Credo Brands Marketing Limited (MUFTI) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Credo Brands Marketing Limited Q4 FY '24 Earnings Conference Call. This conference may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risk and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kamal Khushlani. Thank you. Over to you, sir.

Thank you, Mike. Good afternoon and good evening, everyone. I have with me Mr. Rasik Mittal, our Chief Financial Officer and SGA, our Investor Relation advisors. I hope you all received the investor deck. If not, you can view them on the stock exchange or the company website. I'll first give you a little brief of what we have done over the last 5 years. This I'm doing in the interest of those who were not on the earlier call so that you just get a little brief history or what background on what we did over the last 5 years or some changes that we made. So in 2019, we conducted an internal assessment and put our learnings to reinvent the brand philosophy. As part of this brand reinvention, we developed a, a new brand identity, designed to elevate our language across all consumer touch points. B, a new merchandise architecture for increasing our share of the consumer's wallet by providing them design suited for specific occasions in our consumers' lives, multiple occasions, so to say, ranging from relaxed holiday casuals, authentic daily casuals to urban casuals, party wear, athleisure, et cetera. Our focus is on creating elegant and expressive clothing for the contemporary Indian man who wants something more stylish than what is commonly available. C, a new and elevated retail identity, all tying in together to communicate the elevated new avtar of Brand Mufti. Since we made the above changes, the brand has gained in value with the consumer and the same is reflected in the performance of the company. We have committed ourselves firmly to the path of becoming an accessible destination for the contemporary Indian man as enablers to help him express his sense of style and be noticed for his elegance and creativity. We remain committed to expanding our reach through responding to the trend of premiumization that we now see all around us. Our design team is constantly focusing on expanding our product range to meet a varied range of consumer needs. Our diverse product range now comes under the mid-premium to premium price range of clothing in India. Our products are available through a pan-India multichannel distribution network that we have built over the years, comprising of our EBOs, exclusive brand outlets; LFS, which is Large Format Stores; and multi-brand outlets which is MBOs as well as other online channels. Our multichannel presence is planned strategically in a manner that our products across categories are available at consumers' preferred shopping channels. As of 31st March 2024, we are present in 599 cities having over 1,800 retail touch points. We have presence through 425 EBOs, 77 large format stores and 1,332 plus MBOs. During the year, we have added 52 EBO stores, and we plan to add another 30 to 40 new stores in FY '25. Our EBOs are located nationwide across 237 cities in high streets, malls, airports and residential market areas. We also have an online presence, which is rapidly growing, wherein our customers can shop through our website as well as through various e-commerce marketplaces. EBOs are central to our growth strategy with them offering a holistic in-store brand experience and help enhancing brand visibility. Over the last 4 years, the average revenue per store has increased by a CAGR of approximately 19%, which shows the pull for our brands and products. Now coming to the quarter and the year gone by. In FY '24, the apparel market in India moderated and after an expansion during FY '23. However, at Mufti, the revenues grew by 14% to INR 567 crores, with gross margins remaining stable at 57.5% for FY '24. Revenues for Q4 '24 -- for FY '24 have remained flat year-on-year to INR 133 crores, with gross margins at 55.9%. In a subdued market, gross profit margins remained stable despite the challenges faced in the current market scenario. This underscores the resilience and appeal of the brand amidst challenging market conditions. The market for premium and mid-premium branded apparel continued to experience softened demand due to consumer behavior influenced by an inflationary environment that curtailed discretionary expenditures, while concurrently witnessing a surge in consumer spend towards travel and other essential purchases. Furthermore, the onset of peak winter was delayed across India, leading to a shorter fresh period, and that had a notable impact on winter season sales for premium and mid-premium brands during Q4 FY '24. This led to excess return stock from channel partners on account of sluggish demand during the quarter. Under Ind AS, the company has to provide for expected goods return. So in Q4 FY '23, this provision was at 14.4% of sales, whereas in Q4 FY '24, it has been voluntarily taken at 25% instead of 14.4%, considering the increased returns due to the current market scenario. This has led to an excess provision of approximately INR 21 crores, which has approximate INR 11.8 crore impact on gross profit EBITDA and PBT and an impact of INR 9 crores on PAT. During the quarter and year gone by, there have been an increase in certain expenses, there has been an increase in advertisement expenses related to brand building and store openings and these upfront investments will strengthen the brand in the coming years. Also, there are increased manpower costs associated with the opening of a larger warehouse in Bangalore and sales staff and MBOs to meet growth objectives. During the quarter gone by, there has been a higher return trade costs on account of excess return stock. This stock was returned to make room for fresh season stock at all retail locations in the new season as we have always managed to liquidate leftover stock profitably. To enhance the brand awareness and strengthen brand recall, we intend to continue using targeted marketing campaigns through digital and social media billboards, multiplex cinemas and live events. We have developed a strong brand identity through effective brand advertising and multiple marketing campaigns for our brands and shall continue doing so. We have already, in the past few seasons, released our ad films across cinemas in the country, which has had a very favorable response on the brand, and it has improved the brand value with our customers. Going forward, we are investing in digital marketing to communicate even more widely the brand in its new avtar. Going ahead, we will spend on around 5% of revenues on branding and advertising. We plan to expand our store network in existing store cities and new cities. We have identified several markets as having potential for opening further EBOs. This offers the potential for market share gains, increased brand recognition and economies of scale. We're also looking to capitalize on the increasing e-commerce demand in the Indian retail and grow our share of sales from our own website and e-commerce partners. We want to leverage technology to improve supply chain management and enhance customer experience. We intend to further invest in IT infrastructure to improve productivity and increase operating efficiency and customized buying experiences of our customers, both in-store as well as online. To summarize, going ahead for FY '25, the company aspires to achieve mid-teens revenue growth backed by new store openings in new and existing geographies and subject to recovery in the overall industry demand for premium and mid-premium brands. The company is also targeting to improve profitability through implementation of various cost efficiency measures. With this brief, I'd like to hand over the call to our CFO, Mr. Rasik Mittal, for the update on the financial performance. Thank you, everyone.

Thank you, Kamal. Good afternoon, everyone. First, I will give you a financial highlights for Q4 FY '24. Revenue for Q4 FY '24 remained flat year-on-year at INR 133 crores. Our SSSG for the quarter stood at 3.9% year-on-year. Gross profit also remained flat at INR 74.4 crores with a GP margin of 55.9% for the quarter. EBITDA for the quarter stood at INR 30.9 crores as compared to INR 40.6 crores in Q4 of FY '23. Our EBITDA margin stood at 23.2%. This is mainly due to increased costs, as mentioned earlier. Profit after tax for the quarter stood at INR 7.1 crores. Coming to the FY '24 performance, revenue for the full year FY '24 grew by 14% year-on-year to INR 567 crores. Our SSSG for the year stood at 0.6% year-on-year. Gross profit stood at INR 326 crores, a growth of 14% year-on-year with a GP margin of 57.5%. Our EBITDA stood at INR 160.5 crores, a slight degrowth of 2% year-on-year. Our EBITDA margin stood at 28.3%. Profit after tax stood at INR 59.2 crores. Our working capital days have increased to 166 days as of 31st March 2024. This was on account of 2 reasons: one, increased inventory due to a higher goods returned. Second is, this year, sales for fresh season goods to our customers had a delayed start in Feb for which payments are due in 60 to 70 days, and therefore, it is showing an increase debtor as of 31st March 2024. As of today, we have received majority of these payments. Going ahead, we want to reduce our inventory days. We have always managed to sell our unsold inventory at a profit and never had a material write-off on account of inventory in the past. We will continue to manage this going ahead, too. We are confident in our capability to handle short-term situations and achieve sustainable and consistent growth in the future. ROCE and ROE stood at 19.3% and 19%, respectively. The Board of Directors have recommended a final dividend of INR 0.50 per share on face value of INR 2 each of the company. With this, we will now open the floor for question and answer. Thank you.

[Operator Instructions] We have the first question from the line of Kunal Shah from [Anova Capital].

Yes. Why have you seen increase in provisions done during the quarter from 14% to 25%?

So Kunal...

Am I audible?

Yes, yes, Kunal, you're audible. Rasik, here. So Kunal, see, last 3 seasons, the market has been subdued. And due to that, the return of goods from our customers has been higher. So to -- and looking at the market condition, present market condition, we will increase the expected return provision for the current year.

I'll just add to this Kunal. See, in the last year, the provision was taken at 14.4%. That was the first year we moved to Ind As, where these provisions have to be made. Looking at history of the last 5, 7 years, the auditors and came to advise us to take a provision of 14.4%, and it was taken accordingly. However, in Q1, on which we went public, the provision was already at 22% for Q1. Now between Q1 and today, as we saw what is happening to give a more realistic picture of the business, it's better to have factored it at 25%. Otherwise, if we factor it at 22% and later on the goods returned is 25%, then this quarter appears to be better and the other quarter, which was actually whatever it is, may turn out to look better or worse. So to come to a more closer, what do you say, reality, that's where I mentioned earlier in my part that this has been voluntarily done by us, and we've spoken to the auditors and they agreed to this. And that's why we've taken the provision at 25%.

Okay. And also I would ask, can you provide some guidance on revenues and EBITDA for the next couple of years?

The way the scenario is looking right now, we -- for the coming year, what we intend to do is we intend to do mid-teens growth. However, by doing that, we have consistently been opening around 50-odd stores every year. But however, for this current year, we are not going to put a gun on our head to open 50 stores. What we're going to aim and strive for is same-store growth. We may open 30, 40 stores or fewer stores than 50 this year, but same-store growth is what we'll strive for, and we'll work on efficiency of our costs to bring our profitably up because -- in our company, we have always grown and calibrating our growth through the profitability lens, and we shall continue to do that.

We have the next question from the line of Naitik from, NV Alpha.

My first question is what sort of degrowth have you seen in our MBO channel for the quarter?

Which channel?

MBO channel, multi brand channel.

So MBO channel for the year has degrown by around a 2%.

And for the quarter?

Quarter would be around, actually quarter I've not seen separately, but we can get back to you for the quarter number.

Okay. And if you could just...

This is due to higher provision mainly.

Okay. It's not...

It's not actually degrowth because we have voluntarily gone for a higher provision for GR which is impacting the Q4 number. That is why the -- that is why it seems there is a degrowth. It appears to be a degrowth in this channel.

Got it. And the second question, if you could just repeat what you mentioned about the receivables, because I have missed that, that would be really helpful?

Receivables, basically what happens is -- see after the autumn-winter season gets over, we send out goods for spring-summer to our counters and our customers. So now this year, the end of season for autumn-winter continued till Jan. And for the fresh season goods, we were sent out somewhere in Feb. So the payments for that from our distributors and all, the payment terms are 60 to 70 days. So till 31st March, the payments were not due. That's why it is showing higher, the receivable days. But however, post that, we've received all the money. As of now, all the monies due have come to us. And last year, what had happened is that we had, in that season, tried to push in the summer merchandise earlier and picked up the autumn-winter goods earlier to see what's the response to that. However, we saw that it's beneficial to continue with the sales and go along with the market. And we supply the goods in Feb onwards this year. And last year, it was Jan onwards. And because payments are 60 to 70 days, whatever was supplied Jan onwards was already collected by -- within March. At this time, that has been collected by now, as Rasik mentioned.

[Operator Instructions] We have the next question from the line of Rahul Dhruv from Pegasus Growth.

Just -- I was not a part of the IPO and started looking at the stock recently. So if -- for people like us, if you could give a little bit of color on what really happened in the period FY '21 to '23. I saw the road map that you put on the presentation. But what I'm basically talking more about is that if you look at your EBO, revenue per EBO, it basically almost doubled between FY '21 and '23. And I wanted to understand, and that's the same even for LFS, the same for multi-brand outlet. So I'm just trying to understand what was the reason for this revenue per store going up so fast in the previous 2 years.

May I know your name, please?

Rahul Dhruv.

Rahul, this is Kamal here. So Rahul, as I mentioned earlier, that there are a lot of changes that we did in the brand. See once we completed 20 years in the business, we did a kind of soul-searching exercise internally, and we did some kind of internal searching to reinvent our brand philosophy to figure what is it that we truly exist for. We've always been a profitable company. Now do we just exist as an apparel business to make money or does this brand truly have the potential to become a legacy and live beyond generations. So we did that kind of study and we realized that there are some things we need to change because in the relevance of the landscape of retail brands since we launched and what it is today, has changed dramatically. So we found our group and our position as to where we should be in that brand. You'll find that in the presentation on, if you could tell me what page, I don't know. So you can see in the grid of brands where we stand as a brand and what we are. So you could see, it's on Page #19, you can see that we found ourselves in a sweet spot right in between the denim-led and casual led brands. These are the 2, what do you say, directions or universes that brand broadly belong to in the casual wear segment. And this is on the X axis. On the Y axis, you see how brands come down from luxury to premium plus, premium, mid-premium and value brands, et cetera. So in that, we straddle both universes of denim as well as casual successfully because the brand has always been a brand that has been created on its own uniqueness, has grown on its own uniqueness has never ever [aped] to be like any other brand. We are one of the brands that has a very, very strong, balanced offering in terms of bottom wear and top wear. And that is visible in our sales, which is almost half and half, and that was also reflected in the industry report. So that gives us that opportunity to cater to multiple occasions in a customer's life. And because we are strong in both top wear and bottom wear, also get a larger share of the consumer's wardrobe. Looking at these things and the price points that we have -- that where the brand stands, we are the enabler brand that when as consumer's aspirations grow, as they are growing, they want to consume brands that they couldn't -- when they couldn't afford them. So we are the enabler brand between the mid-premium premium to the international brand. That's where we found a spot for our brands. So those are big changes that we made in our brand identity, our merchandise architecture as well as our retail identity. And all of these changes very, very favorably were accepted by consumers, by trade and all of that. And that's what you can see has happened. And there onwards, there was a price rise also that happened in the market, in fact, in 2023, which was also well accepted by the consumer. But somehow after that, it's been very coincidental. It happened around the time when we have gotten listed. That brands in the mid-premium to premium category, in particular, have faced headwinds.

Right. And so do you see these headwinds kind of receding? Do you see any major changes in the trends as to how -- can we really see a recovery from here? Because I'm just looking at the online sales also, it has kind of gone up very sharply this year as a percentage of sales from 5% to 11%, which basically would have -- I would have thought would be a function of returns or excess production, which you've not been able to sell.

So it is on account of excess returns. You're bang on there. And of course, there is also a push towards e-commerce. And that is the channel that we use to liquidate our -- we call it OSM, the old season merchandise, and we managed to do that profitably. Unfortunately, the last couple of seasons have been muted. And currently, the scenario still continues to be volatile, Rahul. So we are the kind of people who typically would like to deliver whatever we say. Hence, we have moderated our growth ambitions, but we certainly want to improve our profitability and our working capital days, et cetera, by the end of this year. So we should -- we are aiming to do that more than trying to grow. April was a very good month, so to say, as compared to last year, but May is somehow again has dwindled. So it's very difficult to say right now on -- immediately see recovery this and that. But there's a lot of work on in the back end to ensure that we meet the goals that we have set out for ourselves.

Okay. If I have -- if I may ask one more question, and this is more regarding financials. So if you look at your other expenditure for this year, it's around INR 134 crores, last year it was around INR 95.6 crore. It's a INR 38 crore increase. And I'm trying to be basically break it up into where does it come from? I can see advertising and sales promotion, which was around 17 going to around 31. That's where a good chunk has come. But the rest of it, I'm trying to figure where would it fall? Because employee cost is not included in this. So where would it really fall? Would it be selling and distribution? Will it be administrative? Would it be one-off, something?

Again, on Page 8, you can see in the presentation, what happened is that some of this, what you see is on account of a onetime thing that we did because last year was our 25th anniversary. So there was a bonus paid to all our employees for the silver jubilee as at around INR 1.7-odd crores and plus the advertising spend, as you said, went up and also the sales and promotion spends went up. For manpower that was outsourced, it went up because on account of a larger warehouse, we moved from a warehouse, which was 55-odd-thousand square feet to 140-odd-thousand across multiple levels. And this has been done, keeping the future growth in mind. So these expenses have now been incurred already. And once these are done, going forward, these will not increase in the same ratio in which they increased in the last year. And some of it was done also keeping in mind growth ambitions at MBOs, where we have put in staff at our shop-in-shops, where some places, we believe and we are testing how the sales staff can help enhance the sales further there. So we've gone a little aggressive there, and we are testing these things out.

Sure. What I was trying to basically get to is you had operating margin of around 33% last year, and that has come down to 28%. So there's a 5% impact or whatever, 4.5%, 4.8%, 4.7% impact. That -- how much of that would get reversed in the current year?

See, some of the big things that I made you count, which is there on Page 8, already accounts, there's around INR 14.9 crores on account of sales and promotion and branding and advertising. There is INR 9-odd plus crores on account of manpower and there is another INR 1.7 crores, which is a onetime payout that's not going to happen again, this year. And then also the other SOR that has been provided for. So these are -- there are marketing investments that we have made in the brand because the brand is now in the new avtar. And that new avtar has to be taken out to the customers so that whatever perceptions, the newer perceptions that people must form for the brand, the way it is, because people who know us, who have seen us, have witnessed us, gave us and propelled our growth that you can see in '21 to '23, right? And that as compared to what it was in 2020 and what happened post that. So that's a conscious investment that's been made in the brand to take the new avtar forward to our consumers. So those investments and also the new provisions that the higher provision that we have made for SOR as compared to 31st March 2023, if you compare 31st March '24, that is a big number again, which is what, on account of GR is how many crores?

On accrount of GR it's around INR 21 crores, right?

It's additional INR 21 crores. Now if you look at Q1, like I said, it's already factored the GR, provision was already made at 22%, but because last year is at 14.4%. So it does not construe to a true apple-to-apple comparison in that sense. So if you factor it in that way, we have managed to grow the brand, sell extra number of pieces, maintain our gross margins stable in spite of the headwinds that we have faced in the market. So we are all good. It's just on account of -- it's just the period that we are going through, wherein we're going through whatever we are, and therefore, we moderated our plans also this year because like I said, we have always grown our business, calibrating it through the profitability lens, Rahul, and we shall continue to do that.

Absolutely. So basically, we can assume that we will effectively go back about 30% operating margin next year?

We should be in that range, yes.

[Operator Instructions] We have the next question from the line of Anant Mundra from Mytemple Capital.

Just wanted to understand, when did we switch to IndAS accounting?

So we switched to IndAs accounting for FY '23 onwards. That was the first year last year.

Okay. All right. And sir, how do you do the deposit accounting? I think we pay out the interest that we receive on deposits to whoever's given us the deposit, basically the franchise owners, is that correct?

Yes. So franchises give us deposits as advances towards the goods that we supply to them. Yes. And -- but we don't reduce that from the receivables. We park it separately in the balance sheet as a liability and pay interest on that to the franchises.

So we book the -- I mean, we book interest on that, and we also book our interest expense on that, correct, right, other income...

Interest expense on that.

Okay. Okay. And sir, we have one subsidiary, what business does the subsidiary do?

There is no business being transacted in that subsidiary. And we are looking to...

Yes, so earlier, it was a sampling unit for us. See, because we are a brand, we have -- we create samples. So we did not want to send them out for the purpose of secrecy. But now we have taken over the sampling unit from that subsidiary. And we ultimately will -- that subsidiary will get closed ultimately, shortly.

And sir...

That is over there. Very, very clean company with no...

Okay. And sir what -- how does exactly the COFO model work? Like who takes the inventory risk in that case? I just wanted to understand how this model works? So if you can elaborate on this model, please.

So Rasik, we'll come to the model in a bit. But what we do is we take the risk on our entire inventory. See, as far as I am concerned, the inventory, I've got my label on it. And that's why my brand has to be managed in a manner in which I do not end up eroding its value. Typically, that happens when with the kind of production that we do versus the demand that we project. Now why we prefer to do this is because whatever is left over at the end of season, I want clean everything up, and I want to pick everything back and bring it to myself because I want to put fresh season into the fresh season merchandise on my counters for my customers every season. And B, whatever I take back, I'm able to calibrate my production in a manner in which I'm able to sell whatever I have produced so far and whatever is left over also from the profitably. And that's a tight rope we have always walked like Rasik said earlier in his speech that there has never been any material write-offs on account of inventory. And we have always managed to do that. And we shall continue to do that even this year, whatever is there due to the last couple of seasons where there is excessive inventory, we calibrate it in the next, what do you say, season, and we'll bring down the inventory levels.

Okay. And sir, exactly, how does a COFO model work? If you can just elaborate on that?

For the COFO model, basically, the lease of the store is taken by us and the CapEx in the store, the furnishing is done by us. So we invest in that basically. And we send goods to our franchisee against a deposit, which is typically to cover for the inventory that we send out to them. And the ownership of the goods passes on to them till the time they sell it. And they make weekly payments to us for the goods sold on the counter. And after the season gets over, the goods are -- we call back the goods and we push for fresh goods on the counter of the next season.

So we take the entire risk on inventory, and we control it. That way, I'm able to manage the entire inventory in my pipeline at the -- right from where it is consumer-facing to my warehouse and I have a total control over it.

Got it. Got it. And my final question was on that we've done a major revamp exercise in 2019, which has really helped us. So just wanted to understand how frequent does the brand need to conduct this exercise because the trends keep changing fast. I mean the world is fast moving now. So how -- and how expensive is this exercise because you need to revamp all your stores and everything. So just want to understand how often will this exercise be done?

So this doesn't happen every 4, 5 years. This is something that happens maybe every 20 years, depends on which life cycle of the brand journey the brand is on and also how evolving a market is.

Okay. So this is like a really long-term exercise?

Yes, yes, long-term exercise. Of course, brand doesn't change direction every few years. We did it after we were 20.

Got it. And we had to change all our stores because of this, right?

Of course, we chose to change them because that gave us -- that propelled our sales northward.

We have the next question from the line of Rajiv Bharati from DAM Capital.

Sir, if you can provide the sales mix in Q4 of FY '23 by channel?

Just hold on a minute while Rasik pulls out the answer. Can you come again? Sales mix for Q4?

Q4 FY '23 last year for the quarter. I think you have given for the full year, but for the quarter.

So sales mix channel wise?

Yes sir.

So channel-wise, see, for Q4, EBO was 57%; MBO was 33%...

Last year. Sir, last year.

FY '23? Yes. We'll have to just pull that out Rajiv.

Yes. Why I'm asking is because you have reported some 3.5% SSSG, right? And your store count itself has gone up by 14%? So I just want to...

Rajiv, I'll explain. That SSSG also that you witnessed is because of -- if you remember, I answered that to I think Rahul earlier that last year, we had picked up the winter merchandise faster. And we had pushed in our summer merchandise earlier in January itself, okay? So some of that growth can be attributed to that also because this year, the sale went on to later. After the sale ended much earlier and fresh merchandise went in earlier. So competition may have been at a discount and we were at fresh. That was something we tried out last year, which I said we've changed to our thing of continuing our sale into February, till is approximately, depending on store-to-store, till approximately Valentine's Day.

When you're saying these primaries you're doing, that is for the MBO channel, right, not for the EBOs isn't it?

Primary?

I mean, when you are sending the fresh merchandise for spring/summer?

No, no, it's for MBO and EBO both. That's what we did last year. So what I'm saying is that last year, we were on fresh when the market was on discount. And this year, along with the market and competition, we continued our discount till about Valentine's Day. Hence, that growth also of 3.9% is relative to that.

Okay. So on this EBO bit, if you can specify from when to when did it last this year versus last year?

Roughly last year discounts ended at around what would you say 26-odd Jan and this year, they ended around 18, 19, 20th of Feb.

And it was there in Q3 also last year, was it?

What was there in Q3, Rajiv?

Did you start end-of-season in Q3 last...

That's what I'm saying last Q3 of FY '24, the autumn/winter '22 season at that time went off sale around end Jan. And this year, in FY '24, the autumn/winter '23 went off sale around 19, 20th of Feb.

Sir, also on this working capital bit, this 166-odd days, you said that last year, it was an experiment which you did.

Correct.

Is it safe to assume that, henceforth, you will be doing it, let's say, beginning of the mid of February itself, always. So this 166 days number...

Yes, yes, it's safe to assume that it will be done around this time.

So the end of your working capital number this 166, is basically...

So that will get calibrated. That's not only because of this. That's also because of excessive inventory, Rajiv. I mean, even last year, when we sent goods faster and got payments faster, but we also got goods back because they came in sooner. So don't get confused on that.

So Rajiv, even the payable days are much lower compared to last year. So it's a combination of all the 3, means receivables, inventory and payables basically.