Vaibhav Global Limited (VAIBHAVGBL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Vaibhav Global Limited's Q2 and H1 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Disha Shah from Adfactors PR. Thank you, and over to you, ma'am.

Good evening, everyone, and thank you for joining us on Vaibhav Global Limited Earnings Conference Call For the Second Quarter and Half Year Ended 30th September 2024. Today, we have with us Mr. Sunil Agrawal, Managing Director; Mr. Nitin Panwad, Group CFO; and Mr. Prashant Saraswat, Head of Investor Relations. We will begin the call with opening remarks by Mr. Sunil Agrawal on the business operations, key initiatives and a broad outlook. Followed by a discussion on the financial performance by Mr. Nitin Panwad, after which the management will be open for -- the forum for 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 that 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 these forward-looking statements publicly. I would now like to invite Mr. Sunil Agrawal to make his opening remarks. Over to you, sir.

Thank you, Disha. Good evening, everyone. Thank you for joining our Q2 FY '25 earnings call. I hope you've reviewed the results and investor presentation. I'm pleased to report a 13% revenue growth reflecting our continued momentum. Consistent with our guidance, we maintained strong gross margins at 63.5%, supported by strategic pricing and favorable product mix. Our vertically integrated supply chain has also enabled us to achieve stable and market-leading gross margins. EBITDA margins came in at 8.7% of revenue compared to 9.5% for the same period last year. This decline reflects planned investments in digital marketing aimed at new customer acquisition, high airtime cost to secure a better channel position in the U.S. and airtime costs in ideal world. These investments are expected to drive long-term gains in new customer acquisition as reflected in our record unique customer base of 682,000. Now let me take you through our key retail markets. The U.S. revenue declined 1.6% year-over-year in the September quarter affected by increased attention on the election activities and Olympics. With consumer confidence improving and the elections now behind us, we expect demand to pick up in the upcoming holiday season. In the U.K., revenue grew by 15% year-over-year, majorly contributed by Ideal World. With signs of improvement in U.K. economy like the consumer confidence index itching up, inflation and interest rates going down, we expect a recovery in consumer demand in the coming months. Additionally, Rachel Galley, an e-commerce brand we acquired in the U.K. 3 years ago has now achieved EBITDA profitability. This highlights our capability to scale e-commerce brands and achieve profitability, demonstrating our disciplined approach to growing digital businesses. Germany continues to perform well, recording 15.3% Y-o-Y revenue growth in Q2 FY '25. Q-on-Q revenue grew by 25%, while operating losses declined substantially by 41%. We are confident of achieving breakeven at the operating level by second half of FY '25. Our 4R strategy, that is; widening reach, new customer registrations and acquisitions, strengthening customer retention and repeat purchases, continues to deliver positive outcome. Our TV networks now reach 130 million households and our unique customer base has increased by 51% year-over-year on approximately -- to approximately 682,000. Even without new acquisitions, the unique customer base grew 6% Y-o-Y. Customer retention stands solid at 41%, with an average of 23 pieces per customer annually on a trailing 12-month basis. We have now completed 1 access acquiring Ideal World and Mindful Souls, and I will provide a brief update on the progress. Ideal World operates 24/7, reaching 27 million U.K. households. We recently upgraded our Sky broadcast to HD network. The business is currently profitable on a direct cost basis, achieving GBP 17 million in sales over the past 1 year. We expect Ideal World to reach full cost profitability from current quarter onwards, so it's Q3 onwards. Mindful Souls continues to perform well with PBT margin of 10% on a trailing 12-month basis. Mindful Souls has a solid base of over 100,000 unique customers, which we aim to grow further. Leveraging VGL group supply chain, we are further enhancing its profitability through better costs and are regularly launching new subscription boxes. At VGL, community impact remains a key focus. We recently launched -- we recently reached a milestone of 93 million meals being served to school children under our Your Purchase Feeds initiative. We are currently donating 54,000 meals every school day. Our long-term goal is to reach 1 million meals every school day by FY '40. On sustainability front, we generated 1.1 million kilowatt hours of solar energy this quarter, nearly 100% of power needs for 2 of our manufacturing units in India. This aligns with our goal to achieve carbon neutrality for Scope 1 and Scope 2 emission by 2031. We are honored to have received excellence in sustainability and Climate Action Award from Indo-American Chamber of Commerce at the 20th Indo-American Corporate Excellence Conclave. This award recognizes our contribution to Indo-U.S. trade, business and our commitment to ESG principles. We look forward to keeping a balance between growth, investment and quarterly payouts to generate sustainable value for our stakeholders. Thus, the Board of Directors has declared an interim dividend of INR 1.5 per share for the quarter, representing 89% of payout and implying a strong belief in our business model and strong growth prospects. We remain vigilant in tracking the macro environment and market trends. I'm confident that our capabilities, team and experience will allow us to sustain profitable growth. We reaffirm our FY '25 revenue growth target of 14% to 17%, with operating leverage and mid -- and project mid-teen revenue growth in the coming years with decent operating leverage. I will now hand over the call to Nitin to discuss the financial performance in detail. Over to you, Nitin.

Thank you, Sunil. Good evening, everyone. Welcome to Vaibhav Global's earnings call. Following Sunil's overview of business performance I will now cover the financial results for quarter 2 and half year ending September '24. In Q2 FY '25, we recorded 13% year-over-year growth, totaling INR 796 crores, up from INR 705 crores received in Q2 FY '24. On a constant currency basis, this reflects 10.2% growth, supported by 9.3% rise in our volumes. Our gross margin remained strong at 63.5%, benefiting from our vertical integrated model and favorable product mix. The EBITDA margin for the quarter was 8.7%. As Sunil mentioned earlier, the current margin profile reflects our ongoing investment in digital marketing, enhanced channel positioning in the U.S. and airtime costs in Ideal World. Sequentially, continuing broadcast expenses as a share of revenue fell to 19.4% in Q2 from 20.6% in Q1, and we expect that dip to reach 18% for full financial year. Profit after tax for the quarter was INR 28 crores. Looking at regional performance., U.S. revenue decreased by 1.6%, U.K. posted a 15% revenue growth, and Germany revenue grew by 15.3% year-over-year. As noted earlier, the existing business growth rate was affected due to audience focusing more on the U.S. election, Olympics and cautious consumer sentiment in U.K. In Germany, revenue growth remained strong, with quarterly operating losses sequentially decreasing by 41%, and we stay on track to achieve breakeven level at operating margins in the second half of the financial year FY '25. For Q2, TV revenue reached INR 456 crores, while digital revenue totaling 296 -- INR 294 crores. TV revenue grew by 12.3% year-over-year and digital revenue increased by 11.8% year-over-year with digital contributing 39% of total B2C sales. This growth reflects our continued investment in digital marketing and related infrastructure. Additionally, our Budget Pay EMI option contributed 38% of total B2C revenue. We have now completed a year since buying Ideal World and Mindful Souls. Ideal World remained profitable on direct cost basis, and we expect that to achieve full cost allocation profitability from Q3 onwards. Mindful Souls continues to perform well, achieving a 10% EBITDA margin over the past 12 months. With VGL supply chain now supporting Mindful Souls, we expect further improvement in its profitability. Our balance sheet remains strong with net cash position positive of INR 100 crores. Free cash flow and operating cash flow were at INR 11 crores and INR 26 crores, respectively, which were affected by a planned inventory buildup for the upcoming festive season. Currently, ROCE and ROE was 17% and 10%, respectively. We are also committed towards creating and sustaining value for stakeholders and are pleased to announce that the Board has approved second income dividend for the year INR 1.5 per equity share, reflecting 89% payout. Looking ahead, we stay committed to deliver strong returns to our stakeholders in the mid- to long term. We are confident in achieving our revenue growth target of 14% to 17% for FY '25 with operating leverage and project mid-teen revenue growth with decent operating leverage in coming year. Thank you. Over to you, moderator, for Q&A.

So shall we start with the Q&A?

Yes, please.

[Operator Instructions] The first question is from the line of Rushabh Shah from BugleRock PMS.

Am I audible?

Your voice is low. If you can just increase the volume. We're unable to hear you loudly, sir. If you can speak a bit louder?

Yes. Yes. So my first question is, so sir, Budget Pain U.S. and U.K. is high. So why give products on credit and why not take it upfront? Is it because of the nature of the people living in those countries?

So Budget Pay ratio we offer based on the customer internal credit score and customers can opt the Budget Pay option for the different products based on their EMI available for the particular product. We are offering since 2016, and we have seen quite a good acceptance with the very low bad debt rate of the Budget Pay. And we're seeing customer traction towards especially buying on the high-end products where they can buying for paying upfront as a full amount and paying an installment is it gives an ease to pay to the customer. So looking to the low bad debt rate and customer acceptance, we are continuing to offering the Budget Pay within the internal credit assessment of the customers.

Okay. And sir, my second question is, sir -- to Mr. Sunil, sir, where do you allocate most of your time? Is it the product design, which is the most important part of the business? Or is this team building or customer acquisition?

So this is Sunil. So I assume you're asking discussion for me. So initial years, I spent quite a bit of time in product development and strategy and -- the product strategy. But last many years, a majority of my time goes in team development. So I meet the team regularly by direct reports and my skip levels and some outside stakeholders as well. And in addition to that, I read a lot. I read trade publication and the books published by renowned businessmen or strategists.

Okay. So my next question is, as we know, the people pay by invoice in Germany, and there has been a delay to get a breakeven in Germany. Now we are EBITDA level positive. So what has -- and what do you think has changed because you had entered Germany before also. So now what has changed that you have entered Germany again? Are you studied the mindset of the people? And how is it different from the U.K. and U.S.?

Yes. So this television business, the costs are largely fixed. So we have about 130 people there. Those people will be needed, whether you do EUR 1 sale or EUR 25 million sales or EUR 30 million that we currently have. And also the airtime that we contracted for about 35 million homes, you would pay them a respective of what revenue you get. So the fixed cost nature of the initial cost nature of the business is such that once you start to get to a critical mass of customer with -- which have good high repeat purchase intensity, then the leverage of this model is very high. But initial 3 to 4 years that it takes for this business to assemble that critical mass of customers is needed for this particular business model. And opposed to the other models where you have 1 store and that 1 store becomes profitable sooner. In this case, we have a store in everybody's living room, about, say, 35 million homes living room, we have stores there. So we have to set up that store cost right at the front. And that is why it takes time. But the model beauty is that once you reach a critical mass, a large portion of gross margin that starts to flow to the bottom line.

My next question is, sir, in one of calls, you mentioned, our revenue per household just $2 and the closest competitor is about $7, and the leader is at about $60. So how has that evolved? And what steps have been taken to go near to leader?

Yes. So we have gained market share over the last many quarters, maybe last 4, 5 years, we continue to gain market share. So our current run rate is around $3.5. Yes, so, $3 something, I don't have exact number in front of me. So let me say, rather than per household, our current market share is about 4% compared to Qurate and ShopHQ that we calculate internally, and that grew from less than 2% a few years ago. So we continue to gain market share over the years and I'm confident that we'll continue to gain market share for many years to come, owing to our vertical model, and agility to bring the blended products to the customer in a very short time because we are so closely aligned with supply chain.

Sir, just a thing on market share. You were saying we've gained market share continuously over the years. So we have gained market share at a more rapid pace since you only say we sell the products at a 50% price of our customers. So has the leader lost quite a bit of market share in the previous years? Or we are lagging somewhere?

So I don't remember saying we sell at 50% because many of the retailers sell the branded product, for example, we sell Bose, or Apple or Samsung or other branded products. Our strategy is more like Zara, where we make our own brands, in-house brands, and we sell product that seems much lower than their nationally branded products. Now we also have set the guardrails of 60% plus gross margin and leverage to give to the shareholders. So if you were to go out and buy the customers that many e-comm companies have initially, then we can scale the business rapidly but that will entail lower gross margins and maybe higher marketing costs. does dilute our EBITDA margins. So we keep our guardrails in place, continue to gain market share, and continue to gain leverage at the bottom line. So that is our business model. Within that guardrails, if you can achieve higher growth rate, we will.

The next question is from the line of Nirvana Laha from Badrinath Holdings.

Congratulations again are on a steady quarter. So the first question is more of a macro question. So any impact on our business model due to Trump getting reelected as we import all our materials into the U.S. So from your past experience with the earlier Trump administration and current developments, any comments on that?

Yes. Thank you for the question, Nirvana. We believe that we are the lowest cost producer and the tariffs would impact equally everybody. So we don't foresee us getting impacted any adverse. In fact, with our gross margin of 62% plus, our cost will be lower than other competitors because their gross margins are lower. So will be at advantage if at all the tariff across the board comes into picture.

Sorry to interrupt. May we request Mr. Laha to please rejoin the queue. The next question is from the line of Rupesh Tatia from Intelsense Capital.

Sir, am I audible?

Yes.

Okay. Sir, first question is on this Budget Pay or financing. So sir, very fundamental question is why do we finance these purchases through our balance sheet? Is it not better to do some partnership and let the financing be on someone else's balance sheet? Maybe -- I don't have historical context of it but maybe if you can explain that a little bit? And then the second question is, I see -- is it related to that only in FY '23, we had INR 26 crores as impairment. In FY '24, we had INR 33 crores as impairment. This is significant compared to our profit after tax. I mean if I look at it, it's almost 20%, 30% of our profits. So maybe you can explain what kind of ROA we make or what kind of interest rates we charge and how are we covered? I mean, how are these impairments considered in our model?

Yes. Yes. So thank you for the questions. I'll go to your first question, the Budget Pay. So we have fairly good experience with the financing we initially started. Initially, when we started, we explored the option to financing from a third party. But there are 2 things, 2 issues we have found where the financing cost was higher. Also, the customer experience while many the customers are not getting credit as their credit allocation from the different financing companies were higher. So then we have find out that it's better to offer ourselves as we give a better experience as well as our bad debts in the financing costs lower than the third party. So over the years, we managed to keep the lower bad debt rates, even with the financing cost of, let's say, interest cost of 2, 3 months, we even better than the other financing companies available out there. That is why we went for the option. And over the years, we optimized got pretty well, and we are pretty steady on our doubtful debt ratio in the financing cost side. The other point you mentioned about impairment. I'm not exactly where you are mentioning that this number in FY '23 -- FY '22, actually, we have a gain of INR 28 crores which was a PPA loan that we have shown in our exceptional items. It was actually gain a subsidy that we have received from the U.S. government on the time during the COVID. I mean, in the last...

I'm looking at annual report -- Sorry to interrupt, sir. I'm looking at the annual report. There is a line in other expenses, impairment losses on financial assets allowances for a write-off of doubtful debts. There is a line item in other expenses in your annual report.

Yes, it is actually a bad debt. It is actually a bad debt the Budget Pay EMI options that we offer to the end consumer. It is roughly -- this is around 1% of the cost to sales ratio and it is in line with, I think, past many years, if I'm referring the current number, that's what you mentioned.

Sir, INR 32 crores in FY '24, if you that is 1%, then the total asset under management will be INR 3,200 crores. I don't think that is the correct number.

Yes.

INR 32 crores, if I refer on the financial annual report, INR 32 crores is a 1% of about INR 3,000 crores top line.

No, no, no. But you are financing 40%, right? Sir, so this is roughly INR 1,200 crores.

No, no, no. It's okay. I got a point. I got your point now. So our financing, 40% is the ratio of the customer who opt the budget pay. The budget pay varies from 2 installments to 5 different installments. So first installment, we collect upfront. So that's why these outstanding is different than the sales ratio, which I mentioned in my commentary, it is 39%. So outstanding it varies based on 2 months to 5 months, different installments. But the outstanding installment debt as you refer in the financials, which is INR 32 crores.

So what is the interest rate that we charge, sir? I mean how -- because this number sounds really high to me.

Yes. So we don't charge interest to the customers. It is an interest-free for the end consumer. That the -- and you can say that the balance sheet bears the cost of interest. Customer don't need to pay. But the advantage is that customers get pretty well adoption of the wherever we offer to the customer a Budget Pay option. And many of the cases where we have opted to the third parties. So credit -- third parties don't give to the good customer as in our internal credit score but third-party don't give the credit to them. So eventually, we may lose the sales. That is why we went for the -- our own financing.

I also see in the financials -- this Sunil, Rupeshji. So I see in financials about -- for H1 FY '24, the bad debt was $1.652 million for H1 FY '24. So the velocity of the bad debt is approximately $3 million a year -- sorry, so it was $2 million in H1 FY '24, it was INR 16.52 crores of H1 FY '24. And for H1 FY '25, it was INR 13.55 crores for H1 bad debt. So what we might be seeing is just the doubling of debt for the full financial year, about INR 32 crores of the bad debt amount for -- towards the Budget Pay. And that is across all 3 organization, U.S., U.K., Germany.

Yes. It's just that the number sounds really high to me, sir, I mean, INR 1,200 crores, let's say, I mean, I don't know, 40%, 50%, your financing on INR 1,200 crore financing, INR 32 crores is roughly 3% hit to the margins and that number sounds really high to me. So that is my point. Maybe I don't know you can to...

I -- so let me give you one more reference. Any third-party financing company we go, there is 1 more company available like FlexiPAY in U.K., they charge trade about 7% of sales regardless of EMI options, they charge 7% of sales. Different financing companies they don't go below even when the interest rate will lower around 1%, 2% before the -- during the COVID or before COVID time. The minimum financing cost from the different companies was 3% to 4%.

But that is to the customer, right, sir, that is not to...

No, no, no, that is to us because it's a 0 cost for the customer.

We can't charge from customer because our competitors don't charge from customers. I'll have to [ bear this cost with ] our balance sheet or we take it from outside factoring.

Okay. Okay, sir. And the second question, sir, is on the content and broadcasting piece. So that also is a very first principle basic question that we were doing INR 350 crore spending in FY '22. I think that number went to INR 415 crores in INR '23, INR 500 crores in '24, and now it's going to be INR 600 crores '25. So that number has gone up by 80% and adjusted for acquisitions, our revenue has grown by -- not even by same amount. I mean our revenue has grown by INR 200 crores, INR 300 crores, adjusted for, I mean, $35 million, if I adjust it between Ideal World and Mindful Souls, but revenue hasn't grown. So I mean maybe you can start from your experience or whatever is your internal modeling but this incremental INR 250 crore spending that you're doing on content and broadcasting. Can it bring, let's say, INR 1,000, INR 1,500 crores revenue to us? And then in -- at what time frame? That is -- I mean, if you can explain that a little bit internally how you look at success of this spending? That is one. And then the second question is some other Indian platform company I track, and they basically don't do any ad spending if the sales velocity is good. They basically do spending only when the sales velocity of customer acquisition numbers start going down. And over the years, it has worked phenomenally well for them. So at the first principle level, I mean can you justify this kind of spend to yourself and to probably to me, to investors?

Thanks for the question. This is Sunil. There are 2 components of content and broadcasting costs. So one is the airtime cost -- so what is the airtime cost and other is e-com marketing costs. So we look at a different criteria for both these costs. Now within the airtime costs, we started Germany 3 years ago. So there's upfront fixed costs, as I mentioned in my earlier comment. And Ideal World, we started one year ago. So that is upfront cost. So Germany will break even in this current quarter and next quarter. So in H2, it will be at the EBITDA level, it will breakeven. But the cost is already up there for 35 million homes. For Ideal World, the cost is there for 27 million homes as it scales at a fully allocated basis, it will break even this quarter. So the upfront costs are there for the airtime. Also in U.S., we took an airtime with a lower channel position that will give us a growth in coming years. So we made these 3 investments in airtime that ramped up the cost for future sake. Now second component is digital advertising costs. We started ramping up digital advertising about a year ago. And where you see the content broadcasting costs go up noticeably because of that. And we are seeing benefit of that in terms of new customer acquisition. And that customer lifetime value is -- 1 year lifetime value of that customer is higher than the customer acquisition cost for us. At all the 6 brands that we have within the VGL portfolio, at each brand, the 1-year margin is higher than the customer acquisition cost. So that -- with that strategy, we started spending, ramping up the spend on the digital marketing. Now your third point was about the Indian companies who don't spend on advertising until they see the ramp slowdown. So our model may not be apples-to-apples with the Indian model. I have not studied the companies you've mentioned. But with our competition within U.S., U.K. and Germany, we don't see organic customers coming in at our scale. Maybe at Amazon scale or Walmart scale with their footprint or their momentum from earlier spend that they have done, they may get a lot of organic. But within our space, from Google SEO that we do or Bing SEO we do, the sales is not as meaningful from organic services as there might be from the Indian companies that you're comparing.

[Operator Instructions] The next question is from the line of Nirvana Laha from Badrinath Holdings.

So following up from what the last participant was asking. So the content and broadcasting costs this quarter has been a fall Q-o-Q. So has this number now peaked out for the foreseeable future? And for the coming quarters on an absolute basis, how do you see this number panning out? It was INR 154 crores in this quarter.

Yes. So for television -- this is Sunil again. For television, we see this number to be -- we foresee numbers to be relatively flat, unless we come across a major opportunity that we don't want to miss. But if we don't have anything in offing, so we foresee this to be flat. For digital marketing, we will continue to gradually ramp up as we see productivity gain within our digital space. So -- but as a percentage of revenue, you won't see any meaningful increase. This year, we expect it to be 18% by the end of this financial year. And for going forward for the next few years, you can expect this to be 18% may be slightly lower, but leverage may not come a lot from this particular area. The leverage will come from HR costs, because our costs are largely fixed. Some SG&A and some from margin improvement as we scale the digital portion, because the margin on digital portion is little bit higher than television portion.

Okay. So it will come from gross margin on digital side?

Yes. Digital space has a higher gross margin than the television space.

And sir, so you said it will continue at 18%, but sir, right now, if you were at 20% in H1 and you're guiding for 18% for the full year. So for H2, you have to be at around 16% to achieve that 18% guidance. So you're saying H2, you will be at 16% and then you'll again ramp up to 18% in FY '26.

For the whole year, yes, because H2 is really higher revenue and the cost as a percentage of revenue drops, because it's a fixed nature, airtime cost. The percentage expense as a percentage of sales dropped -- and for next year, H2 may be higher than 18% and -- H1 may be higher than 18% and H2 will be lower than 18%.

Okay, got it. And sir, out of this INR 1540 crores, can you split this between TV and digital so that we understand exactly what part will grow and what will not.

Yes. Out of this 18%, 11% is related to airtime cost and rest 7% related to the digital marketing cost.

Sure. And the 7% is digital and where exactly? In platforms like Meta and for SEO, if you can break that down a little bit?

Yes. So majority is spend through Meta. But there's some portion in different affiliates, SEO, Google but majority of spend through Meta. Okay.

And business wise, is it possible to split the 7% between the Mindful Souls and the U.S. business, U.K. and Germany?

Yes. Internally, we do like Mindful Souls is a pure D2C company, which has a higher digital marketing costs compared to U.S. and U.K. business. So model is it different in the other brands. So percentages varies between the different brands.

Sure. Would it be fair to say that half of the 7% probably goes to Mindful Souls?

Not exactly half, but good amount of portion to Mindful Souls.

Okay. Okay. And on Mindful Souls, can you tell us what was the Y-o-Y and Q-o-Q revenue and volume growth?

Mindful soul is Q-o-Q is flattish for what we are seeing right now. But month-over-month, in recent months, we have seen -- started seeing improvement in Mindful Soul. And profitability is also getting better with the regional supply chain has started from -- benefited from October onwards. And then the upcoming season events that we are seeing and different -- 4 different new products we have launched in a couple of months back subscription program. So expecting the subscription numbers will improve, which will reflect an improving of our quarterly and monthly revenue going forward.

Sorry to interrupt, Mr. Laha may we request you to please rejoin the queue. The next question is from the line of Anuj Sharma from M3 Investments.

A couple of questions. If you look at the broadcasting cost, basically the airtime over a long period of time, what is the inflation we can expect in this -- this particular cost?

So the per home cost doesn't go up unless we take the home in a better channel position. And also, the number of homes is not really expanding. So from cable is shrinking, but we are moving from cable to OTA homes, over-the-air homes. So those homes can be little more expensive than the cable. So as the mix changes, then the cost may move a little bit, but per home, wherever we are, hasn't really gone up to us per home basis.

Okay. Okay. And then there is a shift in the mix from TV to OTA or OTT, what's the inflation or what's the premium you have to pay per household suppose?

So depends on channel position, from cable, the normal cable we used to have in the 100s and OTA usually is in 30, 40, 50s, the cost is almost double or sometimes even more than double. But that universe is smaller than cable. Cable is about 60 million homes in the U.S. and OTA is about 22 million -- 23 million. So it's about -- just about 1/3 universe.

Got it. Got it. And also, we have been investing in digital. But can you just explain how do you go about budgeting this digital spends, how do you really forecast or what goes to your mind deciding the budget on digital? That will be helpful.

Yes. So digital usually is linked to productivity of the spend. So if you see the spend, productivity is coming down, then we ramp down the spend. And if you see the productivity is strong based on our criteria, what is the ROAS we look at? So different platform has different ROAS, Meta has different and Google branded is very different. And Google paid shopping has different, affiliate has different. So we look at those productivity measures and ramp up and down. Overall, we look at the total band of say if we have $1 million spent budget for the month for all the brands put together, some brand sometimes spend more because they see more productivity. Some brands spend less, because they are seeing less productivity. But overall, we are pretty close to our projections.

Okay. Okay. And this question are on the budget scheme. So what incentive a customer has. So assuming there is no interest and there is option for 2 installments, 3 installments, 5 installments and outright pay, wouldn't it be logical from the customer viewpoint to take 5 installment of the maximum installment? And do you see that shift happening? I mean, people from upfront going to let's suppose the maximum possible installment, which is free of interest. How is that shaping up?

So we leave the decision to the customer. We offer that customer has the option. We -- if we are offering for Budget Pay, ideally we would like that customer can opt it because margin of the product design based on that. But it's up to customer, if they want to pay a full amount or go for EMIs. Now the customer, they don't want to take a risk for credit default, which may take their credit ratings lower, they pay full amount. But it's up to us -- up to the customers, who want to take the Budget Pay options or not. But we offer for the -- unanimously for the products for all the customer, not distinguish from particular product, particular customer based on their whatever credit score.

Okay. But logically, if it's interest-free, won't the customers gravitate towards the maximum installment option?

Yes. We are -- logically, you're right, but -- and we see that customer opt also majority customer go for the Budget Pay, but some of the customers are also they don't go for Budget Pay.

Okay. But do you -- would you disclose the breakup between the 2 installment, the 3 installment and 5 installment and how they have shaped up over a period of time maybe?

We do put the product, 2 installments, 3 installments, 5 installments, customer can select based on the available installments.

No. No, I'm saying from an investor viewpoint, a shareholder, would you classify what percentage of that 40% is availing the 5 installment versus the 2 installment as a bucket?

So -- first this depends on how much we offer it. So every product has a unique feature of -- from 2 to 5. And whatever we are offering, they can either take that or they have to pay full. So for 40% customers, we offer budget -- 6 as Budget Pay. Some products, we don't even offer anything. For that product, they have to pay full anyway if they want to buy, especially in lower-priced products. $10, $15 product, we don't offer any Budget Pay.

Okay. And my last question is, let's suppose a customer default. What are the recovery options we have? Generally, what process we follow for recovery? And when do we generally give it up saying that the cost of recovery is higher than the estimated recovery amount?

So the system already built accordingly after how many days the payment need to be retried after how many days of interval payment need to be adoptive acceptance or card update or token update happens. And after how many days that we send the reminders to the customer via e-mail or physical letter, then later on transferred to the debt collection agency. So this was the process, pretty long process, robust process that we have that we follow for the value we see failure in the installments payment.

Okay. And my last point is if the customer really defaults, his credit scores are impacted. Is that correct?

Yes. So we don't -- unless we pass on to the debt collection agency, then the score impacted. And we don't transfer that if it's a really substantial amount to the debt collection agency, but only impact once we transfer to debt collection, agency. Otherwise, it doesn't impact the customer credit score out there. But internally, as soon as customers do a default then customers can no longer buy on the Budget Pay option, while they can buy on full payment.

The next question is from the line of [ Pradeep Maity ] from RGI Meditec Private Limited.

I have a couple of questions. My first question is what is the gross margin for digital revenue? Can you comment any exact number?

Gross margin for Meta products or certain Google products is anywhere from 65% to 70%, 75% depending on product to product.

Okay. Actually want to know about total actually average gross margin, total digital revenue?

Total digital venue has a lot of components because we also have rising auction, $1 auction, where we sell products at 5% or 7% margin only. So there is a clearance mechanism because we come up with 100 new products every day. And the small quantities are not sufficient to sell on television, we sell through auction.

Average gross margin, sir. For digital revenue?

So I think including RA -- excluding RA. Yes so I'll have Prashant pull out that number in the meantime, you can ask some other questions.

Okay. When the digital revenue become 50% of total revenue?

Yes. So our rising auction will be limited, because it won't rise as a percentage. But the other margin, other component, there is a fixed price catalog or Meta or Google product, overall margin will grow up even further. We are not giving separate guidance on that, but that margin will go up higher.

Okay. And my second question is why company sold the Encase Private Limited? What is the issue with that company?

So for the Encase that we were finding that earlier our idea was to get a China Plus One strategy and get a cheaper packaging products, which we use in U.S., U.K. and Germany for the end consumer. Now we are finding that many of the products is available out there in China itself with even lower pricing after duty. So -- and the margin is not in line with what we guided to our investors and above double-digit margin that we are guiding to the investor is not coming with that business. That is why we decided to exit that and source this from the third-party China.

Okay. And with that last 1 question. What was its acquisition cost, when we bought that our company bought that and what is its selling cost?

Yes. So we bought -- we invested in this country roughly around INR 4 crores, and we sold that in round in INR 50 lakhs.

That means INR 3.5 crores approximately the company lost in that acquisition. Am I right?

So we yes, yes, right. And we already booked that loss in March 24 -- 24 accounts.

Thank you. The next question is from the line of Angad Katdare from Sameeksha Capital. Please go ahead.

My first question is in our cash flow statement, there's a grant of loan of INR 7 crores, also an impairment of loan of around INR 1 crore. Can you throw some -- can you throw some light on these 2 line items?

Sure, sure. So this was the loan related to the Encase Packaging, which was outstanding for a long time. It is the same loan that we have done a mortgage of the property lying with the Encase Packaging, the land and building and plant and machinery. Though the mortgage and the property valuation was coming and fully covered with the loan outstanding. But for the conservative accounting, we have taken a loss and booked the impairment of INR 1.1 crores for this outstanding loan.

Okay. And my second question is on the inventory days, it has increased from 72 to 86 days. I know it's due to the upcoming festival season. But fair to assume this as a base going forward? Or if not then what can we take as a sustainable inventory base?

Yes. So we expect the after season, that is at the end of December as well as end of March, the inventory comes down because we run 2 clearances. We run December clearance and we run March clearance and inventory strategy comes down. So from the base point of view, so you should look at the last year's days as a guidance for your future position.

Yes. And even if you refer the cash conversion cycle, -- so we have maintaining around 170 days cash convergence cycle in payable, receivables and days -- and this we -- internally, we are keeping the similar kind of cash to middle cycle for upcoming period around 170 days.

Okay. So if there is a clearance after December and in March, just assuming will the gross margin have impact on the -- will we have impact in that quarter?

Yes. So yes. So that is why our first quarter margin was pretty healthy 66%. And the second quarter and the full quarter -- full year guidance that we have given a 200 basis point improvement in last year. So full year, we are guiding 64%. So that guidance was incorporated in Q3 and Q4 clearance that we have planned. So it is baked in already.

The next question is from the line of [ Rushabh Shah from BugleRock PMS ].

So my question was when a customer buys from your platform and then he doesn't have a repeat purchase. So do you offer him any incentives for the retention of the customer?

Yes, definitely. We have pretty robust e-mail text flows in place to get the customer back -- so we increasingly increase offers for them to come back. The first offer is to offer a complementary product -- not complementary -- complementing product to what they bought. The second is for the free gift and then percentage discount and $10 gift card and the $20 card. So we have a lot of these processes in place to get this customer back.

So my next question is a target audience or 50-plus age group. And you are considering investing in the OTT platforms also. So have you been able to convert the audience in the TV or rather add new customers in the new generation platforms?

Yes. So that's a good question, Rushabh. Now we have a lot of OTT sales and sales growth is also pretty robust. But we have not been -- we have been able to move many of our existing customers over to OTT. But to acquire new customer OTT, it still is a new area. There is -- we get a lot of app downloads, but still, there is no ecosystem to convert those downloads into customers. So the new customer acquisition OTT is relatively low, but the customer conversion -- and you see customer conversion over the OTT who are buying from us and have cut the cable connection or even existing customer who are still buying some television or e-com and then them buying over OTT is pretty good.

Sir, just on the customer part of it, what is more important for you? Is it adding new customers or the conversion of the customers from one platform to another?

We both have KPIs on both fronts. So if -- say if we slow down the new customer acquisition, then the funnel will dry. So we don't want funnel to dry up -- so we want funnel to be fully populated. And then once the customer comes in, we want to retain it -- retain the customer and then also move them to other platforms so that the lifetime value goes up. And when we move from one platform to other, lifetime value shoots ups up quite substantially.

The next question is from the line of Rupesh Tatiya from Intelsense Capital.

Sir my question is, let's say, for INR 4,000 crores sales whenever we reach what would be the content spend velocity would we need? Is INR 600 crores spend enough? Or we have to go to, let's say, INR 720 crores, INR 750 crores kind of number?

So the television broadcasting, we expect that to stay literally flat. It may go up a little bit, but relatively flat. But the digital cost may go up because as we scale up our digital customer acquisition and retention, so that may go up. So as I mentioned earlier, in longer run, this 18% may stay relatively flat. So our internal operation is showing 17% to 18%, but guidance I want to give to you is relatively flat, the leverage will come from HR cost, SG&A and margin improvement.

So just to summarize, even at INR 4,000 crores, you expect 17% to 18% content and broadcasting cost?

So there is a guidance I want to give you because it may go lower, but at this time in our journey, I don't want to give a guidance below 17-odd percent.

Okay. And then, sir, I mean, if I look at the model from gross margin to EBITDA walk, right? I mean 60% gross margin, 20% employee cost, 20% content and broadcasting cost, 10% maybe manufacturing packaging, shipping all that cost. So 60% gross margin results in 8%, 9% EBITDA margin. And I mean whatever operating leverage you're talking about in HR and all that is like 1%, 2% kind of thing. So to meaningfully see a jump from 10% to 15% margin. To me, it looks like gross margin is the biggest lever. I mean your gross margin, I think, has to go above 65, probably close to 67, 68 and only then we can see the mid-teen kind of margins. So what are your thoughts on that?

First lever is the HR cost. We have 2 new businesses in Germany and ideal word, and we staffed substantially for these 2 relatively new businesses. And as we scale up, the HR cost will drop down quite substantially across the group. And we also believe as we are creating efficiencies through AI, will gain efficiencies in our knowledge or cut across the group as well. So you'll see substantial gain in HR costs from currently 19%. So it has a potential to go down as we were 13%, 14% in years to come. Now the affiliate cost, there is the content and broadcasting cost, which is currently -- we expect it to be 18%, that may go to 17%. And SG&A, as we scale up, we'll see leverage here because as you scale the shipping costs go down, the other areas goes down as well. The rents, the other expenses go down substantially. And so margin may go up from 64% that we are projecting for this year. It may go up a couple of percentage of maybe 2% or 3% over the years, but other areas will also have leverage opportunities.

The next question is from the line of Parth Dalal, an individual investor.

Sir, for the Mindful Souls slide, we have mentioned there are 4 new products for the quarter. And earlier, I think Nitin sir said that a lot of expense goes in there. So how to read this only four new products for the quarter, whereas our US, UK, you said that we have a big churn like 100 new products a day.

Yes, Mindful Soul is subscription business. For subscription business, there's a lot of thought and a lot of promotion that goes into a new product launch. Rather than on television, you get -- you make some changes to the ring or pendant or earring based on the stone that you have or the accent stones you have or the color of the scarf you have. So you gain a lot -- you get a lot of velocity coming in for television, because that customer watches us hours every day. So we constantly need to bring new for them without a lot of depth that a subscription business needs. And the promotion cost for the new products that we get in is very low or almost nonexistent on television business. Whereas on e-com business, we have to promote a lot before the customer the product gains traction. So it's a bit different business model and not really comparable television to subscription model.

Okay. So the 4 new product that is mentioned is the subscription products?

Correct.

Okay. And for -- sir, do we have Budget Pay in Germany? The same setup that we have for other 2 regions.

Yes. We don't have budget pack. Actually, it is a pay by invoicing. So it is 21 days payment after receiving the item. So installment payments, we have -- we don't have that, it's just the payment -- 14 days -- 21 days credit to the customer for pay by invoicing.

Okay. So what is stopping us to, I mean, start the Budge Pay set up there? Is there any regulatory limitation?

Yes. It is -- we're finding it is not easy to operate with the pay by invoicing and the other competitors are also not offering to the consumer. While in U.K. and U.S., the -- our combat competitive offering the Budge Pay. So we aren't going until -- that until we see a profitability, good margins over there, then we can think of to offering installments payment to improve that.

Got it. Got it. Agreed. And in the same slide for Germany, it is mentioned immediate TAM increased by 20%. So is this recent thing, anything that has happened recently? Or how should we comparing this 20% year-on-year? Or what is the time period?

So actually -- so it means that when we started Germany, so comparing to U.K. U.S., where we have our existing market starting Germany has increased our addressable market by 20%.

Got it. Got it. And final one from my side. So any other acquisition on the cards, sir? Anything on the table with the management?

So not anything on the horizon. Our aim is to get Mindful Soul starting -- scaling up and Ideal World, giving us meaningful positive EBITDA before we go for a new one.

Sir, because there was this social media post somewhere, which said Vaibhav Global looking to acquire -- create and craft in U.K. So I don't know if there is anything to read in that?

No plans right now. .

Got it. That's it from my side.

This will be the last question, which is from the line of Nirvana Laha from Badrinath Holdings.

Sir, the digital growth this quarter Y-o-Y was only 11.8%. This was without Mindful Souls in the base. So next quarter onwards, we'll have that in the base. So what is your comment on this growth and organic digital growth, what kind of number are you targeting going forward?

Yes. So we had some new airtime coming for Ideal World for -- in U.S. So those new airtime give us more television growth and digital was not as robust on that one. But going forward, we expect digital growth to be faster than TV growth.

Sure, sir. So just doing some math, the numbers that you said about 18% content and broadcasting and 11% part remaining more or less fixed, which has to do with TV. So I think you're planning to grow the digital spend by 15% year-on-year for the next few years. So will the digital growth, therefore be higher than the 15% in line with 15%? Or how will it be?

Specially if you raffle that past 10 years, digital CAGR is 18%, it was actually without the aggressive investment on social media marketing. And we expect that this growth rate will continue to grow as we are investing more on social media marketing. So we are expecting that the growth rate will be higher than the investment of 15% that you mentioned year-over-year.

Okay. Okay. And sir, when you say that gross margin for digital sales is higher than TV sales, what is it driven by? Are we able to spend cost our products via digital -- or how is the gross profit per unit going up in digital versus TV?

Digital ecosystem, even when we compare ourselves to say, Amazon or other D2C players, we find that the players have to absorb higher marketing costs, Meta costs or Google costs or affiliate costs. Therefore, the margin potential is higher in digital space than television.

Okay. Sir, I'm not sure I understood the explanation. I'll take it offline. Last question from my side. Any plans on lightening the balance sheet, sir, I believe we are -- we invested -- we made some investments in land, et cetera, in the U.S., which we are not using since we have an ROE goal also along with margin. So any plans of working on the balance sheet to make it more slim?

Yes. For that end, we are looking for rezoning of that land into partial commercial and partial warehouse cum light office use. First, we have rezoning done and part of that land will sell for retail -- local retail and let me lighten the balance sheet from that extent. And we don't foresee much CapEx in coming times. So balance sheet will continue to be lighter than we had in the past few years.

As this was the last question for today. I will now hand the conference over to Mr. Sunil Grewal for closing comments.

Thank you. I want to thank all the participants for your time and great questions. If you have any further questions, feel free to reach out to Prashant Saraswat at VGL or Amit Sharma at Adfactors PR India, and we'll be happy to answer your questions. Thank you all again.

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