Ladies and gentlemen, good day, and welcome to the Q2 FY 2022 earnings conference call of Relaxo Footwears Limited, hosted by Motilal Oswal Financial Services Limited. 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 zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Sumant Kumar from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.
Good afternoon, everyone. On behalf of Motilal Oswal, I would like to welcome you all to Relaxo Footwears Q2 FY 2022 earnings conference call. From the management we have with us today Mr. Ramesh Dua, Managing Director, Mr. Ritesh Dua, Executive Vice President, Finance, Mr. Gaurav Dua, Executive Vice President, Marketing, Mr. Sushil Batra, CFO, Mr. Vikas Tak, Company Secretary. We'll begin the call with a brief discussion from the management team, and then we can open the floor for the Q&A. Over to you, sir. Thank you.
Thank you, Sumant. Good afternoon to everyone. Ladies and gentlemen, thank you very much for attending our earnings call for Q2 FY 2022. We have already shared our earnings, press release, and results presentation. Hope you got an opportunity to go through that. I will start with Q2 FY 2022 financial performance, followed by H1 FY 2022 financial performance. In Q2 FY 2022, Relaxo booked operating revenue of INR 714 crore as compared to INR 576 crore. This is a growth of 24% year-on-year. EBITDA during the quarter stood at INR 117 crore as compared to INR 127 crore during the corresponding period of previous year.
EBITDA decreased mainly due to steep increase in raw material prices, enhancement of marketing, brand promotion, and other administrative expenses as compared to corresponding period of last year, wherein raw material prices were extremely low. Other income stood at INR 7 crore as compared to INR 5 crore in the corresponding period in the previous year. The increase is mainly due to higher interest income on investment during the quarter. Our profit after tax was INR 69 crore for the quarter, as compared to INR 75 crore during the corresponding period of previous year. For the first half of FY 2022, we registered revenue of INR 1,212 crore as compared to INR 939 crore in the corresponding period of the previous year.
EBITDA was at INR 183 crore as compared to INR 184 crore in the corresponding period of the previous year. Our profit after tax was INR 100 crore for the first half of FY 2022, as compared to INR 99 crore during the corresponding period of previous year. At the end of September 30, 2021, we have 400 exclusive brand outlets which contributed around 6% to our H1 FY 2022 revenues. Exports are also picking up with opening of market and contributing more than 3.5% of revenue in H1 FY 2022. Going forward, we are cautious about the inflationary trend in the raw material prices, which has further intensified and has reached elevated levels impacting gross margins. However, we are taking all possible measures to mitigate its impact on margin, including timely price increase.
We will continue our effort to grow our presence in untapped and under-penetrated market and focus on strengthening our brands. We can now open the floor for questions. Thank you very much.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on your touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Tejas Shah from Spark Capital. Please go ahead.
Hi, and thanks for the opportunity, and seasonal greetings to the team. Sir, my first question pertains to the slide that you are sharing in the presentation, the data on the realization increase YoY. It has been a very, very sharp increase, and despite that, we have seen kind of margin pressure in the quarter. First of all, how should we think about this price increase and consumer reaction to that here? How should we think about margins based on this price increase going forward?
You know, the main thing are the raw material prices are still on the increase. They are yet to stabilize. It's always our hope that in the third quarter things will stabilize. Now still things are volatile, and we are keeping a watch on it on day-to-day basis. Accordingly, we are Revising our prices. At the same time, naturally, when there's unprecedented increase, there is always a consumer resistance. We are cautious while increasing our prices. We have been able to absorb part of the raw material increase in cost. We have to also be mindful of the competition and take steps appropriately accordingly. We are taking our price increases accordingly from time to time. Already twice we have increased the price in the past. A third is also being planned. Accordingly, we'll keep on acting the way things are turning out to be.
Sir, how much price increase have you taken so far in the year?
Around 15%.
This is weighted average across portfolio?
Yeah, yeah.
Okay. Sir, you spoke about inflation still being high. Have you taken again after reporting this quarter number, or have you taken in October, November so far?
In October, yes, we have taken some price increase.
Okay. Do the price increases taken so far protect our margin at current level, or we need to take further interventions to bring it back to previous levels?
No, because raw material prices are not stabilized so far. We will have to always keep a note of it, and also we have to keep a note of the market situation. Annually we will keep on taking appropriate actions.
Sure. Second question pertains to how is demand reacting to this price increases and what's your read on the demand scenario. Because we are getting very divergent views on rural demand and then non-urban demand as well. Just wanted to check your sense on what's your read on the demand dynamic.
Well, it is just, for the time being, demand is being affected because people don't want to keep stock of those things. They just want to reduce their inventory in the pipeline because, you know, there have been two price increases. Third also we have taken. Even in the market, there are two, three MRPs floating in the market. Inventory in the pipeline is reducing. For the time being, there is some effect on the demand that we are witnessing. I think in the coming time when the price and stock will reduce, then our demand will also improve.
Yeah. Sir, last one, bookkeeping kind of question. What percentage of our turnover comes from below INR 1,000 MRP as on last year or as on half year this year?
90%. Around 90%, yes.
How do you see, sir, this GST changes which have been made, and how do you see that impacting the brand going forward?
Well, it is for everybody. It is not for our company. Whatever GST government is proposing, accordingly we will take appropriate action on that.
Yeah.
In the short term we may find some consumer resistance, but, you know, after all, it is for everybody.
Okay, sir. Okay. This is very helpful. Thanks a lot. I'll come back in queue for further questions.
Thank you. Ladies and gentlemen, you may press star one to ask a question. The next question is from the line of Gaurav Jogani from Axis Capital. Please go ahead.
Thank you for the opportunity, sir. My first question is with regards to, you know, the demand for the open footwear. Last year, you know, we have seen a lot of strong demand for your open footwear, especially like, you know, the rural side. Now the things being normalizing this year and, you know, the schools and the offices also opening up. How do you see the demand pattern changing going ahead?
Yeah. Demand of open footwear, you know, there are two kinds of things. One is closed footwear, another is open. Open consists of sandals and slippers. The demand of what we find, that the people who are now starting moving outside, outdoor, so those articles, whether it is sports sandal or it is a sports shoes, they are going up. Meanwhile the demand of slippers, that has gone down this year. Because last year everybody was indoors, so those articles were selling more. That is the change that we are witnessing this year.
Okay. Sir, you know, with your portfolio being, you know, tilted more towards the open footwear, so do you see a relative impact on your volumes or sales to that extent for this year at least?
Yeah. Because slipper numbers will definitely be less than what it was earlier demand. The shoe division is growing more, so that will have some effect.
Sure. Sir, the next question, you know, is with regards to, you know, the margin last year has been very sharp expansion, you know. I mean, it was even higher, above the historical average. What sort of stable margins, you know, as a company do you envisage? I mean, I understand that there are two extremes. Last year the margins was expanded very high, and this year it's been impacted due to raw material. What kind of stable margins going ahead do you expect for the company?
Yeah, you are right. Last year, raw material prices were very benign, and this year it is unprecedented increase. That is definitely telling upon our margins. Last year it was unusually high, but this year, what I think around 70% should be all right this year.
Okay. Going ahead, you know, 70% margins should be a steady state margin you are looking or target?
Yeah.
Okay. Sir, with regards to, you know, you have been telling in the opening remarks, you know, that the focus is on increasing the presence in the untapped markets. Any light that you can throw on which all markets have you now expanded to and, you know, how has the mix changed for you over the last 1.5 to two years in the product wide segment also?
What we have seen is now South market started performing reason because the South was the only market which opened up last. Kerala being locked down for one year and three months, now it has opened up. We are seeing demand recovery coming from South market more.
Okay.
E-commerce also have done well. E-commerce is also doing pretty well now.
What is the contribution for e-commerce now for your overall sales?
We are doing 10% e-commerce.
Sir, in terms of the margin profile, you know, is e-commerce a lower margin channel vis-à-vis, you know, the regular Indian channel to that extent, given, you know, there are returns and there is also the e-com clearance margin also there. How do the margins differ between the channels?
No, we try to keep the same margin across all the channels, be it e-commerce, modern trade or wholesale. Because otherwise the goods will flow from one category to another category, you know. We try to keep the same margin.
Okay. Sure. Also, thank you. That's all from me.
Thank you. A reminder to all participants, you may enter star one to ask a question. The next question is from the line of Nirav Rajiv from B&K Securities. Please go ahead.
Yes, sir. Good afternoon, sir. Sir, this is just more from a longer term perspective regarding the kids footwear segment. I mean, I just wanted to know your views regarding the long term prospects of the branded segment of the kids footwear. I've just read certain reports which indicate like the kids footwear, given that the sizes keep changing, the inclination towards branded wear is low. Wanted to know your perspective, firstly on the market and also where does Relaxo stand in this segment. Also any inputs on the margin side.
Presently, you know, whatever category we are in, whether it is our Bahamas, Relaxo slippers, Flite or Sparx. In all categories, we do make articles which are meant for kids. We are keeping a tab, whatever demand or things are changing. Accordingly, we are re-introducing our article and capturing our demand and supplying the market.
Sure, sir. Just anything on the, like, the long-term growth aspects of the kids wear segment. Any outlook on that front? As a key player, where do you see that market growing in the next five years, we can say?
What we find it is growing at a normal pace. Maybe in certain category, high fashion or maybe different category it may be there. As far as we are concerned, what we are in, it is a normal kind of a growth that we have been capturing.
Sure, sir. That's it from my side. Thank you so much.
Thank you. A reminder to all participants, you may enter star one to ask a question. The next question is from the line of Yash Mehta from Chanakya Capital. Please go ahead.
Good afternoon, everyone. Sir, Relaxo has done very well in the value segment over the years. Are there any plans to enter into the premium segment which has a price of about INR 1,500-INR 2,000? Is Relaxo looking to expand into the premium segment? What are your views on the premium segment?
We have our articles above 1000 in our Sparx brand, and that is what we are doing. You know, in other categories also, whether it is Bahamas. In every category we have premium articles based on the price segment we are in. That is accordingly we keep on developing premium article in every category, whether it is Flite or it is Bahamas or Sparx. In 1000 + it is only there, you know, shoes are there. There it is 1000 +. That we are also taking care and focusing on that. We'll continue to do that.
Okay. Sir, with improving logistics, do you think that the operating cycle will get better over the time?
Can you repeat?
With improving logistics, is it possible that the operating cycle will get better over the time?
Logistics, actually, there is no major change in terms of, you know, improvement in logistics. It's government prerogative, you know, when they'll improve the infrastructure and how the time will be reduced. It's a long process. Maybe after five years we can say about it, but right now we are just following whatever is there.
Okay. Thank you very much, sir. That's all from my side.
Thank you. The next question is from the line of Mythili Balakrishnan from Alchemy Capital. Please go ahead.
Thank you for the opportunity. I just had a question around the four different brands. Could you just help us understand how each of those brands have performed over the first half of the year?
Can you speak a little loudly, please?
Sorry. I'll just repeat what I said. I just wanted to get a sense of how the four brands have performed for us. How has Sparx, Bahamas, Flite and the main Relaxo brand done?
If you talk about Sparx brand, it is doing pretty well because last year the demand was subdued because it is more of an outdoor category and premium category. People were not moving out. Now people started moving out. Sparx brand overall is doing much better than the other brands. Secondly, in Flite we have two categories. One is outdoor and one is home brand, which we call Flite EVA and Flite PU. Outdoor brands across all four categories are doing much better compared to what it was last year.
Got it. If you could also help us understand, like, what would be the contribution of each of these four brands to the total revenue?
It is around, you know, Hawai segment like Bahamas and Relaxo around 25%. Rest is almost equal between Flite brand and Sparx brand.
Hawai plus Bahamas is 25%, and rest is equally shared again between-
Hawai and Sparx. Flite and Sparx. Almost.
Right. Also just wanted to get a sense from you that, you know, in terms of Sparx especially, we are seeing a lot more advertisement, which is focused on, you know, being fit, being outdoors, but a lot more shoe type advertisement. I just wanted to get a sense from you, is that something that is going to be the next focus for the company in terms of looking at more from a, you know, good sports shoe rather than, you know, a more sandal kind of a thing which it was earlier?
It's mixed actually. You know, the sports segment is doing pretty well. Like, there's a trend of athleisure, you know, so there's a good trend. Sandals are doing pretty well in South India. You know, people don't prefer too much of covered shoe over there. It depends upon market also. Shoes is more for North and West, and sandal is more for South India. Both areas are pretty good for us.
What is the mix between shoe and sandal?
Sandal is 60%, 40% is shoes.
Got it. My last question was more on the unorganized slash, you know, the imports which come in from China. Have you seen any disruption in them and is that also some contribution that we can expect for growth going ahead for us?
Well, I think the freight cost from importing from China has gone up significantly. Over last one and a half years, the supply has subdued, you know, from China.
Got it.
That is advantage for us.
That we need.
Yeah.
Got it. That's all I had. Thank you.
Thank you. The next question is from the line of Akhil Parekh from Elara Capital. Please go ahead.
Thank you for the opportunity. First question on the price hikes that we have taken and the inflationary environment that we have been talking about. In past con calls you had mentioned that there is a shift from unorganized to organized, in this COVID time. Do you continue to see this trend given that the inflationary scenario is extremely strong at this point of time?
We are having good market share, but still it's very difficult in an organized-unorganized market to capture the data and try to find out. It is very difficult, you know. As far as we are concerned, we can only focus on what we are doing, how we are doing our trade in different markets. Because share of that is totally not captured anywhere, it's very difficult to comment on that.
For the unorganized, we have been hearing that some of the organized players also have been struggling in the last eight to 10 months. Would it be fair to assume that we have also gained market share from the organized, those bigger organized players?
Our market share is improving, but to what extent it is replacing unorganized, it is very difficult to comment.
Okay. It is better than, say, a year or two years back?
You can say that. You can't calculate, you know, because things are not available in open domain.
Sure. Second question is on the capacity front. On the presentation, I see, we have mentioned at INR 750,000 footwear pairs per day, and we have recently commissioned our Bhiwadi capacity, which is at INR 150,000 pair and it takes INR 1,000,000 pairs per day. Currently it's INR 900,000 pairs per day, correct, per day as you mentioned?
At present we have declared its capacity INR 1,000,000 . In the board meeting it was approved. From October it is INR 1,000,000 . Earlier it was INR 750,000 .
Okay. We have added INR 250,000 pairs.
Yes, we have added.
Okay. The plant is already commissioned. The commercial sales have begun. It's continuing with it?
Yes, it has started.
Okay. Last question on ad spend, if you can please guide us how much it can be for the entire FY 2022?
Can you repeat? The voice is not clear actually.
I'll repeat my question. The ad spend as a percentage of sales, if you can please guide for the entire FY 2022?
4%. We are going to do 4% ad spends as a percentage of revenue.
Okay. That's from my side and switch off the phone.
Thanks. Thanks.
Thank you. The next question is from the line of Vikas Jain from Equirus Securities. Please go ahead.
Thank you so much, sir, for the opportunity. My first question is with respect to our presence in the Southern region or Southern part of India. Sir, can you just highlight as to what are the steps that you are taking with respect to expansion of our revenues from South India, mainly focusing on either rather distribution expansion or retail outlets addition? What has been the pace over last, say, one year or what was the pace one year back and what is the current status? If not, what are the growth plans mainly in the Southern region to grow in the Southern region? I'll come up with the second question after this.
In South India, you know, there was lot of lockdown. The lockdown was extended maximum in Southern markets, especially Kerala. Now they have started opening up, and we are getting a demand recovery. Talking, it's just recovery happening from South India. Once the recovery is done, then we'll start growing. Some markets we have already started taking steps and appointing distributor like Tamil Nadu.
Sure. Sure.
Uh, which we are not-
If you could just give a ballpark figure as to like what was the revenues in the South probably one year or before the COVID time and what are probably at a normalized rate what would be the revenue that this quarter or so? Any rough amount?
Two years back it was 10%, fell down to 7%-8%. Now we are back to 10%.
Sure. Understood. With respect to the distribution addition means, how has been the pace? What was it pre-COVID and what is the current status?
We just started distributor expansion of last three months onwards. It's very early to say anything about that, you know.
One last question from my side, sir. As you mentioned in your opening remarks, the raw material inflation is incrementally hurting us. Any guidance that you would want to give for at least next one or two quarters of what would be gross margin figure that we can come up with in H2?
You know, because raw material prices are not stabilized, so margin will continue to remain under pressure. We are cautious of it and keeping a tab on the market conditions and accordingly taking our steps.
Understood. Okay. Thank you so much, sir, for answering. Thanks.
Thank you. The next question is from the line of Girish Pai from Nirmal Bang. Please go ahead.
Yeah, thank you for the opportunity. Firstly, I want to understand the mix of open and closed footwear in the first half of this year. If I recall, last year it was 85%-15%, and I think the year prior to that, FY 2020, it was 80%-20%. What was it in 1H FY 2022?
If you talk about FY 2022, it rose to 90% and 10%. Now it is back to 85% and 15%.
So 85% and 15% is 1 H, is it?
H1.
H1. Okay. It was 90%-10% in FY 2021.
Q1, I think. Yes.
Okay. You're talking Q1 and Q2.
Yeah, yeah.
Okay. Sir, the other thing I want to ask you is over the years, I've looked at your presentations, and every time I see the 50,000 MBOs as being a standard number that I see in your presentation in terms of your penetration and distribution. Have you not increased your penetration beyond the 50,000 number? Because I've seen your presentation six years back, it is still a 50,000 number.
Yeah, because of last one and a half years, you know, we are still able to maintain that because there are a lot of outlets getting closed down. You know, this COVID has created a havoc. We are just maintaining it. Once this, you know, raw material prices, COVID outbreak, GST, all these things get settled, then we are able to give you the exact picture, how fast we are improving.
No, even pre-COVID, I've seen for many years the numbers remained constant about 50,000, anyway. My next question is-
Yeah, because you know, the outlets are the same, but our presence has improved, you know, in terms like suppose an outlet used to keep three brands, now they're keeping four brands. The depth has improved.
Sir, you made a claim that you increased market share. When I look at the volumes, it is down YoY. Is it that the market is down far more than you have done? I mean, when I look at the volumes that you sold in Q2 this year versus volumes in the year before that, they're down YoY. Is it that the market's volumes are down much more than you?
No, we can't say that. Mainly, the demand for closed footwear this year has increased. The overall demand for, I mean, open footwear has gone down because people are now moving out. That is the reason. That's all.
Okay. I guess just one last question regarding competitive intensity. There are a couple of at least couple of IPOs on the cards, Campus and Metro. Are you seeing any increased competitive intensity or competitive moves from either of these players, at least from the Campus' side, that you're seeing in the market, which is probably not letting you increase prices more than what you could have otherwise tried to do?
You know, this Metro is totally different. We are nothing to Campus, only one category, sports shoe. We have our own space. Market is big. They have their own space. There's nothing of any alarm or concern.
When you talk about, you know, you have to watch the market when you take price hikes, who were you referring to specifically?
No, there are so many brands in the market. We have to see consumer behavior also. All these things we do take in mind, and accordingly, we take our pricing decisions.
Okay, sir. Thank you. Thank you very much.
Thank you. The next question from the line of Divyata from Trident Capital Investments. Please go ahead.
Yeah, good afternoon, sir. Sir, my question was more pertaining to your product life cycle. If you could just help us understand from the product launch in terms of the conception to manufacturing what colors and sizes would you generally, you know, push to manufacture and also the distribution, in which cities would you push more sizes and different colors and the end product life cycle once the demand tapers off. If you could please help us understand what is the product life cycle for your various brands.
You are asking about concept to launch?
Yeah, from launching to, say, from conception, like once you decide that you want to launch one product to manufacturing to distribution and to end product life.
It varies, category to category. You know, Sparx takes more time compared to basic Hawai.
Okay.
We can't give generalized figure, but Sparx takes maximum time. You can say around sevne to eight months compared to basic Hawai, which takes two to three months.
Got it. How do you determine into which colors or which sizes you want to push in which of the geographies, like in which of the regions?
It depends. We get data from the marketing department, you know, which state or which region, what preferences they have, which color, what sizes, you know, the size of the feet. All the data we have, accordingly we take the decision.
Okay. Have you extended your technology data? I was going through your past annual reports, and there is mention of various IT technologies which you've deployed to understand you know the market behavior. Have you extended to your retail stores also where you get a sense of what is the fast-moving product or what is the slow-moving product?
We do have SFA, you know, which lies with the sales officers. We have DMS, which is again software-based and it is at distributor point. We get data from there only, what sizes are selling, what SKUs are doing well, which market performing how. These two, we can say this is technology piece what we use.
Okay, fine. Would you put some light on your competitors in the West and the Eastern region? We keep hearing that VKC brand is also picking up. On the Western side, VKC and Paragon, would you have some view on them?
The market is quite huge, you know. We have equal presence if you talk about in Western market compared to Paragon and VKC.
Yes.
They have some strong states of their own. We do also have our strong states.
Right. The new facility addition that we have talked about, so that will be for any particular brand or particular open or closed footwear or it will be across, like the additional INR 150,000 pair per day, which product will be manufactured there?
These are some less of Hawai slippers, Bahamas, and some Sparx slipper also, I should say.
Okay. The idea of increasing the capacity on the Western side is basically to cater to some newer markets which we are not already present?
No, no. It is overall, you know. We have to overall increase our penetration, whether it is South, whether it is West or even some underrepresented parts of North and East also.
Okay. Got it, sir. Sir, lastly, you did mention that the demand has not yet picked up. In H2, would you see some ramping up of demand, especially of the closed footwear?
No, now market has opened, by and large, all parts of India, and things are opening up. I told there is lot of resistance because of price increases that were happening. The raw materials are going up almost month after month. There is resistance from consumer, from retailers, and they are liquidating the stocks which are in the pipeline. That is it.
Got it. Got it. Okay. Thank you. All the best, sir.
Thank you. Ladies and gentlemen, you may press star one to ask a question. The next question is from the line of Yusuf Inamdar from Motilal Oswal Financial Services Limited. Please go ahead.
Yeah. Thank you, sir, for taking my question. Sir, I have a question. I have only one question from long-term perspective. Sir, if I look at the competitors, the average selling price of two of the largest footwear companies is in the range of INR 500-INR 600, whereas ours is in the range of INR 125-INR 150. Can you just tell me, like, since we are beginning to focus more on closed footwears and high-end products, can you just give me any idea or ballpark number, what could be our ASP in the next three to four years?
No, it will increase, but it will increase not at a regular pace in a what you call sustained manner. Don't expect it to increase substantially, because if you appreciate, we are serving masses, and 85% business is from masses. Only 15% is other. Ratio will remain what it is. It will have some effect, some improvement. That's all.
Yeah. Correct, sir. Sir, one more thing. With respect to the number of exclusive brand outlets which we have is around 400, sir, is it safe to assume that gradually we'll be increasing our EBOs? Is it safe to assume that slowly we are moving towards more of a retail model compared to the distribution model which we had earlier?
No, no. Presently, we are focusing more on multi-brand, and this 400 is a kind of our, what you call it, display cum sale model, where strategically we understand the consumer behaviors and understand what is the consumer psyche. Our business contribution from our retail is just 6%, so we'll continue accordingly only.
Okay, sir. Okay. Thank you, sir. That will be all, sir. Thank you.
Thank you. The next question is from the line of Gaurav Jogani from Axis Capital. Please go ahead.
Thank you for taking my question again, sir. My first question with regards to, you know, the, what are the key learnings from the COVID times? I mean, you know, a lot of retailers we have seen have cut down on costs and, you know, have done process improvements during this COVID times. If you can highlight, you know, two or three key initiatives that you have taken during COVID times and that can help in cost savings going ahead as well.
The you know, cost saving is an ongoing process.
Okay.
We have to always keep the company competitive, efficient, and that is going on. Even in these difficult times, at the factory end we are improving our efficiencies, and that we'll continue to do it. Administration, you know, but at the same time we have to. Last year we had some cut in marketing and administration expenses, but this year we have started these expenses and the brand building again. We can't keep it always on the low. As far as manufacturing efficiency is concerned, that effort is on.
Sure. Any numbers that, you know, you'd like to highlight, you know, like some percentage of cost that you're permanently able to save now going ahead, say like INR 10 crore , INR 15 crore or, that, you know, that will be permanently taken as saving going ahead as well?
It is only in the marketing and administration last year we took a cut.
Okay.
In our permanent nature, I think, I don't see much possibility, but I think consulting, that's what we can say. That is the only item which we cut last year and we are not reinstating.
Okay.
In manufacturing, you know, we are even if we can hold our conversion cost, that is a great achievement. That is what we are trying to hold on to it.
Sure. Sir, one related question to this. I mean, you know, a lot of players are now talking about, you know, substituting the raw materials with alternative materials which are cheaper and also better quality also. Any kind of process reengineering also that we have, you know, worked out that you would like to highlight in terms of the raw material side?
You know, we have to be mindful that we have to maintain quality first and other thing afterwards. There is very little possibility of doing little bit juggling of the polymers. Beyond that, people will only sacrifice the quality. We are mindful of that. Accordingly, we are taking cautious moves.
Sure. Sir, one last bit from my end is, you know, over the years if you know, if we take a trend from, say, FY 2013 to even FY 2021, we have seen that the EBITDA margin expansion is largely being, you know, led by gross margin. Gross margin has expanded from around 53.5% in 2013 to around 59.5% in FY 2021. What further scope do we see of expansion in the gross margin, or do we think, you know, this is kind of a peak level at this point in time?
No, gross margin, definitely there has been improvement year after year. This year being a different year, you know, the raw material prices are touching new heights, and we took some price increase also. It's really tough, okay, how much margin we can.
No, sir, not in short term. Actually, I'm not asking for the short term. I'm talking about the next three to four years maybe. You know, what kind of gross margins that you think you can target going ahead, barring these volatile times?
Long term, definitely we have been adding new product every time. I think 40% churning is in our case. We add more premium product in each category. Definitely there is always scope to improve the gross margin. We can see the, I think, same trend in coming years, long term.
Okay. Okay, sir. Thank you. Thanks for
Thank you. The next question is from the line of Ankit Kedia from PhillipCapital. Please go ahead.
Sir, you mentioned the e-commerce contribution today is, you know, become 10%. With things opening up and, you know, the contributions remaining same at, you know, double-digit, how much of this is coming from closed footwear and Sparx, and how much is it from open footwear?
Majority is from Sparx footwear, which is around 85%-90%. Rest is from Bahamas and open footwear.
Sure. Sir, with the ASP difference, you know, in one of the questions you mentioned that we are not doing price differential. Would the inventory online be similar and fresh inventory or we are liquidating inventory online?
Majority it is running articles, you know, and very few, maybe you can say less than 10% is the obsolete inventory which we are pushing. Majority is the regular articles.
Sure. Sir, my second and last question would be again on your EBOs. How many of these EBOs are owned EBOs currently? Over the next two years, what is the plan to you know expand our EBO count in South market as well?
No, for the time being, there is no plan for any EBO in South.
Okay. Sir, how many of the EBOs are owned versus franchisees currently?
Majority are owned.
Okay.
Let's say I think around 430 we have our own and franchisee is around 30 and few are co-owned, mixed model.
Sure, sir. Sure. That's helpful, sir. Thank you so much.
Thank you. The next question is from the line of Ashish Kanodia from Ambit Capital. Please go ahead.
Yeah. Thank you for the opportunity, sir. Just on gross margin, I think if I look at the, you know, change in inventory, my understanding is that, you know, had there been no inventory built up, the impact on gross margin, it had been even higher than that during this quarter. Is that understanding correct?
You are right. Definitely the increase in inventory definitely impacts the gross margin calculation as far as calculation is concerned. Otherwise, yes, margins has been improving except this one and a half year, and especially the two quarter journey due to raw material prices. If you just exclude that part, even then there is improvement in gross margin.
Sure, sir. Secondly, you know, just, you know, what is your internal thought process in terms of where do you you know at current RM prices, what is the comfortable gross margin where, you know, the company would like to operate at? To reach that kind of a gross margin, what is the kind of price hike we will need to take further?
No, prices of raw material are still on the rise. Things are not stabilized. We have to keep on watching from time to time, rather month to month, and we have to then see what is the consumer sentiment, market sentiment, and pass on the prices increase. Since things are not stabilized, we cannot comment on that, how the things are going to turn out in the coming months.
Okay. Sir, just, you know, I think there was a discussion that, you know, I think the retailers or the distributors might be liquidating inventories because of COVID and all. Is there a difference between the primary sales and secondary sales? What I mean to say is when I look at the, you know, the growth reported by Relaxo, and if we have to compare that with the actual growth which a retailer or a distributor might have reported, will that growth be higher? If that is the case, as you know, the retailers and distributors starts to rebuild the inventory, then that will ultimately benefit you in subsequent quarters. Is that the right way to look at it?
We have to see once, you know, things stabilize the markets, inventory also, you know, at the moment people are cautious in mind. Once things come to normalcy, then only we'll know how the things turn out to be.
Okay. Last question is in terms of supply chain, while the RM prices has been higher, but has there been any challenges with the supplier as well, or is the supply at least uninterrupted?
Supplier of raw material you're talking?
Yes. Yes.
Yeah, some of the raw material, even the supply has been an issue, like ethylene-vinyl acetate. It doesn't mean that we have any obstruction in production, but things have been little difficult. That is why, you know, these inflationary trend. Whenever there is shortage of a material, then only people are, I mean, inflationary trend become much more adverse. In India, particularly when the supply has been also restricted, that has added to the problem.
Sure, sir. Sure. That's very helpful. That's all from my side. Thank you.
Thank you. The next question is from the line of Girish Pai from Nirmal Bang. Please go ahead.
Yeah, thanks for the opportunity again. Sir, during the course of your commentary, you mentioned that there are two or three different MRPs in the market. Is this a unique position that you're in as we speak today compared to the last 10 years? How is this impacting your sales or how is the distributor response to this?
No, that's. You are right. At the moment, because there has been too frequent increase. You know, there are so many articles. Every article, retailer, they never come to zero stock, then only he will buy the new article because some of the sizes, they become short of the inventory, so he has to buy the new also. That is why there is a mix-up of different MRPs in the market. It will take some time before things get set right.
Is that responsible for your slower volume growth this quarter?
After all, we told you that people are liquidating their inventory in the system. Whenever there's a price revision, people want to be a little cautious in buying. That is what we are noticing. As inventory is now, supply chain is getting reduced. Distributor sales are better, so his inventory also he's trying to be cautious.
Okay. Okay.
Everyone wants to play it with a minimum inventory.
Okay. A more strategic question. Pre-pandemic, when I look at your ASP and volume growth statistics across, say four to five years before the pandemic, your ASPs haven't grown very much. It's been basically volume growth led. Is that your strategic thought process beyond the pandemic? Is that how you would want to grow? You wanna kind of drive volumes and not focus too much on ASP?
No, you know, we are not focusing on what you call it, ASP. We are focusing on what category consumer needs. Whatever category trade is requiring, we are offering that trade.
Okay.
Our focus is on building the categories, whether it is Bahamas's brand, whether it is Flite, PU, EVA or Sparx. Historically also 85% has been slipper business also for the company, and that always gets good traction in the market also.
Okay. Sir, last question. Your cash flow from operations seems to be quite bad, at least when I compare for 1H versus the full year numbers. Anything that will change in the second half, for the cash flow from operations number to look better than what it was, at the end of September 2021?
Any cash flow is bad, I think from number point of view, yes, agree. If you see the number, there is an increase in inventory. That is the main reason for that. Due to inflation, the inventory which we were carrying, so I think 20% is coming from the inflation and rest is the overall increase volume. These are the reason being a special situation. In coming time, definitely it will be back to normal and there will be comfortable cash from operations.
Okay, sir. Thank you. Thank you very much.
Thank you. Ladies and gentlemen, you may press star one to ask a question. The next question is from the line of Mythili Balakrishnan from Alchemy Capital. Please go ahead.
Sorry, this is a question which comes possibly at a tangent, but currently we are in an environment where raw material prices are going up, but at some point that will turn around and it will start going down. In that time, do we sort of start reducing prices or do we just reduce prices on new SKUs and you know, how do we think about pricing in that kind of a scenario?
Look, it is, you know, we have to wait and see how the things stabilize and we have to see how the market situation is there at that time. We have to be mindful of one thing. We have to be reliable with the consumer, and that is what goodwill we have built for always.
No, no. Yeah, I agree. I think so. Thanks. That was my question.
Thank you. A reminder to all participants, you may enter star one to ask a question. The next question is from the line of Jignesh Kamani from GMO. Please go ahead.
Yeah, hi. I just want to ensure that we have a very high inventory and as you mentioned that raw material prices are increasing very frequently. Compared to competitors, we will be favorably priced because of the high items inventory and inflation going up.
I don't know what is your question. What's the exact question, please repeat it?
We have very high inventory and as you said, still raw material cost is increasing, every month. Because of high inventory probably at a low cost or a current cost, we'll be favorably placed compared to our competitor?
Inventory in the raw material, you know, that is always available when there is a rising trend. As well as other finished goods is concerned, we have inventory because there were low demand in the open footwear segment. In the coming time things will improve on both fronts.
If there's a price hike, we will get a benefit of that also on the upcoming, right?
You know, there is always a time delay in getting the things, because you have to watch coming months also and trend also, and then you have to take appropriate action. There has been unprecedented price increase. Entire price increase, we have not been able to pass because otherwise it is, you know, polymer going up by 100% is something beyond imagination.
Okay. Secondly.
We take appropriate action.
Understood. Secondly, whenever there's a price hike or expected price hike, generally dealer or distributors try to, you can say, increase their stock so that they can get the benefit of a lower priced product. Are we not witnessing that scenario as of now?
No, no, actually, when we revise the price, we revise the price for MRP also, no? His margin remains same.
Understood.
Rather, he's more cautious to let his inventory be lower so that when the new price comes, he's able to pass on to them accordingly. Otherwise, if he has an old MRP, sometimes he has to push that article first.
In the old MRP, probably he may be discount offering to customer will be much lower, right? Compared to a new MRP.
That could be at a retail level. I don't know what kind of discount they'll do. When there are two prices prevailing, then they have definitely something, he gets some advantage also.
Understood. Okay. Thanks a lot.
Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments.
Thank you all for joining the call. This is all from our side. Looking forward to join you again. Thank you very much.
Thank you.
Thank you.
On behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.