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

Thanks, Faizan. On behalf of Edelweiss, let me welcome you all to the Q3 FY '21 earnings call of VIP Industries. From the management today, we have Ms. Radhika Piramal, Executive Vice Chairman; Mr. Anindya Dutta, the Managing Director; and Ms. Neetu Kashiramka, the CFO. So without any further ado, I'll hand over the call to Ms. Piramal for her initial comments, post which, we'll open the floor for Q&A. Thank you, and over to you, ma'am.

Thank you, Shradha. Welcome, everybody. Good afternoon. Thank you for attending this call. I will say, there are 2 ways to look at Q3. We can look the last half full or the last half empty. So on the concerning side, certainly our sales are nowhere near what the normal level is, and as a result, we continue to make losses. Having said that, on the positive side, I will say that October, November, December was obviously a much better trend line and a positive trend compared to April through September. And we see this positive trend continuing. So certainly, we are well below our potential, but we are pleasantly pleased with the uptick in demand, and obviously we look forward to a much better year next year. The other thing which is very positive is we have an extremely strong professional management team in place now. Mr. Anindya Dutta was appointed the MD on the first of February. It will be my pleasure to introduce him briefly in this call today. He will not be participating much since he's only joined the company 2 days ago, but you will hear much more from him in the quarters ahead. In the meanwhile, I would like to now hand over to Ms. Neetu Kashiramka, our CFO. She is also relatively new to the company, and will be taking a much more leading role along with Anindya Dutta in the months to come forward, and she will be leading our Investor Relations for the months and years ahead. So with that, over to you, Neetu. Thank you.

Thanks, Radhika. Good afternoon, everyone. Thanks for taking out time and joining the call. Before I actually start talking about numbers, I would like to reiterate the same point which Radhika just mentioned that, yes, operations are affected due to pandemic. And luggage industry is linked to travel, and therefore, it takes time to revive. Our revenues are going in line with the domestic air traffic. Beginning of quarter 3, we saw demand pick up as we entered the festive season, and demand seems to be improving further. So we are hopeful that quarter 1 of next year will be better than this, mainly because of 3 reasons. One, schools will open. A lot of marriages which couldn't happen during the last full year will happen now and a lot of people waiting to travel. During quarter 3, our income from operations was INR 243 crores against INR 108 crores of quarter 2 sequentially, loss was at INR 7 crores as against a INR 35 crores of loss in the sequential quarter. Important to note that, if you see quarter-on-quarter performance, the first quarter, we did a 7% revenue. Second quarter, we were at 25% of the pre-COVID level, and now we are at 56%. So yes, trend line seems to be better. And we understand that it is not close to the '19, '20 level, but yes, I think we will reach there soon. Let me also brief you about our current borrowing status. So our current borrowing is at INR 150 crores. However, net debt is zero. We are having a cash balance of INR 207 crores, which means that we have INR 57 crores of surplus accumulated during this 9 months. A little update on Bangladesh operations. So Bangladesh production has started in full swing. And this quarter, we did a INR 27 crores revenue with a INR 1 crore of loss. So that's it, and I now open the floor for questions.

[Operator Instructions] The first question is from the line of Tejash Shah from Spark Capital.

Just a couple of questions from my side. First on gross margin. So we had a very sharp sequential recovery, but gross margin did not move in tandem. So is it largely driven by pricing -- price correction or is it under absorption of cost, which is hurting gross margin sequentially? And Y-o-Y, we can understand why sequentially it is not showing that delta.

So sequentially, if you see the gross margin is almost in line. And in our earlier quarter calls also, we mentioned that this year, it will be in this range only. Two reasons. One, there are, yes, pricing discount going on in the market. Second, the production currently, whatever goods we are selling, it's not from Bangladesh. And those are the actually, 2 reasons. So it's not because of under absorption.

We'll move to the next question from the line of Rupin Shah from InCred AMC.

Congrats on smart sequential recovery. It's a further -- like it's a follow-up on the previous question. Why the gross margin is flat, sequentially? And so what is the basis of that? And when can we see the same EBITDA margin like FY '20, FY '22 or FY '23? So just wanted to understand gross margin?

So gross margin, again, same thing. There are more price discounts in the market. And the second, whatever currently we are selling, this is not fully from Bangladesh. It is a mix of Bangladesh and China. And the EBITDA margins to reach that level, I think, it will be FY '23.

FY '23. Okay. And just wanted to understand the user industry profile as well, like -- so there is a pent-up demand, which is coming in -- sharply in this third Q? Or where the demand is coming from, like, in essence of the international travel and the limited travel domestically? So like I just wanted to understand the focus like marriage season or the offices are opening up? And what is the outlook in the improvement in the user industry?

Radhika, you would like to take this question. Okay. So I will take it.

I can. Can you repeat the question, please?

Mr. Shah, please repeat the question?

Yes. So I wanted to understand the user industry profile. So is this a pent-up demand which is coming in third Q after a sluggish 1Q and 2Q? And from where the -- exactly the demand is coming like, it's -- like pent-up demand from the marriage season or the offices are opening up. So understand -- I just wanted to understand that particular thing. And the outlook in improvement in the user industry.

Yes. I understand. I understand. Okay. So there are 3 drivers for our business. The first is domestic air traffic, the second is the wedding market and the third is the gifting market. So all 3 are seeing some resumption. The domestic air traffic figures are widely known. In fact, Neetu, you can consider putting that in our investor FAQs service slide from next quarter onwards.

Yes.

And so you see our revenues are tracking domestic air traffic pretty closely. So in October, November, December, they were half of what they were the previous year, and so were our revenues. In addition, we have some gifting and wedding market. And as -- I mean wedding certainly happened in Q3 and Q1 also looks to be good in terms of the good number of dates. And this thing is slowly, but surely resuming. That will be probably the lagging of the 3. Thank you.

The next question is from the line of Shanti Patel from Shanti Patel Investment Advisors.

Sure. We are missing our Chairman today. Why he is not there? That is the first question. Question number two, what you think about the trend in sales and the trend in the cost, resulting into in the next quarter, profit or loss for the company? That's all.

Okay. Thank you for your question. Chairman could not attend today because he trusts Neetu and Anindya and myself to take forward these conversations. As for your question about the sales and the cost, Neetu, may I request you to answer that, please?

Yes. So see, exact guidance, I can't give, but what we can say that if sequentially, the way we are growing from 7 to 25 to 56, it is definitely going to be better than 56. And same way, the margin profile as well. But quarter 1 definitely looks better because of 3 reasons, which we said marriages, school opening and leisure travel also coming up.

Sorry, I mean, don't feel bad about our Chairman because he is very polite and very shareholder-friendly. So we wanted to -- that is the only reason, no other reason.

No, we appreciate it.

[Operator Instructions] The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund.

My first question is on inventory. Just wanted to have a sense in terms of what is the carrying old stock inventory that we are still carrying on, on our balance sheet?

So overall inventory is in the range of INR 300 crores, which is a mix of old as well as new. So inventories are getting cleared. In fact, now all our factories, both Bangladesh and Nashik are running full swing, getting ready for quarter 1.

Okay. My second question is on the employee cost. I believe that the salary cuts have been reinstated from January. So essentially, just wanted to have a sense in terms of next year, what could be the run rate on a per quarter basis on employee cost that we can expect?

So what I can tell you is our overall fixed cost, which used to be INR 25 crores per month -- sorry, INR 40 crores per month will be -- is currently at INR 25 crores. So that's kind of saving, and this will be sustainable. So INR 25 crores is going to be the run rate of fixed cost rate going forward.

So does that mean that the employee cost may not significantly increase from this INR 30 crore run rate, which is a percent...

It will definitely increase from where we are, but not equivalent to what it used to be in '19, '20. So 50% of reduction will come back.

Okay. So the INR 30 crores can go to maximum INR 40-odd crores per quarter. Is that correct?

Yes. You are right.

Okay. And my last question is that what has been the operating cash flow generation so far in the 9 months? And is it fair to say that this entire cash flow generation would be funding our losses so far in the 9 months?

Yes. Absolutely, right. So if you see, at the level, we have made INR 100 crores loss, INR 97 crores, to be more precise. And we have generated INR 105 crores from working capital.

Okay. For 9 months?

Yes.

And just one last question on the Bangladesh operation. So is it fair to say that from next year, majority of our sourcing will be from Bangladesh and resultantly, in terms of procurement cost, we can sort of see high benefits?

Yes, you're right.

Is it possible to quantify or very difficult to quantify it?

Difficult to quantify at this stage. Also raw material prices of most of the raw materials are also on the uptake. So how much we'll be able to pass on and -- will also be -- it will all depend on the competitive intensity as we move along.

But in terms of gross margins, we have historically done about 50-odd percent, 50% to 55% has been our gross margin range. So is it fair to say that it can be sort of an improvement post the sourcing from Bangladesh? Or you believe that you'll pass on the savings from Bangladesh?

So it will depend on the competitive intensity. What I can say is in the current year and the gross margin is at 40%; next year, it will range between 45% to 50% before it reaches its pre-COVID level.

The next question is from the line of Karan Khanna from AMBIT Capital.

Firstly, we've been hearing about a lot of supply chain issues with respect to sourcing from China with the vendors in China demanding a proportion of payment in advance. Also, we understand that this has resulted in shortage of luggage inventory across channels. In that context, can you help us understand is VIP has been facing similar supply chain issues? Or the impact would be relatively low given the optionality of sourcing from Bangladesh?

So challenges are there. But since they've already almost moved out of China, we are fully dependent on Bangladesh now. So only raw material which has to come from China to Bangladesh. Yes, some ifs and buts are there, but still it is relatively better than buying actually, directly from China.

Sure. And secondly, if Anindya, if you could take this. Given your experience of the international markets in the past, will it be fair to assume that VIP will be looking to boost its efforts on marketing or making exports a larger chunk of the revenue as this is what you've been highlighting in the past? Or can you help us understand what would be the 2 or 3 key initiatives that you'll be focusing on over the next 6 to 12 months?

Let me take this answer. Karan, thank you for directing your question to Anindya. As I said, today is only his fourth day on the job. So let's wait a quarter before posing him questions directly. Definitely, as you've heard Chairman say many times before, that VIP Industries has an opportunity to expand into international markets. Our international revenues have been very weak in the last 5 years, and I'm sure that Anindya's rich experience in this field will help us in that endeavor. Thank you.

Sure. And just the last question on backpacks. With the offices, et cetera, starting to open up, can you help us with your thoughts on the overall recovery expectation for this segment as the channel is still holding last year's inventory?

Yes. So I'll take this one and then we go back to you for the next. We do have a lot of backpack inventory. It is a -- there's a mixture of schoolbags and backpacks. And colleges and schools are opening at different ways across different states. So it's really difficult for us to comment right now. But we are hoping for a good upswing in backpack and screw that demand. And schools have started opening and we'll continue to open across all grades, standards and states.

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

Sorry, I got disconnected earlier. I believe you answered the question on gross margin, but I heard you on another question answering the same. So I was just wondering, when we are very sure of controlling costs and even if demand has to revert back to normalcy next year, margins will be -- gross margins will be -- will take time longer than that. Is it largely because of competitive pressure or because of inventory that we are carrying in the system today?

I think it will be because of the competitive intent because everybody is sitting with stock. Sequentially, quarter-wise, I think it will improve. But going straight away from 40% to 50% might be a challenge. So it may go up gradually.

But we have one advantage versus competition that we have a captive unit in Bangladesh. So as the throughput comes through, does that absorption rate of ours should be better than competition?

That's what I said. Sequentially, it will go to its original. But it will go sequentially. It will not happen overnight or within 1 quarter.

Sure. And any requirement to provide for debt inventory if any in the system today?

Not -- we have been doing that over periods. So there's nothing which will surprise anyone.

Sure. And lastly, on insurance claim that we had made. Any update on that? It's been almost 18 months revenue now.

Yes, I understand. So as of now, yes, we are seeing some improvement, but I cannot commit a date because still not closure to closing. So I think maybe next quarter, I should be able to answer this more promptly.

The next question is from the line of Pritesh Chheda from Lucky Investment.

Ma'am, last quarter, we had highlighted about INR 100 crore of cost which you would optimize in the subsequent year. I think you answered to one of the question that the fixed cost will be down by about INR 15 crores a quarter. So that counts to about INR 60 crores, another INR 40 crores will counts from employees, that's how the INR 100 crore number is?

Yes, overall. So this year, we have saved close to INR 180 crores. 50% of that will come back and 50% will be saved.

[Operator Instructions]

Yes. And so that's how -- because the fixed costs will be cut by about INR 100 crores and corresponding, we have a 10% lower gross margin expectation is where we are saying that the EBITDA margin will be back to normal in FY '23 is how we are putting the argument?

Yes. Yes. You're perfect.

The fixed cost-cutting is all retail-driven? Or it has to do with the operations of the company?

It's a mix of all. So basically, we have -- I explained earlier also, like, for example, in the management staff, a particular job was done by 5 people. We have done some automization, whereby going forward it will be done by 3 people and so on. And there is also a reduction in the field staff. So since that is something which will come back, so the number of promoters on the field. Whereas in the management staff, whatever cuts we have done will be sustainable.

And should we assume that you will not get into a retail operation built up for some quarters or couple of years?

It all depends on how the market demand revival happens. So immediately, if you ask me in course, next quarter, am I going to put up more EBOs, no. It will all depend on how the market sentiments are and the consumer behavior also. Like today, a lot of people are buying online, whether they will go out and buy again, it's all -- these will depend on that. But I don't think it is going to be in immediate 2 or 3 quarters.

And lastly, your best guess, guess is that quarter 1 next year, we will be back to pre-COVID. That's how you're putting right?

I didn't say that. I said it looks like it will be much better than current situation.

The next question is from the line of Ankit Kanodia from Smart Sync Services.

And good to see some growth coming back quarter-on-quarter. First of all, I wanted to appreciate the fact that you have been now sharing a lot of information on your presentation. Is it possible to have more information in terms of the revenue breakup and the channel breakup as to?

Let's see, internally, we'll discuss and decide. So as you said, we have already started sharing enough. So...

So for this quarter, can we have any ballpark breakup of which channel is doing well? And how are you doing in terms of it?

So I can say the GT is slower than the other channel. So general trade is slower than the other channels. All the other channels are almost in line.

What about the e-commerce?

E-commerce is doing well for us.

Is it fair to assume, it is more than 20 now?

Yes. Yes.

Okay. And do we expect it to go higher, going forward?

May not be because GT will come back, right?

Okay. And if we get to the normalized demand, which was there, say, sometime in FY '18/'19, so is Bangladesh capacity enough to take care of that demand or again we'll have to fall back to other sources.

So internally, as of now, we have decided that Bangladesh should be able to take care. So Bangladesh and CSD with some third party. With that, we should be able to manage the revenues of '18, '19 levels.

And suppose if we get some pent-up demand? And is it -- how quickly or how much time-consuming it would be to expand our capacity in Bangladesh, if we would want to.

It should be a 3- to 6-months lead time.

3 to 6 lead time. And any ballpark figure in terms of CapEx required for that?

Not too huge. We should be able to do with our internal.

The next question is from the line of Jaspreet Singh Arora from Equentis PMS.

The impact in 3Q on gross margins, you mentioned the higher discounts and higher sourcing from non Bangladesh. Do you think a good part of it could be arrested starting 4Q itself?

Yes.

Okay. And almost entirely in the next financial year, as you mentioned earlier?

Sequentially, so exit quarter might be that way, not...

Okay. Okay. Okay. Fair one. And the other question was on e-commerce. I think it touched almost 25% plus contribution. You mentioned that it's in that range and...

But on a steady basis, when the general trade improves, we also mentioned that it will be in the range of 20%.

Okay. Great. And just lastly, amongst the end-use activities, so domestic air travel, gifting, wedding and schools, I believe schools is the only one which is kind of still the most impacted.

Yes, and -- lagging behind.

Yes. And will be -- will open up only maybe in a staggered manner and because of the sensitivity involved. So how much of our revenues would be linked to the school factor? Ballpark?

I don't think I can share this. Overall, we are saying, sequentially, we are doing well. And we are hopeful to see. Next session will definitely start. So the quarter 1, when all the schools has to start for the next year, I think we are hopeful the way that India, the numbers are coming up, it's showing a tremendous improvement. And my son's school have started this week. So he has gone -- for this full week, he is going to school.

Okay. Okay. Okay. So the backpacks would be for office, school and leisure? Is that how it's divided, and that's where the school.

Yes. But the bulk of it is actually school.

Actually bulk of backpack is school.

Yes.

The next question is from the line of Atul Mehra from Motilal Oswal Asset Management.

Just one question on given the environment for the trade has not been very good and we heard of some of the shops shutting down as well. So would you like to talk a little bit about what has been the receivables position? And is there any risk to any of the receivables and any provisions would have made along that line?

Our receivables have been very good, in fact, almost half of what it used to be in the past. That's also because our revenue is less, but there is no risk. Barring Big Bazaar, which outstanding, still remain. Otherwise, we have received all our money.

Right. And ma'am, what would be the approximate amount outstanding on Big Bazaar?

Close to INR 35 crores.

Right. And we have already provided for it in the books? Or how is it like?

No, we are hopeful of receiving -- we have started receiving it, starting January.