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

Good evening, ladies and gentlemen. A very warm welcome to the VIP Industries Limited Q3 and 9M FY '22 Earnings Conference Call. From the senior management, we have with us today 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 Mr. Anindya Dutta, Managing Director, VIP Industries Limited. Thank you, and over to you, sir.

Am I audible?

Yes.

Good evening, everyone. Thank you for joining on this call. At the outset, I am quite happy to announce a good set of results for Q3. The last quarter was possibly one of the best demand environment since the pandemic started. With COVID well under control, travel came back in a big way. The airline passenger traffic was at its highest since April 2020 that we saw. Compared to the same quarter of 2019, airline passenger traffic was showing a recovery of 85%. Our results were in line with the trend. In fact, better at 92% of 2019/'20. The sequential growth compared to previous quarter was at 20%, which in the pre-pandemic years what we saw, due to seasonality, it used to be in the range of 4% to 5%. So definitely, it was much ahead and the revival was much better for us. The conducive environment, from a COVID point of view, not only fueled travel. In fact, from travel point of view, some destinations like what we read or what we saw, Goa or religious destinations like Tirupati, Shirdi, Varanasi et cetera actually had higher traffic than the pre-pandemic levels. So not only travel but also celebrations and weddings had a flavor of revenge indulgence, which was quite heartening and reinforces our confidence of demand coming back to where the pandemic disruption left it. While the business environment was conducive in Q3, it has been a roller coaster ride for the industry of these pandemic waves that we have experienced. It's been quite challenging for the business constantly dealing with the ups and downs. And unfortunately, as we speak, we are in the midst of one more wave. However, thankfully, the severity seems to be much lesser and lower health issues. And without any government-imposed lockdowns or other restrictions, the impact on the business seems to be much lesser. As the demand situation was getting better, inflation became a spoilsport. We are witnessing severe inflation in all our input cost materials, from plastics to metals to polyester, rayon, and adding to them is the ocean freight and all logistics costs. Compared to the same quarter of the previous year, raw materials, on an average, is witnessing about 13% inflation. And that is not only eating into our cost efficiencies that we are building, but it's also needing to take us price increases. We took a price increase in mid of November and half the quarter saw some recovery of realized of the margin impact due to the price increase. You would have all received the results, but just to reiterate some of the highlights from the financial performance. Quarter 3 saw income from operations at INR 407 crores, which was INR 243 crores in Q3 of the previous year and INR 337 crores of the quarter prior to this, and that's the 20% sequential growth I was talking about. Gross margin was at 49%. This is after netting of other income as compared to 47% in sequential quarter. This largely has come on our price increase and an improved mix. We kept tight control on our fixed overheads, and that delivered an EBITDA of INR 67 crores at 16% as compared to 14% in the sequential quarter and from mere 8% in the same quarter previous year. Profit, PAT for the period quarter 3 stands at INR 35 crores. This is as against INR 19 crores of quarter 2 and a loss of INR 6 crores in quarter 3 of the previous year. So as a business, we continue to be very sharp focused on our fundamentals. If at all the pandemic has disrupted something really big other than the demand, it has been on our supply chain. And we have taken this opportunity of the disrupted period to build our supply chain back in a way that gives us much better control upstream and by doing our own manufacturing. In the long run, this will help us not only unlock cost efficiencies better but will also make us cost leader and also improve our speed to market. Besides going higher on our own manufacturing and upstream control, there is one more area we have been taking up and in a big way we have invested behind in the previous quarter. This is in hard luggage, and we see hard luggage as a proportion to the total luggage segment has been taking -- going higher in salience in a big way. I think, somewhat, this is in line with the global trend and also some bit of the hygiene factor during pandemic fueled it. This is also -- this is the supply chain, which is possibly less disrupted is hard luggage because of local manufacturing versus imports. So we've -- as a business, we have improved -- increased our capacities in hard luggage in a big way. In fact, after a long period of time, we have invested to the tune of almost INR 36 crores in increasing our capacities in hard luggage and this is across the sites that we have in India and Bangladesh. Our core strength was always our brands, our new products and innovation and our distribution through channels. And that's something that we have started to scale back in a big way and much more strongly than what we had before. We saw a huge amount of new launches and a lot of pent-up launches were done in the previous quarter, both in hard luggage and soft luggage. Mostly in hard luggage saw new range of products launched across channels. We are also continuously working on streamlining our supply chain for better fill rates and availability. And as we do this, the pandemic disrupted our organizational strength in terms of people, talent and the overall structural adequacy, and that's something also we have -- it's been a hard work scaling back, but that's something that we're feeling good about in terms of where we are as we speak today. So going forward, I'm quite hopeful of having lesser or rather no demand disruption. While we'll have to battle in the short term the high inflation that's on to us, but we will continue to progress on strengthening our fundamentals, and I'm quite confident we will further improve our results going forward. Thank you. And with that, we could take the questions now.

[Operator Instructions] The first question is from the line of Karan Khanna from AMBIT Capital.

Congratulations on a reasonably strong quarter. So maybe, firstly, on the recovery, considering the quantum of price hikes which you have taken over the last couple of years, can you help us understand what has been the overall extent of volume recovery which you have seen versus 3Q FY '20 which wasn't impacted because of COVID?

Thank you, Karan. So the volume is moving in line with the value group growth and recovery because overall the ASPs of our products has not gone up significantly. There's just about a percentage or 2 higher than 2019, '20, the same period. So from that point of view, the volumes continue to grow back and the revival is not only in value terms, but also in volume.

Sure, okay. Secondly, in the investor presentation, you've given us a split in terms of the mix across Caprese and across all your brands. So can you help us understand internally what mix across various brands are you striving to achieve in the next year or so when you see complete recovery?

Yes. So Karan, what we talk about the scale-up of the Aristocrat brand, because that represents our fight in the value end and that's something that is very important for us to gain back some of the lost share. However, our main strength is in the brands VIP, Skybags and those are some things that we need to get back in terms of proportion. So we are focused on growing both ends. I think we have done a good job in coming back or powering up on the value end. The premium and the mid-premium also had some headwinds, which was external in terms of whether it's international travel or more premium consumption. Also, we had challenge in our supply chain to bring out these products better in the previous quarters, but that's not got corrected as we speak in Q3 -- for Q3. So I only think that mix will get more evened out better. We will come back to the strength that we had in VIP and Skybags. And hopefully, we have added -- we would continue the growth in the Aristocrat brand the way we have been able to get till now.

So what I'm trying to understand is that with the company starting towards a similar revenue mix which you have seen in 3Q FY '20, possibly with the higher share of Aristocrat, is it fair to assume that given your investments on the supply side and the price hikes, et cetera, that you have taken, on a like-to-like basis, your GMs, the gross margin, should outpace those levels seen in 3Q FY '20 of 63%?

We would have been somewhere there, but for the inflation that has certainly come up. So unfortunately, these forces are not all coming in our favor at the same point of time. So the mix is getting better and will get better. However, what I foresee in the coming time, inflation versus price increase is something that we have to balance. And at this stage, price increase is something that we'll have to see also from a competitive point of view because we are not willing to bring first on, on everything. Maybe that's something that we have done in the past. So we're going to keep a very strong eye on competitiveness as we look at pricing and focus both on value and premium at the same time.

And thirdly, on backpacks, given schools and colleges have recently opened across several states, any initial thoughts on the movement of this category in the second market? And also the possibility of discounts to liquidate your current inventory?

Let me take the second part of the question first. I think we are in a better position, much better now, because somewhere during quarter 3, while it was not uniform across, but there has been sporadic demand based on school opening in different states for different sections of classes and colleges and all that. So we are in a better situation as far as the stock that we were carrying on backpack. However, as you rightly said, that we are also expecting things to become extremely or far more normal with the next session as the school opens, and that is something that should bring back a good tailwind as far as the backpack category is also concerned.

And then lastly, on expansion plans for Sinnar, is there any development here? How much CapEx will you incur? And what's the monthly volume offtake which you would expect from this plant post commissioning?

So the CapEx is happening in Sinnar and a little bit in Nashik. So if you meant Sinnar as a separate site and Nashik as a separate site. So we are increasing capacity and adding machines and lines there. So both the sites are coming up. We are also starting to manufacture hard luggage in terms of making -- producing shells in Bangladesh also. So in all these 3 sites put together, we would -- this is where we -- I said that we have invested about INR 36 crores in plant machinery as well as we have acquired some assets in terms of building and sheds in Bangladesh and also as part of this investment.

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

Yes. Sir, once this new capacity comes on stream and the raw material prices revert to the past mean, what kind of swing can we expect in our gross margins due to pricing share of own manufacturing?

So very difficult to exactly predict this is the inflation where and how, how and when it will get tamed down. But in a very -- the picture that you are painting, I think our gross margins at that stage should be consistently in excess of 50%. But at this stage, I don't think it is either meaningful or relevant on my part to predict gross margin number there. It's a volatile environment. And we are goal-seeking or targeting our best to keep our number at 50% plus as we speak. But as everything becomes fine and from a competitive point of view also, we gained back the shares that we are aiming to, we will start seeing the efficiencies of back-end manufacturing coming on to our business in the way we had thought out.

Can you share the price hike which we have taken in this quarter?

We took a 4% price hike in this quarter, which was effective November 15. So we got a 1.5 month's impact.

Sure. One last question. Can you share the progress on EBO expansion? Because if I recall it properly in the last call, we mentioned that we would probably reach a count of about 460 by end of FY '22. So what is the update on that sir?

So I think we had a very good quarter in quarter in -- from October, November, December in scale back. Most of these programs -- most of the opening of new outlets -- EBOs are happening through the franchisee route. So on a base of somewhere about 220 such franchisee outlets, we opened about 45 or we signed up about 45. So work is in progress there. However, this month, and now as we speak, it has been some bit of a setback there. So let's see where we hit. But I think these disruptions are just something that is digressing or are slowing us down in the weeks and months that is going into this. But we'll be coming closer to that number, if not on 31st March, maybe by 30th April, given we have come back very quickly in February.

The next question is from the line of Aditya Lalpuria from B&K Securities.

I've got a couple of questions. So I wanted to know like what will be the CapEx plan for full year '22 and '23? And as far as I recollect, we are planning to spend the INR 15 crores to INR 20 crores on increasing our Bangladesh capacity. So can you provide an update on that?

So as I said, this is something that we have done now, which I spoke about, the INR 36 crores. And there is some routine CapEx that we do in refurbishment and then so that's -- a similar kind of an amount is something that we can expect to be spending for the subsequent year in terms of capacity expansion. .

Okay. And what will be the sales contribution from our Bangladesh operations in this quarter, in 9 months?

You mean to say from what we sold, what percentage came from Bangladesh?

Yes. Yes.

This quarter, it was about 45%.

Okay, okay. And sir, like you have given the brand-wise contribution. Could you also tell us the brand-wise contribution for the 9-month period, like the way we have given it for like quarter-wise. So can you do it for the 9-month period as well?

I don't have it right now in front of me. Maybe we can..

We can share it later.

The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund.

Yes. Congratulations, team, for a very good performance. You mentioned that Bangladesh contributed to 45% of revenue in the third quarter. Is it possible to highlight from next year onwards how much this contribution can increase to?

Let me answer that question slightly differently in terms of own manufacturing versus outsourced manufacturing. So own manufacturing, I'm expecting it to increase to almost 65% to 70%. This will be between Bangladesh and Nashik and Sinnar overall. But the exact speed is something that, I mean, like we could work it out and give it to you separately. So from what the key point is, let's say, '19, '20, our own manufacturing was in the range of about 40%, which is going to go up to 65% to 70%, and that's the underlying shift that we are talking about. And the other extreme is importing from China. And that contribution, which was as high as 50% in 2019, '20 will come down to less than 10% in the coming year. Or even now as we speak, it is less than 10%.

And what was the share of own manufacturing so far in 9 months?

So far in 9 months on an average.

60.

Would be about 58%. Yes, about 58%. Sorry, so there's a big scale up quarter-on-quarter that is happening on that. So it's a very fast-paced scale-up that is going on in Bangladesh as well as Sinnar. And just since you have given me the opportunity, I would like to talk about Bangladesh. Scale-up is not only in total volumes, but also in terms of the complexity it is taking on. In producing the categories, so it used to produce only about 3 categories. And today, Bangladesh in the near future, Bangladesh will produce all the 5 categories that we are in and is already producing more than 300 SKUs per month.

Okay. Secondly, if I look at your net current assets has gone up to about INR 343 crores versus INR 260 crores in March. And as again the cash and investment balance has declined by about INR 100 crores during the 9-month period. So is it fair that the inventory has gone up versus March level at INR 300 crores in December?

No, there is a working capital investment of around INR 69 crores, if you see from March to -- in the 9 months. And balance is on CapEx, some investments on CapEx.

And what is the inventory as in December?

Inventory as on December has not gone up substantially. It has just gone up by INR 25 crores.

Understood. And if I look at your ad spend this quarter, it was about 2.3% of revenue. So will this be the trend going forward as well? And if I look at your employee cost, is it fair to say that the third quarter number can be annualized in FY '23? Or it can also exceed from this?

Not on the ad spend. I think that is something that we're going to increase in terms of our investment in building our consumer franchise. This disruptive environment, going up, going down, certainly is kind of within the quarter held back decisions on investments in that. But quarter 3 actually started to see a lot more activity happening from our side in terms of building consumer preference for our brands using promotions as well as a lot of digital marketing. . So to answer your question, that ad spend percentage or level will go up in the coming year.

And on the employee front, is it fair to annualize the third quarter run rate? Or would be higher than that?

Slightly higher.

Maybe slightly higher but..

Not much.

It won't go back to what it used to be before.

So I was trying -- what I was trying to understand, are we okay with the current employee strength in terms of investing in growth? Or we are still looking to plug the gaps?

So from an exit point of view, we are almost very close to where we want to be, and that's why I said it will go up marginally from here. But not for the 9-month period or a 12-month annualized from now backwards. So that investment in terms of people and structure has been going up, but we've reached close to where we want to be. And there won't be too many -- too much of addition there from where we are today in January.

Sure. And my last question is that 48% of revenue comes from hard luggage. So would it be fair to say this is fully in-house manufactured? And as this percentage of in-house goes to 60%, does that mean that even on the soft luggage we are looking at increasing manufacturing capacity of our own?

So hard luggage is 60% right now on quarter 3 and 40% is soft luggage. The entirety of the hard luggage is manufactured in-house. Soft luggage, we don't manufacture in India. It gets manufactured in Bangladesh but -- and the India manufacturing is necessary for the CSD part of the business. So that gets outsourced. But even that outsourced partner is an exclusive partner where we have far better control on the cost structures of the product and the overall economics of our -- the product gets -- made there. So to that extent, we -- in soft luggage, we have almost 70% of the production, 70% to 75% of the production in-house. And the remaining 1/4 gets outsourced, but in a much more controlled way.

And sorry, just one last question. So if I look at share of Aristocrat it has increased to about 40% this quarter versus 30% during pre-COVID. So as we enter FY '23 and possibly international travel also resumes back, do we see the share going back to the pre-COVID levels of 30%? Or how should we look at it?

No, I don't think it will go back to 30% because the market always has been slightly bigger there compared to what our salience of that category was, and that was a very conscious effort and attempt to gain back share there. However, VIP and Skybags will definitely scale up from where it is today.

The next question is from the line of Niket Shah from MOSL AMC.

Yes. I just had one question. Given the fact that Q1 is the best quarter historically and India has not seen a very strong Q1 because of the first wave and the second wave, how is the company prepared for this Q1 given the fact that most of us believe that this is an endemic and things will revert back to pre-COVID levels in terms of travel and in marriages? So just trying to understand your preparedness for the first quarter in terms of your inventory and production back-end?

So firstly, I would say thank you for asking that question. I think you are bang on and we resonate exactly the same -- same conclusion that we have -- you have that quarter 1 is the biggest quarter for this industry. And we are quite relatively sure that we should -- we will not have a disruption there. So we are looking forward to a good quarter 1, and we are quite well prepared than what we ever used to be before in terms -- during the pandemic stage. But yes, a lot of things are happening as we speak. The ramp-up is happening month-on-month. So we have some way to go, but I think relatively we feel quite confident about doing a good job for quarter 1.

And would you also like to comment on the product mix that you would like to achieve, given the fact that we are looking at a very strong Q1 across the board, not for luggage as such, but just generally for summer businesses as well.

In terms of the hard luggage and soft luggage mix or the brand mix you wanted to understand?

Yes, brand or pricing essentially, not hard or soft.

I think Aristocrat would -- the value-add will continue to have the similar dominance. It may go down a few percentage points, but that's a guesstimate at this stage right now in terms of share -- the salience between the brands. But as I said, once again, that VIP and Skybags would come back in terms of the share of the overall revenue and volumes. So we'll see exactly what kind of mix comes up, but we'll continue our progress in Aristocrat, maintain that level of market share. And we'll make sure that our VIP and Skybags brands comes back.

Sure. And if you -- just one more question on the export part of the business. Would you like to spell out anything in terms of any progress that you would have made in the last couple of quarters? Or how should one think about export business over the next 1 or 2 years?

So it's -- like the domestic business, that is also inching back to where it was in terms of where we are distribution, largely in the GCC countries and Middle East, the demand has started coming back. We had our distribution there. The brand is salient there and, therefore, we're kind of on a similar kind of revival is coming back there. But besides that, as of right now, we have nothing much to share in terms of the plans or things that can happen in the immediate future.

And any D2C brands that you plan to launch only for online? Is that a thought process? Any update on that?

No, there is quite a few, but I don't think we are at a stage where we could start sharing or talking about that part as of now.

The next question is from the line of Ankit Kedia from Phillip Capital.

A couple of questions from my side. First, on gross margins where you said you're targeting around 50% of gross margins. Now with own manufacturing share increasing from 50%, 60% to around 65%, 70%, shouldn't the gross margins ideally be going up, even factoring in that our premium brands, you're converting the share of premium brands in FY '23 for VIP, Skybags would start to inch up. We've already taken price hike in the system. And going forward, if inflation is under control, do you think that gross margin guidance of 50%, 51% is slightly conservative?

Yes. In the statement that you made, the big assumption is inflation to come back to where it used to be before in terms of raw material prices. When that happens, definitely, we will have the advantage of own manufacturing fully visible. But I don't expect that to happen in the near future.

So despite share of own manufacturing increasing, you are saying that margins could continue to bleed because we are not able to take price increases due to competition and volumes could be a challenge?

That's right. So it's a very fine balance. So there is cost efficiencies that is getting built because of our upstream control. However, that is getting negated by the sharp inflation that you have had. And any chance of huge price increases to cover up for that is going to get restricted based on our competitiveness aspiration that we have.

So just to add, so Anindya mentioned that there's a 13% inflation, and we have taken price increase of 4% 2x. So therefore, 4% to 5% is absorbed in the [indiscernible]. So the efficiency will be equal that absorption.

Sure. My second question is on the A&P spend. If you're looking for a bumper of Q1, will our A&P spend next year, if everything is sitting today looking good, will it go back to that 5% to 6% range of A&P which we used to have previously? Or will still be conservative and thinking that can still happen and conserve cash.

No, we won't -- we have never been pessimistic about this. We deal with the volatility. So we're not going to be expecting bad things to happen. So our A&P will definitely go back to 5% levels in terms of our plans. We would plan to put that kind of money to continue to strengthen and build our brands.

And Neetu ma'am just on the provisioning, we have done around INR 7.5 crore provisioning in 9 months. Would it get reversed going forward? Or do you think this provisioning is going to change.

That is with regards to the Big Bazaar. So we all know it's in the public domain. As of now, nothing is happening. But whenever things improve and somebody buys that business and we get our money, it will get reversed. In fact, that amount is INR 22 crores. The provision overall created in last year and now, it's INR 22 crores for Big Bazaar.

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

While most of my questions have been answered, I had one question on the supply chain. So what we hear is that there has been unavailability or delays in supplies across the micro market, even by the larger players like yourself, with supply chain issues seeming to be higher for the smaller and the unorganized players. So in that context, can you help us with your thoughts on what is happening on ground given over the last 1.5, 2 years you have taken a lot of initiatives to improve your supply chain?

So in fact, the last 18 months has been a struggle on our part also to get -- to bring supplies to wherever demand was. And that is also because we took the tough route of changing from -- importing from China to making it ourselves. So in a short span of 4 to 5 quarters, we kind of developed capability and capacities to make produce in-house. This should result into better supplies in the long term and in future -- and in future to come. And it will be in a more controlled fashion. I think we would have a better control over that because we are manufacturing it ourselves. As far as the market is concerned, yes, we have seen sporadic supply issues and largely it is to do with China as well as the freight becoming quite prohibitive for smaller importers to bring in products from China. So to that extent, it would be too much projective to look into '22, even talk about what could happen in the future. But there seems to be headwinds, as we see right now, for smaller or very regional importers to bring in products from outside and at extremely competitive rates. So that dynamic may change, but it's something that only the future will tell, and it's very difficult to predict that right now.

So I believe there is a double whammy of organic demand growth and also grabbing some share from the unorganized players. So from that perspective, will it be possible to give some sense on how has been the mix now between the organized and unorganized players versus pre COVID?

No, I'm sorry, I won't have numbers to do -- to tell that. And I think it's the feel on the numbers, which I think you also have that unorganized sector has got some hit during the last 18 months. But I am sorry, I -- there is no secondary data on exactly what is the mix of organized versus unorganized on an ongoing basis.