Ladies and gentlemen, good day and welcome to the second quarter and first half FY 2023 earnings conference call of Aditya Birla Fashion and Retail Limited. The call will begin with a brief discussion by the company's management on the Q2 FY 2023 performance, followed by a question-and-answer session. We have with us today Mr. Ashish Dikshit, Managing Director. Mr. Jagdish Bajaj, CFO. Mr. Vishak Kumar, Director and CEO, Lifestyle Business. Ms. Sangeeta Pendurkar, Director and CEO, Pantaloons. I want to thank the management team on behalf of all the participants for taking valuable time to be with us. I must remind you that the discussion on today's earnings call may include certain forward-looking statements and must be viewed, therefore, in conjunction with the risks that the company faces. Please restrict your questions to the quarter and yearly performance and to strategic questions only.
Housekeeping questions can be dealt with separately with the IR team. With this, I hand the conference over to Mr. Jagdish Bajaj. Thank you, and over to you, sir.
Thank you. Good evening, and welcome to the quarter two earnings call of our company. Let me take this opportunity to first wish you all and your families a very happy festive season. This quarter's revenues are the highest ever quarterly revenues for the company at both Standalone and Consolidated level. This was driven by aggressive network expansion, strong e-commerce performance, and new category expansion, amped up by encouraging performance during EOSS and early festive season. The solid comeback seen during last quarter in the offline channels continued in Q2 as well, indicating a strong return of the market to pre-COVID conditions. These results should also be viewed in context of higher brand investments after a gap of two years and our investments in scaling up Ethnic and other new businesses in line with our long-term strategy.
The company delivered sales of INR 3,075 crore at Consolidated level during the quarter, which is 50% above same quarter last year. Consolidated EBITDA for the quarter was at INR 418 crore, growth of 24% above last year levels. Please note that this is despite significant rent rebate in same quarter last year, and also significant investments into marketing INR 100 crore approximately and organizational build-up into our subsidiary this quarter. The company earned a Consolidated PAT of INR 29 crore, which is almost 6x of the last year levels. Please note that this is also despite higher Ind AS 116 impact due to relatively large store additions versus same quarter last year. Without which the PAT at Consolidated level would have been double of the reported number.
Our current performance and the investments which we are making in building up newer businesses are in line with our long-term strategy that we shared with all of you during our annual investor conference in March 2021. The company continued to focus on building digital channel with higher focus on omni capabilities. E-com revenues of the company operated at an annual run rate of INR 1,300 crore, which is 40% higher than last year's e-com revenue. For the quarter, the company's e-com revenue grew 41%, versus previous quarter. It is important to note that we continue to deliver a strong e-com performance even though there was strong rebound of offline business. This is the testament to the strength of our omni capability that has helped us to build a resilient e-com business model.
The company made rapid network expansion during the quarter with addition of 85 branded stores, including 31, 13 Ethnic stores. Further in line with this plan of opening 70 new stores in Pantaloons during the year, 21 stores on net basis added to network in Pantaloons during this quarter. We have completed takeover of Reebok India operations, which will help us to build a strong play in sportswear market. We are pleased to announce that Masaba has launched the brand Lovechild, catering to beauty and personal care segment, which is in line with the stated objective while collaborating with House of Masaba. The brand is already available across major marketplace and gaining strong consumer touchpoint. Now let me take you through the performance of H1 of FY 2023.
Sales in H1 FY 2023 grew by 108% versus last year to INR 5,949 crore. EBITDA grew by 375% over last year to INR 918 crore. PAT of INR 124 crore versus losses at the net level of INR 347 crore. Earnings per share of H1 is INR 1.44 per share. Company's ROC for H1 FY 2023 is at over 30% at operating capital employed of INR 1,922 crores. The net debt of the company on September 30th stands at INR 243 crore versus INR 504 crore in March 2022. I will now take you through the performance of individual businesses, starting with Lifestyle Brands.
Lifestyle Brands continue to deliver impressive business performance at the back of a strong retail performance, as reflected in LTL growth of 27% over last year and aggressive e-commerce growth which accounts for the 16% o
f the quarterly revenue for the segment. Revenue for the quarter stand at INR 1,680 crore, 45% higher than last year. EBITDA increased by 52% over last year to reach INR 286 crore. E-com revenue grew by 18% over last year. The growth in this business segment is driven by premiumization, casualization across all brands, along with rapid channel expansion. Retail business grew by 45% over last year on the back of robust net addition of 157 stores during last one year, new category introductions and impressive LTL growth.
Wholesale business also showed a strong recovery from the COVID impact with 79% growth over last year. We also continued to penetrate deeper into smaller towns and now have presence in 550 stores. In addition to our core categories that did exceedingly well, this quarter was also the best quarter for our women's and kids business, as the segment showed strong growth trajectory across brands. Moving into Pantaloons business. Before I explain the performance of Pantaloons, let me take this opportunity to share that Pantaloons is celebrating its 25th anniversary this year, when Pantaloons has become a 400+ store network, serving to its customers across 195 cities. Pantaloons posted highest quarterly results on the back of accelerated network expansion, strong EOSS, and Pujo performance.
Revenue for the quarter stands at INR 1,094 crore, 64% growth over last year. EBITDA at INR 176 crore versus INR 125 crore last year. Pantaloons opened net 21 stores in the quarter, in line with its aggressive expansion plans for the year. This is highest quarterly network expansion in the past five years. E-com revenue grew 20% over last year, led by strong consumer pull during the first ever festive event held on app and website. Other business segments continue with its outstanding performance. The portfolio comprised of Active Athleisure Innerwear, Youth Western Wear brands, and Super Premium brands. During the quarter, this portfolio had posted revenue of INR 307 crore, a 31% growth over last year. Let me begin by talking about Innerwear business performance.
Innerwear business continued to scale up rapidly and reached 30,400 trade outlets at the end of the quarter. The brand is also present across 1,111 stores, exclusive business outlets, and would continue to grow exponentially through retail format in line with our long-term vision of building strong brand loyalty. The revenue for the quarter grew by 27% over last year. The brand also started its kidswear category this quarter and now offers its product for the entire family. Now let me talk to you about Youth Fashion business and Super Premium brands. Youth Fashion consisting of Forever 21 and American Eagle and Super Premium brands that have kept their growth trajectory firm throughout the first half of FY 2023.
American Eagle posted its highest ever quarterly revenue with 70% growth over last year on the back of its strong product positioning in the denim segment, robust e-commerce performance and continued expansion trajectory. Forever 21 grew 40% over last year with net addition of two new stores during the quarter. The Collective and other Super Premium brands posted 35% growth over last year with a strong like-for-like growth. The segment is consistently maintaining high growth trajectory with a strong profitability over the past three quarters. E-commerce channel witnessed 100% growth in revenue over last year, led by strong traction on own website and encouraging acceptance on the market. Our Ethnic business, we are executing our comprehensive strategy to build a complete portfolio of strong Ethnic Wear brands across multiple occasions and price points.
It gives me immense pleasure to inform you that our portfolio has 7 strong renowned brands with presence in more than 60 stores. Sabyasachi. Sabyasachi has shown a strong growth momentum in its business and is now executing its strategy to be a first India based global luxury brand. We are pleased to inform you that we have opened an exclusive Sabyasachi store in New York, spanning across 5,500 sq ft. Revenue for the business grew by 60% over last year with a strong growth across all the categories. Tasva, our premium men's Ethnic Wear brand, is on its rapid expansion trajectory, aiming to end the year with 70 stores. Operating at 21 stores at the end of quarter, the brand also launched its first comprehensive marketing campaign, which is currently live across prominent digital platforms.
Jaypore is present across 13 stores and witnessing very strong traction on its offline channel. The brand continues to grow on the back of network expansion and growth in new categories that it has also added such as home and accessories. Revenue for the brand grew by almost 80% over last year. Shantanu & Nikhil delivered the highest ever Q2 business, with revenue growing by 48% over last year. The brand added two stores and is now present across 14 stores. The brand continued to invest in brand building activities with revamping stores and celebrity tie-ups. The first half has seen ABFRL progress with its growth plans, achieving record earnings while consolidating its balance sheet.
The company is well poised to continue the momentum with improvement in profitability, while gradually transitioning towards a business model which is highly capital efficient and be able to generate higher returns. With this, we can open the floor for Q&A.
Thank you very much, Mr. Bajaj. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their 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, thanks for the opportunity. Sir, just first question pertains to versus pre-COVID level, there seems to be a stronger bounce back in Lifestyle segment. When we compare it with Pantaloons, it is relatively muted. While on margins it is actually opposite scenario. Lifestyle segment margin is still tracking below pre-COVID levels while Pantaloons has done phenomenally well on that count. How should we read this divergent trend on growth and margins between the two segments?
Hi, Tejas. Tejas, if you read the numbers carefully, I don't think you should be concerned about margins or Lifestyle. I wanna first start with that. Because if you look at the reported margins for EBITDA margins for Lifestyle segment, they're almost same level as Q2 FY 2020. 17% versus 17.4%. I think you don't need to be concerned about that. It's pretty much in line with what the base was. Even the marginal difference, if I were to explain, is largely coming from the shift in channel mix. E-commerce, which is relatively less profitable channel, share of that channel has grown and therefore it's marginally compensated by the strong growth that you're seeing in the retail channel. But overall margins are pretty much in line.
I think on an annual level, you won't see any difference. It's a very small quarterly phenomenon. On the growth front, yes, you're right. There is a much greater buoyancy on the premium end of the market. I think consumers at that end of the market are less affected by everything that's happening around, and the recovery seems to be. This is not something which has happened in this quarter. This was the case previous quarter also, and therefore is reflected even in entire half performance. We continue to see continued buoyancy around the better-to-do, well-to-do customers, more urban markets and more premium parts of the business.
Pantaloons on the other side has operated in environment where consumers have been probably more affected in this current inflationary environment, and therefore it has to deal with a more difficult business situation. As you've rightly pointed out, what is creditable is that despite that, Pantaloons has managed and continued to show strong profitability trajectory both with respect to pre-COVID level, with respect to last year. It's a continued solid, consistent improvement in profitability that Pantaloons had been executing for four, five consecutive years before COVID, and continued to come back now to improve that journey for last couple of quarters as normalcy has come back. I think both businesses are on very strong ground on that piece.
Sure. This is again. Second, clearly, at least from the ongoing World Cup, it is clear that we are putting a lot of might behind Van Heusen and Innerwear now in terms of branding support. How should we think about opportunity and scalability in this brand, at least in terms of guidance, how should we think about this year or next year? Can you give ballpark figure also, in terms of scaling up from here?
Tejas, we had indicated INR 500+ crore revenue was our first goal. We'll easily cross that this year, so we would have got the business to a level where it's no longer a small player in the segment. Of course, you know the market size and the large opportunity ahead, so we'll continue to invest. This year, as the normalcy has returned, two factors we need to keep in mind. One is, as we see the opportunity and step up our ambition from INR 500 crore INR 1,000 crore in next two and a half years, clearly the investments will go up perhaps in the second half of this year and part of next year to get the next level of step jump that we want to achieve in that business.
The fundamentals of that business are very strong. Brand is premium, price points are high. Now the basic economics is also working out simply because the size of the business is achieving reasonable scale. Our ambition will continue to remain. We had guided to INR 1,500 crore revenue in FY 2026. Our endeavor is to get as close to that as possible. That's as far as Innerwear is concerned.
Yeah. Last one on Ethnic Wear. Clearly the investment you have made has shown up in terms of expenses or losses also this quarter. What will be the nature of this investment? Is it largely on network that we are creating or branding support that we are putting? Because that's also visible. Just an associated question there, with seven brands in this space now to play the portfolio there, are we done in terms of having a number of brands that we wanted to own the portfolio with? Or there are some gaps that you would like to fill in organically or inorganically in this space?
I think, Tejas, to a large extent, we have played out the portfolio well. There are two brands in fact all four designer brands, which are Sabyasachi, Tarun Tahiliani at the extreme high end of luxury, followed by Shantanu & Nikhil and Masaba, all play in the wedding destination shopping, which is evergreen and long-term potential that we have seen. Below that, we have launched a range of core brands, either from designers, which is S&N from Shantanu & Nikhil, or organically built like what we are doing in Marigold Lane in the regular women's wear segment, premium women's wear segment, or Jaypore, which is a 100% subsidiary and beginning to get scale for the first time this year.
Coming to your first question, which is really what we are doing in this business. If you look at the numbers, we started this business in FY 2019-2020 with a small acquisition of Jaypore and stake in Shantanu & Nikhil. Size of the business in just three years back before the COVID was zero. We have now got to a quarterly run rate of INR 110 crores. I think this is based on the businesses that we had acquired. Our journey forward is singularly built around our large ambition in one single brand, which is Tasva, the men's premium Ethnic Wear brand. Most of our investment, and therefore I wanna make sure that you don't treat all the brands at the same level.
Most of our investments, and therefore current quarter losses and maybe going forward a little bit for some more time, are currently in Tasva. The nature of those expenses are building an organization for scale. We have given an indication of INR 500 crore in five years. Now we feel more confident. We'll probably try and look at that number in a shorter period of time. This year, we would be looking at close to 65-70 stores. 25 of them have already been launched. Another 40-45 will get launched in the remaining part of the year. Advertising campaign has just got launched. I think, that's not fully factored in Q2 results. You'll see deeper investment going in Q3 and Q4 as wedding season comes in.
Clearly this is our single largest among the Ethnic portfolio in terms of organically building a very sizable business very quickly. That's our largest investment vehicle. Needless, however, to say that Jaypore has now studied the business model is fine. We now need to accelerate that, and that you will start to see. This number of INR 100 crore a quarter will quickly move to INR 150 crore-INR 200 crore a quarter, as we go forward. You'll start to see some of it in quarter three, but I think the Tasva story will get played out in next 12-18 months, where the first round of sort of investment, both in terms of opening 75-100 stores, as well as behind the brand and the organization will become visible.
Sure. Last one, just, Tasva will be on COCO as of now or it's a mix of COCO and full?
Currently, most stores, about 25, I think 20-odd plus stores are COCO. It's early stage for the brand. We are very selective about giving it to franchisees right now. We wanna perfect the model before we bring in franchisee. As you know, we operate with close to 600 franchisees, 2,000 plus stores which are franchisee-driven. It's a easy thing for us to do, but we want to be very, very responsible and careful about where we get our franchisees to invest capital, and that's been our approach. Early stage of brands, we want to perfect the model before we hand it over to franchisees.
Fair point. Thanks and all the best to the team.
Thanks, Deep.
Thank you. The next question is from the line of Nihal Jham from Nuvama Institutional Equities. Please go ahead.
Yes, thank you so much and good evening to the management. Three questions from my side. First is on Pantaloons. This quarter would have seen the full benefit of the EOSS, right, which was not in Q1. Is that a right understanding?
Yes, that's right. That's right, Nihal.
From the perspective of EOSS coming in full this quarter, plus Pujo, would you say that maybe the sales were a little lower than expectations given as we highlighted that maybe there's some stress at the lower end of the market?
I think if you look at our journey over the last few years, we've been constantly trying to strengthen our proposition with our product that has got premiumized and significantly better quality of product and with our stores looking good. I think we feel today a lot more confident in terms of our growth. I think what we've seen in this quarter with the concentrated EOSS, I think it's quite in line. I think the growth is perfectly in line with our expectation, given everything that we've done to strengthen our proposition.
Sure. Point taken. Second question on the-
Just to add to Sangeeta's response.
Yes.
See, what we are also doing, and you're seeing that in the consistent, solid profitability performance of the business, is we are not chasing growth at disproportionate cost. Therefore, the growth is organic, it's high quality, and it's reflecting in strong profitability. To that extent, there is a marginal loss of potential growth, but that's the improvement in qualitative part of the business that Sangeeta was talking about.
Yeah. Equally, I think it reflects in our margins. I think the fact that we've been able to keep our markdowns despite a full EOSS quarter under check, I think has helped us improve our profitability as well.
Understood. Moving to the next question, which is on Ethnic. Ashish, you highlighted that there could be some more investments coming in. I would assume that maybe is it that this quarter you'll see the full campaign in terms of appointing the brand ambassadors, and maybe this is where most of the investments in terms of P&L will play out? Or is it that this is gonna be something that will require regular investments over the next 12 months?
Nihal, first of all, I would request you go to the website, go to our presentation. There's a beautiful ad which Tasva has launched. We've given the link there. We've already signed our brand ambassador, Ranbir and Ananya, and it's a lovely ad which is getting very good feedback and response. Have a look at that. Coming to your question, I think what we have right now in the business is an organization, fully fleshed organization. We have expenditure, which is in creating the brand, creating retail identity, creating the stores. Our revenue is very small because at this stage, by the time we were in the middle of the quarter, we had only eight to 10 stores leading towards the end of the quarter, about 20-25 stores.
What you will see in next 12-18 months is clearly deeper investment, but that would be in marketing. The organizational investments have already been happening. It will hopefully be and then certainly be compensated on the other side by revenue buildup which these stores will bring as the brand becomes popular, as the number of stores expand. You would perhaps go for a couple of quarters of deeper investment, and then the investments will get balanced by the revenue numbers that we expect.
Therefore, in this, the whole strategy is deep investment, quick ramp up to establish a brand which by the end of next year should be anything between closer to INR 200 crore in terms of revenue and at least revenue run rate by that time, and has started to become a visible and a meaningful proposition for customers.
Sure. Just one last question was that we've received a first tranche of investment from GIC in the first half. Now, with the remaining amount that is gonna come, any plans of debt repayment or any allocation, thoughts that you want to share?
I think no new news for you if that's what you're looking for. Our next round of money is due in March 2024. If you look at state of our business, Madura business is generating strong EBITDA and cash flow to fund its own capital and growth, in fact, leaves something for other businesses. Pantaloons also now you can look at and credibly believe that the cash flow generation of that business is good enough to fund its, you know, if you've noticed, perhaps it doesn't come through. Pantaloons operate with very high return. Net working capital terms are exceptional and industry leading, so very strong cash flow generation there, which will fund Pantaloons growth.
Therefore, to that extent, the excess cash coming from here or from additional capital that will come back, which is still about 14, 15 months from now, will be to ramp up these businesses, which is Innerwear, Tasva and rest of the Ethnic businesses, Jaypore, Shantanu & Nikhil, Sabyasachi, et cetera, which we believe are very, very powerful brands, very strong consumer proposition and currently sub-scaled and will dramatically change with the investment that we will be able to put into those businesses.
Sure, sir. Thank you so much, and I wish you all the best.
Thank you.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Yes, sir. Thanks for the opportunity. Sir, or in fact the EBITDA margin of businesses other than Lifestyle and Madura segment, we were operating at about 10%-11%, which got dropped to about 2% in this quarter. I just wanted to understand what are the factors that led to this decline, and how should we see the margin trajectory of these businesses going ahead?
I think you're right. That's part of the segment which internally we put three businesses there. One is the Super Premium business, which is The Collective and the high end of the international brands. Second is the value fashion business, which is American Eagle and Forever 21. And third is Innerwear business. The larger part of the shift in margin profile currently is coming from Innerwear. We expect that in another six to 12 months, as Innerwear starts to chase the next step of its growth, which is INR 500-600 crores, where it's running today to about INR 1,000 crores, may take some more time for that, but that would be the one. The other businesses, which is the Super Premium businesses and the Youth Fashion businesses, are quite profitable.
The Youth Fashion business is slightly above break even, and Super Premium business is double-digit profitability.
Okay, I got it. Sir, within Lifestyle, the wholesale channel is still about 20% lower than pre-COVID, while retail has seen exceptional growth trends. Wanted to pick your thoughts on the trajectory for this channel going ahead for Lifestyle.
Devanshu, you know, we've managed the entire quarter actually for many quarters now without Central. Okay?
Mm-hmm.
That is, it was a very large customer account for us, which is not there. That is one thing which we have to recognize. We have also significantly scaled up our own retail business in many markets to be able to create very strong retail formats. Having said that, the business with the rest of department stores and the traditional trade business is strong, and we should be fine with that. In fact, we expect that that momentum will continue. It's primarily a function of the gap which Central left in the system.
Got it. Last question is on new value format, Style Up, where we are seeing some launches. We already have strong expansion plans for Pantaloons in tier two, three, four towns. Wanted to understand if this would be an additional platform other than Pantaloons to play the tier two, three, four opportunity. How should we think about this?
Yeah. Hi. Style Up, we are testing the proposition and it's in a pilot phase. This is not a tier two, three, four town proposition necessarily. It is targeted towards a different consumer segment. Here it is truly the value segment, where we believe there is a very large opportunity. I think as Pantaloons over the last few years has premiumized and moved up in terms of price point, we felt there's an opportunity here to target this consumer. Therefore, Style Up should be seen as a completely different proposition, which will be in large towns and over a period of time in small towns as well. It is a completely different consumer segment.
It's a very large opportunity, as we know, and I think that's the way ABFRL wants to play in that segment. That's how we should think about it. At this stage, we've just
Launched a few stores, about four stores, with Style Up, our new proposition. As I said, this year is a year to pilot our proposition, and as we are ready to scale it up, we will come back to you and tell you more about it.
Got it. Thank you. That's it from me.
Thank you. The next question is from the line of Gaurav Jogani from Axis Capital. Please go ahead.
Thank you for the opportunity, sir. First question on this is with regards to the net debt. The net debt right now is around, you know, INR 250 odd crores, as mentioned in the press release. I'm assuming that the current INR 50 crores of the GIC money has also come into this. Effectively, if you take off that GIC money, the net debt should be around INR 1,000 odd crores. If you see at the end of March 2024, it was somewhere around INR 500 crores. This means that without that our net debt has effectively increased by 500 odd crores, or maybe this is due to some losses. If you can explain this difference here of this 500 odd crores increase in the debt.
I think you're right, the way you have calculated it, and that's the reason we raised capital because we feel, you know, and we have talked about in the past, our business is set up for very, very aggressive growth. We expect to grow more than 50% or thereabout this year. We feel even going forward, that's the kind of growth rate that our business is set for. When you're growing that fast, and you could see that in the numbers of Madura, Pantaloons over last year, you also need to build an inventory and therefore at the beginning of the season there is always a build-up of inventory. In a fast-growing business that requires you to plan inventory ahead of the market.
September is particularly that point where your inventory needs to be fully loaded, your stores need to be fully ready for rest of the season to come through. We are in a very strong growth phase, and this is largely inventory-led. Of course, there may be some capital investment pieces also, but most of it is largely coming out of inventory build-up. Net working capital at a total level if you look at it, that remains pretty much under control. On the operating capital that we have, the net working capital number, which you can see the last part of the presentation, is about 100, actually only about INR 19 crore.
INR 260 crore.
A lot of it is inventory, which has come perhaps in the last month and a half, and gets balanced on that account.
Shiv, just one follow-up on this. Actually, you know, if you see a payable, the payables has also, you know, commensurately increased in line with the inventory. If you see the payables, the payables actually right now is a humongous amount around INR 4,700 crore. If we take it in terms of, you know, the number of days, it's actually coming up to around 150 days. You know, which I think would be the highest in the industry.
Don't you think, you know, as this number increases in absolute terms, this could have some pressure on the margin, because, you know, ultimately these vendors who are giving us the product on credit would be also charging us higher margins on the product price.
If that's the assumption, that must already be built in margin, so don't worry about it. Margin is after all that, because this is not something which has happened now. We have consistently explained to you our rationale for building a business where the front end of the business in a largely retail format where average inventory is about 120 days, a part of our business is into manufacturing. We hold working capital from fabric level because we do 30%-40% of our manufacturing. We wanna make sure our business model is aligned. The front end investment, which is inventory, needs to be as close to the back end, credit period that we have. Therefore, we operate with 120 days classical backing period.
Some seasons it shows up at one point a little bit higher or lower, and that balances our working capital. Which is why, while you are focusing on one part of it, we have delivered. If you look at the first half of INR 6,000 crore with a net working capital of INR 20 crore. That's an outcome, and this is primarily done. The business is engineered carefully around this so that we can grow this business from INR 6,000 crore first half to, let's say, INR 12,000 crore-INR 12,500 crore next three years into INR 20,000 crore-INR 25,000 crore without blocking large working capital into that. The whole model is designed around that. It's been consistently and carefully done over the last four or five years.
It's not a one-off phenomenon that's going on.
The last question is, you know, with regards to the Pantaloons margin, you know, while, you know, on an absolute basis, it has increased to around 16, the margins are around 16% odd. But if you see the dip is around 540 basis or a few basis. Though I agree that, you know, there was also a year sales element in this quarter. But do you think it is also impacted because we opened 20-odd stores in this quarter and most of them would have not contributed in terms of the revenues. Going ahead as the stores scale up, the margins could improve further.
Let me first tell you a historical fact on this. The business has grown from 100 stores to 400 stores, and every time we have expanded, our margins have only expanded. Pantaloons is one business you can go back and check every single year from 2014, 2015 onwards, percentage margins have increased despite every single year network expansion being added to it. I think we have a strong operating leverage. As we add stores, our profitability improves. One quarter, 20 stores which would have operated maybe for about 10, 15, 20 days or maybe a month on an average on a network of 396 stores, I don't think that would have an impact.
Okay. Sure, sir. Thank you, and that's all from me.
Thank you. The next question is from the line of Ankit Kedia from Phillip Capital. Please go ahead.
A couple of questions from my side. First is on the private label contribution in Pantaloons. For last three, four quarters, this number is around 62%. You know, previously you had guided that you want to take it up to around 70% in the medium term. Where are we in that journey, given that bulk of the stores are gonna be in tier 2, tier 3 cities for Pantaloons where, you know, private label could be more suited competitive sense?
I'll come to your central question, but the assumption that Pantaloons expansion in only in tier two, tier three or that ratio is dramatically higher is not true. In fact, as a format, we are finding increasingly greater opportunities in bigger cities as urbanization is driving a lot of concentration of population, new establishments are coming up, et cetera. I don't think that mix is changing significantly. We are clearly short on what we have indicated and set goals for ourselves as far as the share of private label increase is concerned. But it doesn't you know, it's an endeavor we will have to get customers to choose. As you know, just before COVID, we had launched a series of new brands and categories.
We had launched Home, we've launched Marigold Lane, we've launched couple of brands on the menswear side. I think we'll have to wait for these brands to play out in early stages. I expect as we proceed forward, the shares will keep going up, but clearly the progress on share of private label hasn't been as much as we had sort of indicated in the past.
Sir, from the EBITDA margins for Pantaloons, one of the levers could also be from a next three-year perspective, you know, while obtaining revenues and scale, gross margin expansion due to private label should play out.
Yes. Yes. That's the lever which we have not been able to fully play out. I think as Sangeeta said, what has worked for us is our improvement in product, overall product proposition, the premiumization marginally that we have been able to do, the store, the brand identity, and I think the next lever which will shift the next trajectory of margin would be increase in private label share. That's been our attempt, and I have to admit that we are short of what we wanted to do on that account.
Sure. Sir, my second question is regarding the CapEx. You know, in the first half, we have done around INR 300 crore of CapEx, and you know, based on your guidance, the stores opening in the second half will be pretty much double than what we have done in the first half. So based on that, where do you think the CapEx would be, and if you could just break it up between the three, four verticals which you have?
I think CapEx will be more than the double of the number that we have. As in, we'll double annual CapEx will be perhaps closer to INR 700-INR 750 kind of number.
Yeah.
Remember, part of our expansion comes through franchisee route, so while we may add stores faster, the CapEx necessarily doesn't need to follow that cycle. Among the businesses, I would say the largest share will come from Pantaloons. Pantaloons is the largest expansion ahead. We had guided and we are still on track of opening between 60-70 stores. We hope we'll be closer to 70. So far this year, we have opened 22 stores, which is a net addition. We have another 40-50 stores to go, so that will be largest part of CapEx.
Sure. Thank you so much.
Thank you. The next question is from the line of Aliasgar Shakir from Motilal Oswal Financial Services. Please go ahead.
Yeah, thanks for the opportunity. Couple of questions. First is on Pantaloons. When I see the area addition versus the revenue growth, let's assume over pre-COVID, it's somewhere about 20-21%, both of them. I mean, how do I read this? You've said before that, you know, your revenue per square feet probably changes depending upon where you're opening stores. Is it because of that factor or else how do I look at the SSG, you know? Yeah, that's the first question.
Got it. I think, Ali, at a very high level, our sales per square feet on the like-for-like stores have started to exceed pre-COVID levels, if that's the question you were looking for. As you rightly mentioned, the square feet addition and the productivity addition, shift are necessarily not directly correlated because it's a function of where you open the store. We have very large variance depending on the tier of town that you open the store as far as SSG is concerned, while it may be same space in terms of square footage. Was that? Are you looking for anything more specific than that?
No. This partly answers my question, but, you know, you also mentioned, you know, in the previous question that we also have a lot of opportunities of opening store in, you know, larger cities. I mean, I was just trying to understand if this store addition has been so much in the smaller towns that the like-for-like doesn't reflect in this. And if you can just quantify what is the like-for-like versus pre-COVID.
I think, do you have the exact number?
Yeah.
It's low single digit. We'll give you the exact number on pre-COVID basis.
Okay. This compared to lifestyle is still, you know, hasn't grown as much. I understand lifestyle business has done far, you know, better in terms of like-for-like growth. Is that a fair understanding? I mean, is this to do more because of the category it operates, which could be slightly lower end? I mean, if you could just shed some light.
I think, Ali, you're right. I started the call with that observation, that the premium part of the market is seeing very strong traction. Our brands particularly are seeing very strong traction. We probably in that part of the market gaining market share from other premium brands. The market at the slightly lower end is probably more affected by overall inflation that consumers are experiencing in their life on everything. Therefore, that part of the market is more affected. Also, Pantaloons is more widely distributed. The urban markets are less affected versus the next tier of towns. All that is probably resulting into this differential outcome.
That's why as a company, our portfolio play allows us to ride good times for each segment, just as we need to grind through the tougher periods, which Pantaloons has done remarkably well in last 12 months.
Understood. This is very helpful. We are not seeing any material change in the trajectory at that lower end, right?
No, it's improving. It's improving. Of course, every quarter we'll have to. I'm very confident that trajectory will also come back as more and more consumers come back. We have built a business model which is resilient enough to withstand this kind of thing, and that's reflected in last six months. If you look at totally, the inflation in textile value chain is perhaps one of the highest in last 10, 15 years that's been experienced. Pantaloons has absorbed a very high pressure on its cost and yet delivered the kind of quality of profitability which is very strong.
Understood. This is very detailed. Second question is on the D2C. There have been news about, you know, few brands that we are in the middle of, you know, acquiring. I mean, I just wanted to understand, given the fact that we've received money from GIC, you've said before that that money will not be deployed here. It's a separate, you know, subsidiary. If you could share your plans, are these two, three, or whichever ones we are looking for companies relatively smaller play so far and, you know, that's not a very sizable play versus our overall portfolio. I mean, if you could share, you know, how big these investments could be and what kind of investments we are looking to do here.
Ali, we had indicated the time of announcement of launching D2C business, that at that stage we were looking to invest about INR 400 crore-INR 500 crore from parent company, which is ABFRL, into that subsidiary. That subsidiary now named as TMRW, which is the brand, that D2C company runs with, is now looking to invest into about eight to 10 investments by the end of this year.
Okay.
Obviously, all these investments will be much smaller compared to the businesses that we have, and these are fundamentally early-stage digital-first brands, which we will take a majority stake in early stage. The journey is on. I think, maybe another quarter or so we'll be able to give you a much clearer update on where we stand on that.
Okay, got it. This is very useful. Thank you so much.
Thank you. The next question is from the line of Vaibhav Agarwal from Basant Maheshwari Wealth Advisors. Please go ahead.
Hello, sir. Thanks for taking my question. You said that this year we will grow by 50%, and our revenue would be around INR 12,000-INR 12,500, and next year we would also grow by 50%. Is that
No, no. Vaibhav, I think now you're putting words into us. I said, look, our last year revenue was INR 8,000. Our first half revenue is close to INR 6,000. Second half is always better than first half. It also comes with greater expansion. It should be reasonable for you to assume that the overall revenue for this year would be more than INR 12,000-INR 12,500, in that sense, and therefore that would be 50% growth. What I said about next few years is in context of our investment that we are a company which is poised for, we have multiple levers of growth, and we have now established those platforms and therefore we will be in strong growth phase even going forward. I don't want to put a number on that.
You already have the numbers that we have given out as forecast for our FY 2026. Our Chairman in last AGM has also stated that, you know, we are confident of not just achieving but exceeding those numbers. That's the only thing I could say at this point of time.
Right, sir. Would we look at changing these numbers? Because I think, we have got some additional funds from GIC, and after that we have not changed any guidance over the longer term. Do you have anything in store for changing these numbers?
Vaibhav, yes, we will, we do. What we want to do is to come back to all of you and broader investor community and come up with a fresh update on our strategy update, some time in the quarter four of the coming year. We would have greater visibility and we'll provide a fresh update, and we are reasonably confident that we'll be ahead of what we had said earlier.
Okay, sir. My next question is that we have been in this investment phase for a long period of time. We have invested in Ethnic, we are investing in B2C. We are investing a lot. When do you think that this investment phase would be kind of over for us or the revenue growth would be much stronger and the profitability would be much higher? When do you feel that the operating leverage would kick in and we would have a higher margin compared to the last few years that we had?
I think it's a difficult question to answer. I'd only say we operate in one of India's largest consumption spaces. Apparel, as you know, its size of the bucket is larger than most consumer categories that companies operate in. As a leading brand, we have one of the widest portfolio which addresses everything from Pantaloons, Peter England one end, and Style Up that Sangeeta is talking about, all the way going up to the luxury end of the market. We operate in men's brands, women's brands. We now extended into sportswear, activewear, Athleisure, Innerwear, and therefore it's a very comprehensive play. Our view is built around that, and that is what is giving us confidence that we could state that we will.
A company which last year was INR 8,000 crore will be north of INR 21,000 crore-INR 22,000 crore, which is what we had given in the public domain. Which is nearly tripling in a short period of three and a half years. All this of course will require investment, and that's why we have raised capital, in line with our growth strategy. Clearly there would be two levels of shifts which will come as far as profitability is concerned. One is the leverage that large businesses and I won't call them mature because the runway for Lifestyle Brands and Pantaloons is very, very large. These large established businesses will start to create operating leverage, which will improve their profitability as we go forward, coming purely from the size of operations that we have.
I'm not factoring in any significant shift in intrinsic profitability improvement. That itself will drive one shift for the company. The second would be the investment that we are making currently. I explained the beginning of the call on Tasva, Jaypore, Ethnic Wear brands. Those investments will again make those businesses from currently very small to suboptimal to reasonably scaled business. In almost no period of time, we have quickly built a business of INR 600 crores-INR 700 crores run rate of Ethnic Wear. We'll quickly take it to our next level of trajectory, and that's when the losses in those businesses also start to reverse and we'll start making money. Similarly, Innerwear is an investment growth. That trajectory will shift in 18-24 months.
What you will see, the picture of the company at that point of time will be significantly different in its profit. All that we have actually guided in our last investor deck. We are pretty much on track as far as that is concerned.
Okay. Great, sir. Thanks, thanks a lot.
Thank you. The next question is from the line of Swati Jhunjhunwala from VT Capital. Please go ahead. Swati, your line has been unmuted. Please go ahead with your question.
Yes. Can you hear me?
Yes. Now we can hear you.
Yes. Thank you for taking the question. Most of my questions have been answered. I just wanted to know what was the percentage of ad spend in this quarter as a percentage of the revenue. What is the outlook on this advertising spend going forward?
I think, in immediate terms, our advertising for next couple of quarters will continue to grow because, you know, it's a necessary nourishment that brands and businesses need when they want to be on such high level of growth trajectory that we are on. The classical ad spend percentage that we have kept for the branded side of our business is closer to 4%. For short period it goes higher to maybe 4%-5%. On Pantaloons, we had operated at 2.5, 2% to 2.5%. Maybe for short period it may go up to maximum 2.5-3. But as scale comes, that'll again start to wind down.
At this point of time, we are almost after two and half years are seeing the kind of growth that our businesses are capable of, and we want to fully fuel them and nourish them. Therefore, for next quarter or so, you will see a more elevated expenditure. The range would be pretty much what I've indicated, which is 3%-4%.
All right. Thank you so much.
Thank you. The next question is from the line of Nirav Joshi from Artifice Distributors. Please go ahead.
Thanks for the opportunity. The question is with regards to the Lovechild, the new cosmetics brand which you have recently launched, how we are taking it forward, and when it comes to marketing and ad spending, how aggressive we would be on the rollout in the coming quarters.
Quarter is a very short time to comment on, but Lovechild has just been launched. It's largely being sold online and with few stores that House of Masaba has. At this stage, we are more interested in making sure our consumer proposition is working, our product receives good feedback, and therefore most of the spend is largely digital in creating awareness among the young consumers. It is nothing which is out of the ordinary, and we'll wait for, you know, brand to get established, the whole range of products to get launched, which will happen over the next couple of quarters before we scale advertising as far as this is concerned. On your question on Reebok, I think Reebok is a business which we have just taken charge of.
From first October is when the management control has effectively moved to us. We will definitely spend a couple of quarters understanding that business, perfecting the model, ensuring the health and quality of retail stores, building capabilities and team. Perhaps the shift in advertising or anything else is a couple of quarters away till we actually get complete understanding of the business and hold of the business.
Okay. We said the part of our growth comes from the franchisees. We transfer the business to the franchisees. What are the returns do the normal franchisees make on taking over the stores? Stores are being managed by the franchisee, or we only manage these stores?
You are talking about Reebok or you're talking about anything else?
Overall on the majority of brands in the kitty.
You know, our view in franchisee model has been fairly stable and it's been tested over two decades of franchising. Fundamental principle is that it's a business where franchisee puts capital and he takes risk on capital on each store because he's equally a part in terms of selection of property and in selection of brand. He therefore comes along and gets returns. However well the business does, the upside can be higher. Similarly, if the store doesn't do well, it's a risk that he takes. We don't offer guaranteed margin, fixed cost structures, et cetera.
Our fundamental business is built around franchisees having deep understanding of local market, good understanding of business, ability to serve customers well, local taste, and therefore he brings not just capital, but brings his knowledge, and to that extent, he takes the risk of the business. Some franchisees make a lot of money, some franchisees don't make money. Some stores are very successful, some are not. We have learned over long period of time that's the only sustainable model of building franchising business.
The expansion we take forward, what percentage would be through franchisee and the company stores?
If you look at our two primary businesses, our branded business of Madura, close to three-fourths or even higher, expansion comes through franchisees. This is not a choice we make. This is when franchisees approach us for the business. We wanna make sure that it is something that they are doing with open eyes. They talk to each other. The franchisees have a great community. They look at which businesses work well and close to three-fourths of them. In Pantaloons case, the number is closer to 15%, 15%-20%. That's our historical number, and that's the level of franchising that we will continue to operate at.
In the D2C space, which segment we are looking? Ethnic, kids wear or the cosmetics and the acquisition side? Any broader under-
Let's say we will start with broad category of fashion, which will cover everything Ethnic, fast fashion, casual wear, Athleisure and so on and so forth. Obviously, some of these brands could have extendability into other spaces where they're not today, and we will leverage that. These are broad spectrum of fashion companies that we are investing in.
For each brand we have a different brand head managing from A to Z, or in the hierarchy, we have a person in the systems looking after multiple brands.
D2C you're saying, or you're asking about?
In your kitty since a decade.
Sorry, I didn't get.
The other brands, all the Madura Fashion brands and the recently added Sabyasachi, Shantanu & Nikhil and all. What's the operational approach in that case?
Our philosophy has always been that a brand is an entity by itself. It's the most important entity, and therefore we invest in leadership at that level. Every one of our brands, big brand businesses, headed by a very senior professional. The brand teams are complete. The product, the design, the marketing, the retail, every aspect that affects the brand and the business is embedded inside that system. We don't have one design team which serves everybody, or one product team which serves. Only the absolute front end of the business, which is acquiring stores or absolute back end, which is manufacturing or sourcing, is where there is a benefit of consolidation. The heart of the business is embedded in independent structures. There's nobody common between Louis Philippe or Van Heusen or Sabyasachi or Pantaloons for that matter.
The whole team operates in that manner, and each of the brand is a unit. For long period of time, we have believed that this is what has driven scale. There were a lot of brands which were our size five, seven, 10 years back. Many of them got left behind. Our focus on. To that extent, there is a little bit of lack of synergy. We believe for creating distinctive brands and a wide portfolio, it's a good thing to sacrifice.
Thank you very much. That was the last question for today. Ladies and gentlemen, on behalf of the management, we thank all the participants for joining us. In case of any further queries, you may please get in touch with Mr. Rahul Desai or Mr. Amit Dwivedi. You may now disconnect your lines. Thank you.