Vaibhav Global Limited (VAIBHAVGBL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Vaibhav Global Limited earnings conference call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Karl Kolah of CDR India. Thank you, and over to you, sir.

Thank you, Margaret. Good evening, everyone, and thank you for joining us on Vaibhav Global's Q3 and 9M FY '22 Earnings Conference Call. Today, we have with us Mr. Sunil Agrawal, Managing Director; Mr. Vineet Ganeriwala, Group CFO; and Mr. Prashant Saraswat, 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 after which the management will open the forum 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 all earlier. The company does not undertake to update these forward-looking statements publicly. I would now like to invite Mr. Sunil Agrawal to make his opening remarks. Over to you, Sunil.

Thank you, Karl. Greetings to all and thank you for joining us today in earnings conference call of Vaibhav Global Limited for the quarter ended 31st December 2021. I hope all of you, your colleagues and near and dear ones are healthy and keeping safe. I hope you have reviewed the results and earnings presentation. Revenue in Q3 grew by 3.5% Y-o-Y on a very high base of last year and grew strong 33.2% over Q3 FY '20. Our 9-month revenue grew by 10.3% Y-o-Y and by 38.9% over the same period of FY '20. Post Q1 of this financial year, consumers went for revenge outings and vacations, thus impacting demand. This phenomenon continued in Q3 leading to muted revenue growth across the digital retail industry. Festive demand was increasing. However, demand tapered in later part of Q3, owing to Omicron uncertainties. Gross margins were at 60.4%, had a slight contraction of 1% Y-o-Y, mainly due to product mix and demand-supply mismatch at a product level, owing to longer transit times. Similarly, EBITDA margin during the quarter was 11.4%. Excluding Germany, it would have been 13.2% versus 17.4% last year. EBITDA margins were impacted owing to conscious investments in digital marketing, OTA households and elevated sea freights. [ A greater test ] is being laid on improvement through better cost and price management in the coming period. During the quarter, investments on new OTA homes, data marketing, marketplace marketing and OTT marketing continued. These investments are intended to support our growth ambitions for the coming years. These investments have already given us 5% higher new customers in Q3 compared to last year's, and a much stronger growth of 40% over Q3 FY '20. In the U.S., our revenue and unique customer counts on OTT has tripled Y-o-Y, implying a great opportunity in this market for us. Our current investments will build on significant opportunities in the long run across our addressable markets in U.S., U.K. and Germany. Retail is rapidly moving digital. And we perceive that lift -- these shoppers want to feel digitally empowered online experience. Hence, we recently finished upgrading our tech infrastructure on Salesforce Commerce Cloud. Our recent expansion in high potential German market is faring well and offers tremendous growth prospects on TV, digital and marketplace platforms. There have been certain earlier than planned airtime tie-ups resulting in higher than planned upfront investments. However, we may now be breakeven by third quarter of FY '24 in Germany, which is approximately 1 year earlier than originally projected. We believe in seeding investments for long-term growth. Recently, TJC UK announced Freeview Channel change to #22 from erstwhile Freeview Channel #50. This investment is expected to enhance the leadership of TJC's proprietary TV channels substantially with corresponding increase in its market share, thus providing long term growth opportunities. Similarly, Shop LC (USA) has decided to move its headquarters to an owned premise whose construction is expected to be completed by September 2024. This move is expected to bring operational synergies and substantial savings in future. We've also acquired 60% stake in Encase Packaging Pvt Ltd. India. This acquisition will further consolidate our existing integrated supply chain and give substantial savings in packaging costs. We perceive that these investments might impact return ratios in the short term, but it provides huge growth opportunities for our future. Our vertically integrated model and our supply chain that we're expanding 30 countries is the backbone of our business and a key differentiator vis-à-vis our peers. The low-cost manufacturing with value sourcing base enables to serve [ absolutely ] value-conscious customers in our addressable markets in the U.S., U.K. and Germany. This results in industry-leading gross margins for VGL. Further, the 4Rs: driving reach, new customer registrations, customer retention and repeat purchases remains to be our key priorities for overall growth. The reach of our TV networks by the end of Q2 FY '22 was approximately 127 million TV homes. We reach TV homes through cable, satellite, telco networks and over-the-air internal-based OTT platforms. Our products are also available on digital channels, including all proprietary websites, smartphone apps, OTT platforms and marketplaces. New registrations in trailing 12-month period continued to be strong and came in at 3.1 lakh compared to 2.8 lakhs in the corresponding period of the previous year. As our engagements with new customer deepens, we expect to continue to drive bigger volumes. Customers bought an average of 29 pieces on a TTM basis from us compared to 27 pieces in the corresponding period of previous year. This reflects our ability to not only support changing customer preference but also respond to them with agility. Finally, our retention rate stood at 42.3% on a TTM basis compared to 51.4% in the same period last year. Retention rate has been lower owing to many essential customers as well as more share of home buyers of last year. Retail has been transient in nature, but the underlying long-term business prospects are promising. Our team's confidence and optimism is reassuring and we're prepared to capture future growth. We expect our overall revenue growth to be 8% to 10% in the current financial year on top of 28% robust growth of last year. We expect our growth rate to be 13% to 15% in next financial year and 15% to 17% in midterm. Sustainability is at the core of everything we do and the same is reflected in our mission and guides on everyday routines and actions. We are enthused to share the fact that our SEZ unit in Jaipur has been conferred with IGBC Performance Challenge 2021 for Green Building (sic) [ Built ] Environment Excellence Award under Factory category and have become the first and only jewelry plant in India to achieve this milestone. Vaibhav Global Limited has recently bought 84 2-wheeler electric vehicles for its employees. These EVs will be deployed for employees' commute. These are expected to sequester 25 tons of carbon every year and would aid in our sustainability effort to become a zero-carbon company in the future. Recently, we have crossed a milestone of 61 million meals through our One for One Program, Your Purchase Feeds for school children with a run rate of 59,000 meals being donated every day. We have a robust cash flow model and track record of returning meaningful cash to shareholders. The Board has recommended third interim dividend for the year, which is INR 1.5 per equity share. In the end, we would like to reiterate that there are multiple levers for future growth and margin improvement. And our long-term ambition is to sustain growth while building decent operating leverage. With this, I now hand over the call to Vineet to discuss financial performance. Over to you, Vineet.

Thank you, Sunil. Good evening, everyone. A warm welcome to Vaibhav Global's Earnings Conference Call. While Sunil gave you some details on overall performance and business status in the just concluded quarter, I will now take you through our financial performance for the quarter and 9 months ended 31st December 2021 in detail. In person shopping, which gained momentum in Q2, continued during Q3 as well, which was later also impacted by Omicron-led uncertainties in the digital retail industry. Consequently, e-comm industry across the U.S. and U.K. faced temporary headwinds with declining sales mix of online sales. Amidst these macro challenges, though temporary in nature, our revenue grew by 3.5% over quarter 3 of FY '21. But when we compare it with the same quarter of FY '20, it is substantially up by 33.2%. In local currency terms, Shop LC U.S. revenue grew by 1.1% year-on-year, and Shop TJC U.K had a decline of 6% year-on-year in Q3 this year. In the U.K., the e-commerce industry was impacted the most amongst our addressable markets. The mix of e-comm market to overall sales retail in U.K. dropped by almost 4.4% during Q3, as suggested by the macro data. We believe these trends are temporary in nature, and we expect the industry to recover soon as shown by the macro indicators as well. Our recent investment in U.K., wherein Shop TJC's Freeview Channel will now be aired at #22 from erstwhile #50, is expected to enhance our viewership substantially. We are confident that our new broadcasting rights in U.K. will allow us to strengthen our visibility in the long term, and we'll continue to get -- gain market share out there. Our TV revenues grew by 1.8% year-on-year to INR 467 crores, whereas digital revenue grew by 4.5% year-on-year to INR 268 crores, implying relatively improved traction and reassures our sustained investment on digital platforms. TV refers to our proprietary TV channels that includes free-to-air channels on OTA platforms as well. Currently, digital sales mix to overall retail sales is 36%, which includes our proprietary websites, shopping apps, OTT platforms, marketplaces and social commerce. This omnichannel offering promote and encourage customers to transact on both TV and digital platforms, which gives them a unique shopping experience and such omnichannel customer tends to be sticky and have a significantly higher lifetime value than customers who buy only on TV or only on digital. Omnichannel also provides opportunity of cross-selling over platforms. During the period, the budget pay revenue mix was at 39% of retail revenue, ensuring flexibility to customers to buy high-ticket size items as well with ease. As far as our product mix is concerned, jewelry accounts for 70% of the total retail sales, and that is 30% is comprised by lifestyle products, which includes apparel, home decor items, beauty and accessories. Over the last many years, share of non-jewelry has increased multifold, indicating our ability to take higher wallet share out of the same household. Q3 witnessed a slight dip of 1% in gross margins year-on-year, which was largely on account of the product mix. Through our robust vertically integrated supply chain, we were able to manage supply headwinds, which is grappling the entire industry and maintained our gross margins at a very healthy level above 60%. Our EBITDA margins dropped from 17.4% to 11.4% in Q3. This is attributable to increased sea freight, our accelerated investments on digital and broadcasting and our initial setup cost in Germany. We believe current EBITDA margins are not a true reflection of our business model and expect it to revert to our earlier levels of mid-teens in the medium term. Profit after tax for the quarter is INR 69 crores as against INR 92 crores year-on-year, owing to the above-mentioned increased investments. Operating cash flow was INR 67 crores for the 9-month period, impacted by higher-than-planned inventory, which is expected to unlock in the coming quarters. Free cash flow was minus INR 155 crores as we underwent major CapEx towards warehouse robotics automation, purchase of land bank in the U.S.A. for our new headquarters for Shop LC, initial setup cost of Germany and towards upgrading technology infrastructure of our mobile websites and mobile apps. The said investments are expected to provide synergies in the -- in terms of cost optimization, functional integration and resultant growth opportunities. On a TTM basis, ROE and ROCE were 26% and 38%, respectively. These ratios reflect short-term impacts of conscious business investments, which we are making but are still at a very healthy level and that are at par with our normal pre-COVID years. Finally, the Board of Directors have recommended third interim dividend of INR 1.50 per equity share for quarter 3 FY '22. Towards the end, I would like to say that our balance sheet remains lean and healthy. We continue to remain alert and agile to ground developments. We are doubling down on market connect, digital initiatives and remain confident on our resilience and ability to outgrow markets. Gradual restoration of markets and normalcy is expected throughout Q4. However, we are adopting pragmatic approach to gain -- continue to gain further market share. With this, I hand over back to the moderator.

[Operator Instructions] The first question is from the line of Manish Poddar from Nippon India AIF.

I had 3 questions. First 1 is, could you probably help me understand, so in Germany, I think you are mentioning the unique customer count is roughly now about 6,000-odd, right, at the end of December? Just in terms of repeat purchase or, let's say, frequency, how are these numbers stacking there?

Yes. So repeat purchase currently is tracking about 8 purchases per customer. So digital customer is lower and the TV customer is higher. So 8 purchases since we pretty much started in September. So that will be about a 4-month period. Now annualized, it will be higher. But we don't have the data yet. Just let me reconfirm. Vineet, can you confirm that 8 purchase is for 4 months or annualized?

So 8 is annualized repeat. So it is improving month by month. So when we started, it was 2, 3 now in the quarter, we see already an annualized repeat of 8%.

Okay. And then the next one is, let's say, your integration of the platform. In both U.S. and U.K., would it be fair that you are now present across platforms, largely, let's say, where you have to operate?

Yes. So all digital platforms, marketplaces, digital trade, mobile, desktops, tablets and social media, YouTube, OTT. Yes, pretty much [ all areas ].

So would it be fair that a large part of the spend, which you would require for probably integrating or the initial investments which you need to do for U.S. and U.K. is largely behind? And here onwards, whatever will be the inflation plus some bit of marketing like spend which you might have to do depending on campaigns, that might be the only spend which you would have to do? There won't be any material or [indiscernible] expense? That is what I'm trying to understand for these 2 geographies.

Yes. So we won't have as much CapEx because our warehouse automations are down. Our major platform CapEx are down. Only further investments will be on marketing automation that we want to create through Salesforce marketing automation. So we already find that the agreement with them last year, there is a continued interest in that space to leverage our customer base.

And the movement to cloud also, it happened for both the geographies?

Yes, everything is on cloud now.

For both the geographies, but -- for both U.K. and U.S.?

Yes, U.K., U.S., Germany, all are on cloud.

Okay. Great. So just 2 more questions then. Looking at Slide 29 where you are talking about EBITDA margins for 9 months. So the EBITDA margin clocked in this 9 months is 12.4%. Now there are 2 numbers, one is 14% and one is 15.4%, the one highlighted in red. Can you probably help me understand what are these 2 numbers first?

Vineet?

On Slide 29.

Slide 29, just a moment. Okay. So the 2 numbers mentions, first of all, our EBITDA margin for the 9 months is 12.4%. If you exclude Germany, the margin is 14%. So that's what 14% means, that if we exclude the Germany loss -- because Germany initial setup loss for this year, excluding Germany loss, our EBITDA margins are 14%. That's what it means. And excluding overall EBITDA, that 15.4% is the year-on-year growth number. So the 9-month EBITDA is down by 15.4%. But the moment you exclude Germany loss, it is down by 5.2%.

Okay. So like the bridge which you have for the quarter 3, wherein you mentioned gross margin and elevated sea freight which is roughly about 170 bps impact, would you have a similar number for 9 months? And just wanted to understand, have you taken pricing increase to cover all this inflation, which you're seeing, let's say, at unit level or at freight level or anything of that sort? Just trying to understand from a pricing, firstly, have we covered that? In quarter 3, 170 bps of impact for 9 months, I'm not sure what the number is. First of all, if you can share that number. And second of all, have you taken the commensurate price increase to offset that?

So our gross margin for the 9 months is 63% against a gross margin of 62.7% for the same period in last year. So there is a 30 bps increase in our gross margins. So some sort of pricing which we were able to do to our customers. But the entire impact of freight is not neutralized. There is some impact of freight in the 9-month period as well. So I guess there will be in the 9-month period because in the last quarter, the impact was very high. For a 9-month period also, it will be similar to the level of 0.7% to 1% kind of an impact for freight. So maybe a 30 bps increase in gross margins, but close to a percentage point impact on higher freight for the 9-month period. [ These too can be numbers taken ].

Okay. Okay. Just one last one. So can you probably help me understand the conversion from EBITDA to CFO has been low in the 9 months. So do we have a lot of inventory which is there on the balance sheet? Or what missing in the maths?

Yes, you are right. So our inventories have gone up from March to December, it is up by about INR 180-odd crores. Part of that is because of all the supply chain issues, which is the industry is grappling with in terms of the delay in supply, so the inventory in transit is also high. And part is also because we prepared for a higher sales quarter, but we are seeing lower sales, too. So we have items in hand as at the end of December. So that's impacting the operating cash flow for the 9-month period. Having said that, the corrective actions in terms of our future buying is already on the ground hitting. So we should see some unlocking to start from Q4 of this year.

The next question is from the line of Nilesh Shah from Envision Capital.

Sunil, I just want to refer to some -- to a report of Mastercard, which came out in the last week of December, which talked about U.S. holiday sales jumping 8.5% and online shopping surged 11%, and categories like apparel and jewelry grew at 47% and 32%, respectively. So I don't know if you're aware of this report, but if you can just kind of share your perspective because our growth rate has been starkly different from the growth rates which this report specifically refers to.

So I'm not seeing this particular report, Nilesh. But what we are looking is attaching the data from QVC or Evine or these comparable companies. All these companies have negative growth year-over-year in last quarters -- last couple of quarters. QVC had 9% or 10% negative growth and Evine had 8% negative growth. So compared to them, we are gaining market share. I know from U.K., it showed that the online purchase -- nonfood online purchase contracted in last quarter. And in U.S., I don't have that report. Vineet, do you have access to the report that you shared with me?

Yes. So while the overall retail grew in both the geographies in this festive period, the online actually has contracted. So for U.S., if we look at U.S. online sales to the total retail sales, so it jumped from 11% to 14% in FY '20 on the back of pandemic. This year, it is down to -- in Q3, it is again down to 13%. So there is a contraction in overall e-comm in the larger space. It is more prominent in U.K. So from a level of 28% online share to total retail sales in U.K., it is -- actually, it went as up as 33% in Q3 of last year. It is again down to 28% in Q3 of this year. So in summary, what you were mentioning, while the Mastercard data also shows an increase in the retail performance, but online and percentage to total retail mix is declining in both the geographies in the same period.

Okay. Maybe I'll probably share the report because maybe as the share is declining, but basically still it grew in double digits. So that was essentially my point. But anyway, I'll basically share this report -- or the article. My next question is basically our now guidance for the current financial year of 8% to 10%, which means that in Q4, we'll probably have to grow at about 6%. And given that we did INR 750 crores in Q3 and Q4, which means we'll have to hit again INR 700 crores, INR 705 crores, how confident are we for this -- given this significantly tempered down guidance of 8% to 10% for this financial year?

Yes. So we are seeing the traction now of similar growth as currently, we are seeing the growth similar to what we have seen in Q2 in all geographies put together. But given the investments that we've done in digital position, which are new OTA homes and digitals. As you will have also seen from new customer acquisition growth, they're higher this year compared to last year's robust growth. All these customers and investments give us confidence for maintaining this guidance.

Okay. Again, I turn to the guidance for next year, which is 13% to 15%, given that next year should be a normal year. I'm actually just wondering why should our guidance for next financial year be lower than the medium-term outlook given that now Germany kicks in, and Germany can potentially add 3% to 4% kind of growth rates to our overall growth rate. So in that context, if I kind of do ex Germany, maybe than what we are guiding for is probably close to about 10% growth rate for U.S., U.K. Is my understanding correct? And why would we want to kind of guide for a lower growth rate versus our medium-term growth rate, given that we anyway now are dealing with a relatively lower base of FY '22?

Yes, that's a good point, having burned a finger once, I just want to be conservative. And given that the last year -- or the current financial year, the growth rate has been very strong through May. So April -- the first quarter was pretty strong. And we want to be careful not to comp higher growth position for first quarter next financial year. So Q4 and Q1 of next year would be subdued growth. And from Q2 onwards, we will see very strong growth.

Okay. Also, the B2B business is essentially back, though on a low base, but that has grown quite well. So just wanted to understand that while our overall retail business didn't manage to kind of grow relatively at a higher pace, but the B2B business grew at a higher rate. So why would this have happened given that overall demand was perhaps sluggish in markets like U.S. and U.K.?

Yes. So earlier, we were selling B2B from our U.S. subsidiary to -- not Walmart but Macy's or Evine, all these companies, and that was not [indiscernible] in this ROI. About 2 years ago, we started offering our manufacturing capability to directly from our supply chain in India and China. And that seems to be giving a good ROI for us. And these retailers, mostly digital retailers and some [ B&M ] retailers as well. So they are finding our value to be compelling and buying from us. So there's one customer in Japan and a couple of customers in the U.S. and a couple in Europe, so they're having higher offtake from us. It doesn't have any front-end expenses and gives us a bit of a scale in our supply chain.

Okay. And just one last point. There were again media reports that in the quarter gone by, there were some kind of information which was being sought by the U.S. authorities, from retailers for all the BNPL exposure that they have in all of that. I just wanted to ask if you are aware of that. Have we received any such communication? And any thoughts on that given that BNPL is now close to 40% of our revenues?

So BNPL has been around this number for us for many years now. Within that, doing 35% to 40%. So we've not increased much exposure on this, relative lower price point afford us to be at a lower ratio. And no, we've not received any inquiry or any communications from government.

[Operator Instructions] Thank you. The next question is from the line of Ashish Kanodia from AMBIT Capital.

Sir, the first question is on the ASP. So when we look at the TV ASP, it has gone up materially by almost 25% Y-o-Y. So just want to get more clarity on what is driving this higher ASP? And a related question on this is I think on the gross margin, there was a comment that it's related to mix. So while the TV ASP has gone up, if you can throw some more color also that how the mix got impacted, which hurt our gross margin?

Yes. So on TV this year -- even to some extent, even on e-comm, our customers were putting more higher-end products. Probably they had more disposable income. So we offer them what they needed. And more related to jewelry and some even higher-end hand bags from [indiscernible] as well. Not so much the hand bags as beauty products, which they pulled in higher product. So beauty, accessory like anti-aging equipment and all that, largely driven by jewelry that gave us high price point. To your next point about product mix. So if you then the -- these kind of disruptions happen,when people are staying home, they were buying a lot of at-home products like home improvement, home games and bedsheets and all that. When they were going out, they want more apparel like handbags or some beauty products and some accessory, jewelry and outgoing accessories. So when the transit times are longer and the product mix changes, so there is a disruption into supply chain demand versus supply. So that leaves a bit of a disruption, and that refers to our comment on our gross margin and product mix.

Sure. That's very helpful. The second question is in terms of digital and broadcasting. So in terms of investment into digital and broadcasting, do you see the current quarter numbers being a true reflection of a more of a sustainable run rate? Or do you see that there is more investments [ do we need ] are needed? And particularly on this, I just want to understand because what happens is there are 2 key things which happened during the quarter. So I think one was your faster airtime in Germany. And second thing was also the improvement in the channel to 22 from 50. So because this might have happened in between the quarter. So do you see that the broadcasting and digital expense are going up in subsequent quarters?

Yes. So we continue to take opportunity where offered to us. Last quarter -- actually the last couple of quarters, we've had opportunities in OTA space in the U.S. and acquiring Sky channel in the U.K. And in Germany also, we've found many opportunities are faster than we expected. So we're taking the opportunity and the airtime usually becomes investment or becomes -- to our cadence, it takes about almost a year, sometimes even longer than a year to get to our cadence of airtime cost versus revenue. So we take these opportunities where they're offered. So that is from [indiscernible] point of view. From digital point of view, we are seeing more traction in the digital space. And we've made investments into marketing and digital marketing, marketplace digital, OTT digital and mobile and desktop digital. So we've seen good customer acquisition as you must have seen from the numbers, and they are helping us quite a lot. And so your question about continuous -- continued investment in current times. So from OTA point of view, if the opportunity will come, we will invest, but we don't have a clear visibility on how much more investment or more opportunities will come. So I would guide you to look at our current run rate of our investment of digital and airtime combined to be there in Q4 and next year as well. So our guidance is taking that into account of the revenue growth as well as leverage. So the next year will definitely gain leverage in our existing geographies compared to this year, most definitely. But hopefully, [indiscernible] FY '21.

Sure. And just last bit is, I think the base quarter is also inflated because of a lot of consumers buying essential items. So either -- is it possible to give some color that if you kind of take out the customers who were first-time buyers last year and just bought essentials. So if we have to take that out, how does the retention ratios look? Or the other way around could be when you look at the TV and web volumes, so for example, TV volumes are down by almost 20% on a Y-o-Y basis. But if you have to actually exclude the essential items, right, which are not something of our core customer, then how would that -- the typical TV volume would have looked like if that is available?

That is not available right off the bat. But Prashant can pull that data and share with you, Ashish in due course.

Sure, sir.

But we do see, when you look at 2-year stack, our customer numbers are really robust. [indiscernible] color on that. So in Q3 FY '20, when you compare with that, our total customer number is 52% higher. So compared to last year, it was only 10.7% higher. So the customer numbers are the robust for us, and that gives us confidence of continued future growth.

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

Can you hear me?

We can, but your voice is quite low. I would request you to speak louder or come closer to the phone.

Sure. Is it any better?

Yes.

Sir, what is the freight status now? So has it stabilized? Or you see that it is still at the higher level and still would take us probably some more time to come down because we are -- what we're seeing from the other industry and other players that it has now stabilized and probably [ peeled out ].

Vineet, do you want to answer that?

So I lost the initial word, your voice was breaking. Runjhun, is your question about freight cost, elevated freight costs?

Yes, sir.

So we saw an impact of about, say, 2% EBITDA margin in quarter 2, which has come down to about 0.7% EBITDA margin in quarter 3. So we do see some softening in terms of the overall impact. However, the current reality is that it is still far away from the normal levels of the last year. While the Baltic index and the other freight rates also show a decline in the current months, the corresponding end mile delivery has increased substantially in the last 2, 3 months, owing to the port congestion in different parts of U.K. and U.S. and the nonavailability of the last-mile delivery operators, et cetera. So all put together the inward freight cost, though the impact has reduced quarter-on-quarter, but it's still not back to the old levels. We hope it will continue this way to improve. And in the coming quarters, we should start seeing some more unwinding of the same.

Sir, can you also quantify the Germany impact like we have given for Q2 that it was 2% impact in Q2? What is that in Q3 now on EBITDA?

So Q3 is -- just a second. Just give me one moment. 1% -- sorry, 1.8% in Q3. So the 11.4% EBITDA margin which you see, so excluding the Germany loss for Q3, it is 13.2%. So 1.8% is impact out of that.

Okay. Sir, just last question. You have said that we have -- the demand was impacted because people were going out and on where it was impacted. However, in the later part of the month on the December -- at the end of the quarter, we have seen that there were restrictions all around the world. And people were again kind of getting stuck at home and not going out much. So you see that has increased any demand. So what I'm trying to understand is, is there an improvement in the demand in this month or in the late last half of the month in December?

So I can take that 1, Sunil. Yes, please go ahead, Sunil.

Yes. So -- limited impact, yes. So from a business point of view, as I mentioned earlier to earlier question, in the current month, we are seeing -- current quarter. So in January, it's 27 days so far. So current quarter, we are seeing similar revenue growth in the U.S., U.K. as we saw last quarter. So we are not seeing demand pick up robustly yet. We are modifying our product mix, product offering to customers based on where they are right now. And some items are receiving uptick and some are still -- at-home products are still not as robust, but higher-end jewelry is still -- it is getting lot of demand. High-end jewelry or high-end jewelry equipment is still getting demand. So we are constantly monitoring it, but the growth hasn't come in [indiscernible] yet. We expect our investments to -- in OTA homes, OTT marketing, digital marketing and the new channel position in the U.K., so those initiatives to benefit us in the coming weeks and months. And therefore, our guidance for current year to be 8% to 10% and next year to be 13% to 15% growth on the current levels -- on the year-over-year.

Sir, that's helpful. Just last question. Can you give any outlook on the margins because Q4 being our seasonally weakest quarter in terms of margin because of the auctions and year-end sales we have, so what is the overall margins you believe that -- I mean, any outlook for this year or next year?

Yes. So our guidance on margin is always 60% up, and sometimes, it can [indiscernible] as you saw in Q3, we were 100 basis point difference. That we always give guidance that our margin will be above 60% for the year, and we expect the current quarter to be same as well.

Sir, sorry. I'm sorry, sir, your voice is getting muffled. I couldn't understand what you're saying.

Yes. So we gave guidance of 60% up margin for the [indiscernible] year-over-year. And for Q4, our guidance will be above 60% margin. And even for next year, it will be above 60% gross margin. Our effort is to increase wherever we can. But given that there is a headwind of related trade we don't want to give an optimistic guidance. It will be above 60%, definitely.

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

So my first question...

Sorry to interrupt you. Mr. Mukerji, may I request you to speak a bit louder.

Yes. Am I audible now?

Yes.

So my first question is on the investments made into digital marketing, OTT marketing and OTA homes, that impacted around 2.2% of sales into the EBITDA margin. So that works out to be around somewhere around INR 15 crores, INR 16 crores in this quarter. Are we maintaining or are we likely to maintain this kind of run rate, quarterly run rate, in terms of investment in the coming quarters as well?

Yes. I believe digital marketing investments will continue because we are seeing good return on that investment within our platforms, customer acquisition and the ROC -- ROAS that you see on that acquisition. Yes. So the current spend should continue in the marketing side in the coming quarters as well.

Okay. Okay. My second question is on the Germany operations. So we are probably clocking around 0.5 million revenue in terms of monthly run rate. And you mentioned that we are thirdly going to breakeven in Q3 of FY '24. So what level of monthly revenue run rate you expect at that point in time, so that we'll be breakeven at probably the operating level?

So we are not giving guidance. Specifically for Germany, based on our internal numbers of customer acquired, the retention rate and the repeat, all these metrics gives us confidence to become profitable by Q3 of 2024. But we are not sharing revenue guidance on Germany separately.

But what would be the OpEx involved, a monthly run rate, if you can help me with that number?

I don't have it in front of me. And we are not giving specific guidance for Germany's revenue and profitability by quarter because it's still 2 years away. So we're not sharing that far out guidance at this time. It will be too premature.

Okay. I understand. A follow-up on Germany. My next question is you mentioned in the last call that you'd be seeing USD 3 million to USD 5 million loss in year 1 of operations. I believe we have already hit $5 million, close to $5 million in -- by December end. So what is the estimate now stands at, I mean, [indiscernible] loss in FY '22 and FY '23 if I may ask?

Yes. So we expect the loss to be approximately $6 million for Germany for this financial year.

And you expect it to narrow down in the next financial year? Or will it remain elevated?

Most definitely we will become profitable by Q2 of 2024. It will be lower next year.

Okay. Okay. And last bit, you have launched this [indiscernible] on the [indiscernible] side. So -- if I may know the revenue from [indiscernible] of the government sales for this quarter?

It's still very small because we are start-up phase again. We are not [ breaking up ] separate revenue to them, but it is not significant yet. Right now for us is to identify the customer segment, the customer creatives that are resonating with customers and overall, retention and repeat from them. We're still too early for giving separate revenue on that business.

Okay. Okay. And one last question, if I may, please. So you have invested in this in case packaging. How will it help us if you can let us understand what is the thought process approach over here?

Sure. Vineet, do you want to take it?

Yes, sure. So in case packaging, it's a jewelry hard box manufacturer. It's an ISO operational unit based out of [indiscernible]. That's a fully automatic and semiautomatic machine infrastructure-ready kind of business. So we used to buy our jewelry boxes from China wherein the import duty in U.S. was 25%. And the import duty on the same jewelry box from India is 0. So at the same cost as the jewelry boxes will now be manufactured in India and exported to U.S. so which will give us a substantial reduction in our packaging material jewelry boxes import duty cost. So a ballpark calculation shows that this initial investment of INR 4 crores should be paid back in 18 to 24 months' time at the max, even by this duty savings. Besides, of course, this cost advantage, what we also get is a lot of agility, a lot of experimentation now facility with us to design and change our jewelry boxes like we do for our products. And last but definitely not the least, this will add substantial boost to our efforts to develop a sustainable packaging material. So we were trying to do that for quite some time now. And with this acquisition, it will give us a tremendous support in that journey as well.

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

And request to Sunil, if you can speak a little loudly. In all the several calls that I've attended, I have to really stretch my auditory power to understand what you are saying. I would request you to speak a little loudly because it's virtually impossible to get all the words. Just one long-term issue. Clearly, it looks like that the year of 2021 benefited us and our business much more because of the peculiar situation that the world was in. And that probably impacted consumer behavior. And accordingly, we had super size growth compared to our healthy longer-term growth of about 17%, 18% that we have witnessed prior to that. So clearly, 2021 appears to be an outlier kind of a year, especially now as Vineet was sharing the data that e-commerce as a percentage of the retail also seems to [ predicted ] in U.S. and U.K. Not a huge deal, but certainly, there is some amount of softening. Now given all of that, our business model has been pretty well crafted, well articulated, high gross margin. With the improvement of the business, there is that operating leverage which kicks in a good way to capture customers and then retain and growing and doing all of that in a capital-efficient way and keep aging product categories, various SKUs to keep the customers hooked and use various sales channels to keep expanding our funnel. And this has worked well all this time. But given the last 2 clearly [ sessioning ] kind of quarters, where September was the [indiscernible] initial early signs of some amount of softness. September affirmed it and December clearly belied our expectations and shown us clear softening. So if all of this is taken into account, on a longer-term basis, is there any challenge or difficulties that you are [ viewing ] or need to revisit our business model? Or do you think there is something which has impacted the business model itself, if that is the [ control ].

Thanks, Bharat. Thanks for your questions. So business model, we don't look at business model on a quarter-to-quarter basis. We look at a stack basis. As I shared the numbers on a 2-year stack basis, the growth is consistent with 5-year CAGR. So up to financial year '21, our 5-year CAGR was 14.8%. And the 2-year stack, when you look at -- when I showed the numbers, it's more than 14.8% CAGR. So given that stack and the long-term trend, we are actually doing better than 5-year trend, not [indiscernible] and future growth also, as I mentioned, in midterm, our growth trend, we have given guidance of 15% to 17%, which is higher than our previous 5-year stack of 13.8% CAGR. And the investment that we constantly make, so we don't shy even if the sales were not trending as good as we wanted, we continue to make investment on our headquarters in the U.S. or there in the channel in U.K., investment in the packaging company because we are confident of the business model. And we are walking the talk, not just saying it. We are making that investment. So given all these investments that we have made into a better channel [indiscernible] including OTT, mobile app, marketplaces and OTA homes and channels, we are confident of our future growth in midterms. Even next year [indiscernible] there may be another way, hopefully not, but we are going conservative giving the guidance for next year given -- having done [indiscernible] for the last 2 quarters. So [indiscernible] we don't repeat that mistake again.

Which is fine, I'm not particularly deterred by the fact that a couple of quarters they've been softer. My question is more fundamental. And partly, I think I heard you saying this, that our confidence remains, therefore, the investments, any additional asset building on digital and channel building activity [ pace ] and going on Germany investment is a proof that we are pursuing the longer-term part rather than a shorter-term part. But my question was that you see, last year, now it is quite evident that we benefited more especially given the fact that people were cocooned at home, were bored and didn't know what to do probably about some jewelry, whatever other stuff. So that might have given onetime additional incremental edge to our performance. But on the core part, the longer-term growth rate in terms of the opportunity, would we believe it is similar to earlier figures, 16%, 17% growth or higher?

So this is what I reiterated [indiscernible] including FY '21, which was a robust year for us, including the primary benefit that we got. So when you look at 5-year CAGR from FY '17 through FY '21, it was 14.8%. Now for future, we are giving 15 -- 15% to 17% growth rate of projections, which I'm confident will be there. . Now I believe for the current financial year, it will be 8% to 10%, and next year will be 13% to 15%. So when you look at the current year and project it out to next 5, 7 years, our CAGR will be equal or better than past 5 years of 14.8%. Also because our business model is very unique vertical business model, low cost, direct to consumer, high gross margin and retention of customers to great lifetime value and highly engaged customer, I don't see any threat to the business model or phenomenon changed this model, which is coming or wouldn't come in.

No, sure. Note that I'm glad you said what you said that 15% to 17%, which is clearly higher than the past 5 years. But on a longer-term, next 5, 6 years, is definitely an important one. I didn't realize we were talking about coming 5, 6 years at 15%, 17%. So that answers the one part of the question. The part I wanted to -- and equally, I'm great that you have not moved away from making investment into the business. So that will be like taking the defeat and ensuring that we kind of [indiscernible] you have not done that. But my second part of the question was that when we think about the more engaged, more lifetime value, loyal long-term customers, from a [indiscernible] non-TV kind of the business keeps expanding, would you say the same loyalty sector and the same kind of customer behavior? Because clearly, newly acquired customer behavior, there must have been something not exactly as in the past. Otherwise, what we acquired last year is customers should have contributed in a similar rate in the current year. So clearly, new digital age, non-TV space acquired customers is they keep getting larger percentage of the activity. Would we say the same thing about lifetime value, loyalty and uniqueness of the model is working in our favor?

Yes. So the digital customers that we are acquiring has lesser lifetime value and lesser repeat purchase, that is true. We also made investments in OTA homes and the acquisition in the U.K., which is a substantial investment for us, especially in the difficult times, it shows a lot of confidence on our side. Now with OTA homes and OTT homes that we are going into, I'll just give you a reference. So let me finish first OTA. So OTA homes, we made substantial improvement in this financial year in the U.S. and now for new channel position in the U.K. So those customer lifetime value is same as TV lifetime value. Now to offset any digital customer's lower lifetime value, we have also invested substantially in OTT space. OTT is like Roku or Amazon Fire or YouTube or AT&T now or Samsung TV, we are in about 10, 12 different platforms. The lifetime value of that customer is even higher than TV customer. So just to give you a reference, the TV customer lifetime value is approximately $700 to $800, and the OTT platform customers' lifetime value is over $3,000.

I see.

We're acquiring customers from every space possible and looking at that acquisition cost against the lifetime value of the customer. So we are looking at ROAS, return on ad spend. So we look at the spend versus what is return coming from customers, very minute. Every platform, whether it's influencer or mobile or Google within mobile or desktop, Google or Facebook or Twitter, everywhere. TikTok, we are just experimenting now, so it's not really meaningful. But Facebook and Google, within Google, there are multiple areas. So we are looking at every channel and looking at what is the revenue and lifetime value of the customer versus our spend. And on that basis, we are measuring our business and making investments.

Right. So what we are seeing is the digital customers may be less loyal but our newly acquired or newly being acquired OTT, OTA customers should more than make up for it because they were far, almost 3.5, 4x the lifetime value compared to the TV customers. So -- and that's a kind of a balancing outlook multiple sales channels that we are doing.

Right. So the balancing, we are not consciously doing, okay? We have acquired so many [ details ] so we must acquire more TV customers. So I don't want to give that impression. We are looking at every opportunity possible to acquire customers in a profitable way. Just acquiring, say, 5x digital customer, but if we're able to acquire them profitably, we'll do it. We're looking at each channel, what is the cost of acquisition and what is the lifetime value of the customer. Even if there's a more front-end investment, we will make it.

No, no, clearly, that I'm aware of, the financial discipline and generating healthy return on each of the investments, whether digital or non-digital. So that sensible prudence is something that I'm familiar with that of Vaibhav. Thank you for all the answers, Sunil. And I hope this will hopefully improve our forecasting machine a little better, forecasting remains the hazardous business always. And therefore, we make projections, always there is a challenge. But I'm aware that you are doing that and if there are answers, which are thrown up by the model is not very satisfying as it has been for last 2, 3 quarters, that we are fine-tuning, improving our customer comprehension or improving our model in such a way that we have a hopefully more improved capability to make a bit more meaning out of the future.

Yes. You're right. Last 2 quarters, we did not meet the guidance and that is the reason we're conservative this quarter in our guidance. And you're right, the forecasting is as we have seen in the last 2 quarters. But given how we see and how [ it was ] made, we feel confident of the guidance that we've given in our future.

Sure. So to summarize, our business model remains intact. Our confidence of the future remains in tact. Therefore, our investments are continuing: digital channels, non-digital channels, geographic expansion in other forays, automation and whatnot. And the core part of the business, that is the business expands. Our operating margins would improve and operating leverage would kick in, remains intact. And in fact, our future growth rates are likely to be higher than the last 5-year average growth which includes fiscal '21 and which was an elevated year. So despite that, we are expecting the future growth rate to look higher than the last 5 years growth. So overall, everything stays except this not particularly very helpful kind of picture.

That is correct, very well summarized. Thank you.

[Operator Instructions] The next question is from the line of [indiscernible].

So we mentioned about mid-teens margin in the medium term. But what sort of margins can we expect in the near term, like the next few quarters, considering that even the German losses in the near term will be slightly higher than expected?

So from the [ CS ] growth, we've already given the guidance. This year, this full financial year will be between 8% to 10% growth year-over-year top line. Next financial year, we're expecting 13% to 15% growth rate on top line. And thereafter, 15% to 17% growth rate on top line.

And actually, [ I would ask about ] EBITDA margins.

So we don't give guidance for EBITDA margin per se, but we give guidance on gross margins to be 60% and up of our business. Now this year, Germany loss would be approximately $6 million. Next year -- we are not giving guidance this quarter, but we'll give you guidance in next quarter, what will be the German losses next year. We want to see it trend better. Outside of Germany, U.K. and U.S. will have levering -- operating leverage compared to this year between both U.S. and U.K. Our effort will be to get to last year's operating -- last year's EBITDA margin, but we're not giving guidance to reach last year's EBITDA, but definitely, it will be leveraged on this year's EBITDA gross margin ratios.

The next question is from the line of Latika Jetha from Concept Investwell.

So my first question is, in the past, you had mentioned that VGL has been doing influencer program. But I want to understand if VGL is doing just promotions, why are these influencers then creating product visibility? All these influencers are helping us in selling while doing live streaming. So the reason because of -- the reason is because live influencer streaming market is growing pretty fast. And recently, there was a headline that [indiscernible] and that's $1.7 billion goods in a single day on Alibaba's platform. So just wanted to get a sense of how VGL fits into this influencer program thing.

Thank you, Latika. Good question. So we are utilizing influencer currently for content creation and posting those creatives on Facebook and Instagram and getting customers from them. So right now, that is the only utilization we are doing. We are not utilizing them for live streaming yet because both in the U.S. and U.K., influencer live streaming is still in very [indiscernible] stages. As that space matures, U.S., U.K., Germany, we'll definitely go there, but it is not there yet. So we are creating the relationships with our influencer for our content creation and posting our content on social media at this time.

The next question is from the line of Mayur Gathani from OHM Group.

Sir, I wanted to probe a little bit more on the operating margins. I mean today, we are at 12% or so with the Germany impact, with the impact of your continuous investments in your new channels, et cetera. So even if I take the Germany impact out, we will come to -- from 11.5%, we will come to 2% additional, 13.5%. The freight might give us, let's say, 0.5%, so we'll become 14% margins. And you say you continue to invest in the newer channels, et cetera, whatever, the OTT platforms and all. So I want to know where is the operating leverage coming in? I mean I can see 14% margin over the next 2 years' time in this company. But how confident are you on the operating leverage? I mean the operating leverage should take us to a 16%, 17% plus margins. Is that a fair understanding?

Vineet, do you want to answer to that?

Yes, sure. Though we don't give clear guidance on the margin number per se. What we see is that our business is such that we'll continue to see operating leverage. If you look at the last 5 years as well, so from a single digit, we moved up to 15.3% in the last year. This year is definitely an anomaly with the Germany investment, the Germany losses of about INR 35 crores already in the 9 months plus the elevated freight cost. And more than that, all these accelerated investments which we are doing in the digital space as well as all the OTA homes broadcasting. Because of which, we see an upfront higher expenditure, hence, the margins are down to about 12% for the 9-month period as of now. What Sunil also mentioned a few minutes back for the next year, like in our revenue guidance of 13% to 15%, we expect the operating leverage to come back. Our endeavor would be to go back to the earlier kind of margin levels, but definitely be a much improved EBITDA margin from the current year. And once the Germany market starts giving profit, all these elevated freight level goes out of the way. We can post that, every 15% to 17% growth year after year, which continue to give the operating leverage story year after year. So one has to look in that perspective. That it's a long-term operating leverage story remains intact, one blip of the current year expected to normalize and unwind in the next year itself.

I completely understand that, sir. My question was more on this, the investments that you continue to do on the newer platforms, OTTs, et cetera, that's around 2% today. So that should become a part of the business, right? And we can't say that this is 2% is a one-off. It's a continuous investment. At Germany, I understand. Logistics, yes, freight, et cetera. I mean, over time, I'm sure it's going to come back to normal or there'll be some elevated impact. But the investments in OTT platforms, they will continue for a much longer time, if you want that 15% to 17% top line growth.

Sure. So the margin [ reco ] which we gave, what we say that like enhanced investment in broadcasting and digital, we don't mean the OTT thing out there. So what is increasing this year largely is the increased investments in the OTA homes. So this year, we contracted a lot many new OTA homes like any other TV broadcasting. So when we contract a new home, the cost comes upfront, the revenue comes with a time lag. Hence, this year, the upfront cost is reflecting in the margins. At the same time, we have stepped up our ante on the digital marketing spend as well. So it is almost 3x the level of what we used to do in the same quarter of last year. So both these put together, the airtime cost increase of these OTA homes and the digital marketing spend upfront, this -- both these helps in acquiring more customers, which we are doing right now and the revenue follows with a slight time lag, hence, short-term impact on margins. Sunil's answer to one of the questions previously mentioned that the run rate of increase will not be there like you are seeing in the current quarter for this expenditure. So the airtime, maybe one can factor in the same rate of airtime and the marketing spend while making our guidance for the next year. So to summarize, while the cost may remain at this level, the revenue will enhance and hence, the operating leverage will start flowing in. For the short term since this is substantially increased investments, you see a dip in the margin because of that.

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

I'll still probe on the revenue growth part. Sunil, you mentioned about the growth on the 2-year basis has been higher than the 5-year basis. But if I look at our registration number has gone up compared to what we were having in FY '20. But our volumes haven't grown. We are not a player where we play on ASPs, right? The business depends on the volumes. If the volume doesn't grow then there is seriously some challenge or some issues with the business, I guess, or demand has shifted structurally to something else. So are you seeing the same concern? Are you having the same concern? Because if I look at the TV volumes on a Q3 '22 -- Q3 FY '22, the volume has been flat, there is no growth at all. Despite our registration has grown from less than 2 lakhs to 3.1 lakh currently. So how should I [indiscernible] understand that, yes.

So our business is very dynamic. And we are not in the cement or [indiscernible] business. The SKU level is very small and revenue is driven only by volume. Our price point varies from $5 to $5,000 and SKU business is very, very wide. So we let customers decide what they want to pull in and will offer a similar product to them, what they're pulling in. So because of this agility, sometimes you'll see that it has to change. But that is the strength of the business, not a challenge. Given that customer wanted higher price point, we offered higher price point and got our revenues to where best we could. Now in future times, will the ASP remain at 32.4% that we saw in 9 months? I don't think so. I think we'll come down. Because when business normalizes, people will go stay at home or buy what they need. It will -- over time, it will moderate. So that's why we don't give a specific guidance on volume, we give guidance on revenue and the gross margins because the business is so dynamic.

But one would wonder that with new registration and more SKUs versus what we had 2 years back, there should some pickup in volumes. I'm not sure how to look at it. But the way the number of customers are increasing, number of SKUs you are having is higher, then we are seeing a quarter where there is no growth at all. So it is hard to...

Chintan, when you analyze a [indiscernible] you don't analyze them by number of pieces sold or the number of kilos we sold. You analyze them by a per square feet retail space revenue growth, right? Here, you have to look at per [ minute ] revenue sold or [ minute ] revenue or per square inch of our real estate home base. This is what we look at. Not exactly by volume, but by revenues and gross margins.

Sure. And one clarification on the guidance. Is it ex of Germany? Or how should we look at it?

[ We'll be giving consolidated ] guidance. Germany, we target breaking down and giving complete numbers so we'll consolidate going forward.

And the broadcasting absolute cost for the quarter will kind of stay at the absolute level, will stay at this level or more investments as we are looking at from INR 90 crores run rate this quarter, it will stay at this level? Or we should expect a little bit more increase in coming quarters?

So broadcast itself would not be higher than this number, but digital marketing may be. Therefore, percentage to revenue basis, you may see stable or slightly lower in the coming quarters. I can't give a specific quarter guidance, but overall, you may see some [indiscernible]

Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for closing comments.

So I want to thank all the participants for your time and for great questions. And I also thank you for all your support to VGL in the past years. If you have any further questions, feel free to reach to Prashant Saraswat at VGL or Karl Kolah at CDR, and we'll be happy to answer your questions. Thank you. Once again, over to you.

Thank you. On behalf of Vaibhav Global Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.