single-digit margin, which was normal in the pre-COVID times, we should be targeting that kind of margin for FY '23, assuming that there is no COVID disruption?

Yes, absolutely. I think we should still gun for that.

The next question is from the line of Sabyasachi Mukerji from Centrum PMS.

So if I look at the numbers compared with the pre-COVID quarter of December '19, that is Q2 FY'20, so you clocked around INR 562 crores kind of revenue number in December '19. And now if I remove the Unlimited piece of the business, so I look at the only stand-alone V-Mart stores, that has a store revenue of INR 574 crores. That is hardly a 2% kind of a jump over 2 years. Despite almost 16%, 17% kind of increase in retail area or store count. So how do you, I mean, explain this kind of weakness in store throughput?

So Sabyasachi, there is a negative SSG of minus 9%, which I mentioned in my opening remarks. And definitely, we are still -- or the business is not definitely out of the woods. There have been challenging times. The entire quarter or the entire period has not been absolutely on full capacity. But I think the way things are looking up now and what we are seeing currently, I think we are -- we should see much more normalcy coming in, in the future.

Just a follow-up to that. So is this -- so Lalit Ji also mentioned about slight pressure in semi-urban and rural markets because of [ traded ] inflation and also affordability issues. So -- and if I just compare with the urban peers of us, they have actually done much, much better than what we have done. So when do you actually see this rural or semi-urban kind of demand coming back to what we used to witness a couple of this back? And second thing is you also mentioned about the volume decline that you are planning for the FY '23. So what is the kind of quantum if you can share?

Sabyasachi, the situation on the ground right now looks positive. As I said, the inflationary pressure will be there. Similarly, I also said that the job market is doing well. The crops -- agricultural crops can -- looks to be better than the further -- the outcome, which is going to come in. So if all those continues to be on the better side, UP election will need more money, I hope customers should get back their money. They should come back to their normal consumption. We hope that to come in from the first quarter of next year, and that's what we suppose it should be. And not that we are targeting any volumetric degrowth, but we wanted just to understand even from people like when we need to call from various economies. What happens in this scenario? Where the price rise is so high? Because in our history, we have not seen such a high price in the commodity cost and which is increasing almost 12% to 15% of the cost of the apparel. And if that 15% rise in apparel cost may give rise to a little quantity degrowth in the customer, at a like-to-like store level. We are not saying at a company level, we'll degrowth. At a like-to-like store level, we are a little cautious on that approach. We have -- still we are very watchful. We would want to increase our volume. But if there is a situation where consumption gets affected because of the price rise, we should not end up with a high inventory. That's the whole analogy that Anand was trying to give you.

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

My question is an extension of the previous participants questions that recovery and overall growth seems slightly sluggish or underwhelming. Considering that the 3 drivers that we've always called out winter, wedding and festive season, all 3 were packed in this quarter and then considering the pent-up demand was also there, this recovery looks slightly sluggish, but you called out that the recovery in rural was weak. So we have now a very decent base of 155 stores coming from Tier 1, Tier 2 cities. So is it that within our bucket of urban store, recovery was way, way better than what we have posted in overall numbers?

So Tejash, first of all, the wedding, winter, everything is in the second half of this quarter. So Q3, it will revive Q3, the first half and the second half. And the first half was largely festival. And within the first half, the festival, which is especially in the eastern side of India, which is Durga Puja, that business, we didn't have a great time because still there were restrictions and there were no puja pandals. And so that part of the business suffered a lot during this quarter. But otherwise, I think, the second half of the festival or the second half of the quarter was very good, except the last 1 or 2 weeks of December, where once again Omicron started hitting us. But yes, what I believe the way -- and you are right, the urban cities, we have seen a better response. But our definition of Tier 1 state is not those pure metro and pure bigger cities. Our definition of Tier 1 is all state capitals. So that is how we define our Tier 1s. Yes, but still, I think out of the lot, Tier 1 did had a better result comparatively. This is true.

So Lalit, you also made a remark in your opening statement that FY '23 should be one of the best year in the last 3, 4 years. So is that -- you are seeing that kind of recovery already on ground? Or is it just we are hoping that on a base that we have created in the last 3 years, things should be better?

So Tejash, yes, I mean, the recoveries happen not immediately. But yes, as I said, the sun is shining and we could see a clear sky. I mean that. And when I say that, there are symptoms and there are signs that we could see and there are calculations that we could make. [Foreign Language]. So we will keep doing it, but we will definitely understand we'll wait for the situation to come in, but we are confident that it has to come in. The whole calculation definitely leads us towards that.

Sure. And lastly, on urban competition. So Tier 1, and in your case, so let's say, a brand like Zudio is now penetrating in areas like population of 3 lakh, 5 lakh [indiscernible], are you seeing heightened competition from a very new set of national champions rather than a regional competition that we used to fight earlier?

Yes, you're right, Tejash. Definitely all these new national so-called conglomerate-led competition in heightening and there's a lot of penetration both from the Reliance as well as the Zudio or the TATA, and also [indiscernible]. So they will continue to come in, and they are now available in most of the towns, especially Reliance Trends. And we will see more of them. We will see definitely more of Zudio and more of them. And we still believe that there is so much of room and there's so much of consumption there, which is bound to grow. But we have -- we will all have a good time.

Sure. And last one, Anand, in your opening remarks, you spoke about expanding Unlimited, if I heard correctly, expanding Unlimited this year in South and West. so West, is it a new addition to our plan? Or was it just a broader remarks you made?

Tejash, Unlimited already exists in West. We have a reasonable presence in Maharashtra and also in Goa. So we will continue to expand Unlimited stores in the existing territories, which includes APTS as well as Tamil Nadu, Kerala, Maharashtra, Goa, all of those territories.

Sure. But under the previous owners, they were also not confident of Unlimited having very strong value proposition in West India, that's why they were focusing on South. So are we seeing any revival there?

So it's not -- we have not identified that exactly this is the location that we are going to open into, but you are absolutely right. We will definitely do our full feasibility and understanding as for a normal V-Mart store and then only get into that location.

The next question is from the line of Abhijeet Kundu from Antique Stockbroking.

Congratulations on a very strong quarter. My first question was around there has been an increase in depreciation as well as interest during the quarter. I mean that -- would that be because of the rentals coming back? I mean, the increase in rentals, would that be the reason? My first question is that.

So Abhijeet, the increase in depreciation is because of the inclusion of the Unlimited stores and the impact of Ind AS 116, which basically optically inflates the nomenclature of rental into depreciation and just cost.

So essentially, the rentals -- that's what I was -- because of the rental increase, the 2 components increased and that was because of the inclusion of Unlimited? Is that right?

Yes. Correct.

And secondly, now that your product will be also available on Amazon as well as Myntra, what has been the thought process behind it? And secondly, typically, what we have seen is that on Myntra, I mean, these metro brands sell their product [indiscernible] relatively far higher. And hence, they can afford to sell it at a -- due to higher trade margins in Myntra. Also, a lot of it is actually the older inventory. So in your case, I mean, how would it be? Would you be selling the older inventory? Or will you be having a whole gamut of products available on these new websites?

So Abhijeet, your voice was not clear. But whatever I could understand I will give the reply. For us right now, we are a very, very novice player in the digital channel, and we are an infant. We consider ourselves infant in that. We are just trying to, first of all, place ourselves there. And we -- as you all know, that we have always believed in honest pricing. Honesty is very important. Launching ourselves with not old inventory and liquidity inventory, launching ourselves with fresh inventory, trying to cater to the similar segment, understanding business from those digital masters, how to treat those customers, how to deal with them, what kind of product works, what kind of product doesn't work, what kind of marketing works, how to place those products. These are all now right now for us learning sessions, and we will continue that journey. And this is a journey that we have to go a little longer. This is not the core of what we do. We are a good brick-and-mortar retailer. We definitely want to be better in the omni-space, and we will learn from all of them, and that is how we are getting into. We have no targets right now to increase the margin, sell higher price products or sell old products. We are continuing with the normal operation. There are some unique assortments that we would want to place, but not with those intensions.

Okay. Got it. And on the Unlimited side, see, one, you are saying that you have hired an agency, which would work on the strength of the brand in the existing geographies. So that is one part. But any work that you would require to do on the merchandising part, I mean, on the product assortment? Anything did you find there and is some work going on there because Unlimited was there, I mean, it was -- it used to be one brand and they changed it to -- it was almost the third phase where Unlimited as a brand had come. So they had started off with Megamart, the old brand. Now also, even after doing all these, since you've -- it was not really what it was. So in terms of essential results, any corrective measures that you are taking in terms of merchandising?

Yes, yes. I'll stop you there. So Abhijeet, we are definitely -- as you know, we have integrated the buy piece. The buying and the merchandising areas have become common and we are definitely bringing in or retailing first of all, all the good things that the brand had done, all the good products that they had created. We are also adding up the new merchandise, new styles that V-Mart was selling. And we have started doing that, that those lines have now started reaching to the store. And we will definitely have a little mixed view as far as the forward coming seasons are concerned. And we definitely, as you rightly said, that brand and that -- those would have gone through multiple transitions. We don't want to give them another shock. So we are very mindful of all of that.

The next question is from the line of V.P. Rajesh from Banyan Capital.

My first question is regarding the competitive intensity. You mentioned Reliance and Zudio are entering into your markets. So are you seeing the smaller regional players exiting the market or incrementally becoming weaker?

We would not call for smaller players are exiting the market. As I said earlier, in these difficult times, in these challenging times, these are upstreams and downstream. The smaller players always suffers the most. And that is what can happen. But they are also, as you have to also understand that there is an entrepreneur sitting on the smaller player and the entrepreneur's ability to create a faster decision, the agility that they could demonstrate, the understanding that they could demonstrate in the business could also be a good asset that could come in. So we still believe and we still feel that they should not go down. But there are some players who are in trouble. There may be some players who could get into further troubles and a lot of others can also come out very well. So we would see a mixed reaction. But yes, these are difficult times for smaller players.

Got it. And my second question is regarding the real markets. It seems that you saw less sales from your sort of new and SKU markets. So can you comment on that? What is your view why the result is not doing well in spite of the continuous enhancements?

As I said in my opening remarks as well, the K graph that you all talk about, there has been an impact for the smaller players. The smaller shopkeeper has not paid them their salaries, the smaller contractor has not got jobs. There has been a relative slowness in that particular market where they have created some amount of loss. If you compare it with the professional world, the corporate world, the bigger cities, there, where we have all got good salary in our pocket, we have all received salaries on time, whether we have gone to offices or not. But for smaller areas, they have to all go out to work then only they get their money. So there is -- there was a difficulty time, difficult time that they all went through. And I think this is going to get required very fast.

Ladies and gentlemen, due to time constraint, we take that as a last question. I now hand the conference over to the management for their closing comments. Over to you, sir.

Yes. Thank you so much, everyone, for being there on the call. And we continue once again doing our best. We are on the similar track. We have focused very heavily on bettering our processes, bettering our technology, bettering our teams, building better strategic objectives. We are also looking into a lot of areas of development as our scale has become bigger, as our size of stores, number of stores have become bigger, as the competitors are becoming bigger. So we are trying -- definitely working very, very well towards all of that. We are very conscious that life is not going to be so simple and not so easy. So we will definitely find all those challenging times and we will all overcome jointly along with all of you. There is a lot of work that we have to do. We will come back very fast because there is a lot of hunger that all our numbers have, and we would definitely want to become the best value fashion player in the middle India. We will definitely want to become one of the best retailers offering our customer segment, those kind of product lines in the territories where we operate. So thank you so much for being there patiently with us, and we will continue to make you proud. Thank you.

Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.