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

Good evening, ladies and gentlemen. A very warm welcome to the VIP Industries Limited Q4 Fiscal Year 2021 Earnings Conference Call. From the senior management, we have with us today, Ms. Radhika Piramal, Executive Vice Chairman; Mr. Anindya Dutta, Managing Director; and Ms. Neetu Kashiramka, Chief Financial Officer. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Radhika Piramal, Executive Vice Chairman, VIP Industries Limited. Thank you, and over to you, madam.

Thank you so much. Good evening, everybody, and thank you for joining this call. The results have been shared with you just recently in the last 30 minutes, I do hope you've had a chance to look at them, or you could have a look at it right now. And sort of to be expected, the revenues are nowhere in line with our hopes. COVID has affected us badly. We have -- had excellence plans for the current year. Regretfully, the second wave has put a dampener on the current quarter. One good news is that we have in place an excellent professional management team leading our company. And in our last call, about 3 months ago, I mentioned Mr. Anindya Dutta would not be speaking too much on that call. This time, I'm very pleased to say he's fully inducted into our company. Having joined us on the first of February, and he will be leading this call for the rest of the duration of the call, including the Q&A. Alongside him will be Ms. Neetu, our CFO. So over to you, Anindya. Thank you.

Good evening, everyone. Thank you for taking time out and joining this call. We will talk about the quarter 4 results to begin it. But before that, let me put a little context. We know that the pandemic has hit industry, luggage industry is possibly the worst or the hardest way. In the quarter 4, we started seeing easing of the pandemic environment in terms of more free movements, travel came back to about 70%, 75% level of the same time previous year. And in line with that, our quarter 4 revenues were at, as you would see, at INR 243 crores from operations, which is at 78% revival compared to the same period in the previous year. [indiscernible] revival metrics was 64% in quarter 3, 25% in quarter 2 and a mere 7% in quarter 1. The 78% revival, however, has a caveat, the previous year March was already hit by the pandemic, and therefore, was at suboptimal limits. So we saw all lead indicators like travel, people moving out or eating out and coming back. However, the luggage industry continued to have some headwinds, which I would like to call out here. Schools and colleges remain closed and continue to obviously do so. Passion travel did not resume in quarter 4. One of our largest account Big Bazaar continued to operate at a suboptimal level compared to the rest of the modern trade, largely owing to the Reliance-Big Bazaar merger takeover. In addition to all this, we witnessed also surge in raw material prices, which is quite unprecedented. The polycarbonate ABS prices were almost 2.5x -- 2.3x to 2.5x of pre-COVID level. So the headwinds are not only on the demand side, but also on our margins. Despite our margin for quarter 4 was at 47% gross margin, I'm talking about. While sequentially, it is better than the previous quarter of 40%. However, it continues to be significantly lower than the same period last year. The corrections in the discount and the mix corrections were partially offset by increase in the input cost. In terms of the fixed cost, the overall fixed cost for the quarter was INR 103 crores compared to INR 136 crores of the previous year. While it was sequentially higher than quarter 3, largely due to the restatement of salary reductions and expense on travel and office which resumed, however, the structural cost reduction to the tune of INR 80 crore to INR 90 crore at annualized level has sustained and will continue to do so. At EBITDA level, we have a loss of INR 5.7 crores against a loss of INR 8 crore in quarter 3 and a profit of INR 10.4 crore in the quarter 4 of last year. For the full year 2020-2021, the numbers, as you would have seen, are as follows: total revenue at INR 667 crores, 39% of previous year; gross margin at 45% against 53% of last year; fixed cost at INR 318 crores as against INR 614 crores of the previous year. At this stage, I would like you to know that out of the reduction in fixed cost, other than the advertising, sales promotion and freight expense, the savings is almost INR 171 crore and almost INR 80 crore, INR 85 crore of this is obtained in the coming years. With all this, we had a loss of INR 124.6 crore as against profit of INR 148.4 crore at a PBT level in the previous year. It is quite evident the impact of the pandemic on luggage industry and our company has been very harsh. I just want to highlight that while we were in the crisis period, we had the -- the company had worked on strengthening its fundamentals. Today, our Bangladesh manufacturing operation has significantly scaled up. And going forward with the Bangladesh manufacturing strength and India consolidation, we'll have a far better upstream control. And also, we will have long-term advantage on cost. We spoke about structural cost reductions and those fixed cost reductions has made us significantly leaner going forward. We are also working on revamping our supply chain structure, which not only will make us far more responsive to the volatility in the demand. But it will also be at a lower cost. We've also ensured that our distribution and our reach has sustained through the crisis and pandemic. And we witnessed our distribution almost scaled up to the similar levels as previous year in March and April in terms of the number of those that we sell to. And lastly, I think, we strengthened ourselves in e-commerce where we were possibly competitively under leveraged in the past. And this, we did with a lot of augmenting of the portfolio. I guess, the gaps that were there in our portfolio corrected our supply chain. And also worked on improving the productivity of our aspects. With all this, we started very well in April. In fact, the first 3 weeks of April was very encouraging because we saw things really coming back to almost pre-COVID levels for run rates. And unfortunately, after that, the pandemic hit again and this time much, much harder. The impact on the business is similar to last year's complete lockdown. We, however, feel the recovery this time will be over a shorter duration. And hopefully, with lockdowns gaining control on numbers and vaccination scaling up, we should start seeing faster recovery. I just want to end by saying that we feel quite optimistic in the long term. VIP Industries is all about products to do with joy, celebration, movements with the families, travel, vacation, marriages, fashion, et cetera. This cannot remain subdued forever, and situation will become normal, hopefully now sooner than later. It's very difficult to predict the duration. But as we come out of this, the demand is now to get back to its original trajectory, and we'll come out strong. Thank you.

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

And I hope the team is keeping well and safe. First question is on demand scenario. So it's been more than a year since we would have experienced normalcy in demand. And however, last 4 months Jan to April is something which can be referred as closest to normalcy in some form, obviously, not the full normalcy. So if you can share some insights on consumer behavior where there's more discount seeking because gross margins have improved sequentially? And -- or -- and is there any fundamental change in how consumers are traveling and how they are looking at the whole category post pandemic or now we have in between pandemic now again? So first question pertains to that.

Thank you, Tejash. So as we are experiencing now, which is just when the things came out of pandemic around Jan to April, I think the post impact of pandemic was still there in terms of consumer behavior. The travels where possibly not as much and a lot of safety was their concern. So while this had an impact on the quantum of the demand. But in terms of the nature of the demand, I don't think there will be much of a distortion as things comes back completely to normal. It is just the impact of COVID and the concern around safety and security, possibly there were some bit of choice like people are buying more hard luggage than soft luggage right now. But I don't see -- personally see an impact, which is long term on this.

Sure. So the second question pertains to margins. Obviously, inflationary scenario has worsened Y-o-Y across raw material baskets. And then for our commodities, also underlying commodity there is sharp inflation. We already had a gross margin shrinkage last year Y-o-Y. So keeping all these factors in mind, how would you like to create the whole pricing power of ours in terms of branding power that we have in the year ahead? And how should we think about gross margin and EBITDA margin, assuming that normalcy comes back by the second half of this year?

That will be a big assumption in terms of what kind of normalcy comes back. But I would assume that even after the worst case scenario, it will not exactly be the same as what it used to be before within this financial year. So there is going to be a constrained demand. And it will have its impact on margins because the pricing is going to be always a challenge in terms of -- from a competitive pressure point of view. However, as I was saying that fundamentally, I think, VIP has done everything that is the right thing to do in terms of making our portfolio, our cost the right. And therefore, as demand situation becomes exactly normal as it was before, our margin should be back to the same level that what we used to be and even better.

And lastly, if you can comment on the insurance proceedings. Any update on that?

So Tejash, I'll take this. So on insurance proceedings, we are currently 5 -- 3 to 4 months away from getting a clear picture. You know it's a PSU and because of the second lockdown against the people are not there. So we are very positive, but yes, it is [indiscernible].

The next question is from the line of Amandeep Singh from AMBIT Capital.

Firstly, we know that the global luggage players are still closing EBOs to keep the cost under control amid COVID-led uncertainty. Similarly, with COVID second wave impacting the recovery, can you help us with your thoughts if you would maintain your current EBO counts or might be -- might have a relook on the strategy and close few more stores? Also, any update on the rental waivers across the malls and high streets amid the lockdown again?

Thank you for the question. You're right. EBO is a concern on cost but VIP -- at VIP we have kind of taken odd measures in the previous wave itself and had kind of shut down almost 100 stores. As we speak right now, our viewpoint is that we would like to continue most of them. We can still look at a few, which is falling -- which is almost sitting on the fence in terms of its long-term potential to profit. But this is something that, as we speak right now, we will -- we are wanting to continue this review. It is also based on our assumption that we think this time the turnaround will be faster or quicker than the last time.

Sir, any update on the waivers which we might be discussing because it's again a lockdown?

Yes. So we've started the conversation. It's very recent right now, it's been the last few weeks where this has happened. But that's something that we've obviously put up very aggressively with the landlords and look at any possibility of waivers and reduction in rents in the short term.

And sir, secondly, on the employee cost, now with the second wave of lockdown, will it be fair to assume that the run rate will remain at -- same at INR 38 crores per quarter going forward? Or will it be fair to expect more efficiencies here?

At this stage, we are -- we've done a huge amount of cut in the previous year. And I think our approach would be to continue with the team and the morale and keep ourselves ready for growth going forward. And therefore, we would -- we may have some bit of efficiency happening here, but largely, we will continue with the employee base and the talent that we have.

Just to add, the employee cost for the quarter does not have incentives and other things. If we do well, then that will be the additional cost.

Noted. And we have been also hearing that the supply chain issues with respect to sourcing from China has sustained. So in that context, can you help us understand is VIP also facing similar supply issues even now?

So as I was saying that we have moved and successfully moved a large part of our production to our in-house potential in Bangladesh. So going forward, any kind of exposure to China supply chain issues is something that we will possibly not have. Though we are dependent on some raw materials coming from China, and there is implication on freight rates that have increased significantly between China and Bangladesh. But in terms of a larger disruption because of which -- of what may happen between India and the China trade, it's not something that we will be impacted.

Sure, sir. And sir, finally, I mean, we are to just extend the previous question. And now with you on board having the experience in the international markets in the past. Is it fair to assume that VIP would boost its export sales via OEM manufacturing assuming that even other luggage players globally would be facing similar supply chain issues from China? Or is it too early to say that?

Strategically and in the long term, what you're saying is, yes, is that something that you would be eyeing. But as we speak, as an immediate short-term measure, that's not something that we may land on or chose to do. So -- but that's something that is under evaluation. This will -- it will be a better time, possibly in the next discussion to see where we land ourselves on this.

The next question is from the line of Jinesh Joshi from Prabhudas Lilladher Private Limited.

If possible, I just need 1 small clarification. Now if I look at our gross margins during FY '21 in 3 out of 4 quarters, we were lower than one of our listed peers. Now I know that there is some bit of cost inflation and the discounting is also going on. But sir, in the past, such cases have been rare when our gross margin is actually lower than the other listed peers. So is there anything specific that you would want to highlight?

I think that's owing largely to the discounts that we were running. And our pricing was significantly higher compared to most in the market in terms of the mid rates that we had. And therefore, the discounts on that were higher. But as I said, that as demand started coming back and we have taken control of the total inventory situation. As we move the discounts out from what we were running, we will come back to our -- we'll come close to our original levels of gross margin.

Sure. And secondly, given that there is cost inflation, which is prevailing currently, is there any action on price trend? Have you taken any hike recently? Or is there something on the cards in the near future?

So yes, we have taken a price increase. In fact, 2 rounds of price increase. Not very large, but as the import prices increased and was increasing, we took one in March and one now in April as well. So there has been -- and this is not across the board, but this is more in selected range wherever we felt that we could take the price up is where we did. It has not resulted into a large part of the gross margin increase. I think the gross margin increase is largely owing to the reduction in discount and the change in mix. But as we open up and everything resumes, I think the higher price will start playing its role.

Sir, is it possible to quantify the quantum, the hikes which we have taken?

So it would be difficult because it is not across the board one, so it's kind of by range in that. So it will be difficult for us to give you 1 number for that.

The next question is from the line of Saurabh from HDFC Mutual Funds.

I just wanted to -- in the opening comments, you mentioned about the savings in costs. Sir, just wanted some more detailed thoughts on that as in how much of this will be variable? Because when we see, as a percentage revenue -- our revenue has also fallen sharply this year, and as a percentage of revenue many of these -- the other costs, especially seems to be in line and listing for A&P, just for the A&P, which would be increasing as the demand improves. How much there would be a cost saving when assuming the revenue is back to pre-COVID levels? That was one. And secondly, sir, international business, you talked about the OEM part, but any thoughts on creating a global brand over a longer-term because our brand is very -- there are not many large global brands. So is there an opportunity there, your thoughts on that, sir?

Sure. I'll take the second question. Neetu, can you talk about the cost reduction part?

Yes. So on the cost piece, what we are talking about the savings is on the fixed cost, which does not go in line with revenue. So that overall saving is around INR 171 crore and 50% of that we said is sustainable going forward. Other than that, if you see, freight will go in line with revenue and advertisement anyways as and when the things improve, we will start with that.

And then just so more like what would these costs be? I understand one would be employee costs which you have been highlighting in the previous quarters also...

Yes. In employee cost there were 2 parts. One was the salary cut which was there till December for 9 months; and then there was head count reduction. So salary cuts has been resumed from January, so it's back to normal, whereas the head count reduction remains. So that's how 50% of the employee cost savings will come back. And on the other expenses, 100 store closures, and we also had -- so wherever there was rent reductions and waivers, will come back, whereas -- for example, you closed 100 stores now, that's the permanent thing. We have closed some of the offices. So closure, yes, it's a permanent, whereas wherever there was a waiver or a reduction, it is temporary.

Ma'am, just asking 1 thing. When we say the head count reduction and store closure, so these will be permanent. But assuming the sales are back to like INR 600 crores, INR 700 crores levels, so will we be able to manage with these lower number of stores as well as lower head count?

At this point of time, yes. On the management fees, we don't intend to increase that.

Yes. To answer the other question that you had about international, as we see, we would love to take the strength that we have in India to the pockets that's outside. And we will get to that. But before that, I think, it's very important right now as we come out of the pandemic is to consolidate and get ourselves fully back up and running the way the India market was. And therefore, our first focus as we are coming out of this will be to consolidate and to strengthen the core. Core is our domestic business, and that will be the first focus. As we do that. And depending on timing, we will look at how we can take our brand and our business outside. And at that point in time, possibly, we can talk more in detail once we are on the beginning or on the start of that journey.

The next question is from the line of Dhaval Dama from Motilal Oswal Asset Management.

So I just wanted to ask you, now, basically, if I have to look at FY '21 as compared to FY '20 gross margins has been significantly lower compared to pre-COVID levels. And you are mentioning that discounting has been quite higher during the current year. But can you highlight or can you just give us some broader understanding, like, say, if the product mix or the brand mix would have been dramatically different in FY '21 for you as compared to what it would have been in FY '20 or FY '19, just a broader understanding? Because to our mind it is very difficult when we compare -- [ evaluate this year or the largest year ] in the category today making similar gross margins as what we have done during the current quarter also.

Right. So yes, the product mix did change in FY '21 in favor of the value portfolio within the VIP portfolio as compared to FY '20 and that happened largely because that part of the market possibly was growing faster. E-commerce was something that was through putting harder than most of the other channels. And we also played aggressively within those areas to get the revenue. So we did temporally reduce or achieve the mix in favor of the value portfolio. But that's not how the VIP portfolio strength is, and therefore, the VIP and Skybags and the ranges under these brands is something that didn't play its role as much in the revival phase because we are carrying stocks, and we had to convert. When we started making Bangladesh, we started making more of these lower end products because that's what the demand was. So I would keep it as more about a temporary phase where we had to go in with our value range more aggressively. But going forward, once the revival is there and we come back -- the demand comes back to its levels of pre-COVID, we should be able to spring back to what our mix was before, the large part of that is not entire.

And second thing -- one more thing I wanted to ask you now, given the current scenario if I were to look at the company in terms of 2 buckets of how things can stand out over the next 6 months and over the next 3 years, if I have to show that. Now do you think that -- how long do you think that as per your view, settlement today, this value portfolio will continue to grow faster? Like you mentioned in your opening remarks that April 1, 2 to 3 weeks, there were decent recovery and we are almost back to pre-COVID levels. So maybe if you can throw some light on that. Basically, how are you looking at over the next 6 months and over the next 2 to 3 years? And also, would we be willing to sacrifice the rate of gross margins as compared to what we were doing at pre-COVID levels for market share gains. How do we look at it?

So to answer the first question, while the environment of constrained demand situation is there, there is always going to be a higher play of the value segment. That is the main [ difference ], because people are going to compete on prices, and that, one, will bring down the prices and also possibly somewhere affordability kicks in during this time and people whatever purchase is happening looking at a lower price option. For that short-term, that as much as what the current situation will last, and that's something that is very difficult to predict. But when you talk about the long term, I don't see the consumer behavior to be one; only going towards the value segment or a large part going there. And also, the marketeers and the -- especially our role in making the mid- and the upper end is going to start kicking in, and that's what we would like to do to create demand at the upper hand through innovation with better products through communication and a better experience of the consumer. So that is what we were good at and we'll continue to come back to do. And therefore, I don't see that as a problem in the long run. Did that answer your question? You had 1 more question.

Yes. So basically, over a longer period of time, are you willing to sacrifice some bit of your older levels of gross margins for market share gains?

So we were not -- we will not be okay losing market share. That's I think is a stronger resolve. And we would like to make sure that we gain back market share. And if that needs us to relook at our portfolio and to look at some bit of shaving of gross margin, we may do that. But right now, I think that's not something -- that's something that is an easy conclusion back to gain market share, you may need to lose much. But to answer your question, we're strongly focused on gaining back our share.

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

My first question is on the preparedness to meet the pent-up demand, whenever it happens. Especially given that the window for pent-up demand should be as short as 2 to 3 months. So if we go by luggage companies, the performance in the West they have seen a significant growth. And I think the population started getting vaccinated. So how prepared are we to sort of meet the similar nature of pent-up demand as and when it happens?

So I think we are pretty well prepared, depending on how and when that demand comes. So as I said, we rely more on our own manufacturing. We have a good amount of headroom to scale up, and we will be able to do that when things starts looking up for sure.

So even if the window is short, we'll be able to sort of manage our supply chain to meet that demand, is that assessment correct?

Yes, depending on how short the window we're talking about. But products -- the lead time for the production and hitting the market is always lower than the lead time to identify sourcing and import it into the country. So to that extent, yes, but we are -- there are a lot of assumptions here and we'll have to see what is the lead time and when does that happen.

Secondly, is it fair to say that the Bangladesh sourcing advantage due to the extent of 15%, given that imports from Bangladesh will not have any anti-dumping duty. So given that our dependence from Bangladesh could now be close to 100%, it makes sense to sort of become aggressive in our journey to gain market share. And given such a big cost advantage, is it fair to say that we may not have to compromise in terms of our gross margins?

I'm sorry, I didn't understand your question. Could you please repeat?

So the first part of the question was, is it fair to say that the Bangladesh sourcing advantage is to extent of 15%, given that imports from China has a anti-dumping duty?

Yes. So there is an advantage of producing in Bangladesh compared to importing from China. And more than the number, I think, what is... sorry Neetu, you were saying something.

Yes, 15% is right.

Yes. So yes. So the answer to that question is yes. What is your next question?

Yes. So the related question is that as we answered to the previous question that we will be chasing market share. So this sourcing advantage from Bangladesh can clearly make us more cost competitive, and hence, in our journey to gain market share, we may not have to compromise a lot on gross margin is what I was trying to understand. Is that assessment correct?

Yes. We would continue to have that advantage. While I'm sure competition can also catch up with lower cost of manufacturing basis. So -- but that is definitely a room that we are going to have to play either on the market share or and on consumers or look at having a better margin profile. But that's going to be completely dependent on in that situation and the strategy therefore will evolve based on the market context at that part of the time.

And lastly, sir, given that a lot of unorganized players operate in the luggage industry, would it be fair to say that the organized players would have gained retail market share in the stores?

Too early to say. It's too early to say that because only when things normalizes in the market completely is when we will get a sense of that. But a situation like this does pose a bit of a problem to the unorganized sectors who relies on their own imports or getting imports [indiscernible] imports in the long term. But as we speak today, this is conceptual, and therefore, we need to see once things normalize how the market dynamics is evolving.

The next question is from the line of Sumant Kumar from Motilal Oswal.

So can you talk about sales mix of urban, semi-urban and rural currently and versus the pre pandemic?

We can talk about how various channels are evolving, but -- and within that, there are insights about -- from the e-commerce channel that Tier 2, Tier 3 cities in -- within e-commerce seem to be showing a better traction. But really speaking, I won't be able to throw light to you for between an urban and a rural contrast between COVID and pre-COVID and post COVID.

Can you talk about the growth momentum in the 2 consumer markets?

Sorry, I didn't get your question. Growth momentum on?

So can you talk about the growth momentum in the rural and urban markets, urban and semi markets.

As I said, it seems like post-COVID in the revival phase, the Tier 2, Tier 3 cities, are not rural and urban, but smaller cities to larger cities. Smaller cities seems to be reviving slightly better than the larger cities in terms of our category revival.

Okay. And talking about the wedding segment, we have a greater expectation, but the -- during month of May and April, there was a lockdown. So the overall demand impact, whatever demand we were expecting, it had a significant impact or some -- or the partial impact?

In which segment. Sorry, I didn't get your question.

Wedding segment I am talking about.