Good evening, ladies and gentlemen. A very warm welcome to the VIP Industries Limited Q2 and H1 FY22 earnings conference call. From 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. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then 0 on your touch-tone phone. 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.
Thank you. Good evening, everyone. Thank you for taking time out this evening to join us on this call to discuss the V.I.P. Q2 results. At the outset, we had a fairly good quarter two with a revenue of INR 337 crore, and more importantly, a very sharp recovery from the disruptions of the previous quarter due to the second wave. We saw a recovery of 80%, and this recovery is measured against our base of 2019-20 numbers. In fact, the quarter gone by has been our largest revenue quarter in the last seven quarters, including Q4 of 2019-20. We saw the business environment increasingly becoming better within the quarter and as the COVID cases came down sharply. Our key barometer, the airline passenger traffic data, also saw a similar level of recovery.
Airline passenger traffic saw a 60% recovery of the same compared to the same quarter 2019. However, international travel and schools, colleges predominantly remained closed and continued online, and we didn't have that demand. While the demand opened up, we faced two key challenges. One, we saw a sharp inflationary pressure building up in our raw materials, and this is also coming from the high ocean freight, that we all know has scaled up abnormally at an abnormally high level. Also, we had constrained supplies coming from the disruption in Bangladesh that happened with a lag of almost 4-6 weeks after what we saw in India. So the Bangladesh disruption continued way into August to the mid of the quarter. However, we had good and tight control on our fixed costs and all other offsets, and that resulted into an overall good result.
If you highlight, you would have all received the presentation. Our quarter two revenue from operations was INR 337 crore, and INR 421 crore in quarter one of this financial year. The gross margin was at 47% after netting off other income as compared to 51% in the sequential quarter. This has happened largely due to the inflation as I spoke about in the raw material costs and ocean freight, and also due to some unfavorable mix. EBITDA at 14%, INR 49 crore, this compares to 12% in sequential quarter and -16% over the same quarter last year.
Overall profit for the period stands at INR 19 crore as against INR 3 crore of quarter one and a loss of INR 35 crore on the same quarter of the previous year. A little bit more details about our revenue concept in terms of channels. We experienced good scale-up across all channels.
E-commerce, with the tailwind of some of the organic shift that we have been experiencing that happened from other channels, was also backed with the festive season. Over the last few quarters, our work on the fundamentals of the channel in terms of assortment, promotion, and performance marketing has given us dividends. Our traditional stronghold channels, general trade and modern trade, also scaled up well within the quarter, and we witnessed our distribution in terms of number of towns that have come back to 2019 levels. The retail channel, which is our exclusive business outlets, continued to be challenged because this is where we had shut during the pandemic period a large number of our stores, and this channel will start scaling up as and when we open back the number of stores that we had shut.
Also, the institutional business was suboptimal, largely coming from our supply constraint. Going forward, I believe the environment would be conducive for good demand with, hopefully, COVID numbers continued to be reined basis the vaccination drive that has happened in the country, and the overall sentiments looks very positive. We are significantly increasing our investment in creating supplies for ABS. We are expanding our Bangladesh manufacturing plant, and we are planning to invest roughly about INR 15-20 crore in the coming time to expand capacities there, as well as we would be investing in our India supply chain here in our own manufacturing to increase capacities.
Also, we would now start aggressively investing beyond creating demand and generating preference for our brand, and this not only will be seen in the promotions and advertising that we do, but also in the kind of new products that we are launching in the market today. The biggest challenge that will remain in front of us right now is to tackle the huge amount of inflation that we are foreseeing in the coming quarters. Overall, with the demand situation coming back, we are quite positive about the business going forward. Thank you, and I can now open the forum for questions.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may please press star, then one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star, then 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. To ask a question, please press star, then 1. The first question is from the line of Karan Khanna from Ambit Capital. Please go ahead.
Yeah, hi. Thanks for the opportunity. So first, my first question is on your, you know, as far as the raw material inflation is concerned. Will it be possible to quantify now that almost 47% of your revenue is being manufactured at your hard luggage facility? Will it be possible to quantify the split between PP, PC, and ABS at your Nashik manufacturing facility? And, secondly, to counter these inflationary trends, what sort of price hikes have you taken in the last two to three months?
Let me just jump in here. Radhika speaking. Thank you all for attending. Karan and I guess the first question is too detailed for us to be able to answer in this forum, and I'll request Anindya, please, to take the second question.
Yes, thanks, Radhika. So,
Pricing.
So the price increases for the quarter gone by have been very little. The new products that we have launched have been priced in line with what we expect the raw material prices to be going up for. But on our base product range, we would be taking a price increase in the coming quarters.
Sure. Secondly, Neetu, in the last phrase in the last call, you mentioned that you were fairly positive that once the business returns to complete normalcy as a company, you can expect 20% kind of an aspirational EBITDA margin to sustain. You already had 80% in second quarter, and as you mentioned, you're quite confident on the recovery aspect as far as the next few months are concerned. In that context, is it possible to get some sense on what sort of a sustainable EBITDA margin should be the company's EBITDA margin in the next few months in the context of the inflation that we are seeing on the raw material side?
So mostly, Karan, we will be definitely taking care of the inflationary pressure. So there's a price increase which is lined up which will happen in a month's a month from now. So definitely, our aspiration is to reach what number we had talked about, but it all depends on the demand context and these raw material pressures.
Karan, if I may just add to that, because now, based on our own manufacturing, which is more like a business than importing and procuring well ahead, you know, ahead in time, the volatility of the raw material situation would have an effect on the overall margin and the results of the company. So, the aspiration and ambition remains there, and we will do everything to get to that. However, we're right now not able to fully confidently comment on what kind of volatile raw material situation we would have, both in terms of price and also in terms of, you know, supply quantum, that also is under severe challenge right now.
I'll just add to that. I think when we said 20% EBITDA, we did not imagine the inflation would be so sharp as it is. I mean, that's just a fact. I think it was not expected to be this much. So, as Anindya correctly said, it remains the aspiration, but we are some way from it.
Sure. And on your balance sheet, I'm looking at the trade receivables. This has gone up from INR 148 odd crores to INR 256 crores as of this September. So any particular reason why there's a sharp increase on the receivables front?
That is mainly because of the scale. If you calculate number of day-wise, it has come down by six days.
It's come down by six days. Okay. And lastly, on the backpacks, will it be possible to understand if there's any recovery that you're seeing on, on, that category, given what you're seeing as far as schools and colleges, gradually there is some sort of opening of that happening on, on, on that side?
So, Karan, what we are seeing in the last couple of months is quite encouraging because while fully schools and colleges have not opened up, there has been some sporadic in some states some classes and some schools have opened. And the moment that has happened, we have started to see the throughput happening of this category. So as things become better going forward, I think it will just all fall in place going forward.
Sure. That will be our last question. I'll come back in a bit. Thank you and all the best.
Thank you.
Thank you.
Thank you. The next question is from the line of Prerana Jhunjhunwala from B&K Securities. Please go ahead.
Thank you for the opportunity. Congratulations on a strong set of numbers. So, ma'am, I wanted to understand, the capacity expansion plan in, because, as mentioned earlier, our capacities were enough for a pre-COVID level of sales. So, the current capacity expansion that you are foreseeing, is it taking into account that we'll reach pre-COVID level of sales, much sooner now, and it will it will be sustainable going forward?
If I was to understand your question better, are you talking about our capacities, our own manufacturing capacities in line with the pre-COVID numbers? And we weren't there, and that's the plan to build our own manufacturing up to the level of pre-COVID numbers. And that's something that's work in progress. The investments that we spoke about is all to improve increase our own manufacturing capacity. Having said that, we have enough avenues of sourcing, whether it is in India or the worldwide supply of China to bring in the supplies that is needed for the demand going forward.
And just to add to that, I think this question is also about demand forecast and how quickly is the demand coming back and how quickly will we reach pre-COVID. I think the demand assumption has been a bit, happily faster than expected, so that's great news. So it's too early to say when will we re-cross pre-COVID numbers. But what we can say is after the terrible second wave, this demand assumption will be much faster than we expected. So suppose there's no variant, there's no third wave, which so far there has not been, then, you know, things are looking better than we expected on the demand side and much worse than we expected on the margin side.
That's great. And second, just wanted to understand on the demand side only, on the different type of product ranges, for example, in the mass segment as well as in the premium segment, how is your demand panning up, and how are you projecting your, you know, sales to, you know, how well you are prepared to take care of any divergence there?
So, the demand thankfully is coming back into the mass premium and the premium segment. The large part of the demand increase happened in the previous quarters in the value segment. While that continues there, the demand on the mass premium and premium is also coming back, but the recovery rate in the higher, in the premium segment is far lesser than the recovery that we are seeing or the growth that we are seeing in the value segment. That continues as a phenomenon even now as we speak.
Okay. Okay. And my last question is on how are we looking at increasing our distribution network that you mentioned about in your preliminaries? Could you give some more color on that?
Sure. So we look at it from a channel point of view. The role of general trade is to build accessibility, and there we would be going forward on a fast pace increasing our distribution, both in the towns that we cover and also go down penetrate into smaller towns to increase distribution. But that's a mid-term to a long-term plan. In terms of channels like exclusive business outlets where we had shut down company-run stores and also a lot of franchisee stores shut down during the pandemic due to profitability issues, a lot of it is coming back. And in the next two quarters, we plan to aggressively try and take back our total number of retail stores or exclusive business outlets very close to the 2019 numbers.
Definitely, in the subsequent year, we would try and we would aim to take it even ahead of far ahead of the 2019 numbers.
Okay. Any numbers that you would like to highlight on the distribution expansion, number of distributors, agents, dealers, etc.?
I can talk about retail stores. We had about 500 of them. We would be having, you know, we shut down about 150 inclusive of our own retail stores or franchisee stores. We would try and get back to about a 460-odd number by the end of this year. That's one of the targets that the team has taken on.
Thank you. I'll come back to the question queue and all the best.
Thank you.
Thank you.
Thank you. A reminder to the participants to ask a question. Please press star, then one. The next question is from the line of . Please go ahead.
Yeah, good evening, team, and thank you for the opportunity. My first question is on the strategy of reopening the EBOs. So what we understand is that the EBOs which were shut down were not contributing significantly to the overall revenue. It's about in single digits. So now that we are planning to again open EBOs back to 2019 levels, how should we look at this in terms of overall revenue contribution and alongside that, the profitable contribution as well?
Thank you for asking that question. You're right. From an EBO point of view, our strategy is to open through franchisee route. We are not encouraging our own investment and opening on our company-run stores. So that's one. Majority part of the now opening will happen through a franchisee route where we believe the retail operations to be run by a partner who's more suited to do it, and we continue to run the business of brands and creating demand. So, did that answer your question?
Yeah, yeah. Sure. Understood. So I mean, in terms of the stores becoming profitable, what are we doing? I mean, because earlier the stores were sort of loss-making. So are we looking at different locations in terms of opening up, or how should we look at it?
Yeah. So, from when the profitability question comes more for our company-run stores. With COVID, we had shut down all the fundamentally loss-making stores, and what we have now are, again, on a fundamental basis, profitable stores. So all, you know, revenue increase would increase their profitability going forward. Also, the rent reductions and all that we did in a lot of places, we were able to bring down the cost, on a longer-run basis, in terms of renegotiation of rents that would also help to drive profitability of the company-run stores going forward. In terms of the franchisee stores, it is selection of the right partners who has the best knowledge of the locale in which the store is coming up and is able to manage the cost and, therefore, its profitability.
Our profitability there is about, you know, at the price that we sell to the franchisee. So there, our profitability is kind of given. We assess the franchisee to our best ability to make him profitable by investing in the revenue growth of that store.
Sure. My second question is, as you mentioned, there was some supply chain disruption from Bangladesh. So was there any sales loss on account of the supply chain disruption? And if yes, what are we doing, going forward, to ensure that we don't have sales loss given that the demand from the festival season could be much stronger?
Yeah. So, to answer the first question, the disruption from Bangladesh supplies happened because of the second wave which happened in Bangladesh, in June, in July and August more. The peak was more in June, and it came down in July and August. So there was a lag of 4-6 weeks between our peak and Bangladesh peak, and therefore, there was a national shutdown there and the factories at disruption. So it kind of was a temporary disruption in quarter two beginning part of the quarter two which resulted in supply disruption, downstream. We would have lost some opportunities of getting sales because of those, that disruption.
Going forward, after that, from August, September onwards, the manufacturing is at full swing, and we don't see a disruption from Bangladesh causing unless there is another wave or another event like that happens. We don't see a problem on a steady state coming in supplies.
My last question is that, is it possible to quantify what could be the increase in revenues from this incremental capital investment which you are making both in India as well as in Bangladesh? Wanting to know the asset turns on this incremental investment.
No. I think that's too detailed for this conversation right now.
So, Bhargav, the basic purpose of increasing the capacities is to have our own dependence and not depend on an external party. So that's the whole point. Also, if suppose today we are doing an outsourcing, if we do in-house, we'll make more money. So that's how it will be. And if today I start to think about spending, it will take 3-6 months for the capacities to get built up. So we have to get ready for the next year. That's the whole plan.
Just one last question. Out of this total inventory of about INR 330-odd crores, the competition is broadly the same as in the first quarter or the backpack inventory, school bags inventory has started coming up?
Yeah. Backpack inventories have started coming up. Also, this also contributes more of raw material than heavy-duty fully because we are getting ready for the next quarter.
Great. Great. Thank you very much, and congrats for a very good performance.
Thank you.
Thank you. A reminder to the participants to ask a question. Please press star, then 1. The next question is from the line of Jinesh Joshi from Prabhudas Lilladher. Please go ahead.
Yeah. Thank you for the opportunity. Madam, I mean, in the previous question, you highlighted that the majority of the inventory on the balance sheet pertains to the raw material inventory. And considering that we are facing RM cost inflation, is it fair to assume that our gross margin in the next quarter can be higher than 47% which we reported in this quarter because we have already sourced our RM inventory, and the situation will be favorable for us?
You see, most of the inventory is not RM. I said the mix is favorable towards RM. Also, whatever we have procured is at a high price only because it already hit us, right, inflation. Further increase, yes, there might be some gap, but our endeavor is to definitely have better margins close to 50%. But we'll have to wait and see how much price increase we can take, how the market behaves. Depending on that, the gross margin will depend. But yes, definitely, we have an ambition to reach 50% for the next two quarters.
Okay. And with INR 320 crore of inventory with a 50% gross margin can essentially support INR 600 crore kind of a top line. So, essentially, our reliance on more sourcing for the next two quarters is lower, right? Is that the right way to think?
No. So, 300 crore is not raw material inventory. That is finished good plus raw material. There is a certain proportion between them. So therefore, that does not translate into a 600 crore heavy-duty increment. And there is a raw material that needs to be procured for coming quarter and the quarter after that.
Okay. One last question from my side. In the last call, we had stated that we plan to launch some 20-25 new products, and majorly one-third of them would be from the value and the mass category. How has been the response to the new launching? If you can just shed some light on that.
So one big, we have launched the set of products that we had planned to do in quarter two, and a lot of it is also planned in quarter three. All of them have been received extremely well in the market. The strategy is paying up for us to generate demand based on that. So it's working for us.
Okay. And these launches were they in the luggage segment, or were they in the backpack segment?
This was predominantly in the luggage segment because in the backpack segment, we are carrying some inventory from the past, as we spoke in the previous meetings. And, you know, once that inventory exhausts, we are going to come up with a completely new range in the subsequent hopefully, in the start of the next financial year.
Okay, sir. Thank you so much.
Thank you. The next question is from the line of Rounak Shah from OHM Advisors. Please go ahead.
Hi, sir. Sir, just a question on the cost side. How much would be our cost savings, due to COVID which, you know, wouldn't come back, back into our P&L?
We had saved INR 180 crore in the COVID year, and 50% of this is sustainable, and 50% of this will come back when the business is back.
Okay. Thank you.
Thank you. Thank you. The next question is from the line of Niket Shah from Motilal Oswal Mutual Fund. Please go ahead.
Yeah. Thanks for the opportunity, and congratulations on a decent set of numbers. I have two questions. The first is, given the fact that we have seen such a big amount of e-commerce ramp-up happening in the country, any thoughts of launching e-commerce-specific or a D2C brand within luggage only for e-commerce? That's the first question. And the second question is, given Future was one of our largest customers, and we had a very lumpy revenues there, with some clarity likely to emerge there, would should one really assume normalization of those INR 250 crore-INR 300 crore bulky revenues coming back for us?
To answer your second question, we are also looking forward to that and share the same sentiment because as things normalize in the one of our largest customers, we have no reason not to believe that we should be able to get back to the similar revenues that we had in the past.
And just one question. So we essentially lost about INR 300-350 crore of revenues. So we are at 80%-85% of pre-COVID, assuming zero revenues from them, right? So in some sense, if that client would have been normalized, we would be above pre-COVID any which way.
So it is not, it has not become zero for sure. It has reduced, higher than or its recovery is lower than other channels. But all the stores are functional, and our business continues with them at a suboptimal level compared to what we think can happen in those stores and with the banner.
Sure. And the one on the intelligence-specific brand?
Oh, yes. On your e-commerce question. So, well, that could be a strategy that we could look at, an exclusive brand. But mostly, I think the codes of e-commerce is to really look at the consumer demand profile and to create our offerings in line with that. We are doing well there, and we can continue to invest behind the demand that is coming up in e-commerce through our current brands and mostly through the portfolio that we are building under the current brands. So the same brand architecture will be taken forward in e-commerce, and we are mostly trusting on the right mix that we need to develop for e-commerce there.
Got it. Has there been any case in this quarter or what you are seeing right now where you're running short of inventory for certain SKUs where demand is far higher than supply? Are you seeing those kind of situations happening currently?
Yes. I spoke about that. In the quarter that has gone by, we have faced several supply situations. And the cause of that was Bangladesh disruption as I spoke about it. While there is no common thread across, you know, any specific SKU or a range, but you know, the production that happens in Bangladesh, that range had issues in the previous quarter in terms of supplies. But that's got corrected now for the coming quarters.
Got it. One final question if I may squeeze in on exports, if you can just let us know any progress on that side, or if this continues to remain in, slightly slower pace.
The export business continues, but there is no major thrust that we are doing on that side right now, largely coming from our supply side. The idea would be to first fulfill the demand that is there in India, and in the near future in the domestic business before we start looking outside.
And for Caprese, we plan to launch the Caprese into other channels and much more wider rollout. Any update on that?
So, in Caprese, it's the focus on e-commerce is the highest right now from Caprese channel point of view, Caprese brand point of view. But yes, we do play it in other channels as well. In the near future, we would like to, you know, go deeper into the e-commerce business with Caprese before we take it, you know, across many channels.
Okay. Thank you so much, Anindya . Thank you. Best of luck.
Thank you.
Thank you. Participants, to ask a question, please press star, then 1. The next question is from the line of Gautam Bhayani from Wisdom Capital. Please go ahead.
Hi, everyone. I, I believe, you know, demand is stronger in hard luggage segment, in our case. You know, how much capacity do we have in hard for hard luggage, in-house, and, you know, what is the current capacity utilization level over there?
So you're right. The demand is in favor of hard luggage, and that's a welcome thing for us because that's been our stronghold in the past. We are, as I spoke about in Bangladesh, we intend to initiate hard luggage manufacturing as well in the near future. So today in Bangladesh, in the past, we were doing largely soft luggage in Bangladesh. But in the future, we are investing to create both, you know, molding as well as assembly of hard luggage in Bangladesh. So that's where we will expand. We are also looking at avenues of expanding hard luggage manufacturing within our Nashik facility, to further create headroom in hard luggage.
My question was, you know, regarding the existing capacity and capacity utilization level. If you can throw some light on that.
Existing capacity is 100% utilized right now.
Sure. And during, you know, you know, COVID wave, you know, the unorganized sector was, you know, hardly impacted. So do we see any recovery in, you know, in that segment?
Recovery?
From the sales front, you know, do we see, you know, unorganized players recovering back and, you know, giving us competition, or, you know, they are still, you know, hardly impacted?
Difficult to say right now. I think the unorganized sector would not go away completely. But there would be. I'm expecting the unorganized sector to have more challenge than the organized sector in the coming few quarters, coming largely from supplies and the import situation from China. So to that extent, they would have higher headwinds than the organized sector, and that could be favorable for players like us.
Sure. My last question, regarding raw material, you know, are we making any shifts, you know, from polycarbonate to polypropylene, to you know, into on our, you know, costing part?
Yeah. Yes, we did that as part of our, you know, hard luggage strategy. And that's the reason why the investments we are talking about in Bangladesh as well as possibly in Nashik would have a higher share of polypropylene than polycarbonate.
Sure. Thank you so much.
Thank you. Participants, to ask a question, please press star, then 1. The next question is from the line of Pulkit Singhal from Dalmus Capital Management. Please go ahead.
Yeah. Thanks for taking my question, and congratulations on the sharp numbers. Just trying to understand the Bangladesh-related sourcing in Q2, what percentage of sales is coming from Bangladesh in the second quarter?
For quarter two. Well, this would keep changing based on inventory levels, but roughly about 40% of the revenue came from what was manufactured in Bangladesh.
Sure. Sure. The decision to also manufacture hard luggage in Bangladesh, I'm just trying to understand the benefits vis-à-vis India because I understand in soft luggage, at least, there's not more labor cost for being worn. But how does it help in the hard luggage side?
So, one, the eastern part of the market could have easier access from there from a frame point of view. And anyway, if we need to augment capacity, it helps to put up in consolidated areas. There could be some advantage in the raw material, which is what we are assessing, in terms of being in a SEZ location in Bangladesh.
Okay. But broadly, Bangladesh versus India, it's 10%-15% cheaper in terms of sourcing cost?
About 10%, yes.
Okay. Can you quantify the lost sales in Q2 because of the supply issues?
No. Very difficult to quantify that right now.
Got it. Lastly, if you can talk about the CapEx plans, I mean, this year and how you look at it for the next three years?
I won't be able to talk about next three years in this discussion today. But in the in the immediate future, we are looking about let's say about a INR 20 crore in Bangladesh. And we are just about building the plans for India, capacity expansion.
Got it. Thank you, Abhineet Anand.
Thank you.
Thank you. Participants, to ask a question, please press star, then 1. The next question is from the line of Madhuchanda Dey from MC Research. Please go ahead.
Yeah. Hi. Just have one small question. As you mentioned that the one of the intention of the ramping up of the capacity is to have more reliance on own manufacturing. So, if you look back to FY20, which was the last normal year, suppose if you had sourced everything from your in-house, what kind of a difference would it have made to your margin?
Yeah.
4%. 3-5.
Please start question. We can't give you a precise number, but I think it will be anywhere between 3%-5% range.
3%-5% and on the at the EBITDA level? Yeah.
Yeah.
Okay. Thanks a lot, and all the best.
Thank you.
Thank you. Participants, to ask a question, please press star, then 1. Anyone who wishes to ask questions, please press star, then 1. The next question is from the line of Neeraj from GL Capital. Please go ahead.
Yeah. Thanks for taking my question. With respect to supply chain on the raw material side, are there any challenges we are facing because, again, there we are completely dependent on China, especially on the soft luggage side?
Yeah. So you're right. We apprehend significant challenges going forward. It wasn't a challenging environment in the past. But China, with the rationing of electricity and the overall government, you know, giving less priority on lower value-added products, we are apprehending possible disruption. So therefore, what we are doing right now is to try and get our raw material ahead of its time, in terms of securing the supply. Also, we are initiating the lookout for alternate vendors in India, in Bangladesh, and elsewhere in the world. So that work is on fast pace happening to develop alternate sources for raw materials and components.
So, any kind of timeline if you can provide where we would be 100% independent of China in raw material sourcing and away from China. That's one. Second is, if it is from India, then exporting back to Bangladesh and bringing back again, will it still justify the valuation norms when the two countries have for SAFTA?
Yeah. So, first to answer the first question, no, we don't have an, we can't have an exact listing on the difference it will make. In terms of alternate sources, that's something that is work in progress to look at various possibilities. Indian sourcing is also for whatever we make in India, both in our plants as well as in the outsourced, you know, contracted manufacturing. And Bangladesh, we could look at options from countries like, you know, Vietnam, Cambodia, also in local Bangladesh supplies. But this is too early, too nascent, work right now. So at this stage, commenting more than this is not gonna be possible from our side.
So second is on the gross margin side and then down to EBITDA level. The raw material cost push is for everyone. It's across everybody on the earth. And I'm sure even similar, I mean, as you explained earlier, it is more hurting the unorganized sector. So is it going to be difficult because we are seeing in consumer goods and other consumer products where corporates are taking price increases from 4%-12% and actually passing on entire cost push to the consumer. And in fact, we have also seen we are seeing that consumer is somehow accepting it. So will that be challenging or a bit difficult in our case of product? Yeah, I do understand that we are just opening up in terms of demand. But for past two years, we have seen consumer hasn't bought our products.
Will it still be very difficult to pass on, or what's your thought on that?
So it's not the best place to be in when you need to take price increase. But the raw material inflation will need to largely get passed on to the consumer in the given environment that we are in. So we will have to do it. It's not the best thing to do. But it won't be difficult to do that in the current demand-supply environment. And therefore, we may need to take the kind of price increases you're talking about even in this category. But we are yet to fully get a sense of what kind of inflation will happen in the coming two quarters, which will give us the quantum of price increase that we need to take.
So, you are talking more about the volatility, which is happening, right?
Yes.
Yeah.
Yeah. Sir, on the hard luggage side, can you quantify what percentage of revenue was in Q2?
47%.
Hard luggage overall.
47% overall. Yeah. Thanks a lot, and wish you all the best.
Thank you. The next question is from the line of Pritesh Chheda from Lucky Investment Managers. Please go ahead.
Sir, I wanted to understand what is the mix on outsourcing and in-house manufacturing within that, Bangladesh and India, and because I think both the places we have our own manufacturing. How is this mix going to change over the next 2-3 years based on the investment that we have for supply?
So the mix used to be about 40/60 in the past, 40 in favor of our own manufacturing and 60 from buying of, you know, finished goods from outsourced manufacturing. Our aim is to take it to about, you know, 60/40, at the first level from own purely own manufacturing to outsourced. And that's the direction on which we are working on.
Let's say within this 40 or 60, whichever you want to refer to in-house, how much would Bangladesh contribute in this?
Bangladesh would be about 35.
40.
35%-40%, and the balance of that 60, what it would be would be Nashik or India manufacturing.
Of the 60. Okay. And I'm just confirming, Bangladesh is 100% subsidiary for us, right? There's no JV partner there, right?
No. It's 100% subsidy.
Okay. Thank you very much.
Thank you.
Thank you. The next question is from the line of Akhil Parekh from Elara Capital. Please go ahead.
Thanks for the opportunity. This is one clarification. In the previous remarks, you mentioned that we almost shut 150 outlets during the pandemic. We plan to bring that back to life by end of this year. That will be 416. That will be mainly through the franchisee route. Is that correct?
That's right.
Okay. So, would that change our product mix, if we are opening more stores through the franchisee route versus a company-owned company operated? Because in other product categories, we usually see that the product mix is more focused on the value product if the store is a franchisee-driven store as against a focused store. Would that be the case in VIP as well, or it won't?
No. So, franchisee product portfolio or the mix to be different from company-run store is not. It's not a fact. I think the product mix would remain same because finally, it is all depends on who is running the store, not, you know, what the store is to the consumer. So the mix will be similar to a company-run store. It's just the modus operandi will be different. We will not be running those stores ourselves.
Okay. Okay. Of the 350 stores which are open right now, how much would be focused stores, and how much would be franchisee at this point of the time?
So it's about 100 and 250. 100 for company-run, about (I'm giving you a rough spread) 250 is franchisee-run.
Sure. Got it. And so second question is about RM part, the inventory part. We have around INR 300 crore of inventory. And we mentioned that, you know, a significant portion would be raw material side. And we are seeing that the polymer prices are still on an inclining trend. Would that be a fair assumption that we might book more inventory gains in the coming quarters if the price trend continues to be higher?
Let me first clarify. Out of the INR 300 crore, while we are not giving an exact spread, but the raw material part is not the majority part. It has a raw material component also into it, along with FG was the comment in the past. So we would not have a material, you know, raw material arbitrage here in terms of having bought it early. So to that extent, polycarbonate and polypropylene that we use in India is mostly bought, with a very minimum inventory in hand. So it's a spot that we buy.
Sure. Got it. Thanks for clarification. Best wishes for coming quarters.
Thank you.
Thank you. The next question is from the line of Karan Khanna from Ambit Capital. Please go ahead.
Yeah. Hi. Thanks to have a follow-up question. So Anindya, you mentioned that, you know, to one of the previous participants, you mentioned that, 3-4 years out, you're looking at 20% revenue contribution from, from Nashik and, 40% from Bangladesh. But if you look at this quarter, hard luggage is almost operating at 100% utilization. That, that's INR 155 crores contribution to your, September quarter, revenue. So in that context, is it fair to assume that, that Bangladesh peak revenue at sorry, Nashik peak revenue at 600-odd crores? And then you're keeping in mind the 40-60/40 spread between own manufacturing and outsource. So 3-4 years out, you're looking at something like INR 2,800-INR 3,000 crores sort of a revenue potential. Is that what you are, internally projecting?
Karan, you've done a lot of mathematics, and I am not able to follow you on that. But somewhere, you commented on the Nashik and therefore the hard luggage manufacturing. So I must tell you that we do hard luggage currently also in Bangladesh, which is more than assembly line. So the total hard luggage that we are seeing as a component of our total sale has both a Nashik and a Bangladesh component to it, where Bangladesh is also going to go up in hard luggage. And Nashik also, we may go up in hard luggage, like we are going up in soft luggage in Bangladesh as well as in India sourcing. So, you know, these are the three sources that we are going to rely on.
We have our own manufacturing in Bangladesh, our own manufacturing in Nashik, and we would have exclusive manufacturing partners in India. This together should, over a period of maybe a couple of years, should become about 80%-85% of our total manufacturing. And therefore, that gives us a good control upstream and therefore a better control on our costs.
Sure. Good. Thank you, Anindya bhai. Thank you.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in this conference call, please limit your questions to two per participant. For any further questions, you may come back for a follow-up. The next question is from the line of Aditya Lalpuria from B&K Securities. Please go ahead.
Thanks for the opportunity. I just wanted to ask, what is the brand strategy which the company is following? Like, which brand is the company focusing on, and which brand is the company, like, looking to push in order from high to low?
So, we have a very robust brand architecture, and that's been a big asset that has worked for us in the past. Brands in VIP, as VIP, Skybags, Aristocrat, and Caprese, we plan to take these four core brands forward in the architecture that we have. So it does; this doesn't evidently need to have any kind of a change, in that. Each brand has its own particular positioning within the product categories that they are in. And it is all about, you know, taking those brands and its equity to the next level as we go forward.
Okay. Answer, like, one more question. Like, how is demand panning out in the current festive season? Like, if you can give a color on that.
Sir, as I said, demand is looking good. It looked good in the previous towards the later part of the previous quarter. It continues to be on the high as we speak in the festive season. So, from a demand side, nothing much to complain except that as international travel opens and schools and college opens, I think the premium end of the luggage segment as well as backpack demand, we are awaiting to open up.
Okay, sir. So, this is helpful, sir. And just, one last question if I may squeeze in. Sir, sir, like, what is the status of the insurance claim?
Currently, the insurance file has moved to the HO. Since the amount is large, it has to go up to the board. We are expecting some positive, in next 2-3 months.
Okay, ma'am. Thanks a lot. That's it from my side.
Thank you.
Thank you. The next question is from the line of Jayveel Shekhawat from Ambit Capital. Please go ahead.
Right. Thanks for taking my question. So, Mr. Dutta, my question is in relation to, say, the upcoming festive season. Which of the micromarkets do you expect to benefit the most? And, Ms. Neetu, if you can just help us understand how it has been historically as well.
We don't have a point of view on any specific market, micromarket in the festive season. The good part is that it kind of activates across the country. In the way we are constructed from our channels and our geography point of view, we experience a demand upliftment across all sectors, going forward.
Sure.
We can only attain so in the past, if you see the wedding season, that is something which is, you know, area-specific. Or for example, Bihar, UP is a large market where, you know, the wedding season when it comes, that's a large part of the business happens in that area.
Okay. Right. And second, in terms of the Chinese supply chain disruptions and the kind of strained relationships that most of the players have been facing with these dealers, can you help me understand what is going on over there, especially, say, in terms of the credit period crunch or in terms of them not taking bulk orders?
So one is the finished goods kind of procurement from Bangladesh and the raw material. The ties with our vendors and raw material and all that has been good and continues to be good. Well, sorry, in China, they are facing an issue of power shortage. And therefore, their ability to manufacture the demand that we are putting in front of them in raw material could be a challenge. And that is a possible disruption that we are preparing against.
Sure. Sure. Thanks a lot.
Thank you. The next question is from the line of Ankit Kanodia from Smart Sync Services. Please go ahead.
Thank you for taking my question. My question was related to when the pandemic hit. My sense is that the unorganized sector was hit even more than the organized sector. Now, assuming that we are coming out of the pandemic, now, how do you see the situation? And the second question is related to how do you see our product mix and discounts during this festive season? Because we have noticed that one of our competitors have been running really huge discounts. And their products are available at really, really cheap price points in the modern trade segment particularly. Any color on that as far as what our strategy is?
So, to answer your first question, and I think it was asked by someone in the previous questions as well. So, organized sector versus unorganized sector, we are yet to see what kind of, you know, situation there, you know, the whole sector evolves into post-pandemic. Yes, there would be disruptions as it was for the organized sectors like us. It will be there. There have been disruptions in the unorganized sector also. And I, as I said, I expect the tailwind on the organized sector to be higher because of ability to come out of disruptions possibly better. So that's on the unorganized versus organized sector.
In terms of discounts, given the inflationary pressures that the whole industry is aware of, we have pulled back in terms of the, you know, super aggressive discounting in the trade demand, going forward. We are possibly putting more attention behind building out brands and building consumer franchise through routes which are not just discounts. While we continue to do relevant promotions, but our approach is to bring more value to consumers and not just reduce price. So that's going to be our approach going forward.
Thanks. Thanks, that helps . And just a follow-up to that. So when the pandemic hit, we saw that, over the last, say, one year or so, the value segment getting more demand compared to the premium segment or the mass segment, I, I should say, rather than the value segment. So are we seeing any improvement in terms of the premium segment getting more demand now once we are getting out of the pandemic, or we have still some distance ahead?
No, I would say we are seeing green shoots there. And I think the premium segment also depends upon a certain, you know, economic strata really starting to spend time in leisure, in vacation, and in weddings. And as international travel opens, I think those were the cues on which the premium segment operates on. And that possibly not opened up as much as the business travel or functional travel was there in terms of consumer behavior. So I think it is going to come back to where it was. While the value segment would possibly going forward, on a long-term basis, will have a higher share, you know, of the overall industry or category. But that will not be stopping the demand that should happen in the mid-premium and the premium segment.
Okay. If I may ask one more question, what category you are seeing in terms of, is getting more strength in terms of demand, e-commerce or modern trade or other any other category?
So e-commerce. E-commerce has been the flag-bearer of, you know, increase in demand during the pandemic time. As I said, it's also due to a lot of disruption in the physical channel that has happened during the pandemic. But equally, we are also observing that as market starts to open up, as people start to travel freely, go around the traditional channels like retail or modern trade is, you know, month-on-month progressively becoming better. Having said that, the post-pandemic situation in the coming years will definitely have a far higher share of e-commerce now because that's almost a permanent change in consumer buying behavior that has happened. So in the pandemic has helped the shift toward e-commerce. And today, it is could be far higher because other channels have been comparatively lower.
But going forward, other channels will also come up. But e-commerce would stabilize at a far higher salience to our total channel sales than what it was before COVID.
Thank you. Thanks a lot.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Ms. Neetu Kashiramka from VIP Industries Limited for closing comments.
Thanks, everyone, for joining the call. I hope we have been able to answer to all your questions. In case anybody has any further questions, please feel free to call. Happy Diwali to everyone. Thank you.
Happy Diwali to everyone. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of VIP Industries Limited, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.