V2 Retail Limited (V2RETAIL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to V2 Retail Limited Q2 and H1 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Akash Agarwal. Thank you. And over to you, sir.

Good afternoon, everyone. A very warm welcome to our quarter 2 earnings conference call. I hope you all are staying safe and healthy through this unusual and challenging times. Along with me, I have Mr. Manshu Tandon, our CEO, and our Investor Relations team. I hope everyone has had an opportunity to look at our results. The presentation and press releases have been uploaded on the stock exchange and on our company's website. Let me start with the key updates. The company opened 3 new stores during the second quarter. The company has opened one new store during the third quarter, which is the ongoing quarter. As on September 30, 2021, the company operates 96 stores, spread across 15 states and 84 cities, with a total area of 10.1 lakh square feet. The same-store sales growth for quarter 2 stood at 59%. We continue to remain focused and committed to the accelerated store expansion strategy despite delays in the first half of FY '22 due to lockdown. So we're looking to open another 5 to 6 stores til the end of this financial year. At V2, with our strong customer connect, we have witnessed strong rebound in the demand post relaxation of restrictions in quarter 2. The recovery has been much sharper with the onset of festive season, starting in quarter 3. Now allow me to give you an overview of our operational performance during the quarter. First, I will talk about the consolidated performance for the second quarter. The revenue from operations stood at INR 149.5 crores, registering a growth of 76% year-on-year basis. Gross margin stood at 34.3% compared to 32.6% last year. The stores were operational on an average for 86% days compared to 45% days last year -- compared to 45% for quarter 1 FY '22. EBITDA for the quarter stood at INR 19.5 crores as compared to INR 9.7 crores in quarter 2 last year. EBITDA margin stood at 13.4% compared to 11.4% last year. Now I will talk about the stand-alone performance for the second quarter FY '22. Revenue from operations stood at INR 149.5 crores, registering a growth of 76% from last year. Gross margin stood at 30.8% compared to 31.8% last year. EBITDA for the quarter stood at INR 16.5 crores as compared to INR 9.5 crores in quarter 2 of FY '21. EBITDA margin stood at 11.1% this year in quarter 2 as compared to 11.2% for the corresponding period last year. Now the consolidated performance highlights for the first half of the year. Revenue from operations for the first half of FY '22 stood at INR 232 crores, registering a growth of 90% from the first half of FY '21. Gross margin stood at 33.7% compared to 32% for the first half compared to last year. EBITDA for the first half stood at INR 29.5 crores compared to INR 17.1 crores in the first half last year, registering a growth of 73%. EBITDA margin stood at 12.7% for the first half of this year. The profit after tax loss for half -- first half FY '22 stood at INR 15.4 crores as compared to a loss of INR 16.2 crores in the first half FY '21. Now the stand-alone performance for the first half of the year. Revenue from operations stood at INR 232 crores, registering a growth of 90% compared to last year. Gross margin stood at 31.1% for the first 6 months as compared to 31.1% for the corresponding period last year. EBITDA for the half -- first half of the year stood at INR 27 crores compared to INR 17 crores, with registering a growth of 63%. And EBITDA margin stood at 11.7% for the first 6 months of this year. The quarter began with gradual recovery from COVID-19 second wave with relaxed mobility restrictions and aggressive vaccination right across the nation, sharply changing the consumer sentiment. Retail channel patients saw rapid growth in demand as the national infection case flow came down. This led to a strong recovery in demand, with sales moving swiftly close to pre-pandemic levels in August and September. All the stores are now fully operational with overall store operation days at 86% for the quarter. Our customers continue to increasingly leverage the convenience of our digital platform with the online channel. As we speak today, our festive sales have been extremely reassuring, and we are having a very positive outlook for our Q3 results onwards. Now I leave the floor open for questions.

[Operator Instructions] The first question is from the line of Priyanka Trivedi from Antique Stock Broking.

Yes. My first question would be, on what should be your CapEx guidance for the year?

Ma'am, your voice is not audible. Voice is cracking.

Can you hear me now?

Still not good. Can't understand you.

Hello? Now can you hear me?

Yes. It's better.

Yes. Sir what would be your CapEx guidance for the year?

So we are planning to open another 5 to 6 stores. So I think for that, we need about INR 7 crores to INR 8 crores, CapEx.

Okay, okay, okay. And my second question would be on your outlook on margins and future sales in terms of the GS -- there's a proposed GST hike of 5 -- from 5% to 12% from January onwards. And additionally, there has been a hike in the raw material prices of cotton and yarn? So how do you see the margins going ahead? And how much percent of our inventory would be in the first thousand range?

Yes. So the rise in the cost price of the raw materials just across the industry or across all the players. So I don't -- I think since -- absorbing it in our gross margin, what essentially will happen is that the price would go up. So I think for the end consumer, they have -- they will have to end up paying maybe a marginally extra cost for the tax hike as well as the rise in cost of the raw material. So going forward, right now, our manufacturing unit sales contributes about 20% of our business. And we are looking to increase it up to 50% for the next year. So I think with that in mind, we are targeting a gross margin of around 34% to 35% for FY '23, even with the cost pressures.

[Operator Instructions] The next question is from the line of Amit Porwal from Marathon Capital.

First of all, all, congratulations on a good set of numbers, seeing a decent recovery. My question is on the number of stores addition planned for '23 and '24. Do we still maintain the guidance of around 15%, 20% increase every year?

Yes. So for the next 3 years, what we are forecasting is about 25% sales growth every year. And out of the 25%, 20% will come from new store addition, and we're targeting a 5% of same-store sales growth. So going forward, so we have about 10.2 lakhs square feet operational right now. So by the end of the year, it should be around 10.5, 10.6 lakhs square feet. So we will add another 20%. So that will be about 2 lakhs square feet new. So it should be around 15 to 20 stores.

[Operator Instructions] The next question is from the line of Vinod Gandhi from Vinod Gandhi Investments.

What is the across sales target for quarter 3 in financial year '21, '22?

So I won't be able to comment on the sales figures that we expect. But it should be -- in the second half of this year, should be very similar to second half of last year.

But in terms of this quarter, I would say there are -- in terms of the weddings and everything and every -- most of the country opening up, will it be a higher target than the previous year?

So internal targets are definitely higher. And till now, we are seeing a good demand. And we have a very positive outlook. But like it's very hard to predict what happens going forward.

[Operator Instructions] The next question is from the line of Ankit Babel from Subhkam.

Akash, I have a few questions. First of all, can you throw some more light on your targeted gross margins of around 35% in FY '23? I mean what would lead to these margins? And any risk to these margins in the coming year?

Yes. So as I said, currently, 20% of our sales -- the contribution for our manufacturing unit sales is only 20%. And every month, we are increasing the manufacturing capacity. And so going forward, I think next year, the manufacturing unit should contribute at least 40% of the total sales. And in those goods -- in those 40%, we will have an extra margin of about 7% to 8%. So that contributes -- that will help us increase our gross margin from 31%, 32% right now to 34%, 35% next year. That will be the major contributor.

So you would like to retain those extra margins? Or you will like to pass it on to the customer?

So we are getting a benefit. Like if we compare the price of cost of manufacturing to the procurement costs when we get from vendors, the total benefit is about 15%. So that's the kind of margin that our vendors keep. So out of which, we will pass on maybe 7% to the consumer and the rest 8% will be absorbed into our gross margin.

Okay. Then my second question is that what kind of sales per square feet you are targeting in the coming 2 quarters and next year? What are your targets?

So for FY '23, we are targeting a sales per square feet of INR 725 per square feet per month.

On an average, okay.

Yes.

Okay. And approximately cost per square foot would range to what levels?

The cost per square foot would range from INR 165 to INR 170 per square foot.

Okay. And my another question is that you have a debt of around INR 50 crores on the balance sheet. Usually, your balance sheets are debt free historically. So can you just throw some light on where do you see your debt at the end of this year, next year or whatever time period you are comfortable with?

Yes. So we have a credit limit of about INR 50 crores. And by the end of this year, I think we will be able to reduce the limit used by around INR 20 crores, INR 25 crores. And by the end of next year, we will again be debt free. Because we didn't want to delay the payments done to our vendors, so we paid most of our vendors even during COVID time, so we had to use credit limit.

Okay. And this INR 725 PSF of what you are targeting, I mean, can you again throw some light on -- do you see that the ongoing demand tailwinds to take this, I mean, PSF to those levels or something internally also you people are doing to push it towards that level?

So like I said, in the third quarter, also looking at October and the ongoing November, I think we are very close to pre-COVID levels. And going forward, we are expecting numbers to be better than pre-COVID. So I think pre-COVID, the last financial year our PSF for the open stores that we have right now was around INR 700. So we are only taking a 4% growth on that. And we are expecting the new stores to at least have the same PSF as the company average. So that is the ideology behind predicting of INR 725 per square feet sales for next year. And you're talking about the steps that we are taking, like the biggest contribution, like I always said, was product. And if we increase the product contribution that are designed in-house from 20% to 40%, so I think that should be biggest differentiator because, in fact, the customer is getting a much superior product as well as at a better price than most of our competitors because we are able to manufacture it ourselves and save on the costs.

Okay. And my last question is on the inventory days. Now I understand that FY '22, we have a lockdown impact in the first quarter, and it won't be good to see the inventory number of days terms. But what are your ultimate targets to bring the inventory days to say by in FY '23?

Yes. So going forward, inventory days should hover between anywhere between 90 to 100 days. And it should be around INR 2,100 to INR 2,200 per square feet. So if we have 10.1 lakh square feet of inventory, the ideal inventory days, the inventory value should be around INR 225 crores to INR 230 crores. So we are...

Currently, it is INR 300 crore.

Yes. So we will be able to rationalize it in the next 6 months. Because what happened was we had to carry inventory due to the second wave, and we had to stop for the festive and the winter season because we couldn't use that summer inventory for the festive season. So now going forward, and I think the next 6 months will be rationalized. Even in Q3, it will be rationalized a lot, which you will see us in Q3.

But again, you have new stores, opening plants, which would be there in, say, in the month of March or April. So when you say around INR 2,100, so I understand it's difficult to take a call on a particular point of day, like 31st March. But basically, like if you end the year at around 10.6 lakh square feet, so ideally, your inventory should be in the range of INR 220 crores to INR 230 crores. So is it the right number which we should look at in the, say, by the end of this year?

I'm not talking about consolidated inventory. I'm talking about stand-alone. So the V2S inventory will be added to this inventory.

And what would be that additional inventory, V2S?

That should be about INR 30 crores.

So basically, INR 250 crores is what you are targeting in the number?

In [indiscernible] subsidiaries.

Okay. So a INR 50 crore reduction in inventory, plus whatever cash flows which would be there, why you still feel that you won't be debt free by the end of this year?

Because we're planning to open 25 stores next year. And we want to open a bulk of those stores in the month of March, April, May, so that we get most of the festive sales.

[Operator Instructions] The next question is from the line of Anish Jobalia from Banyan Capital Advisors.

Akash and the team, congratulations. Very good come back quarter in the light of the receding impact of COVID. So I have the following questions. One is, before the second wave happened, you were targeting close to INR 1,000 crores sales and 9% to 10% pre Ind AS EBITDA. But then this target has got postponed. So now with our strategy of also further increasing the gross margins, can you share what kind of targets do you have for FY '23? Can we do better than that what you earlier envisioned?

Yes. So because of COVID, what has essentially happened is that the target has moved from FY '22 to FY '23. Because in FY '22, so we were expecting our manufacturing contribution to increase. But due to COVID, we didn't accelerate that process. So I think for FY '23, our guidance is the same. We should do anywhere between INR 1,000 crores to INR 1,100 crores of turnover, with an EBITDA -- pre Ind AS EBITDA margin of 9% to 10%. So we are targeting INR 100 crore EBITDA for next year, pre Ind AS.

So sir, but when you are speaking earlier, our gross margin target seems to be 31% or 32%. But now we are speaking of 34%, 35%. So wouldn't we be expecting higher margins? Or is there something that I'm missing? So that's my follow-up question.

This is the operator. Participants, the line for the management has dropped. We request you to please stay connected. Ladies and gentlemen, thank you for patiently waiting. The line is reconnected. Sir, you may go ahead.

So my question, Akash, is that when you're guiding for 9% to 10% earlier, so that time over, I think gross margin targets were close to 31%, 32%. Now with the increased target around gross margins, when we'll be able to do better margins say, in the next year? Or is there something that's not [indiscernible]?

Yes, you're correct because our earlier guidance, the first where we changed that we -- our forecasting was around INR 750 to INR 775 per square feet. So we've got that guidance down to INR 725 to tell our investors. But our internal targets are higher than those. So your question is correct, because earlier, the gross margin projections were around 32% for the [indiscernible] per square feet projection was INR 715 to INR 770 per square feet. But now we made a sales force where we target of INR 725 per square feet. That gives us the sale of about INR 1,000 crores, INR 1,050 crores for next year.

Yes. So -- and second question is, in terms of getting our revenues from our own manufacturing subsidiary. So this product would be kind of like a private label product, right? So in terms of the acceptability by the customers, are there any challenges? Or can you speak a bit about the response that you have already seen, whether it's kind of surprising on the positive side, and that's why you're looking to engage the products from your own manufacturing subsidiary?

Yes. So looking at the data, what we have seen essentially is almost 75% of the products that we are making has a better sell-through then the products in the same range from a vendor. So it has been a very positive result. That is why we're looking to increase the [indiscernible] because these all -- all these products are exclusive from us. Because we also get private labels from our vendors, but those are not exclusive designs that are exclusive to our stores. But now what we're manufacturing ourselves are designed that are exclusive to us stores. So I think that has already helped us in connecting more with our customers, and that is why we're looking to increase it even further, gradually.

Okay. That's fantastic. And if I can just ask one more. So in terms of the -- our consumer sentiments, I believe like our stores are more around the Tier 3, Tier 4 towns, where the impact of the COVID has been, I think, higher than the other Tier 1, Tier 2. So how is this translating to our business, let's say, versus competition, which has got more number of stores in the Tier 1 towns? So in general can you speak a bit about the recovery for us from the consumer's sentiment perspective?

So I would disagree on one point there. I think that Tier 3, Tier 4 were the least affected. I think the main metropolitan cities were more affected. Like if you go to a smaller town, I think it's been one year since people forgot about COVID in most of the cities that we operate in. So I think the recovery for us will be much quicker than players prominently was -- stores in Tier 1, Tier 2. And we've already seen that happening. And like even in August -- and July and August was almost 90% of pre-COVID levels, and we have seen almost the pre-COVID level for October and November. So this is very promising. And I think people have started stepping out of their homes more. They've been tired of being at home for the last 2 years and having lockdowns. So that's the worldwide trend. And I think we have a very [indiscernible] outlook. The number of weddings was also, I think, a record number of weddings in the next 30 days and going forward in the summer. And I think this trend should continue, and the sales will be better than pre-COVID levels.

[Operator Instructions] The next question is from the line of Amit Porwal from Marathon Capital.

Akash, one question is on the -- as stores are mostly located in North and East, so are we planning -- like one of our competitors have acquired certain stores in the South part of the country. So are we looking to broad data stores in South and West? That is question 1.

Yes. So I think for the next 3 to 4 years that the number of stores, new stores that we're targeting, we can easily open them in the existing clusters that we operate in. Because we opened a few stores in the South, and we realized that the assortment is very different there. So we don't have that bandwidth in our sourcing team where we can source for 3 different regions because the whole assortment changes. So I see for the next 3 to 4 years, we want to focus in the existing clusters that we're very strong in, which is Bihar, Orissa, Jharkhand the Northeast. So I think we have enough potential and enough district that we haven't covered yet to actually cover the number of stores target -- new stores target for the next 3, 4 years. But after that, once we feel we have saturated the existing market, then we'll look towards the South and East -- South and the West.

Next question is on the warehouse capacity. So how much stores can the current warehouse address?

Yes. So we just moved into this new warehouse, I think, last year. And we have flagged the capacity till FY '24. So we can easily service us still a turnover of, I think, INR 1,600 crores, INR 1,700 crores.

Okay. The next question was on the rent. Now with COVID stabilizing -- a little behind us, do we -- and the real estate are seeing a pop, do we see the rental for our new stores going up?

I think it should stay at the similar level that we have right now, which is, I think, INR 44 per square feet. So I think it'll be -- the average would be the same for new stores.

Okay. And the last question, what would be the CapEx for FY '23, absolute number, assuming that we are opening around [ 30 ] stores?

So the number would be around INR 25 crores.

[Operator Instructions] The next question is from the line of Ankit Babel from Subhkam Ventures.

Akash, a couple of more questions. First is, what was your e-commerce sales in Q2? And what are you expecting it to be in the full year of FY '22 and '23?

Yes. So for Q2, the e-commerce sales was INR 4 crores -- around INR 4 crores. And for the first half of the year, it was around INR 16 crores. And we are looking to close the year with around, I think, INR 24 crores of e-commerce sales.

So why is it declining sequentially?

Because we are changing the technology partner. So we are implementing omnichannel. So we are not doing delivery from store as of now. So we are doing that implementation. So that is why we've reduced the ad spend. And we want to first take that system live, and then we will accelerate all this e-commerce sales again.

Sure. How much time will it take?

I think it should take another 45 days.

Okay. So by the end of this quarter, you'll be up with the new technology partner?

Yes.

So next year, what are your targets then in e-commerce?

Next year, our target is anywhere between 5% to 10% of sales. It all depends on the traction. So you can say INR 50 crores to INR 100 crores of sales, but we don't want to burn cash. So it all depends what is the marketing ROAS and what is the kind of return and how ads are doing and what is the organic traffic. So it depends on the business performance.

Yes. Actually, my next question was that on, if you achieve the INR 50 crores, INR 70 crores of sales, will you make money? Will you lose money? Cash, noncash? How the profitability would be?

I think we could even say that EBITDA would be maybe minus 1%, 2%, that's it, for the e-commerce business.

Okay. And this sales would be in addition to what you have guided, INR 1,000 crores, INR 1,050 crores offline sales?

Yes.

Okay. And you also mentioned that for next 3 to 4 years, you'll focus on the existing questions on the -- as you see a huge potential here. So can you throw some light on the store potential in the next 3 to 4 years in these clusters for V2?

So like -- we have already identified about 90 locations that we are not present in, in the existing clusters and 90 different districts where we can open stores. And there are some districts in those 90 where we can have 3, 4, 5 stores also. So if you look at the next 4 years, we want to open, I think, around 120 stores and -- which can be easily covered by the already identified location in these existing clusters.

[Operator Instructions] The next question is from the line of Amit Porwal from Marathon Capital.

Sorry. So Akash, you are guiding for a substantial rise in revenue and as well as stores in coming years. So my question is on the bandwidth. Are we looking at adding up in the team? What's the plan there?

Yes. So the management team and the core committee that we have in our company, their biggest priority right now is getting the right manpower. So we just hired a new HR head. And we've already given the LOR to our new CFO. And our retail operations head has joined from Easyday. And marketing head is also about to join over the next 15 days. So I think a lot of focus is given on recruitment and getting the right people, because ultimately, they are the ones who will take the company to the next level. And like -- me included and the whole management team, we're focusing a lot on recruitment and getting the right management personnel, experienced people.

[Operator Instructions] As there are no further questions from the participants. I would now like to hand the conference over to Mr. Akash Agarwal for closing comments.

Thank you, everyone, for joining the call. We hope we have been able to answer your queries. Stay safe. For any further information, we request you to get in touch with Marathon Capital, our Investor Relation adviser. Thank you. And have a nice day.

Thank you. Ladies and gentlemen, on behalf of V2 Retail Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.