Vedant Fashions Limited (MANYAVAR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Vedant Fashions' Q4 FY '24 Conference Call hosted by ICICI Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Varun Singh from ICICI Securities. Thank you, and over to you, sir.

Yes. Thank you, Sagar. On behalf of ICICI Securities, it's our pleasure to host Vedant Fashions' earnings conference call. So today, we have with us from the management, Mr. Vedant Modi, Chief Revenue Officer; and Mr. Rahul Murarka, Chief Financial Officer. We can kick start this conference with the results discussion followed by Q&A. So yes, that's it from my side. Thank you, and over to you, Sagar.

Thank you. Thank you very much. Good afternoon, and a warm welcome to all the participants. I am Vedant Modi, the Chief Revenue Officer of the company. Thank you for joining us today to discuss the Vedant Fashions Limited Quarter 4 and Financial 2024 results. I'm joined by Rahul Ji, who is the CFO of our company. I hope everyone got an opportunity to go through our results and investor presentation, which have been uploaded on the stock exchange as well as the company's website. Let me take you through the quarter and full financial year performance. In this quarter, we continued with our retail network expansion strategy, which is the dominant channel for the company and have successfully rolled out approximately 62,000 square feet of net retail area in the fourth quarter. We are pleased to announce that we have successfully launched the first EBO of Mohey brand, measuring about 7,500 square feet in the city of Bengaluru. It is a unique piece of architecture that provides an ideal blend of tradition and contemporary state-of-art thereby enhancing the shopping experience of our consumers. We have also launched another EBO of Twamev in this quarter. In the financial year 2024, we have successfully expanded our retail footprint presence by about 2.34 lakh square feet. This expansion highlights the commitment to provide our consumers with the best possible shopping experience. As of March 2024, Vedant Fashions' EBO area stands at 1.7 million square feet, spanning across 676 stores in 268 cities and towns globally. The national EBO footprint tally is 660 stores spread across 255 cities and towns. In the fourth quarter of FY '24, our overall customer sales grew by 5.9% over quarter 4 financial year '23. In this quarter, we continue to run our flagship marketing campaign with Mega Star Ram Charan, built around the timeless tale of the relationship between a father and his son. We also launched across channels, a 360-degree campaign with Bollywood actress Kiara Advani, highlighting the theme of Dulhan wali feeling that embodies the spirit of a bride and executes the charm a bridal lehenga holds in every women's life. We also partnered with India's leading celebrity stylist, Tanya Ghavri, for a campaign on DreamDulhanLook, where she guides brides to be through the perfect ensemble choices across a wide range of products with different draping styles to be unique, timeless and being oneself. We have also launched several campaigns across platforms on various festivals celebrated across different geographies of India, thereby strengthening us as a celebratory wear brand. With the introduction of our Vivaham collection, that is Panchkacham and Veshti, we have successfully extended our reach to authentically embrace the cultural richness of South India. These initiatives reinforce our brand's dedication to diversity and inclusivity. This has been a one-off year and our performance was majorly impacted due to significantly lower weddings coupled with muted sentiments of consumers and higher base effect of last year, which was post COVID. However, we are confident as a business entity and our preparedness in terms of every aspect of business including market consciousness, like network expansion, multidimensional and multiregional marketing, adequate and appropriate inventory and merchandising backed with a robust auto replenishment system and back-end dynamics. These have helped us effectively maintain strong financial margins and profitability metrics, reflecting resilient fundamentals of our business. With this, I will now hand it over to Mr. Rahul Murarka to take you through the financial performance of our company. Thank you.

Thank you, Vedant. Namaskar and good afternoon, everyone. I would like to highlight the key financial performance metrics for Q4 and FY '24 based upon the consolidated financial statements. Starting from Q4 FY '24 performance update. The company has reported revenue from operation of around INR 363 crores, delivering a growth of 6.3% as compared to Q4 of FY '23. The company continues to report industry-leading gross margin of around 67.1%. The EBITDA margins were around 49%, and the EBITDA stood at around INR 178 crores. The company reported best-in-class PAT margin of 31.9% and the profit after tax stood at around INR 116 crores with a growth of 6.4% compared to Q4 of FY '23. Sale of our customer is around INR 511 crores with a growth of 5.9% as compared to Q4 of FY '23. Now I would like to summarize FY '24 full year performance. The company reported revenue from operation of around INR 1,368 crores and sale of our customer revenue is around INR 1,853 crores. The company continued to report industry-leading gross margin of around 67.2%. The EBITDA margins are around 48.6% and the EBITDA stood at around INR 664 crores. The company continued to report best-in-class PAT margin of 30.3% during FY '24 and the profit after tax stood at INR 414 crores. Moreover the PAT generated during FY '24 is about 126% of the net cost of working capital employed computed based upon internal management MIS. On comparing our performance with FY '20, which was a normal period not having an impact of pent-up demand. The company's revenue from operations grew by around 49% and PAT grew by around 75%. The company has been able to efficiently maintain working capital at 88 days and has been able to achieve healthy ROCE of approx 85.3%. The company has a track record of generating significant cash driven by a healthy cash conversion ratio. During FY '24, the company reported healthy cash conversion ratio of approx 81.4%, which has been computed based upon operating cash flow over PAT and based on internal management MIS. The cash conversion ratio, excluding finance income from PAT is approx 96% computed based upon internal management MIS. During FY '24, the company's overall performance was impacted due to significant lower weddings nationally, muted consumer sentiments, coupled with higher base effect of last year post COVID. However, the company has been able to effectively maintain strong financial margins and profitability metrics, reflecting resilient business fundamentals. Thank you and namaskar, everyone. We can now move to the Q&A session.

[Operator Instructions] The first question is from the line of Sameer Gupta from India Infoline.

I have 2, and I'll come back in the queue for any follow-ups. So firstly, I noticed that the receivables on a full year basis have gone up from around 130 days to around 150 days this year. Any change in policy regarding credit for the franchisees? Or is it just that you had a better March versus previous year, a bit of both, any other factor I maybe be missing out?

Thank you, Sameer, for your question. So as far as internal MIS, receivable days is around 64 days as of the year end. It has increased compared to last year because of the new square feet area which we have added around 234,000 during the year. However, the improvement in revenue was not to that extent. And hence, we can see the net receivable days increasing. If you will see our increase in primary revenue and secondary revenue are in the similar direction. And also, the operating cash flow over PAT is around 81.4%. And we have been able to efficiently maintain working capital at 88 days. So that is the overall reason we wanted to explain.

Rahul, just a follow-up there, since primary and secondary revenues have grown in a similar way, receivable should also typically grow in a similar rate, but there has been an acceleration, just wanted that clarification.

So I'll just add on to that, Sameer Ji. If you look at the way we function as a company, the business fundamentally is we take a security deposit from our franchisees and they pay us as and when the actual product gets sold in the store. As this was a weaker financial year and our SSSG degrew, basis that receivables have increased because the product is at the store level. And at the same time, we've opened about 234,000 square feet net area in this financial year that adds receivable on top of this. So that's the overall business logic. At the same time, as a company, we have worked very hard on ensuring that inventory days are made more efficient. And that is why while we had a weaker year, our overall working capital days only moved from 83 days to 88 days despite having a weaker year, and that is why we have been able to maintain a PAT of -- PAT over working capital of about 125%.

Got it. Got it. I'll probably come take it offline. Second is the -- second question is that I noticed there, the rent from -- computed from the cash flow statement and the ROU assets in the balance sheet they've also seen a higher growth versus overall retail area that you have added. So is there an increase in the proportion of stores where you basically pay the rent? Or am I reading this data incorrectly?

No, you're right. So basically, whatever square feet addition we have done on net basis, majority, I would say, or more than 80% has been on account of the lease stores. So that is why you are right. You can see that impact.

So right now, as a total area, how much proportion of revenue or proportion of stores is where Manyavar is paying the rent?

Around 65% of proportion of revenue comes from stores where we are paying the rent.

And this number was 60% last year.

No, no. It is around 65% consistently. This year, it may be 67%, last year it was around 65%, so yes.

Broadly, if you look at this year as a whole, what we saw as a trend is that Tier 1 was outperforming Tier 2, Tier 3. Even from a business development perspective, that is why there was a higher focus on entering core markets of India that give us results now. And that is why a majority of these stores that we don't pay the lease in are in Tier 2 minus Tier 3, Tier 4 towns. So it's also a result of the overall fundamentals of the way the economic cycle has been happening in the country across tiers of towns as well.

And a large part of your store addition has happened in Tier 1 this year, is it?

It's a mix of both, but this year, you could say that a lot of growth has come in Tier 1 and Tier 2 plus cities where the stores are in our own lease.

Got it. I'll come back in the queue for any more questions.

Our next question is from the line of Gaurav Jogani from Axis Capital.

So my first question is with regards to the overall demand environment. If you can just give a sense of how the demand environment panned out in the last quarter? And how are you looking the demand environment in the year coming ahead?

Thank you for your question. So overall, as per our understanding, if we comment on the full financial year, there were a mix of 3 elements playing for us. One is overall lower number of weddings happening in the country. Secondly, there was also weaker consumer sentiments in the particular target audience we cater to. And lastly, the base effect of the previous year. So these were the 3 things that were happening overall in the financial year. We are quite hopeful the way India is growing, the way the mid- to long-term of India looks like, I think we are very confident about the business from that perspective. Broadly, Q2 onwards, we feel that things should hopefully normalize. But given the scale our company operates at, this is something we will have to look and understand.

Sir, just a follow-up. Generally, we as an analyst look at the total number of weddings in a particular year and then correlate it with the total number of weddings. So would that not be a right assessment given that last year the number of wedding dates were higher?

Apologies, Gaurav. I couldn't fully listen to your question.

So I will just repeat that. What I was trying to ask is, last year, that is FY '24, the number of wedding days were higher. And I think despite that, the number of weddings were lower. So is this a unique phenomenon that you noticed last year? And given that in FY '25, relatively, the number of wedding dates would be lower. So how possibly this could impact the revenue growth for FY '25?

Gaurav, as we mentioned, while there is definitely a correlation between wedding dates and the number of weddings happening in India, it's not 100% directly proportional. The big change when you look at last year is that FY '23 because the country had come out of COVID, there were a lot of weddings. And that is why when we look at last year, the number of weddings look to be slightly weaker when compared to FY '23. Hence, it has also got a big connect to coming out of COVID and that whole relationship playing out, which is something we saw for the first time in our sort of history with the company. The way we look at things moving forward is FY '24, the base has definitely normalized. And as we move into FY '25, while Q1 as a particular quarter has almost no weddings, but after we move out of Q1 and move into H2, Q3 and Q4 have a good number of wedding dates. So we are quite hopeful about how things move into the future.

Sure. And my second question is with regards to the Mohey, the store that you added. I mean, what gave me the confidence that to go ahead and open this Mohey store? And if you can give any first early nuances of the Mohey stores how the operational metrics have been? And how these are panning out in that particular brand?

Sure. So with Mohey, even in the newer Manyavar Mohey stores which we are opening, Mohey is continuing to perform much better than it had ever done. That gave us the confidence that if the layouting and the overall store is created of thinking of a woman in mind, this can yield to much better results. Hence, with Mohey EBO being piloted, we have already seen great sort of consumer feedback at the store level even the sort of conversion numbers we are seeing are very positive, and we are quite happy with the way the store has been performing. While it has only been 30, 35 days that the store has been operational. I think we would like to see a couple of more quarters to fully give you feedback on how Mohey EBOs are performing. But we are quite confident and we would like to pilot with more stores as we move into the next few quarters.

Sure. And just one clarification, what is the size of this Mohey store that is added this particular quarter?

This particular store is about 7,500 square feet.

The next question is from the line of Rishi Mody from Marcellus Investment Managers.

Rahul, just a quick question. Firstly, can you explain the other income amount. It seems to have jumped a bit this quarter versus, say, the previous 3 quarters. Any particular reason for this?

So it is mainly because of increase in the finance income. So if we see the quarter-wise breakup Q4 versus Q4, it has increased by INR 107 million. And the finance income actually has increased by INR 113 million. So it is mainly because of finance income, broadly because our cash balance has been improving over the years. So the average investment has improved compared to last year. And also, the yields over the investment income has improved compared to last year. So finance income is the main reason why we see a higher other income.

So there is no exceptional income in this where some stores sold to franchises or some lease canceled and nothing of that sort in there?

No, no, no, out of INR 113 million -- out of INR 107 million growth in other income, INR 113 million is out of finance income only.

Okay. All right. All right. Second, I wanted to understand that we are opening bigger stores now. We are opening 3 to 4x the company average size stores now, but the new stores are not coming in at productivity levels, which were coming in till FY '23, we're coming in at about 50% productivity versus 70% of the older stores that used to come in pre FY '24. So just trying to understand how are you all tracking this? Or do you all see the strategy working out? Or there's not enough depth in consumption to be able to support this bigger stores?

I think there are a couple of things here. Firstly, we've not 3x-ed or 4x-ed the size of our store. The store size has moved from an average of about -- you could say the last year average was about 2,400 or some 2,250 square feet. And the stores that we've opened this year have been at an average of about 3,050 square feet. So it's definitely grown but about -- by about 35%, 40%. At the same time, when we talk about productivity, while the newer stores have been lower this year, this is majorly on account of that newer stores take about 2 years to mature as we've mentioned in our previous calls. And this year being a slightly weaker year, they have taken a little more time to sort of get to their typical first year levels. But the whole understanding is that majority of the stores that we've opened are futuristic decisions and right calls. So as we move forward and consumer sentiments bounce back, these stores should pick up and perform better.

All right. So we can chalk it up to a one-off this year. But the concept you're saying is still viable that bigger stores will give a better...?

Correct. We've definitely increased the size of the stores, but all I'm trying to say is it's not 3, 4x. It's moved from 2,250 to the average store being opened this year being at around 3,050 square feet.

All right. Also, like last few quarters, we've opened -- we slowed down our run rate of new store openings. Is this just to be cautious till the market recovers or we're facing some issues from the franchisee and where they're not willing to invest given the weak macro environment?

So Rishi, if you look at it from a perspective of store openings, we comment on square feet because that's a more relevant metric in our case. So on a base of about 1.45 million, we have opened 2.37 lakh square feet at a financial year level. So we've continued to demonstrate robust store openings across the financial year. We definitely did consolidate a lot of the older stores in terms of replacing them and relocating them with larger stores. So that was a strategic drive that has happened over the last 2, 2.5 years. And as we move into the future, we might continue doing the same with some of the sub 1,000 square feet stores that we have where more potential lies for our business.

All right. Okay.

However, the way next year is placed, I think we will be a little slow when it comes to the early parts of the year because, as I mentioned, Q1 is with -- has almost no wedding dates. So the way we are looking at business development is to place a majority of our stores in later part of Q2 and early part of Q3 from an opening perspective.

The next question is from the line of Ankit Kedia from PhillipCapital.

Vedant, just a question on store opening again. You mentioned this year, you opened stores now in metros, Tier 1 and some Tier 2 cities. So FY '25, where do you see, which geographies you're planning to open stores? And would these stores also like FY '24, 80% of the rent would be paid by the company?

So Ankit, just on this question, some of these decisions are very dynamic. So I can comment on a 3- to 5-year basis, we feel that from an overall 3- to 5-year basis, our overall openings would be split between Tier 1 versus Tier 2, Tier 3. And the mix of lease paid by us versus lease paid by franchisees would continue to be at similar trends as it is now about 65%, 66% being borne by us, remaining by franchisee partners. So I think 3 to 5 years, we feel it's going to move in a similar trend. But in a single year, there are many dynamic calls that we have to make. So it might move couple of basis points here or there.

And the bigger stores, 15,000-plus square feet stores, is it safe to assume that the rent for all these new stores are being paid by the company because these will be flagship stores at select locations?

Yes, so broadly, strategically, the thought process is any flagship store is a store where the company bears the lease cost. So typically, majority of the flagship stores would be on our lease.

Sure. The second question is on Twamev. Now we have seen more than 1 year for Twamev store being there. Anything to highlight on the feedback from the consumer, how has been the acceptance in this festive because Q4 was better than Q3. And how has been the overall response. And going forward, any change in strategy on Twamev or it continues the way it is and it's getting better?

Twamev is performing very well when it comes to the exclusive brand outlets, and the only execution task that we have to take up is to open a store in the best markets of the country. As we look for only the best properties in the best markets, and we don't want to sort of compromise at all. This might take a little more time than a typical Manyavar store does. But the idea is to be present in all the best locations with the best possible store. So we will continue on that execution strategy and move as fast as we possibly can. At the same time, from a consumer feedback angle, things are looking very positive for a premium brand, we've seen good conversion rates happening on the store level. We've been getting great feedback. We've understood the needs of the premium consumer a little more, having operated Twamev for a couple of quarters now. We've also changed a lot of CRM practices that we followed. And basis those, we are kind of poised to grow well with Twamev. And as in more new stores open, I think the model is quite set for us to continue growth with.