V.I.P. Industries Limited (507880) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the VIP Industries Q1 FY '21 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 Ms. Shradha Sheth. Thank you, and over to you, ma'am.

Thanks, Aisha. On behalf of Edelweiss, let me welcome you all to the Q1 FY '21 earnings call of VIP Industries. From the management, today, we have Mr. Dilip Piramal, the Chairman; Ms. Radhika Piramal, the Executive Vice Chairman; Mr. Sudip Ghose, the Managing Director; and Ms. Neetu Kashiramka, the CFO. So without any further ado, I'll hand over the call to Mr. Piramal for his initial comments, post which we'll open the floor for Q&A. Thank you, and over to you, sir.

Good afternoon, everyone. Thanks for taking out time and joining our conference call. Well, this is a very, very unique period we are undergoing. And our company has been -- is in the -- we are connected with the travel because we make luggage and we are in that sector, which has affected the most. So during quarter 1, our focus was on cost control and cost rationalization. Important to note that the company operations were severely impacted due to this pandemic as luggage industry is linked to travel, which will take time to revive. Therefore, we focused on cash rationalization in this quarter. And our sales have been only INR 58 crores in this whole quarter, which is less than 5% -- which is about 5% of our original budget sales. Can you imagine? I mean, INR 58 crores is less than 10% of what we did last year, and in this quarter, and it's really been a disaster. Fixed cost, which used to be INR 40 crores per month at a consolidated level last year, will be at INR 25 crores per month this year. So we've already been able to prune it by INR 15 crores, which is more than 1/3, really about 35% reduction we have taken. And as I mentioned, the first quarter was a disaster, which is our best quarter because in this quarter, the travel is at its peak, school reopens and the marriage season also is at peak, and we lost sales on all these fronts. So the loss for this period was at INR 51 crores as against a profit of INR 35 crores last year. But last year, we had a onetime loss of INR 48 crores because of a fire in Ghaziabad. Hopefully, we will get the insurance money this year, which will be a profit. So we hope to get at least INR 40 crores. So to that extent, the first quarter loss will be mitigated. We don't know when we are getting that money, but I think in the next 2 -- within the next 2 quarters, we should get it. Revenue in April and part of May was almost nil. Things started slowly at the end of May at a slow place (sic) [ pace. ] July is better than June, but nowhere close to old level. So hopefully, demand should revive in quarter 3 due to the festive season, school starting, and some pent-up demand on account of marriages. Also, I think we will be getting used to the COVID. As it appears to me now that the countries have learned how to cope with COVID, and it is only the older people, people who are 60 plus which includes me who have -- who are more at most risk. But I think the rest of the population will learn how to cope with COVID. And it will be like any other disease, but maybe the mortality rate is a little bit higher than the normal flu. Let me also brief you about our liquidity situation to take care of this tough time. We have plans to borrow around INR 300 crores to have a war chest for these tough times. However, currently net is nil, which means we have borrowed, but not utilized. To be more accurate, the net debt was nil at the end of July. But I think now we have a debt of about INR 2 crores, INR 3 crores. Cash flow is being managed well by making payments equal to collection. Update on Bangladesh operations. Bangladesh operations yet to start post-pandemic, mostly it will start in quarter 3. Income from operations from VIP Bangladesh operations was nil. Profit after tax from Bangladesh operations was negative at INR 10.3 crores compared to INR 3.8 crores during Q1 last year. Operations at Bangladesh will start in current quarter with production of March to start with -- followed by luggage as and when demand cycle improves. So let me tell you -- brief you a little bit overall about the demand and supply position. Today, the -- yesterday, we had our Annual General Meeting, and questions were asked about supply. The problem today is not so much on the supply side, but it is more on the demand side because we were at the beginning of April, which is our largest quarter, we were very well-stocked up for the whole -- for that quarter. And I think the way things look like that this stock will be enough for us to last the whole year. So the question is more of demand rather than of supply. And we are very sort of well positioned for supply because for some time, it is going to be low, and I think our Bangladesh factories, combined with our Indian factories and Indian outsourcing will be more than enough, we will hardly have to buy anything from China. So I would also like to add that in -- as -- if you had seen our results for the last quarter of FY '20, that is the January to March quarter, our margins had gone up substantially. And that was -- a good part of that was due to the Bangladesh operations. But once we are relying entirely or, let's say, mostly on Bangladesh for our soft luggage activities, for our soft luggage production, our margins will be even higher. So that is a very strong point, and that is where we think the strength of the company is. Although we are very, very badly impacted because of the loss of sale, our inherent strength, our balance sheet is very strong. Even today, we are virtually a debt-free company. Of course, the position will change now day by day. But our balance sheet is very strong. Our inherent costing is very much in our favor. We are the lowest cost producer in the world today. And we will now diversify very actively as the demand worldwide increases because demand for luggage has gone down all over the world. It's not only India. So it will take us time. And we are well equipped to bear this storm. And so I feel that it has set us back by 2, 3 years, but we will get back to being a very strong company. I now turn over to your questions. Thank you.

[Operator Instructions] The first question is from the line of Amandeep Singh from AMBIT Capital.

So I had a few questions. Firstly, on gross margins. So sir, during the last quarter, you had highlighted that gross margin is sustainable, given increasing share of Bangladesh. However, during 1Q, the share was India was high along with huge discounts. So can you help us understand outlook on Bangladesh share in gross margin for FY '21?

See, at the moment to say anything for FY '21 is very difficult because it all depends on each quarter. So I would request all of you not to ask for any margins and all for FY '21. Because EBITDA will change, let us say, if our sales are INR 50 crores in a quarter, and so there is no EBITDA. And there is a sales of INR 100 crores, it changes very drastically. So I cannot give any guidance at all for FY '20 -- I cannot give any guidance for figures for FY '21.

Sure, sir. Secondly, sir, on PPE segment, I mean, can you help us understand what would be the opportunity size and initial traction of the products launched, which is V shaped masks and face shield?

It is very small. We will be hardly doing about INR 5 crores business in a quarter. So if you see the overall operations of the company, it is nothing. It is a small gesture. Even if we are able to save a revenue of, let's say, net revenue or contribution of INR 1 crore or even less INR 1 crore per month, I don't think we'll do INR 1 crore a month also in the beginning stages. But it will be something, let's say, in the whole year, we earn INR 5 crores to INR 10 crores, we will be very happy.

Sir, that's helpful. And sir, you highlighted in the opening remarks that the management tends to borrow around INR 300 crores. Can you help us the expected utilization of these funds given the net cash outflow in 1Q was hardly INR 6 crore? And also at what rate are you raising these NCDs. And what would be the yield on your cash and liquid investments currently?

I will ask our CFO. We have a new CFO who joined us in the beginning of April. So she was there in the last investor call also. And I will ask her, Neetu Kashiramka, to answer this.

Yes. Yes, sir, I'll take this question. So most of the debt still what we are raising is below 8%. More precisely, the recent NCD was raised at 7.45% and our yields are in the range of 6.5% to 7% blended. So mostly, we are having a carryover of 1%. And utilization of INR 10 crores...

And utilization, yes.

So utilization payments, we are creating our war chest as Chairman mentioned in his opening remarks. Today, we are following a rule of whatever we collect, we pay. But at some point of time, we will have to clear our creditors. So the assumption, what we are taking is if we have to pay all our creditors immediately, we have enough money, and we can sustain 6 more months without revenue. That's the war chest which we have.

Sure. That's helpful. And finally, with the gradual unlocking across states, can you help us understand if you are seeing any pent-up demand pickup across any of the product portfolio, brand, and categories? Or what are the earlier trends visible?

As I said, it is very difficult to give any figure. So please -- we can make whatever assumptions we want. We have made 2, 3 scenarios that if we sell INR 200 crores in quarter 3 and maybe [Technical Difficulty]

Hello?

Line for Mr. Piramal is disconnected. [Operator Instructions]

Okay. Before Chairman comes back, Radhika here, I can take that question. So many FMCG companies are saying that they are back to growth, some discretionary companies are saying that they are at 40% of last year's level or 70% of last year's level. Please recognize our luggage is very different. Luggage is for travel, and people are scared to travel. So you can see from our revenue of Q1, about 5% of normal. So there's no -- and July I'll not say was materially different from June. Although it is getting slightly better. So there will be rolling lockdowns, rolling easing, I don't have very high expectations for Q2. Q3 is a big question, and that's what Chairman was saying like we've done some scenarios, what is it at INR 200 crores, what is it at INR 300 crores, what is it at INR 400 crores. So what I can say at this point is we are prepared for all the scenarios. Let's see how the virus moves. Next question, please.

The next question is from the line of Aditya Kondawar from JST Investments.

So in the opening remarks, you mentioned that you plan to diversify very actively. So can you just give some color on that, please?

Chairman?

Yes. We are working on a few lines. But at the moment, there is nothing which I can announce. So let us -- give us some more time. Because it is -- we want to do something which can be -- like masks and all we have started. But this is a very short-term activity. We do not know how long it will last. And also what is happening, the whole world is entering masks. So even though the consumption of masks and all is going to be very high, but everybody is making it, it is very easy to make masks. All you need is a sewing machine. I mean, to the extent that even hand sewing machines. I saw a program on television that Rashtrapati Bhavan, which has about 1,000 families live there. That they are starting making masks at -- with hand sewing machines. So mask is a very large business, but the whole country is going to make masks. So we -- I do not think that we can have very great revenues. But I mean, in our sort of context, as I said, even if we make INR 5 crores, INR 10 crores net revenue, it will be a great thing. But to have something more substantial, that is some business which can give us in hundreds of crores, it is going to take us some time, and we don't want to speculate on anything at this moment. But there are 1 or 2 activities which we are looking. We are also thinking of increasing our ladies handbag manufacturing. At the moment, we are not manufacturing anything ourselves or in India, most of it is imported. But that is one category, which I think if we start making either in India or in Bangladesh, our cost of manufacturing will go down. Earlier on, we had not considered that because we had so much of luggage opportunities on our plate that we didn't want to diversify too much. But today, the circumstances have necessitated that we get into more business activities. So we have to sort of double our efforts and put in more effort in our own manufacturing. So that is one category where we will definitely give a boost. And even internationally, that should have good opportunities. Plus, we're looking at 1 or 2 new lines, but I cannot say any -- I cannot announce anything at this moment.

The next question from the line of SivaKumar from Unifi Capital.

Sir, can you revisit the cost-cutting measures that you have taken at your end? And the employee expenses were flat on a sequential basis. Any guidance on that going forward?

Why they were flat on a sequential basis is because, in the first quarter, we could not really cut too much of expenses. And let us say, we had to terminate some people so the onetime dues and all also was there. So that is why they were flat. But broadly, we have been able to cut expenses by about 35%. Once again, I'll ask Neetu to give you the details.

Yes. So it is sequentially looking flat because last year, in the quarter 4, we had taken a reversal on Director's commission and performance pay for all the employees. So that is one reason why you are seeing it sequential. And overall employee costs, there is a reduction of 35%.

So there was a reduction in the last quarter?

Yes. Because of the reversal of Director's commission then.

There were -- I think the reversal of nearly INR 10 crores in the FY '20 last quarter.

Yes, yes.

Okay. And for this year, ma'am, how much should we bake in, in terms of employee expenses?

35% reduction for the year.

Right, ma'am. And ma'am what is driving the other income in the top-line of INR 18 crores?

So other income predominantly consists of the INR 14 crores of NDS reversals because of rent waivers, reductions, and closure of shops. And INR 2 crores is the insurance claim. So out of the INR 18 crores, INR 2.5 crores is recurring balance is one time.

The next question is from the line of [ Sanmati Kumar ] from -- an Individual Investor.

Madam, first question is as per annual report, it says that we have 2,095 staff strength. So is -- all of them are full-time employees or any contract laborers are there?

I cannot hear you. Now listen, let us not make this into an annual general meeting type of question. Please keep it like more like a professional equity type. And this is not an annual general meeting. So what is not necessary? Please don't ask unnecessary questions.

Okay. Sir, we had some INR 280 crores worth of raw material and finished products as well as some amount to be received from our customers, and we had made some provision during Q4 FY '20. Based on the current situation, is any more provisions need to be taken against these 2 lines maybe?

No, no. Whatever provisions have been taken have been taken, there are nothing more.

Okay. So for whatever the products we have, do we have to sell it under any aggressive discounts?

Listen, I cannot answer such questions, please.

[Operator Instructions] The next question is from the line of Jinesh Joshi from Prabhudas Lilladher.

I just have one question on the dealer distribution side. I mean, my sense is that quite a few of our dealers and distributors might be sitting on a lot of unsold inventory. So have we engaged with any of them to get a pulse of how long will it take for them to kind of liquidate the stock so that our primary sales can gain traction?

Yes. Let me answer that, Chairman. Radhika here. So we are very closely tracking primary and secondary sales. So the different channels have different stock levels. So modern trade always has the least stock level. So typically they keep 3 to 4 weeks whereas -- versus general trade. Honestly, the general trade, they keep higher. So they might be, depending on the individual dealer on average, I would say they would have 8 weeks of stock. So I don't believe the stock levels are very high, to begin with, let's say, at the end of March, but then there has been almost no sales. So the general trade will have the same issue as the company VIP, where they had a certain amount of stock, which normally would have been 2 months cover let's say. But then in the absence of sale, that becomes 4 months or something like this. So all we can do is very closely track the primary and secondary. And we are focusing on secondary sales. We have offered some dealer schemes in June and July or distributor schemes more than dealer schemes to try and move out the pipeline inventory. But until there's a real demand assumption, we can't do too much. E-commerce is going well, so that is good, and we have been more active there than we were in the past. So that's one good thing. We do expect the general trade resumption to perhaps be a little faster than the modern trade resumption, simply because there -- general trade is on the high sheet and the modern trade is in the malls. And we are closely tracking market share primarily. Secondary is sort of my overall answer to that question.

Yes. Fair enough. And any idea how are the unorganized players dealing with the current situation? I mean, are there cost structures lean enough to survive or...

How does it matter to us, what the unorganized sectors are doing? We are just not concerned with them.

The next question is from the line of Aditya Bapat from Equentis PMS.

I'm referring to your presentation, wherein you have said that you have achieved a fixed cost reduction of about 35%. So just wanted to know that how much of this -- like is there anything that we can bring down further in the coming quarters? And once things normalize, what part of this could be sustained, this reduction?

So I will say that...

Neetu will take this.

Well, you see -- if you want you can.

Sir, some noise is coming from some of the analysts.

[Operator Instructions]

It's a very delicate thing because as you cut down I mean, you are basically downsizing your company. And the entire infrastructure you have created in 30, 40 years, and in the more particularly in the last 5, 6 years, you are down -- closing that down. So we have to be careful. We have to be cautious. So if required, we will cut down a little bit more if things don't sort of turn positive in the time we are expecting them to be. And you -- another question is? Yes.

So shall I take 1 part of the question? So sustain -- what is the cost reduction sustainable? So 1/3 is sustainable.

Let me continue, I'm talking. See if it is like this that many of these costs are absolutely variable. For example, we have -- we are running 250 exclusive retail stores of our own, and now we have decided to cut down 100 out of that, yes. The figures might be slightly varying. But that is because, overall, we feel that the sales level is going to come down. So you have to close the marginally weaker shops. But if you want to increase it back to that old level, we have to increase the shops. So it is not that we can sell the same amount of -- what we were selling in 250 shops, we cannot sell in 100 shops because there is an outside limit what each shop will sell. So it is not sustainable, but some -- we can make some improvements in productivity. As you learned today, a lot of people, I think, some of the consumer goods companies, their sales are 100%. In fact, one company, I learned they -- first quarter, the sales were up by 5%, and they're operating from home. So much expenses has reduced. So there will be some productivity gains. But I mean, overall, we cannot say that it is not sustainable that we'll operate at 50% cost and have the same revenues as before. I think I have answered that -- I mean, broadly speaking, yes?

Yes, sir, you have done that. That was pretty detailed. Just one last thing. You said that out of the 250 exclusive stores, we have cut down 100 of them. So I'm just trying to understand this is a permanent closure, right? Not closure due to lockdown or...

For the time being. Am I right?

Yes. Yes. It's permanent now.

Further, it is permanent, till I mean, we can always bring it back because, see, unfortunately, even the landlord doesn't have an alternative. His shop is going to lie unutilized because the whole market is down. I mean, not for everyone, but there might be some other -- some shops which might open. But like them all then all are lying vacant, so they don't have much of a choice also.

The next question is from the line of Tejash Shah from Spark Capital.

And I hope everybody at VIP is keeping safe. Sir, we understand that this is very difficult time, and projecting FY '21 is next impossible for anybody. But you spoke about INR 300 crores of war chest. So what scenario because you said that you have built different scenarios. So what scenario have we projected to actually arrive at this kind of number, so on the debt based number?

This is a very, very basic scenario. So we can't give you the numbers per se, but the worst scenario. When I said that 6 months if this continues similar to what we have now.

See, it's like this, I mean, how much can we borrow. We can borrow, let's say, about INR 300 crores. Nobody is going to -- we cannot borrow INR 500 crores, INR 600 crores. So we have just come at a figure INR 300 crores and now we invested that amount in -- made investments. So we are going to sort of suffer a 1% at the most arbitrage between borrowing and lending. Yes, so we can afford that, okay? But then, gradually, we hope that we don't have to -- we -- our overall borrowing does not exceed INR 150 crores. And we're just being safe at INR 300 crores, something which we -- still we can manage.

Perfect, perfect. Sir, second, parallelly, apart from COVID, there is another story, which was viewed us and the whole China sourcing. And thankfully, VIP had an advantage versus others on Bangladesh facilities. So when things normalizes, how do you see the whole supply chain redefining, getting redefined because of this?

Okay. Let me explain that we had reached Bangladesh sourcing at about nearly 40% to 50% of our requirements. Today, that 50% is more than 100% of our requirement for the whole year. Means I think even in next first quarter, we will be doing approximately the same, means what capacities we have in Bangladesh today. I don't think we're going to exceed that. Also, we have good capacities in India, both on our own in hard luggage and outsourcing also in soft luggage. So I feel that between Bangladesh and India now, we are well equipped to cater to increasing demand. And we can also -- see in this soft luggage creating a new factory doesn't -- for us, doesn't take us long. Because now we are so well-established in Bangladesh, which is a very difficult place to operate in. But today, we -- after 8 years, we have got our act together. So we can set up a new factory within 4, 5 months, 6 months. And virtually, that was our original plan that we had a factory to make factories. But every year, we should make 2 factories. Each unit is of a particular size. So if the demand increases, let's say, including international demand, we are in a position to ramp up our capacities very fast. So that way, I think we are well equipped to deal with increasing sales. We don't have to -- reliance on China is more or less over for us.

So, sir, the other dimension of this development is that unorganized used to depend heavily on China alone. So does it -- basically competitive landscape, does it improve our standing whenever market actually normalizes.

Absolute terrific, very much.

Okay. And sir, lastly, one channel, which was...

Main problem is our unorganized sector. And let me explain that to you. Ever since we started importing from China, I mean the countries started imports of consumer goods, the entire unorganized sector which was the small-scale sector earlier on in the '90s, so they have -- they are the sector which has been very badly hit. When we talk of manufacturing and all in India, that it has gone down and all. So it is this unorganized small-scale sector which has been very badly hit because prior to the year 2000 that was a very tax evading depending on all orders given by the government and preventing the large-scale companies from getting into these areas. Because there -- for us, the labor cost was very, very high. Our union -- labor was very unionized and the unorganized sector remained very small. So there were no large readymade garments and all that units in India. So this sector has after the imports have been allowed from China, we were all sort of at a level playing field. I could import from China at the same price as what the unorganized sector would, in fact, my prices were better because my volumes are more. So that has made a very big change in the entire Indian economy. So we are not so badly -- we are not much affected by the unorganized sector.

Sure. Sir, one more channel...

Further added helped us. In fact, GST made a very big difference. I think our margins and all overall has gone up by 5%, 6% after the imposition of GST because the unorganized sector had to -- which was not paying GST at all had to now pay GST. Even if they didn't pay it on the finished product, the input costs had the GST. When we pay GST at 18%, we get a setoff of about half of that, which if somebody doesn't pay at the final level, at least they have to pay that input cost. They don't get the credit of that. So the revision is only of about 9%.

Interesting. Thanks for the detailed explanation. Sir, another on CSD channel, at least we expect that that channel to revive the faster because they are doing their work normally. So any update on that?

Yes. I think 30%, 40% of our sales are coming from CSD alone. Am I right?

Yes. Yes. So I will say that they're definitely our most valued customer in Q1. While CSD -- CSD demand itself at the canteen level. So they are reporting -- and there was a news report just today, I think, that the footfalls are around 50% of normal. So we are getting some demand from CSD, but it's 50% of normal.

And Radhika, last call, you said that this whole Atmanirbhar thing was only in paramilitary canteens and not in CSD at large. But now we are picking up from media that they are also emphasizing on domestic sourcing and domestic brands. So any update on that, whether that has come to CSD also?

Nothing has come formally, but we are well prepared for it because we've always had our own manufacturing hard luggage in India. And then our soft luggage, we have third-party vendors in India also. So for us, it's just no problem to supply all of CSD from India and all other channels from Bangladesh.

The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher.

I have a couple of questions. One being on the distribution, like you said that there are 250 exclusive retail stores and 100 of them will be closed down. So the stores which we are closing down, are they more on the high street or malls that is one part of it. And secondly, from the long-term distribution viewpoint, looking at the rate changes have happened, assuming normalcy comes in, say, 6 months down the line, do you think -- do you -- you need to make any change in the strategy over the medium term as far as the distribution plan is concerned?

Yes, there will be some changes. Let me say that there will be some changes. There is definitely a shift towards e-com, which was happening even otherwise. Even prior to COVID, e-com was getting -- was the fastest growing channel. And I think this trend will get more accentuated. It's already getting accentuated. And there will be some changes. In fact, I would say that in the last 20 years, the biggest change in our business has come on the retailing. The retailing scenario has changed drastically. Manufacturing has remained more or less the same. Products also haven't changed so much, but the retailing channels have changed. And that is the evolving situation, and we are well both preemptively, proactively, and reactively, we are very well doing this all the time.

Sir, purely on closing around of these 100 stores on an annual basis, how much would we be saving?