Vedant Fashions Limited (MANYAVAR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Vedant Fashions Q1 FY '23 Earnings Conference Call hosted by Edelweiss Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nihal Jham from Edelweiss Securities. Thank you, and over to you, sir.

Yes. Thank you, Angel. On behalf of Edelweiss, I would like to welcome you all to the Q1 FY '23 Results Conference Call for Vedant Fashions Limited. From the management today, we have Mr. Vedant Modi, Chief Marketing Officer; and Mr. Rahul Murarka, Chief Financial Officer. I will now hand call to Mr. Vedant Modi for his opening remarks. Vedant, over to you.

Thank you, Nihal. Good afternoon, and a warm welcome to all the participants. Thank you for joining us today to discuss the Vedant Fashions Limited Q1 FY '23 performance and results. I'm joined by Mr. Rahul Murarka, the Chief Financial Officer of our company. I hope everyone got an opportunity to go through our financial results and investor presentation, which has been uploaded on the stock exchange as well as on the company's website. Vedant Fashions is the category creator and market leader in branded Indian wedding and celebration wear industry. We have grown from modest roots to become India's largest celebration wear entity. We have strategically created a house of brands which caters to the need of different demographic and geographic segments. Owing to the efficient governance model, the performance of all our brands has been motivating in this quarter. As a company, our governance model is firmly based on 3 Ps: People, we invest in relationships, be it our customers, our employees or any of our stakeholders. Products, our mantra for product is twofold, superior quality and value for money. And finally, profits. This P is a litmus test for the above 2 Ps, it indicates the health of the company. Allow me to take you through the highlights for quarter ended June '22. We're happy to report an efficacious and satisfying quarter in terms of retail sales, revenue growth, best-in-class margins and return metrics. All of these despite an adverse and challenging macroeconomic environment and inflationary conditions leading to pressure on discretionary spend. We are witnessing growth momentum through increased efficiencies and establishment of a variable model firm. We, as a company, have come stronger out of COVID and have surpassed pre-COVID levels in terms of overall customer sales growth, which stands at 60% over quarter 1 of financial year '20 and 119% over quarter 1 of financial year '22. The SSSG growth has been 25% over quarter 1 of financial year '20, which was pre-COVID levels and 105% over quarter 1 FY '22. The consumer demand for ethnic wear is also showing great recovery, and we are gearing up for a promising festive and celebratory occasions ahead in this year. On the network expansion front, in Q1, we opened new stores of around 10,000 square feet and have a very strong and healthy pipeline for new rollouts planned for the financial year. As of June 2022, VFL's EBO area stands at 1.28 million square feet globally across 603 stores. The national store footprint tally is at 590 stores, spread across 228 cities accounts. We've also opened 1 new international store in UAE in Urban Garden in this quarter and now have 13 international stores panning across 3 countries. Efficient and innovative marketing has been the [indiscernible] stone in our journey to building great brands. Keeping to the same tenet, we are glad to share an instance in which our marketing campaign for Mohey #DulhanWaliFeeling targeting brides to be featuring Ms. Alia Bhatt was a huge success. We have witnessed greater acceptability for all our brands, which is a hypothesis that is supported by a strong traction and positive sentiment. Going forward, we are optimistic of having a favorable year ahead. With this, I would now hand over to Mr. Rahul Murarka to take you through the financial performance of our company.

Thank you, Vedant. Good afternoon, everyone. I would like to highlight key financial performance for Q1 of FY '23 based upon the consolidated financial statements. The company has continued to demonstrate strong financial metrics and returns during Q1 of FY '23. Starting from comparison between Q1 of FY '23 and Q1 of FY '22, the company has reported revenue from operation of INR 325 crores in Q1 of FY '23, delivering a very strong growth of 103% compared to Q1 of FY '22. The company continues to report very high industry leading gross margin of around 68.8% during Q1 of FY '23. The EBITDA margins were around 51% and the EBITDA stood at INR 165 crores for Q1 of FY '23, with a growth of around 106% compared to Q1 of FY '22. The reported PAT during Q1 of FY '23 is INR 136 crores, which have significantly increased by around 122% compared to Q1 of FY '22. The company reported best-in-class PAT margin of 31%, and the profit after tax stood at INR 101 crores during Q1 of FY '23, with a strong growth of 123% compared to Q1 of FY '22. The company has a track record of generating significant cash driven by a healthy cash convergence ratio. During Q1 of FY '23, the company continued to generate high cash conversion ratio of approximately 146%, which has been computed based upon operating cash flow over PAT. With optimization in working capital, we have been able to achieve industry leading trailing 12 months ROCE of approximately 98% during the period ended June 2022. After a long time, during Q1 of FY '23, we have witnessed a normal quarter with no COVID restrictions. This synergized well with our robust ecosystem, leading to efficiency in operations and resulting improvement in working capital days from 94 days in FY '22 to 65 days approximately in Q1 of FY '23. This has been computed based upon trailing 12 months revenue, our internal MIS reporting format. The net receivable days, based upon the trailing 12 months revenue, has also reduced to 35 days approximately in Q1 of FY '23 from 53 days in FY '22. The net receivable days have been computed after reducing deposit received from franchisee and provision from [ sales ] returns from trade receivables. The sale of our customers were around INR 500 crores during Q1 of FY '23, with a significant growth of 119% over Q1 of FY '22. The company also reported very strong SSG growth of 105% over Q1 of FY '22. Now I'm comparing our Q1 FY '23 performance with pre-COVID levels of Q1 of FY '20. Those figures have been considered based on internal management MIS. Our revenue from operations significantly grew by approximately 58% and we witnessed significant growth impact by approximately 81% over Q1 of FY '20. Our sale of our customers significantly grew by approximately 60%, with a strong SSG growth of around 24% -- 25% over Q1 of FY '20. Thank you, and [Foreign Language], everyone. We can now move to the Q&A session.

[Operator Instructions] First question comes from the line of Gaurav from Axis Capital.

Congratulations on a good set of results. Sir, my question is, first, on the strong expansion in the gross margins, we have seen the gross margins expanding to now 68.8%. And commensurately, our EBITDA margins is also now 50% plus. So my question is how much of this is a phenomena of the season of the mix? And what could be a steady state level that we can expect going ahead?

Sure, Gaurav. As a company, our endeavor has always been to improve our gross margins and improve efficiency in margin. We have been able to do this in the past and our endeavor will also be to continue to do this in the future to improving our margins. However, on a quarterly basis, the gross margin may vary from one quarter to another quarter. And hence, we should look at the gross margin level on an annual basis. As far as your question on steady state gross margins are concerned, no, we don't want to give any guidance. But historically, we have seen that we have been able to achieve very high gross margin of 66%, 67%. And we don't find any challenge there of now that in achieving the similar levels in future [ FYs ].

Sure, sir. But going by your Q1 performance itself, it looks like EBITDA will reach the 66%, 67% gross margin level at least for this year because if it has to go below that, the rest of the 9 months might do really bad in terms of the GMs.

So as I've mentioned, one our part would be to look at the gross margin at an annual level because the quarterly gross margin may vary from one quarter to another. So maybe we can discuss on the gross margin when we achieve the year-end gross margin level.

Sure, sure. And so my next question is with regards to the store opening. So one, we have added around 10,000 square feet in terms of the stores, whereas we've added 8 stores. So average square feet comes around 1,250 square feet for the new stores. Also, the number of store openings has been relatively -- in terms of square foot addition has been in 10,000 square feet.. So on the both fronts in terms of the store sizes and in terms of the these square feet additions, if you can help us, how can we look it ahead, going ahead?

Gaurav, thank you for your question. So when we talk about the 10,000 square feet number, which was the net opening for this quarter, there were about 8 stores opened, and some of those stores that were added in this quarter were also SIS stores, which are typically smaller on average, about 500-odd square feet. Like we've been mentioning for a long time now that typically the newer stores that we will open, which are exclusive brand outlet stores, not the SIS version of it, will be 2,000 or more than that typically, unless it's a one-off Tier 3 or a Tier 4 city that we're entering. So the plan is to open larger stores as we move forward. Now with concerns to the 10,000 square feet number which we've added in this quarter, typically, because Q2 is a weaker season compared to the rest of the year, we tend to add the majority of our stores by the end of Q2 or start of Q3. And we have an extremely strong and healthy pipeline which you will start seeing in the coming few quarters. I think we are very well poised to open a lot of stores and a very high number of square feet in the coming seasons.

Sure, sir, that's helpful. And just to follow up on this one. I also see that you have added 3 new cities also during -- sorry, 5 new cities, rather, during the quarter. So if you can help us, which are these cities? Are these Tier 2, Tier 3 towns? How are we looking in terms of the city additions, if anything, on that?

Sure. So the cities we entered, so the city with the highest population was Balasore with a population of about 23-odd lakhs. While we went down to a city called Bhimavaram, which is at a population of 1.08 lakh from the large population reports we have. I hope that once the new census gets updated, which is I think in 2 years now, the numbers for population will be a lot more accurate. So I think we continue to open stores in newer cities. There are some Tier 2 cities that are left to cover, very few of them, but majorly it will be Tier 3 and Tier 4 towns that we enter as new cities.

Okay. And sir, just one last bit, if I can pull in. In terms of the -- across the retail spectrum, we have seen that this quarter was aided by a strong wedding season as well as some bit of pent-up demand also flowing through. If you can highlight on the demand front, how has these 2 aspects played out during the quarter?

I think demand was very strong across channels, and we were able to witness a lot of bookings. We were able to witness good increase in volumes and a good increase in our merchandising mix. So I think all those levers, like I mentioned in the last quarterly call also, that this is the first quarter that we saw, after almost 8 to 9 quarters of disruption, where the big fat Indian weddings were not allowed. So it was great from all perspectives, and we are very confident about moving into the future with such trends.

[Operator Instructions] Next question comes from the line of Percy Panthaki from IIFL.

Congrats on a good set of numbers. I just wanted to know your per square feet sales which you do typically in a normal year in Q1. Is that -- what percentage, higher or lower, than the full year sales per square feet?

So, Percy, the way I would like to answer this question is typically when you look at a historical average of quarter 1 out of the year, it's about 24% of our business. So that is a metric which we can use to kind of calculate.

This is the total sales or this is the sales per square feet you are talking about?

This is the total sales. So typically, 24% of the year's total sales would come from quarter 1.

Okay. Okay. Understood. Understood. Secondly, can you give me an idea whatever growth you've done this quarter. Y-o-Y you've grown 100% plus. How much of the growth is from a pure price increase angle? How much of it is mix? And how much of it is volume, rough estimates of the breakup from this?

Sure, sure. So about our overall SSSG was about 105.2%. When we break that down into volume and ASP, volume growth was at about 102.3% and ASP growth was about 1.4%. So this is at the company level. We witnessed very good growth in terms of our average basket size numbers and different sort of parameters that we track at the store level and at a product level. So all of those worked in our favors.

Okay. So basically, you are saying that the average bill size has gone up. So people are purchasing either more number of items or more premium products. Is that the right way to look at it?

No. So not exactly because last year, the same quarter, was a COVID-impacted quarter. So the walk-ins were less. So of course, we saw tremendously a lot more walk-ins coming in from last year. And that is why you will see that because a lot more customers walked in, we were able to have very good sales. And as the -- so when we look at average basket size, internally, we break it down into average basket size of a groom walking into our stores and the average basket size of a non-groom walking into our store. And this was a normalized year, the walk-in numbers of non-grooms was higher compared to last year, given it was a COVID-impacted quarter. And that is why we were able to witness good average basket size growth within these each segment. So overall each metric of the business was performing pretty well. So we were able to bring in more consumers and consumers within the segment that we operate in which is groom and non-grooms had a -- we had a better basket size.

And this 1.2% or 1.4% ASP growth that you are saying, that is pure price increase or it includes the mix effect in this?

So like we've been mentioning, Percy, we don't usually incur direct price increase into our products. It is almost entirely a change in merchandising mix, that is a continuous effort.

Okay. Okay. Because I thought that a lot of your products' SKUs are long running. It's not -- it's fashion. It's not fast fashion or seasonal that your SKUs keep changing. So whatever SKUs you had, let's say, 2 years ago, a large part of them would still continue this year. So if that is the case, then, I mean, the price increase would have to be in those SKUs only, right?

So Percy, that's not exactly how the case is. In terms of change in mix, it does not happen, let's say, after 2 years. It's a little quicker than that in typical fashion. And especially in Indian wear that is what we see, apart from white kurta, which is a very classic product, typical products do change within that time frame. So it's more to do with a change in mix and the kind of products we churn out.

Understood. And last question for me. Any color or flavor you can give on the 3 smaller brands, that is Manthan, Twamev and Mohey?

Sure. So when we talk about Mohey, there are a couple of metrics that we track internally. All of them have been very positive in nature and have been really encouraging to see the brand growth. And the quality of Mohey as a brand has been improving in terms of all these numbers that we internally track. There is also one important metric that we keep seeing, that Mohey's SSSG was higher than the company's average SSSG both compared to last year same quarter and also compared to pre-COVID quarter 1 of FY '20. So that was also very encouraging to witness. At the same time with Mohey, we continue to open the flagship mandible stores. And we will also experiment with stand-alone Mohey stores this year. So I think those are overall things that excite us with Mohey and the nucleus category of lehenga has been performing really well with very good high conversion numbers coming from the front-end retail store level and saree has also been picking up pretty well. When we talk about Twamev, Twamev has been a very, very phenomenal sort of a success story for us internally. It's been beating all our internal numbers. We are very hopeful and we are very confident of having great exclusive brand outlets of Twamev this year. And we are very confident about the kind of success that Twamev as a brand will possibly bring for us in the future. Manthan is still in the incubation stage. We've been trying out the brand on different online marketplaces and through the MBO channel. Again, it has been growing very rapidly given the small base, but we would like to see the brand and work on the product categories a little more for the coming 2 to 3 quarters before commenting on Manthan.

Next question comes from the line of Abhishek Basumallick from Intelsense Capital.

Firstly, congrats on a good set of numbers. I had two basic questions. One is probably an extension of what you just talked about. So can you just help me understand what are your plans on the Mohey brand in terms of scaling it up? And the second question is about, what is the competitive scenario looking like in Manyavar overall? Those 2 questions.

Sure, sure. In terms of Mohey, I think the plan in terms of a retail footprint expansion is to continue with our growth strategy of having Manyavar Mohey stores as the flagship concept of our company, where typically goes above 3,000 to 4,000 square feet will have a good Mohey section within them. And because the PG is very similar for Manyavar and Mohey, this is an additional benefit that we are able to achieve. At the same time, in terms of Mohey, we are also going to experiment with stand-alone Mohey stores. This was in terms of retail footprint. In terms of product category, there is continuous innovation that is happening through our design and product [ deals ]. And that is the result of which we are able to witness better conversion rates at the store. So overall, all the metrics, like I just mentioned, which we track, have been performing better and better over each quarter. I think in the next 2 to 3 quarters, we should have a very good confidence of start to scale up the whole Mohey brand overall.

Just to get a sense, I mean, could you share what kind of metrics you're talking about? Or is it just internal and something you cannot share?

So I think the 3 most important metrics which we track for Mohey internally are productivity, the dead stock levels and inventory turnover ratio. And of course, the conversion at the store level. So these are probably the 4 most important metrics for us which we track for any of our newer brands.

Sure, sir. And the second question that I had was about the competitive intensity in Manyavar. And we've been seeing other brands also from the other large retail chains, they are also starting to advertise a lot, and especially in celebration wear. So what do you -- what are your thoughts on how the competitive intensity is shaping up?

So overall, what we -- I would like to comment on is what we are witnessing as a brand. So every market we operate in, we've been growing. There has been strong SSSG growth. We've been witnessing good retail footprint expansion across. So until now, we have not witnessed any such pressure. And also given the kind of moats that exist in this industry, it is a very sort of protected environment. So when we talk about the industry moats, we started producing Indian wear in 1999. The journey since then has been very good with all our jobbers, our vendors and our artisans. And handling them and understanding how they operate over the last 2 decades has been a phenomenal sort of learning for us. And that is why we're able to produce Indian wear directly, which is a tricky task for larger [ brands ]. And when we talk about India as a country, consumer preferences change every 50 kilometers. That means the number of designs that are required, the kind of technology and industry inventory replenishment staff that is required to manage operations in an Indian celebration wear brand is very complex. So we've been able to achieve and be very productive on all of these fields. Lastly, talking about the brand moat themselves, Manyavar as a brand is one of the most aspirational yet value-for-money brand that people are connected with that too emotionally. So that creates an edge, and until now, given the kind of brand power and brand equity Manyavar has, the brand has almost become synonymous with the category. So overall, these are the kind of defense mechanisms that the company has. However, all of that said, we operate in a much, much larger industry, which is about 1.8 lakh crores and there is definitely room for a more organized player to enter and operate alongside with us.

[Operator Instructions] Next question comes from [ Sadvik ] from Generational Capital.

So first question is for Vedant. So out of the INR 320-odd crores revenue, could you give a breakup of how much of it was from Mohey? And also, could you share the per square feet revenue of, say, Manyavar and Mohey both if that would be possible.

Thank you for your question. So we've decided that strategically we're not disclosing the numbers of our brands separately as of now. Once they scale up and are larger in nature, we will definitely start to do that. So it will be difficult to comment on this. Talking about productivity number that you asked. So about in FY '22, we saw productivity of about 12,800 plus, and that is the kind of productivity we witnessed. Of course, quarter 1 of this year beat the last year's quarter quite phenomenally with 105% SSSG. So it could be quite exciting to see the kind of productivity number we're able to achieve this financial year. And in terms of branch split, I think you can refer to our DRHP, which mentions the kind of split that our brands have dated quarter 2 of financial year '22.

Okay. Okay. Sure, that was helpful. Because I think in the last call, you were mentioning that once we scale up to, like, say, 10,000 per square feet in Mohey, then we can look at possibly scaling of that massively. So I think that was the key metrics you were tracking for the Mohey specifically.

Sure. So I would like to reiterate my point, while Mohey, so Manyavar, Mohey stores, which is our flagship concept, they have a very good productivity level. And even Mohey within our newer stores is achieving very good productivity levels. What I mentioned or I meant by the 10,000 per square feet productivity level in Mohey is that we are experimenting with standalone Mohey store this year. We've not done that before. And once we experiment and kind of understand the numbers we're able to give out, it is the expansion strategy for the standalone Mohey concept and rather the Manyavar Mohey flagship concept.

Okay. Okay. That was very helpful. So the second question is for Mr. Murarka. Sir, am I correct in my understanding that sales are booked basically when the products are shipped to the franchisees and not when the actual purchases are done to the customers?

Right. That's right. So primary revenue which we see in the [ P&L ] is based upon the replenishment which we make through our [ purchase ].

[Operator Instructions] Next question comes from the line of Rushabh Doshi from Nirmiti Investment Advisers LLC.

So actually we met a couple of your retailers. So from them, their feedback is what that they expect the kid segment to do very well. So if you could just throw some light on this. And also like maybe around [ 60,000 ] other retailers, they were a bit conscious of thinking of adding Mohey because, firstly, it takes a lot of space. And secondly, they have to take a lot of inventory upfront. So how are we addressing these issues? Or are we going to give them higher gross margin here? So like these are the 2 questions.

So if I got the first part correct, you were talking about kids, right?

Yes.

Yes. So internally, we've created a separate vertical for kids, and there has been a lot of work that has gone on in terms of product. And our team has been calling and training about kids has been talking about how can we [indiscernible]. So I think that is why the whole retail network is also excited about kids and we've been witnessing good growth. So again, kids as a category has been doing good SSSG business as well for us. So we're also very confident. The only sort of concern with kids really that Manyavar brand is so productive that sometimes we find it difficult to give the whole kids section more space in our stores which would immediately increase the business fror kids. And that is, I think, the one major thing which we're able to achieve by opening much larger stores. On your other side of question, so as a company, even though we are in a buy-and-sell model, the entire inventory is managed by the company by ourself, right? So even though the franchisees give us their security deposit, which takes care of more than the cost of goods that we send to them, it is not really their responsibility to take care of the product and liquidate it. If the product does not sell well in our store, as a company and as part of our policies, we bring it back to the company and we send it to another store and we kind of try to use the entire supply chain technology system that we've created in order to make sure that the product gets sold. And that is one of the key [ USP ] of our company. While on the other hand this might be the reference to a lot of retailers asking us to add Mohey. But as a policy, we have decided that we don't want to add Mohey in stores that do not have the space and capacity to kind of show the women the entire plethora of our collections. So if the store is less than 3,000 to 4,000 square feet, typically, we do not want Mohey to be in that store. So I think it is more of that point than anything else.

And this -- what percentage would be our kids on an overall company level?

Sorry, can you please repeat that? I can't hear you.