Vaibhav Global Limited (VAIBHAVGBL) Earnings Call Transcript & Summary

Thank you Aman. Good evening, everyone. And thank you for joining us on Vaibhav Global's Q2 & H1 FY '21 Earnings Conference Call for the quarter and half year ended September 30, 2020. Today, we have with us Mr. Sunil Agrawal, Managing Director; Mr. Vineet Ganeriwala, group CFO; and Ms. Dipti Rajput, Head Investor Relations. We will begin the call with opening remarks by Mr. Sunil Agrawal on the business operations, key initiatives and broad outlook; followed by a discussion on the financial performance by Mr. Vineet Ganeriwala. And following that, the management will open the -- for a Q&A session. Before we get started, I would like to point out that some statements made or discussed on today's call may be forward-looking in nature and must be viewed in conjunction with the risks and uncertainties we face. A detailed statement and explanation of these risks is included in the earnings presentation which has been shared with you earlier. The company does not undertake to update the forward-looking statements publicly. I would now like to invite Mr. Sunil Agrawal to start proceedings. Over to you, Sunil.

Thank you, Karl. Good evening everyone and thank you for joining us today. We hope all of you and your families are staying safe and healthy. Our thoughts go out to all those affected by the pandemic and we are truly grateful for the selfless efforts put in by the frontline warriors. As I look back, I feel incredibly proud of the entire VGL family as each member rose to the challenge, demonstrating resilience and agility. Our strong run over the years has received further boost during the pandemic. While numerous businesses have upended in these challenging times, our unique vertically integrated model has delivered ahead of expectations. I am happy to report strong performance by VGL in Q2 FY '21, continuing the momentum of the first quarter. Retail revenues improved by 29%, EBITDA by 42% and PAT by 44% on Y-o-Y basis. Correspondingly, we continue to deliver margin accretion, that is EBITDA & PAT margins at 16.5% and 11.8% have expanded by 220 basis points and 170 basis points, respectively. Our cash position improved with operating cash flows at INR 93 crores and free cash flows at INR 77 crores for H1 FY '21. Our retail businesses Shop LC in the U.S. and Shop TJC in the U.K., witnessed robust growth during the quarter at 19.5% and 26.6% in their respective local currencies. Further, ROCE reached the milestone of 50% on trailing 12-month basis. Keeping in line with our payout policy, the Board announced second interim dividend of INR 5 per share. Real-time action is critical in today’s world, where success is increasingly defined by speed and agility. We have demonstrated these qualities successfully in the backdrop of unprecedented market volatility and nervous consumer sentiment. As you know, the pandemic has caused people to remain largely indoors. Distance shopping formats are becoming increasingly popular and we continue to see strong growth for fashion jewelery and lifestyle products on our platforms. Our retail business volumes exceeded 3 million pieces in this quarter, registering a remarkable growth of 27% year over year. On trading 12-month basis, we served approximately 450,000 unique customers, a significant jump of 27% over the previous 12 months. Our solid supply chain network comprising of manufacturing in India and China as well as sourcing operations in over 20 countries is the engine under the fast growing direct-to-consumer retail operations in 2 of the largest consumer markets of the world. Customers on our platforms of TV, web as well as marketplaces and social media associate our products with high quality and excellent value. This is a key differentiator that drives robust gross margins, which have consistently remained at or higher than 60% across diverse business cycles and came in at around 63% in Q2 FY '21. Now for an update on the quarter’s business developments. We have implemented several initiatives to enhance customer experience and increase engagement. At Shop LC US, some of these initiatives include themed events of Christmas in August that received strong response; enhanced studio set-ups both indoor and outdoors and expanded marketplace presence to Overstock.com. At Shop TJC UK, these initiatives include launching of QuickPay for preregistered customers on the website, Rising Auction now available on the mobile app, expanded our presence to the Fruugo! and Wayfair marketplaces, launched social DR, organized 2 virtual customer open days receiving heartening response. At TJC, we now deliver ordered products on an average of 1.5 days quicker compared to same period last year. In addition, across both the retail geographies, we have expanded our product offerings across categories while expanding our existing categories to more innovative products. We have been continually enhancing our technological infrastructure to support our fast growth. We rolled out Microsoft D 365 ERP to both retail units in U.K. and U.S. in the quarter. So our entire business now is covered by ERP. We also continually invest in our customer-facing technological stack, including AI, to ensure that our customers have best experience. We are continuously strengthening our supply chain to cater to the expanding customer base. This involves expansion of new products sourcing from existing geographies and also exploring new geographies to add to our network. In Q2, we added South Korea and Japan for beauty products and Vietnam for apparels. I am extremely happy to share with you that in August of this year, we successfully commissioned a 1-megawatt solar PV power generation project under captive use in Bikaner, Rajasthan. Together, with the existing rooftop generation facilities, we now generate our own renewable power to satisfy 45% of the power requirements at our manufacturing facilities in Jaipur. We expect to take this to 100% in next 1 year. Now to share the progress on our 4R strategy, which is focused on strengthening reach, registrations, retention and repeat purchases. At the end of Q2, the reach of our TV networks stood at 101 million TV homes as compared to 97.7 million in the same quarter last year. In addition to cable, satellite, telcos and over-the-air TV, our products are now accessible on our expanding presence on digital platforms, including our proprietary websites, mobile apps, OTT platforms, marketplaces, influencer marketing and social direct response. New registrations on TTM basis came in at 260,000 compared to 180,000 in corresponding period of the previous year. As discussed earlier, the momentum of customer registration has increased significantly over the last 2 quarters due to COVID, through expansion of new product categories and through expansion on new digital platforms. This quarter, we saw our customers purchase an average of 27 pieces on TTM basis as compared to 30 pieces in the corresponding period of the previous year. While the absolute number of old customers continue to be at good levels, the repeat rate is low due to sharp increase in denominator that is the new customers in H1 this year. Finally, coming to the retention rate, it stood at 50.8% on TTM basis as compared to 50.6% for the same period last year. Before I conclude my opening remarks, I would like to reiterate that inclusiveness remains high on our business agenda. We are focused on bringing a positive change to the lives of our team members and the communities we serve and operate within. While operating continuously in difficult circumstances, we have ensured the safety and well-being of our employees by maintaining necessary precautions and safety measures across our retail units, manufacturing units and offices. For functions that are not necessary to be present in the offices, we prefer that our employees work from home. With the COVID-19 pandemic still affecting the world, we continue to support the brave frontline workers. We have donated over 197,000 masks to hospitals, care homes, police stations and schools in the U.S., the U.K. and India. We have also provided about 3.4 million meals to migrants and people in need with the help of our partner, Akshaya Patra in Jaipur. It is heartening to share that our One for One program, where we provide school going children with healthy and nutritious meals for each product sold, we reached 43.5 million meals in India, the U.S. and the U.K. combined. In conclusion, I want to share that we believe that our unique vertical, low-cost, agile and direct-to-consumer model gives us massive market advantage. With over 20 countries' strong sourcing network, robust IT infrastructure and a solid team, we are excited about the future. All spokes in the VGL’s wheel of business wonderfully aligned for swift and comprehensive response to the current opportunity. We expect to build on this success and close the second half of the year with 18% to 20% constant currency growth in retail revenues. While doing so on a relatively stable cost base, we see the current momentum of margin expansion to sustain, creating opportunities for ongoing cash generation. On a medium basis -- on a medium-term basis, we are confident of delivering 15% to 17% revenue growth on the top of strong revenue growth in the current financial year. With that, I now hand over the forum to Vineet to discuss financial performance for the period under review. Over to you, Vineet.

Thank you, Sunil. Good evening, everyone. I hope you are all safe and doing well. I will now take you through our financial performance for the quarter and half year ended 30th September 2020. After a good start to the financial year last quarter, we are glad to report the continuation of our growth momentum in the second quarter as well. Our overall revenues at INR 599 crores marked a strong growth of 23.4% year-on-year. Retail revenues improved significantly by 29.4% to INR 595 crores. I am happy to share that both geographies have contributed firmly to this growth. On a constant currency basis, Shop LC US recorded a growth of 19.5% year-on-year while Shop TJC UK grew by 26.6% year-on-year. We ended the first half of the year on a strong note. For H1, our overall revenue grew by 24.2% to INR 1,149 crores. Retail revenues increased by 30.7% to INR 1,140 crores. On a constant currency basis, Shop LC US recorded a growth of 19.9% year-on-year while Shop TJC UK grew by 29.1% year-on-year. For quarter 2 FY '21, within retail, TV revenues grew by 24% and web revenue grew by 41%. While online shopping is expanding significantly in the time of the pandemic, we are seeing strong traction on TV as well. Likewise, for H1, TV revenues improved by 24% year-on-year and web revenues by 44% year-on-year. At the end of H1, TV contributed 64% of total retail revenue and web contributed 36%. We do report both these numbers separately, but TV and web form a symbiotic omnichannel ecosystem that needs to be evaluated collectively along with our other emerging platforms. In this context, I would like to remind you that the lifetime value of our omnichannel customer is significantly greater than that of our TV-only or web-only customer. We continuously cross-promote our various engagement platforms with the objective of expanding the omnichannel customer base. Sales contribution from fashion accessories, lifestyle and essential products continue to increase in our overall product mix, further diversifying the base. Contribution from non-jewelery products increase meaningfully to 32% for H1 FY '21 as compared to 22% for the whole of FY '20. Volume growth has been strong on both TV and web platforms. For Q2 FY '21, TV volumes grew by 21% year-on-year while web volumes grew 37% year-on-year. For H1, TV volumes improved by 30% and web volumes increased by 39%. ASPs continue to be lower year-on-year as the sales mix transitions are based on what the customer pulls. As you know, we have been moving our focus away from B2B to the more profitable B2C business, which now forms 99% of our total revenues. Another important aspect of retail revenues is sales made on EMI basis which we refer to as Budget Pay. In H1, the contribution of Budget Pay to retail revenues was 36%. Gross margin came in at 62.9% for the quarter and 63.6% for H1. Our strong supply chain network enables us to source from micro markets globally at cheaper costs with a shorter turnaround time and this allows margins to sustain at 60%-plus levels. EBITDA margin expanded by 220 basis points year-on-year to 16.5% for the quarter and by 190 basis points to 15.3% for H1. PAT grew by 44.3% year-on-year to INR 70.5 crore during Q2 and by 45.3% year-on-year to INR 123.4 crores in H1. Cash flows were healthy for H1 FY'21. Our business model supports high cash accretion based on strong conversion from operating profit. Operating cash flows stood at INR 93 crores, while free cash flow came in at INR 77 crores for H1. We had cash and cash equivalents of INR 308 crores at the end of Q2. Return on equity was 29% and ROCE expanded to 50% on trailing 12-month basis. Debt-light capital structure facilitates high return on capital employed. During H1 FY '21 we incurred CapEx of INR 16 crore attributable towards investment in newly commissioned solar power project, studio enhancements, warehouse improvements, ERP and plant and machinery. We have announced an interim dividend of INR 5 per equity share for this quarter, in line with our dividend policy of 20% to 30% payout ratio of the annual consolidated free cash flow of the company. This takes the total dividend declared for H1 FY' 21 to INR 10 per share. Overall, we enjoyed another strong quarter with robust growth, despite the challenges that we all continue to face. Our agile business model has helped us rapidly to changing global scenarios and maximize value for all our stakeholders. We also remain focused on maintaining our lean operating cost structure that further adds to our ability to create simultaneous value for both customers and shareholders. With this, I conclude my opening remarks and request the operator to open the forum for questions.

[Operator Instructions] The first question is from the line of Runjhun Jain from Nirmal Bang.

So congratulations to the management, very good set of numbers. Sir, we have seen that the first half has been quite strong and the outlook also says that we are probably likely to continue for the future. So is there any change in the guidance what you have provided for the full year?

Yes. So we have given 18% to 20% guidance for the H2 of this year.

18% to 20% for the H2?

H2, yes, for -- on constant currency basis for retail revenue.

The next question is from the line of Bharat Shah from ASK Investment Managers.

When we look at our TV sales, compounded growth over the last 5 to 6 years has been about 9% and non-TV omnichannels or other channels have been at about 30%. But when we compare it for the first and second quarter in the current year, both the channels have broken materially from the past. Can we say is there something structurally altering? Or it is just that people have been cooped up at home and they've been making more purchases? In other words, are we structurally breaking away from the growth rates of the past or it is merely a reflection of the times that we are in?

Good question, Bharat [Foreign Language]. So part of this, as I mentioned in my earnings call -- part of this has to do with COVID because there was more viewership and more people staying at home. So part that and part is our product agility. So they bought the product appropriate for the time, and our merchandising team is also learning very rapidly how to be more pivotal. And the third part is our team. So we recently appointed new team leads in U.S. and U.K., and those teams and also our IT and finance, HR, all these leads are getting new in the role. And they are doing really a good job in capitalizing on the opportunities for the business. And that gave us the confidence to improve our guidance for H2 for this year. For the coming years we are continuing our 15% to 17% guidance, even on the top of very robust growth this financial year, which was partly COVID induced. So there is higher confidence in the business model that we have at this time than we had in the past. We always had tremendous confidence, but traction confidence is more now than ever.

Also, when you are saying that with the rising business our margins have been steadily improving period by period, that is happening along with the fact that U.K. contribution to the pie is increasing? And so is the non-TV segment, the web and the marketplace and the social media percentage. So would it be fair to say that the profitability and return on capital employed in the U.K. business and non-TV segment is superior to the other parts of the business?

So there are 2 parts of the question, one is the U.K. and other is the non-TV part of the business. U.K. has done well in recent years. There were definitely certain opportunities to grow. And we believe that U.S. also offers tremendous opportunities for us. As we are learning every day, we are implementing more and more strategies or more and more tactics to improve the business. And as I mentioned that we are on to multiple platforms of selling and multiple product categories. So there are tremendous opportunities for us to continue to grow, both in the U.S. and U.K. for years to come. Now to your next point about multiple platforms other than television. It is true that there are multiple new areas that we have gone into in recent past, and they all offer tremendous opportunities for future. We are very excited with all the prospects that we have for the growth in those areas. Now our gross margin point in those platforms, we keep constant requirement of gross margins on any market, whether we sell on marketplaces or we sell on social DR, or we sell through influencers. Our own e-complex on digital platforms also offer same margin, except the Rising Auction format, which is a lower margin, but there is a kind of symbiotic relationship with television because all the remaining small run SKUs we exit through Rising Auction format. So that is kind of tied up with television. But other than that, we expect similar margins for all our businesses.

Sir, one last thing, when we look at gross margins that we've been maintaining at 60% plus, say 63%, 64%, and operating margins now touching 16.5%, so roughly about 47%, 48% is the rest of the expansion. How much broadly will it change or out of this 47%, 48% would be characterized as kind of relatively more fixed, relatively more semi-variable and the one which is variable? Roughly if I can get a broad sense, it will be helpful.

Maybe Vineet, you may have a better idea on the ratio of how much is fixed and how much is variable?

Yes, sure, I will take that, Sunil. So approximately -- so below the gross margins, out of the total expenditure, approximately 30% of that is completely variable. So they are in the nature of shipping costs, credit card expenses, marketplaces and so on. So they are completely variable in line with revenues. And maybe about 10-odd-percent would be kind of a semi-variable expenditure which would include the freights, et cetera, and so on and so forth. The other are relatively fixed in nature, the balance 60% would be kind of more fixed or stable.

You mean 30%, 10% and 60% of the total expenses?

That's right, the total expenditure below gross margin till EBITDA. Out of that total expenditure, about 30% would be variable, 10% semi and the rest 60% would be sort of fixed or stable.

The next question is from the line of Kanwalpreet Singh from AMBIT Capital.

Sir, when I compare the Q1 number and the H1 number, which is given in the presentation, I see that Jewelery as a percentage of total sales in Q1 was around 64% and for H1, jewelery is around 68%. So if I am not right, Q2 must have seen significant growth in Jewelery segment. So with this as the base, I wanted to understand how are you seeing certain trends in the non-jewelery segment? Because as I understand, you introduced a lot of new products, as I remember you saying that even masks were introduced during the pandemic time. So just certain trends which are happening in non-jewelery and what are the major categories there that you are focusing on now?

Thank you, Kanwalpreet. In Q1, our Essential segment was about 13.5%. And in Q2, our Essential segment is just about 3.5%. So essentials have really slowed down, but that space has been taken up by jewelery and other LSP categories. So, let me rephrase that number. That was on the gross level and net of returns, it is 18% to 5%. So it was 18% in Q1, it's 5% in Q2.

Right, sir, and which segments are more resilient in this which are non-essential and which form like, let's say, 10% or more of the -- like the major chunk of the non-jewelery sales?

So non-jewelery, the beauty is number one for us. Beauty would include the anti-aging creams or fragrances or hair care. So, that is number one. Number two would be home. At this time, people are staying at home, they need kitchen utensils or home decor, bed sheets or the bathroom accessories, all that; followed by accessories like handbags or other such accessories -- scarves, handbags and all that.

Okay. So would it be fair to say that this is like almost half and half, half between beauty and half between home?

I don't have the breakdown, Kanwalpreet. That probably Dipti can share with you later.

Okay, sure. Sir, the other question which I had was with regard to cash generation and capital allocation in the medium term because the cash generation has been very strong, almost you are doing around INR 80 crores of free cash flow almost every 6 months. And the gross block in the fixed assets basically is around -- under INR 70 crores. So just wanted to understand from the medium-term perspective, next 3 to 5 years, would you be looking at returning cash more back to the shareholders or how do you think about capital allocation in the medium term?

So as we did last year, we didn't’t see a major opportunity to utilize the cash for any M&A activity, so we returned the cash to the investors. So we will continue to do that, look at closely. If we have opportunities, then we will keep the cash or utilize the cash in M&A. But if we don't, we'll return it back to the shareholders.

Right. If I may just add 1 follow-on. So in inorganic opportunity, do you see, I remember last time you had said that Japan and Germany may be interesting market from a similar demographic profile. But do you see such opportunity in the medium term for acquisition?

Yes. So we are constantly exploring, whether to go in geographical expansion or to look at any other entity which is suitable for us, which will have synergies and benefits. So we constantly look at other areas as well, and at the right time, we will go into those opportunities. We are open to that. But we are not aggressively going for it because our existing businesses have tremendous opportunities for growth, as you are seeing, in last few years, especially during pandemic we have learnt so much and executed on these opportunities.

The next question is from the line of Chintan Sheth from Sameeksha Capital.

Congrats for the good set of numbers. A couple of questions, one, on the other income, if I look at relative to our cash balances, the yield is slightly lower than what we used to do in the past, is it partially driven by the lower interest rates, that explains the decline? That is one. Second, again, on the capital allocation, so we are right now 15% margin, you see growth guidance are also in line with what we have previously guided, upping for the second half, obviously. So we see a continuous trend of your margin expansion through operating leverage. Do we see that to support this growth going forward, do we need extra channel in either of the geographies? Because now additional broadcasting cost can sufficiently cover the cost of -- don't much impact our historical margin trend. Do we feel the need for extra channel in either of the geographies?

So Vineet will take the first part and I will take the second part.

Yes. Thanks, Sunil. So our other income are slightly lower only because of the reduced interest scenario. So broadly, the overall interest rates in the market have come down. And most of our funds are in U.S. where the rates are substantially down since last year. So that's the only reason. If you look at corresponding, you will see the corresponding saving also in the interest cost as well. So nothing changed drastically other than the broad interest scenario in the market.

Answering your second part, Chintan, we are currently broadcasting our signal in the U.S. and U.K. independently. And the same signal, we try to put in as many channels each home that can be productively accretion -- which should give positive ROI to us from an investment point of view. So we are still about 1.7 channels per home in the U.S., and about less than 1.4 channels in U.K. So we still have a lot of opportunity to grow compared to QVC and HSN, who have 3 or 4 channels per home. Also within those markets, we have more homes that we can get. And we are also learning more about the product categories and we're also learning a lot about digital platforms to reach to the customer. So we have a lot of opportunities of growth within these 2 markets. As I mentioned in earlier question, that if there is an opportunity that arises for other geographies, we will look at it. We are not going aggressively at this time because there is so much opportunity in front of us to execute and grow rapidly in our existing geographies.

Hours of day broadcasting, how are we related to last year? If you can just qualitatively give some color to it. And what are our plans going forward?

You mean the revenue growth?

Broadcasting, number of hours or number of minutes per day broadcasting today, that is in Q2 versus previous year?

So we are 24/7 live or 24/7, in both locations, we are live programming. So we are covering all the minutes of the day. But our effort is to broaden that signal to the same home as well as more homes.

Right. So it will be 1.7x24 in U.S. and 1.4x24 in the U.K., that is the way we have to look at it?

Yes, that is correct. But also improve the signal to more homes in both geographies. In U.K., we are fully covered, but in the U.S., there is some opportunity to improve our footprint. There are still about 25 million to 30 million homes that we are not in currently.

Okay. And how is the OTT in terms of revenue contribution within the TV segment, if you can speak a bit about it? Because that's a new segment related to the cable TV. So if you can provide some color, how that is shaping up?

This is still small. We recently hired a 20-year experienced veteran from HSN to lead our OTT initiative, very powerful, very capable person. So we expect this year to do just about $2 million in OTT in the U.S. So that is less than 1% of our sales in OTT. But we expect this to accelerate in the coming years.

The next question is from the line of Vishal Jajoo from Tycoon Mindset.

I just wanted to know your views. As we are expanding in our web segment as well, so are we sort of facing any competition threat from players like Amazon who have like delivery days of very few, like less than a day? So are we sort of facing any threat of competition of them being entered in our space?

Thank you for the question. So Amazon has its own space and very powerful space, and they have amazing business model, all my respect for them. So we are learning from them every day and accelerating our time to consumer. As I mentioned in my opening remarks, in U.K., we are already 1.5 to 2 days quicker in delivery. In U.S. also, we are going towards that to be quicker to the consumer. And also, we are on Amazon as well, so marketplace we started 3 years ago, and this year we expect the marketplace to contribute about $13 million in our sales between U.S. and U.K. compared to last year, it was just about $4.5 million. So even on the marketplaces like Amazon, we are expanding our business rapidly. So that shows the strength of our product offering and our storytelling abilities.

So do you think that there would be any margins impact on long term? Because in Amazon there would be many sort of entrants of other competitors as well. So do you think that this will impact our margins in the near future?

Our margin on marketplace is exactly same as our own business, there is no lower margin on Amazon, Walmart or eBay. So we don't expect our margin to be impacted in any way. So our guidance is on medium term, that we will be plus 60% margin business model. So we start with the product selection that will give us that margin or the brand solution that will give us that margin. If they don't give us that margin, we don't go into that.

Okay. And just thought of I want to have just light on, if we just expand in other geographies, you have mentioned that we won't be expanding in the near future because we see the growth opportunities in U.S., U.K. as well. So if we just expand in other territory, so how much time does it take a company like us to expand in other geographies like if we expand in Japan and Germany, so how much time will it take to have a good established base over there?

So based on our earlier experience of U.S., U.K., and Germany, we were in Germany in 2007, but during -- the recession came, we closed it. So it takes about 3 or 4 months to establish a new entity there, between 3 to 6 months. But it takes about 3 to 4 years for the unit to become profitable. So we have a gestation period of that period.

Okay. So expansion will always be a long gestation period benefit in the future, right?

Correct. Yes. So in 3 to 4 years, there's a margin or profit realization from that particular unit.

The next question is from the line of [ Kapil Bangar ], as an individual investor.

Congratulations on splendid results. So I had a couple of questions; one is on the logistics part. You mentioned that logistics, the number of days that have earlier taken you about 1.5 days to 2 days of improvement is there in logistics. So what was the number earlier and what it has come down to in the U.S. and U.K. separately?

Sure. In U.K. -- the days' improvement is in U.K., not in U.S. So in U.K., it used to be approximately 4 days earlier, now it is 2.5 days. So a product gets to a consumer in 2.5 days. In the U.S., we have not been able to execute on faster delivery yet. Due to pandemic, there is a lot of demand and pressure on all the carriers. So we are negotiating with them to reduce the time to delivery to the customer. In fact during pandemic, earlier it used to be about 4.2 days, and during pandemic, it is actually now about 5.3 days right now. So it has gone up during pandemic. We hope to bring it down after pandemic maybe Q4 of this year or Q1 of next year, our aim is to bring it down to 3 days. And we are working towards that. We are trying to do that in a cost-effective manner that doesn't impact our profitability.

Okay. So yes, 4 to 5 days is on the higher side. And just drawing a parallel here with Amazon, which currently does the next-day delivery and is now working on same-day delivery. And actually, if the time difference between a desire and actual consumption is lower, it creates a better mousetrap for the consumer as well. So a shorter delivery will -- delivery period will mean more purchases by the consumers.

Yes. Thanks, Kapil. We recognize that and appreciate your advice. So we are definitely working towards it. And we have a lot of opportunities to increase customer engagement with better delivery in the coming quarters, coming years. And we are working on the same.

Glad to hear that. Second is, do you think now we have the capability to use these platforms, the great platform that we have created in the form of channel, app and website to now start advertising sponsored products the way Amazon, Flipkart, any other e-commerce platform would be doing, like we see sponsored products on these platforms. Would it be possible for us to also generate certain advertising revenues through the large customer base that we have? Essentially, the thought process here is that with minimal capital investment and having access to consumers in developed markets such as U.K. and U.S., we will be able to get more revenues and get a larger share of the wallet.

Sure. Thanks for the question, Kapil. So with Amazon or Flipkart, they are marketplaces, and with all third parties selling the product, so they have a good revenue stream of advertising. So advertising within their platform to get more visibility for those sellers as well as to get from placement ads. We manufacture majority of our product ourselves, we sell very few third-party brands, and we have no third-party sellers. So we don't have an ecosystem of advertising revenue generation within our businesses. And we do not yet have any visibility of converting to marketplaces anytime soon. So thanks for the advice. We will keep that in mind. But we don't have that visibility at this time.

Okay. Just one more question from my end. The new customer addition is very robust. Congratulations on better traction on that front. But still, given the market size there is a lot of scope in further expanding the customer base. So what new steps are we taking to do that?

So we constantly invest money in to get new customer in both geographies, whether through television, being on the good channel positions where customers see us as a passer-by when they flip the channel, or on web properties through digital advertising, or on social media. We allocate the budget in a way that will continue to grow in a consistent manner, while having the leverage benefit of profitability. So we are a little bit conservative compared to the many e-com players who burn a lot of cash to gain traction, like 30%, 40%, 50% growth, but burn a lot of money and be negative profitability. So our philosophy is a little bit different. We are happy to grow 15% to 17% year-over-year in a profitable manner.

Okay. I would like to squeeze just one more question, a short one. I saw Shop LC products listed on Amazon Japan also. So have we at least on a soft launch basis introduced certain products there? Amazon Japan is what I -- is where I saw Shop LC products?

That is a pretty good insight you have. Actually, this was just added last week -- or 2 weeks ago. We started putting -- our India unit has started to put products on Amazon Japan and Amazon Germany, and we are testing those markets with some product, what product is working on them for our future potential growth in these markets.

Okay. So currently at pilot stage?

Correct.

And is the new app launched in U.S.? You were planning to launch it in Q2, and I had shared a feedback that the app reviews are something that we can work upon. So has the new app been launched?

The new revised app -- so we've made improvement on our current app, but the new app will be launched in Q4 after the season. Because during the season, we didn't want to take chances of new customer experience.

But just an input here -- one humble input from my end. We are seeing a lot of traction and some tailwind also because of work from home. And if we are able to get a better version of app in the market during this time, that could lead to even better traction because it would lead to better customer experience and we could do better in terms of new customer acquisition during these times when because of COVID, lockdowns, work from home is going on, et cetera.

Most definitely, I appreciate the advice. We have to balance between the risks of any disruption versus increased revenue that it may give. So on the balance, we take the decision, what is best for the business, and that we decided to launch the new app version in both the U.S. and U.K. in Q4.

[Operator Instructions] The next question is from the line of Pritesh Chheda from Lucky Investment Managers.

Congratulations for a good performance. I just wanted to understand one part, the marketplace and the social platform as a channel. These 2 channels, what it would contribute as a percentage of sales today and, say, in the next 3 to 5 years what would be your aspiration in this channel? And what are we doing to achieve those aspiration, both on the softer side and also from the technology/employee point of view?

Sure, Pritesh. Good question. As I've mentioned earlier, marketplace, this year we expect to grow about $13 million or so. So that will be based on operations between 3% to 4% of our revenue, not even that actually, a little less than that. Social DR, this year we expect to do little less than $2 million, that will be less than 1% of our revenue. But both these channels have tremendous potential to grow for our business as a percentage of sales and in absolute dollars in coming years. For coming years, we are not giving any fixed guidance. For coming years, our growth will vary, but that will definitely be much higher than our other platforms.

Much higher than other platforms in the sense that eventually it should be higher than the web platform of ours? Because for us, the platform-wise highest revenue is TV followed by web and followed by others. So when I have to understand it, should it be higher than your own web platform?

So that is very long term because web platform is substantial money right now, it is -- almost 40% of our sale is coming from U.S. and about 30% some odd coming from U.K. So these are very small right now to make a prediction. When it will be bigger than web, I do not know.

Okay. And what are we doing in these areas in terms of people hiring or technology or any other things needed to develop this channel?

So just to say just for the social DR team, we are about now 15 people team, very bright people managing this initiative between U.S. and U.K., and marketplace is a strong team and we are continually making investments in that team. And technologically, our IT team is on the top of supporting these 2 teams for any enhancement they need to be on the top of that. If you look at our listing on Amazon, the enhanced brand content of our listing on Amazon is even better than our own website. So you will see a lot of support coming for these areas from our IT teams.

And any lateral hiring that we have done here?

Yes, constantly. I mean We're aggressively hiring these 2 divisions and very bright and -- young and bright people. So is young kind of -- but very bright people.

Okay. And my last question is, considering the cash that we generate in both these geographies, as you have been mentioning that if the cash is not utilized for an acquisition then it gets paid out by whatever percentage the Board thinks fine. But if it is an acquisition, it means addition of a geography is the only way of an acquisition or there can be other ways of acquisition?

It could be same geographies or other geographies. Example, if there was a differentiated TV channel available to us in any of these 2 markets, we may acquire it where we can add more value. We get their customer and their product understanding and get our sourcing to merge with that and our low-cost operation to merge with that or go into new geographies.

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

Brilliant set of numbers. Congratulations to the entire team. I have a couple of questions. First one is a bit more fundamental in nature on the operating margin side. We have been seeing that our operating leverage till now, each quarter we are kind of surpassing the operating margin of each quarter, with the latest one clocking 16.5%. So what is theoretical operating margin that you can achieve in the near term? Or what kind of margin level gain, is it 20% or 25%, what kind of visible margin we are aiming at?

Thanks for the question, Sabyasachi. So we don't give guidance on what future operating margin we will have. We'll only give guidance on our top line, and we also guide that there is an operating leverage available to us based on our high gross margin and our some nature of fixed cost versus variable cost. So you will have to make your own model on that, I can't give you guidance. And also, there is no parallel to our model. There are some parallels in Inditex and QVC, they both are approximately 20% operating margin, at very high revenue level. We believe in long term we can even exceed that, but where it will go, we don't know.

Sure. Second thing on the Budget Pay side, I see that in H1 FY '21 compared to FY '20, I think the Budget Pay contribution has come down from 39%, 40-odd percent to 36%. And I also see one more thing on the balance sheet side, is the short-term provision rising, almost doubling, from INR 19 crores to INR 37 crores. Do we have a link here? Is there an increased provisioning in the short-term provisions? And is it a worry? Any highlights on that?

I couldn't get the second question. The first question, I can address about the Budget Pay. That due to essentials which are at really low price point, we didn't give any Budget Pay in that. So we typically don't give Budget Pay on under-20 products. If it is over 20, we give Budget Pay. If the price points come down, as it did during COVID essential velocity, so the Budget Pay came down. But in longer run, we think about 40% to 45% of our sales will come from Budget Pay. That is the overall benchmark we keep in mind. So if Vineet can address the second question about provisioning, if Vineet understood the question? I could not understand it.

Yes, Sunil, I'll take the second one. So the increase in short-term provision is only because of that in this COVID scenario, when there was so much hardship in the like broader geography, so we found that the customers may not be able to return a product in the 30-day period normally, which we allow them to return our product. Hence, consciously, we are allowing them for -- like even if they want to return, we are allowing them and factoring that part and keeping a return provision for that. So the provision is only on account of higher returns, which we expect. Once the geography starts opening up, it might increase to some bit. Having said that, even after this factoring that increased part, our overall return ratio remains the same. So this is just to factor in and more for like the customer convenience and nothing else.

What is the average return rate right now? I believe it was 18% in Q1.

Yes, it's very similar to that, 18.1%, around that percentage only. Like Q1 and similar levels of last year. So overall, returns have not increased, but actual returns which have reached the warehouse and those which have not reached the warehouse, that is creating this distortion in the provision amount. Otherwise, no change in any trend as such.

The next question is from the line of Juhi Shah from Stallion Asset.

So, I have just one question. Lately, there has been a second round of lockdown in a couple of countries in Europe and some parts of U.K. as well. So has that impacted our volumes in any way? Or is there any correlation between the volumes or like the visits on the website with the lockdown? Do we expect any impact?

Yes. So if there are more people staying at home, they watch more television, they surf more web, they go more on social media. So we do see a spike in volumes as more people are staying at home.

Okay. Is it in the line of what we saw in the previous lockdown, in the previous quarter, or is it better?

So the current month when the recent lockdown happened in U.K., so U.S. is not as much in lockdown as in U.K. So we are seeing volume growth in October in U.K. From overall business point of view, I would say, we are at the level of April and May, but we're not selling as much essentials, people don't need that anymore. But they are off taking jewelery and lifestyle products.

The next question is from the line of Sunil Damania from Marketsmojo.

I have a couple of questions. Number one, in terms of -- how many SKU do we have in the first half of 2020 versus what we had in the similar period last year? So that's the question number one. Number two, we do some kind of clearance sale plus auction, so what is the kind of revenue that we derived in the first half of FY '21, if you can throw some light on that?

Sure. So from the SKU point of view, in Shop LC, we keep approximately 45,000 to 50,000 SKUs at any given time, but that doesn't mean they are designs. So designs would be about 20,000 at any given time. Because some designs are different colors or different sizes, so the SKU count goes up. And the count is pretty constant year-over-year because we have fixed time in the day for the television. So we keep the same number of SKU churning, so the remaining SKUs goes out through our Rising Auction. On our website, increasing for Webex, means web exclusives, we are increasing SKU numbers over the time, but very slow increase. So over the years, we don't expect the SKU count to go above 55,000 in the U.S. In U.K., the number, I don't have an exact number off the top of my head, but I think the number of SKUs in U.K. is about 40,000. But that is also a constant number, it doesn't increase any materially higher.

Okay. Okay. And how about this revenue from clearance of sale and auction?

So you mean the online auction?

Yes. So basically, you also take out certain items which is slow moving in nature, where you basically do auction and you also do clearance of that product. So I just wanted to understand what kind of revenue you did in the first half of FY '21?

So we don't create separate provision. So we keep churning out the product constantly as they become aged or as they become short quantities and they churn out through our Rising Auction platform or through clearance on the website, or through seasonal clearance that we run on television. So our gross margin is all put together of such exit of the product as well. So from the revenue point of view, I can give you that -- so 24% of our revenue off the website is through this online auction, if that makes sense to you.

The next question is from the line of Kanwalpreet Singh from AMBIT Capital.

Sir, firstly, do you have any sense of -- I want to understand if there is a metric for utilization on the current asset base? Because in previous con calls, we've heard that there has been operating leverage which is played out. So for our future sales, do you expect significant capacity addition or do you think the current base can have higher sales?

Yes. Vineet, do you want to take that?

Yes, sure. So we would go for some manufacturing capacity additions in India in the next few years. But having said that, our normal routine CapEx year-on-year takes into account these capacity additions. So we added some even in the current year, we had added some even in the last year. So our normal routine CapEx annually, which hovers around INR 30 crores to INR 35 crores, takes care of all these routine CapEx requirement as well for increasing the capacities. When we go for a new unit, it might be another maybe INR 10 crore or so at a point of time.

Sir, just to get a sense, if you are doing, let's say, like last 2 years, you're saying, you did around INR 30 crores of CapEx every year. How much of sales do you expect to get from that, let's say, on jewelery if we take that as a consideration?

So I mentioned the total CapEx, normally, routine CapEx hovers around INR 30 crores, INR 35 crores. A part of that is in technology, studio, et cetera. A small part goes into the manufacturing capacity additions. On an average, it would be about, say, INR 5 crores, INR 6 crores annually, if you look at the last few years. It is all into jewelry manufacturing. Right now, we don't manufacture any of the non-jewelry products ourselves in our factories. So this CapEx is all going in -- the factory CapEx is all going into the jewelry manufacturing capacity only. And overall, you see the jewelry revenues, which have been growing. If I remember correctly, I believe there is a CAGR of about 7%, 8%, if you look at the last 5 years numbers.

Right. Sir, and asset turn for manufacturing capacity for jewelry, how much would that be approximately?

So a bulk of the jewelry is supplied from India. Hence, the growth is directly attributable. I need to check the actual number for asset turn. Maybe we'll send that to you separately.

Sure, sir. Right. Sir, the second question I had was when you say repeat purchases, when you say 27 or 30, that is number of items bought per -- by a unique customer. Would that be right?

Correct.

So I just wanted to understand, especially because web is becoming a significant part of the overall sales and growing very fast, do you see a particular differentiation in terms of repeat purchases between TV versus web? And how maybe your customer journey has been because my sense would be, for a web customer maybe they start off slow and then they ramp up? So maybe if you can throw some light on that qualitatively, that would be very helpful.

Sure. So within web, there are 3 streams of web properties. So we sell through streaming television, the broadcast over web. So people who don't have television signal in their homes, they consume our media or live streaming through web. And there is prescribed catalog. So all the product that are now in our warehouse are published on the web and the people browse and buy. And third is online auction. So the repeat purchase is different on all these 3. And also, many customers or most of our customers, we like our customers to do omnichannel purchase from television and from web. So their quantities are clubbed between the 2 medium. So we consider -- to Vineet's point in his opening remarks, we consider our business to be omnichannel from a television and web platform perspective. And we see that the lifetime value of a customer who is omnichannel is approximately 15x than the web-only customer and about 8x of TV-only customer. Now the customer who buys on marketplace, we don't consider that our customer. So that is not in the data. Because that customer belongs to those marketplaces. The customer who has transitioned to us, and that transition rate is less than 2%, so that customer becomes our customer, and that becomes a part of denominator. The customer that we are acquiring on social media, so that is our customer because they come and buy on our website, and they are still very new, and relatively very small business. So that is not impacting the business as a whole. But if the business becomes very big, maybe 10%, 15%, 20% of our business, and their repeat purchase or the retention is different, then the business shape may differ in future. But that business is expected to stay relatively small for the next 2, 3 years.

Right. Sir, just a follow-on on that. So like from the web channel, which you mentioned, apart from the streaming TV, if I just consider the fixed price catalog and maybe the online option, are there repeat purchases that are significantly different from what you have for a TV customer? Or would you say more or less the same, around 27 pieces?

So I have not looked at the data recently of pure FPC customer versus RA customer versus web TV customer. We look at differently who are our -- what is the lifetime value of those customers? And how can we transition them to other channels, so they become omnichannel, become much more valuable to us. Just to give you an example, an omnichannel customer repeat purchase is over 100, whereas the customer who buys only on web, whichever 3 of the verticals, their repeat purchase is less than 10. So our interest is to transition that customer to other channels as much as we can.

Okay. Okay. Right. Sir, just last small question from my side. Of your customer base and you say like 4.5 lakh customers, unique customers, what percentage of them would be omnichannel?

I don't have the data. That's a good question. Did you have that information? Vineet?

Sunil, we will send that separately to them.

Okay. I got this information. Yes, it's approximately 11%. Srikant, our U.K. MD, just shared that information with me.

Okay. Sir, and has this significantly changed over the last 3 years?

I don't have the data -- data just came to me.

The next question is from the line of Runjhun Jain from Nirmal Bang Securities.

Probably for the last time. Sir, most of the questions have been answered. Sir, just wanted to understand, we have started this year on a very strong note and expecting to continue the trend for the future also. Is there anything that structurally has been changed in the marketplace or like probably earlier the competitors were very strong and very aggressive, they have mellowed down? So what has actually changed and it is something which is likely to remain or it is temporary you feel?

So some portion of this is temporary, Runjhun. As I mentioned that the COVID viewership has definitely helped us, and some is permanent. So what is permanent is our learning. What customer looks at from -- at what given time, what product, and our understanding of how to address that need very rapidly. So COVID has taught us the agility and the power of addressing the need immediately. And what we have done is to expand and strengthen our team very rapidly. During COVID time when most of people were letting people go, we hired people aggressively. And we have taken some very capable people in all the units, and that is strengthening our organization for long term. So some portion will be, as I gave the guidance, in medium term, we will continue to show the growth of 15% to 17%. And for H2, we will have 18% to 20% growth year-over-year. Now 15% to 17% growth will come on the top of strong year that you saw this year. So that means some of the learning that we've got in COVID, we are confident that we'll retain. That's why we are giving consistent guidance for next year as well.

That's fair enough, sir. Sir, one thing, likewise in the cost, like during this quarter also we have seen that the gross margins have been more or less steady and same, like the last quarter. But the EBITDA margins have improved drastically. So is there any part of any cost also which probably is not there because of less activity in the market, like something probably freight cost? So I'm just guessing this. So is there any cost which is likely to come again and can impact the margins in future?

So I don't see any major costs coming back in the future. Now as Vineet already mentioned the breakup of our fixed versus semi-variable versus variable, that should be the guideline for you for going forward, creating a model for operating leverage.

Okay. If I missed it, what is the portion of the non-jewelry imported sale?

When you look at that data...

I will take it from Dipti. It's okay, sir, I will take it from Dipti.

For the half year, it is -- non-jewelry is 32%.

32% is non-jewelry, sir?

That's right.

Lastly, can you think of now any reason specific which can probably spoil this party going forward? Maybe U.S. election, maybe rising cases in Europe? I know you have partially answered this about the U.K. scenario of COVID cases, but do you think anything which can derail or put a stop on this or derail this party?

So Runjhun, we have tried -- we always try to derisk the business, whether it is in the terms of business growth drivers or it in terms of people or in terms of competitor intensity. So just on the business driver point of view, we have constantly put in a lot of effort into having new bullets fired, for example, marketplace that we fired 3 years ago, social DR, we just fired recently, the innovation excellence center for product innovation. We just hired somebody, a very capable person from Titan. He comes with a lot of experience for innovation to create a center of excellence for innovation. And we stood up those people across all the business units. So every unit has an innovation manager now. And then we are creating a team for branding. We're constantly searching for a very good capable branding person to develop in-house brands and product merchandising and strengthening the team from a strategic point of view, we constantly scan what our competitors can do. And from an affiliate point of view, from OTT, we'll just make the investment in a very capable person. So we are constantly scanning the horizon for potential business disruptions and insulating ourselves against those disruptions. So having said that, what we don't know, we don't know. So to answer your question, from the visibility point of view, I don't have visibility of any threat coming to us. But if there is some that I do not know, I do not know.

The next question is from the line of Bharat Shah from ASK Investment Managers.

Sunil ji, this is a bit hypothetical and business model kind of a question. Supposing you were to know about pandemic 1 year before, would -- anything you would have done differently right now or in that intervening period? Would it have any impact on the business design?

The first thing I would do is to get every one of my employees to start exercising, to live better, live healthy. So if the pandemic were to hit, every one of them would be safe, and their families would be safe. I would make sure that everybody would have PPE in place, everybody would have all their education, all the learning that they can get to safeguard themselves. That is the first thing I would do. The next thing I would do is to look at how as a business, we can make it more resilient, create the safeguards around the organization from safety of the people and safety of our customers. So send out masks to our customers in advance, which I know many people scrambled. We got so many thousands of remarks from our customers when we sold masks, when other people could not. Because of our agility, we could get that sooner, but I wish I could have got them even sooner in larger quantities, to make people safe and make people remain away from the harm. And also look at more talent, if I could hire more talent quicker. We started hiring the people maybe 2 or 3 months down the road, but I wish I could have started that day 1. Because this was an opportunity that I would never get again, to hire the talent.

So basically, talent recruitment would have taken a precedence if this unfortunately event you had more time to deal with?

Yes. So just take all the precautions, keep our people safe, their families safe, our customers safe and then take structural benefit, if I could. The first thing I would do is to keep our people safe.

The second one, if and when TV and web and other devices kind of all become one seamless kind of a device or a place, would it -- how does it impact your business?

Can you repeat that question, Bharat [Foreign Language]?

I'm saying if over a period of time, if and when, if at all, TV, web, which means your mobile or your device, all of these were to kind of merge into 1 common technology kind of a piece for the customer -- consumer, would it -- how will it alter your business design?

So in case that were to happen, I don't see the visibility of that happening, I'll tell you why. Because OTA is over-the-air signal, so in U.S. in the last 5 years, it increased from 13 million to 20 million homes. And those are mostly local news, local advertising, local sports and people get it for free. Everybody has TV screens in their homes, and TV screens have actually increased in the last 5 years. The increment is low single digit, but TV screens in people's homes have increased constantly. And this free signal continues to be consumed. And we are almost in 13 million to 14 million of those OTA homes. And our effort is to get to 20 million and increase the share within those OTA homes by multicasting. Right now, we are in 1 channel wherever we are, maybe 1.1 channel wherever we are. We have an opportunity to go to 2 channel, 3 channels in those homes, in those increasing homes. So I don't see a possibility of them completely merging. But if they were to, we are well prepared with investment that we have done in OTT, in our web platforms, in marketplaces, in social DR and mobile apps. So we are well prepared if that were to happen, so we are well positioned to take advantage of that.

The next question is from the line of Astha Jain from Hem Securities.

First of all, congratulations on very strong set of numbers, especially I think this is the record high profits which we have posted for any single quarter. So big kudos to you and your team, Sunil. My question is more of a macro. First of all, I just wanted to know with this second wave of infection which is going around in the Europe and even in the U.S., are we making any sort of upside or downside changes in the guidance which we have given? And second question is, what will be the growth drivers which you people are thinking which can give a great support to the company in achieving its guidance going forward?

Sure, Astha. Thanks for the question. The first question, our guidance of 18% to 20% does not account for a rise in COVID intensity. If it rises, it actually is positive to the business even above 18% to 20%. But if it does not rise, stays where it is, or even if we have a cure, say, next week or next month, we are comfortable with our guidance of 18% to 20% growth for H2. Now your next part of question, what are the growth drivers for next year or medium term of 15% to 17% growth guidance that we have given on the top of this strong growth this financial year? So for that, we made investments in our web platform, digital platforms, the third-party digital platforms, social DR, OTT, our own TV visibility that we see, in both geographies, in low channel positions, in OTAs, and also product sourcing, product innovation, team development that we have hired very capable people recently. So these are multiple growth drivers that we have put in place that will give us growth for many years to come. And with the time, we'll learn more and more, put in more growth drivers into play.

Sir, even why I'm asking is that now we have a base effect also, which will be working in the future financials. So after seeing all that also, are you people confident enough of achieving this sort of guidance? That's why I was asking that.

Yes, we are very confident. And that's why, as you might have seen in our earlier con calls, so we don't give aggressive guidance. We try to meet or exceed the guidances that we give.

Ladies and gentlemen, that will be the last question for today. I now hand the conference over to the management for closing comments. Thank you, and over to you.

Thank you all for your robust participation in the Q2 and H1 FY '21 investor conference call. Once again, I wish you and your loved ones health and safety. Feel free to contact Dipti Rajput or CDR, if you have any further questions that we can help you with.