Ladies and gentlemen, good day, and welcome to the first quarter of FY 2022 earnings conference call of Aditya Birla Fashion and Retail Limited. The call will begin with a brief discussion of the company's management on Q1 FY 2022 performance, followed by 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. 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 reviewed 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.
Company due to the widespread lockdowns in most parts of the country due to the second wave. The business witnessed severe dis-
Sir, sorry to interrupt you. Sir, we missed on the beginning of the call.
Yeah. Good evening. Welcome to the earnings call company. The quarter under review has been a difficult quarter for the company due to widespread lockdowns in most part of the company linked to second wave. The business witnessed severe disruption in the quarter, as the bulk of our network was closed. The latter part of June saw a substantial part of the network restarting operations. Despite loss of one full month of operations in this quarter, business was able to recover to 40% of pre-COVID levels, that is, of Q1 FY 2020. With the momentum picking up strongly by the day, we are seeing our July sales coming back to 85% of pre-COVID levels of FY 2020. This is despite partial lockdowns that we are still witnessing in many parts of the country.
As on 26th July, out of our 2,150 stores, close to 65% of our total retail network resumed partial operations. With more states gradually opening up, as we heard Maharashtra announcing opening today, we are very confident of an even faster recovery in the coming months. We expect this quarter to be better than the second quarter of the previous year. We believe the pace of vaccination will also improve the coming months, which will help rebound consumer optimism strongly. Now, let me give you a snapshot of the financial performance of our company.
Sir, can you start it again?
The revenues of the quarter.
Sir, we are unable to hear you. Hello?
The revenues of the quarter are not comparable with the previous Q1 FY21 due to the more severe shutdown in Q1 last year. Consolidated revenue for this quarter are INR 812 crore compared to INR 323 crore in Q1 FY21. Due to our extensive focus on our digital initiatives, the e-commerce channel grew to more than 2.5 x over Q1 last year. While our partners' e-commerce has grown tremendously, our own brand.com have also scaled rapidly. The company has decided to make substantial investment in building its digital and e-commerce capabilities in a bid to strongly pivot its business model around digital. This will be the significant driver of company's growth in coming years, in tandem with its strategy of network expansion and product innovation. Let me take you through some of the initiatives which will help the company leapfrog into a more digital company.
Roll out a new multi-brand e-commerce website and app to leverage combined equity of our brands digitally by Q4 this year, enhance digital customer engagement through social media, expand omni-channel coverage from 1,300 to 2,000 stores, and strengthen our digital backend capabilities. On cost initiatives, with our consistent focus in aligning our rental cost with the scale of the business, we are happy to report that we have been able to achieve lower rent as percentage to sales in this quarter versus the same quarter last year. This is due to continued and proportional rent reductions that we managed to get from our landlords for the quarter. We continue to engage in discussions with our landlords for further rent concessions going forward. The company continues to focus on cost optimization as its first priority.
Our other expenses, comprising mainly of store operating expenses, warehousing, logistics, and other operating costs, were higher by INR 70 crore compared to last year. Most of them are variable. They grew in line with growth in sales this year. Apart from this, we spent INR 20 crore more on advertisement and a one-time additional ECL, Expected Credit Loss provision of around INR 12 crore. I will now take you through the performance of individual business, starting with our lifestyle brands. Lifestyle business continues to focus on taking its brand to more customers across markets, channels, and product categories. We have made significant shift in our product portfolio last year in line with consumer demand, because of which our casual wear portfolio has grown to 59%. The strength of these brands has been visible right through the pandemic, as reported in last two quarters.
Even this year, lifestyle brands continue to march ahead of its competitive state by recording rapid recovery in sales post-May. The revenue trajectory in July is expected to cross 85% of pre-COVID levels of July 2020. This strong performance is on back of a versatile product portfolio, agile go-to market, and a deep multi-channel distribution strategy. In line with its continuous focus on delighting customers, business took leaps in transforming itself digitally. E-commerce revenue of business grew by 3 x over last year's levels. The business is India's largest omni-channel branded fashion network with more than 1,000 stores now enabled for omni-channel retail. The business continues to press home its advantage and plans to open 400+ stores during this financial year. Nearly 90% of these stores build around franchisee-based asset-light model. Out of the total expansion, nearly 100 of new additions will happen in Q2 itself.
In line with this product innovation and premiumization strategy, business will enhance its portfolio during this year with the launch of versatile premium product offerings such as Venetian flex denims and a new premium casual wear line in Louis Philippe. During the quarter, revenue of the business was INR 435 crore and EBITDA loss was INR 57 crore. Moving on to Pantaloons business. Being a large format store, Pantaloons took longer to resume operations as a large chunk of the network is in malls, which took longer to open. That did not deter Pantaloons in reaching out to its consumers through various digital modes, serving their fashion needs. Pantaloons accelerated e-commerce presence with average daily doubling on pantaloons.com, which was launched this year. Before I move to the various initiatives, the revenues for the quarter for Pantaloons business was INR 220 crore and EBITDA loss was INR 55 crores.
This year marks a landmark year as Pantaloons embark on executing key elements of its growth strategy. Pantaloons used last year to refresh all aspects of the consumer-facing assets. In line with this, Pantaloons has launched a refreshed and contemporary new retail identity, which significantly elevates brand imagery and consumer experience. In line with its strategy to expand consumer wallet share through extensions into newer categories, Pantaloons will build on its newly launched categories such as home, sarees, infant wear, and bolster the offering through introduction of new brands in premium ethnic wear and street loungewear. Pantaloons will execute one of its largest ever expansion by opening more than 60 new stores this year. Nearly 20 stores are ready for launch in next 30 days. Finally, in line with emerging consumer habits, the business is launching a new website and app for its captive digital channel, pantaloons.com.
In summary, business is well positioned to leverage its strong operating model, which had already started to show strong profitability and incremental return on capital by expanding consumer product categories and channels. Innerwear and international brand. The innerwear, activewear and athleisure business rode the strong demand for such contextual products during last year. Consistently building on the momentum, the business this quarter grew more than twice of last year levels. The products are now available across 23,000 + trade outlets and over 50 EBOs. E-commerce posted significant growth over last year, with the scale of business growing fourfold. The business is looking to aggressively expand its EBO footprint with doubling the EBO count by end of this year. Youth western fashion and super premium brands have continued to do well and have now established their profitability.
Revenues have grown to 4 x of last year sales, and thecollective.in has performed exceptionally well, gaining 5 x of last year's sales on website. Ethnic business, we have executed our comprehensive strategy to build a complete portfolio of strong ethnic wear brands across multiple occasions and price points. Apart from growing the existing brands in collaboration with designer partners, we are all set to launch two premium ethnic wear brands in coming quarters. One, men's premium ethnic brand and two, premium women's ethnic wear brand in next quarter or so. The ethnic business partnership with Sabyasachi and Tarun Tahiliani have just begun. The Jaypore business continues to do well online. In parallel, we will build our offline presence by opening 10 stores during the year. Coming to the debt.
The net debt of the company as of 30th June 2021 increased to INR 1,200 crore due to losses incurred in Q1 and rise in working capital requirement in line with sales recovery last year. As sales recover in coming months and business operations assume normalcy, we expect the debt situation to improve over current level. Finally, to conclude, through the slew of initiatives and strategic interventions last year, we believe the company has come out much stronger and is well positioned to leverage from large opportunity that Indian fashion sector offers. Thanks, we are open to question answers.
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 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. Participants, you may press star and one to ask a question. The first question is from the line of Aditya Soman from Goldman Sachs. Please go ahead.
Hi, good evening. Couple questions from my end. Can you throw some more light on gross margins in the quarter, and why they are sort of lower sequentially? Second question on the last point you made on debt. We see it's gone up because of, obviously, operations being shut and working capital. When do you expect debt to, say, come back to 4Q levels, any sort of timeline, assuming there's no further lockdowns, of course?
Hi, Aditya. Can you hear me? This is Ashish here.
Yeah. Hi, Ashish. I can hear you better.
On the gross margin, Aditya, the business has been pretty stable and strong because this quarter doesn't have too much markdown, which is the first quarter. The lower gross margin is primarily due to absorption of manufacturing cost because manufacturing operations were shut for about 40, 45 days in the month of May and parts of April and June. That's the reason why the manufacturing cost had to be absorbed in that, and that's why it's appearing in the gross margin. There's no other reason other than that.
Thank you. Understand. There's no further discounting, right?
No, no. In fact, it's much lower discounting across businesses because there's no reason to really create leverage of discounting. I think consumer footfall was what it was. No discounting in the industry. Yeah.
Thanks.
Some of our gross margin is a mix of channel mix also. Different channels operate at different level of sales realization, and therefore, there is an element of gross margin movement, which happens depending on the channel movement, but not from the discounting itself. On the debt level, Aditya, I think if recoveries remains what it is showing early signs, and if there is no third wave, then I think we should be able to sort of record strong recovery by Q3. It's hard to put a number to it, and I wouldn't want to give numbers right now. Clearly, I think as the recovery comes back and if the cash flows remain strong, if the normalcy is restored and stays till Q3, I think we'll come back to normal as well. Yeah.
Yeah, understand. Since you're seeing already, I mean July you said is back to about 85%. Are we already seeing an improvement in cash levels, or it probably is still upcoming?
Aditya, that comment on 85%. There's a lot of echo.
It's all you. Go ahead now.
Can you hear me now?
Yes, I can. Thanks.
The comment on 85% was regarding lifestyle brands. The Pantaloons business is relatively lower. It's about 70%. Definitely I think, as retail opens up, large part of this business is retail, which is where the cash flows immediately come in. Your receivables is practically zero days. Cash flows have started to come in strongly in July itself.
Thanks, Ashish and Jagdish. I will come back later.
Yeah. Thank you.
Thank you. The next question is from the line of Aliasgar Shakir from Motilal Oswal. Please go ahead.
Yeah. Can you hear me?
Yes. Ali, we can hear you.
Yeah. Yes. Yeah. Hi, thanks for the opportunity. Just first of all a quick follow-up on this debt. Can you just share what is your inventory level today? I was just trying to see that the debt is increased quite significantly.
Yeah.
I just wanted to understand the kind of increase from inventory and how much has been lost.
Ali, if I could get your question, there was a lot of noise. It's regarding the inventory levels right now?
Yeah. Basically, I was trying to see the reconciliation of the debt increase from the last quarter. How much has gone into inventory, and how much has gone into loss funding?
Jagdish, do you have the exact number for inventory?
Ashish, the net working capital has gone by INR 200 crore and another INR 350 crore has gone into.
No, how much is in inventory?
Inventory and-
Okay.
The losses.
It's mostly the losses for the quarter and the NWC has gone up by INR 200 crores.
Okay, got it. This is helpful. Second thing, I was just wanting to understand your strategy on Pantaloons. We are looking to add 60 stores. How are we seeing that franchising these stores? Are we looking to do a large portion through franchisee, or are we still looking to do largely through our own stores?
Very large format stores are not amenable to franchising beyond a point. We are perhaps one of the few retailers which has 15%-20% of our mix which goes through franchising. We'll keep the same level. I don't think we would want to increase the level of franchising.
Coming from the background that some of our peers have a very reasonable portion of now larger stores also coming through franchising. Is there an operational issue that we face that makes you kind of restrict your franchising? Obviously lifestyle already is significantly on franchisee, or what else do you think is hurdle that restricts?
I think at 20% with the size of the network, Pantaloons is one of the largest franchise business. We believe fundamentally, retail is about running stores and unlike brand business where there are many other drivers on what you bring to the table. To that extent, we don't want to run the only skill that sort of only core part of retailer is to manage and run stores well. I think beyond 15%, 20%, we don't think it's healthy. From return on capital point of view, as we had shown in our presentation, if you recall, and you can go back and look at it, the ROC on Pantaloons stores is extremely good at store level, and therefore, it also deserves the capital.
We feel in terms of managing consumer experience, standards of operations, which are important pieces for a retailer, we wouldn't want to go too much on the other side on this issue.
Understood. Just last question on the ethnic wear. You mentioned that there are two new launches in the ethnic wear. Can you just throw some more color? Are they largely in-house or are they through some of our partnerships, with some of the acquisition that we have done? What price point, what category, and what kind of investments and growth we are building here?
Okay. In Jagdish's speech, he had called out two new launches that we are talking about. The first one is premium men's ethnic wear, which is through a partnership, but this is the company in which we hold 80% stake and Tarun Tahiliani holds a 20% stake. The purpose of that partnership is to take his design skill, but launch it in a affordable premium segment, a menswear brand. That is due to be launched in October, and we expect to open between six and 10 stores in the next six to eight months, which is by the end of this year. As we said in our announcement of the partnership, we plan to open about 150 stores over next three to four years in that business. It'll be five years in that business.
That will be a very large play in the affordable premium men's segment, largely built around wedding and such occasions, festivals. The number two brand that Jagdish had mentioned in his speech was a premium ethnic wear line. As you know, inside Pantaloons stores, we sell a huge amount of ethnic wear at the premium end, largely through external brands. We have therefore decided to launch one premium brand which will start in Pantaloons with probably 40, 50 stores of Pantaloons and is getting launched this September, so we are just a couple of months away from that. We will also take it out and launch 10-15 stores this year to test out its external format. These are two brands which will play in a very affordable segment of menswear and the womenswear.
The womenswear line will be more daily wear and office wear and other such occasions, not meant for bridal or very premium occasions. While the menswear line is created more around wedding and festivals, but again, it's an affordable range. Both these are scalable opportunities in ethnic wear.
Got it. How much investments are we expecting there over the next two, three years?
Ali, we'll have to see. I think, at this stage, we have put in capital of around INR 70 odd crores in that business when we invested in that business. As we scale up, we'll have to figure out. We feel both these models are very unlike our previous discussion on Pantaloons stores. Both these models, once established, are very franchisable because this is store format which we do in lifestyle brands, and once we crack this format, these will be franchisable. I suspect once we establish the model, I think the capital need will come down significantly.
The line for the participant dropped. We move on to the next participant. The next question is from the line of Richard Liu from JM Financial. Please go ahead.
Hi. Thank you for taking my question.
Richard, sorry to interrupt you. May I request you to speak little louder, please?
Hi. Is this better?
You'll have to speak little louder, Richard.
Okay. Ashish, can you hear me now?
Yes. Much better.
Okay. Thank you. Ashish, got a couple of interrelated questions, but before that, if I can make a request to you to reconsider telling us what are the pre-Ind AS 116 numbers, because I personally, for one, find it very difficult to fathom what is really going on in the business from a margin perspective with these numbers. Also considering that your FY 2026 target that you have stated on the investor day, that is really based on pre-Ind AS numbers, right? I guess if we have to track the progress of that, I think a reverse to a pre-Ind AS number would be very helpful. That's one bit if I can put on record. Now, coming to the question, if I look at the drop in your turnover versus the losses that happened this particular quarter, right?
If I look at slide 11, you are really talking about a turnover of about INR 435 crore for the Lifestyle business. Pantaloons is about INR 220 crore. With half the turnover, both these businesses have actually made the same amount of losses, which is INR 57 crore for Lifestyle and INR 55 crore for Pantaloons. Can you put some perspective into this? I would think that the Pantaloons would be a more higher operating leverage kind of a business as compared to Lifestyle Brands.
Yeah, Richard. You can therefore see how the losses in Pantaloons are much higher as a percentage of revenue if you were to see. Compared to INR 220 crore of revenue, the loss percentage is much higher simply because of the fixed cost structure that a retailer has. More prominent despite all the savings and rent concessions, it remains a fundamental fixed cost structure.
That's why the losses numbers are much higher as the percentage of sales. In Lifestyle Brands also, to a certain extent, 55%-60% of our business is retail, the share of retail is not entirely fixed costs. There's a part of variable cost through franchise network, that's a significant part of our business. To that extent, the losses are less compared to it. If you were to look at our overall overhead, I presume you're talking of with respect to Q1 FY 2021, or are you talking of Q4? Q1 FY 2022.
Right now I'm just talking about Q1 FY 2022 in absolute terms, Ashish, because with 2x the turnover in Lifestyle, you still incurred as much loss as Pantaloons did with half the turnover.
My question in terms of Lifestyle is:
Are you talking about comparing profits or losses between the two businesses, or between the two businesses, Ashish?
Between the two quarters? Between the two businesses in the same quarter. Let me just repeat. I mean, Pantaloons has about INR 220 crore of turnover for this quarter, Q1 FY 2022, and made a loss of about INR 55 crore. Yeah. Lifestyle has 2x the turnover of Pantaloons, which is INR 435 crore, and still landed up making as high a loss as Pantaloons.
Okay. My question is that if the level of revenue was significantly higher, should not the losses have been much lower than Pantaloons?
There are two, three elements. One is, Lifestyle Brands runs a large manufacturing operation. As you know, close to 40%-50% of our products we manufacture ourselves. We have nine factories, which have a large cost in that.
That cost absorption is unique to Lifestyle Brands in their comparison with Pantaloons has no fixed costs on that. This has just happened maybe second time in the last 20 years, when we had to shut our factories because of COVID-related reasons. There is a one-time large impact of 40, 45 days of factory overheads, which have sort of taken away this quarter performance as far as Lifestyle Brands is considered, if you were to compare the two operating models. Barring that, the number would have been much lower, but we had to take that cost in Lifestyle Brands, and that sort of exaggerated the losses of Lifestyle Brands. It has no impact on Pantaloons because they're purely variable and buy and sell model.
There are few other factors, which is advertising, which also because Lifestyle Brands revenues have been strong simply because there is a lot of support, e-commerce revenue has been strong. There is, as Jagdish mentioned, about INR 20 crore more additional advertising. A large part of it is Lifestyle versus Pantaloons. Some of the fixed cost, whether it's factory overheads or advertising, are differentially played out for this quarter specifically between Lifestyle Brands and Pantaloons, and that's showing up in the difference performance.
Okay. And now if I compare it YoY , Ashish. You did about INR 190 crore of turnover in Q1 last year in the Lifestyle Brand, and this year it is about INR 435 crore, right? It is more than double. Yet if I look at the EBITDA losses that you reported, that has come down by only INR 10 crore, right?
68 crore last year, INR 57 crore this year. I mean, why would it be so? Especially since, if I remember correctly, last year Q1, you had a very, very low gross margin of about 41% at a blended level, and this year it is much higher at about 50%.
I think again, you need to look at it as a percentage of that, and there is a fixed cost impact that's happened. There is increase in advertising that got played out. As I said, last year we had cut the costs completely because we were very uncertain. This year, if you look at it, we are talking already about 80%-85% of revenues.
A lot of our investments are back, whether it is in advertising, whether it is scale of operations, so some of the costs are variable costs that have gone up, the investments in e-commerce, or even in terms of the fixed overheads under absorption, which was quite severe. It was, I think, I don't know the number for last year's similar quarter. It must have been probably slightly lower than that. That's the reason. We can give you probably a closer tally, maybe separately Jagdish can take you through on the two numbers. Jagdish, is there anything you want to add to that?
No, that's okay. Actually, it is unabsorbed fixed overhead.
That's a large part. I mean, unabsorbed fixed overheads are very large part for this quarter.
Sure. Ashish and Jagdish. Thank you for that. I would just once again request you to consider the pre and post- Ind AS thing, just to help us understand this better, because it's absolutely difficult to pattern what's really going on with the numbers based on these post- Ind AS numbers. Thank you very much. Wish you all the best.
Richard, we'll come back to it. We thought that we should consistently follow what gets reported and explain that and rest of the industry. We were the only company, we continued to show post- Ind AS a year after, but we realized that most people in the industry have moved on. We recorded your request. Let's see, it's always difficult to keep two accounts and keep tallying between them. Let's see if there's a smart way to be able to explain both numbers, I think we'll try and do that.
Sure. Thank you very much. Yes.
Thank you. The next question is from the line of Nihal Jham from Edelweiss. Please go ahead.
Yes, thank you so much, good evening to the management. Three questions from my end. First, on the 400 store target that we laid out for the lifestyle brands, how many of them would approximately be Peter England and Red and the new Allen Solly format?
Should I take that, Ashish?
Yeah, go ahead.
Yeah. Roughly about 150 stores will be Peter England Red, and about 50 stores would be Allen Solly retail.
That's helpful. The second part was on the new ethnic wear brand we are launching. I'm talking about the second one. It is clear on the first part that the premium men's wear ethnic. The second one that we are launching initially inside Pantaloons, is that targeted only towards women to be sure of that aspect first?
Ashish, you want to take that?
Sorry, I missed that question. Can you repeat it?
Yes. I was asking that for the second ethnic wear brand that we are planning to launch in October, which is gonna start off with Pantaloons 40-50 store format pilot. Is that only meant for women's ethnic wear to start with?
Yes. That's meant for only women's ethnic wear.
You said that it will be more of regular wear rather than it being closer to bridal or the high-end format ethnic wear.
Yes. It'll be at the meat of the market, at the largest segment of the market, which is mid-premium to premium. That's where Pantaloons has a strong customer franchise right now. Most of that business is currently being serviced by external brands, and we feel Pantaloons has the design and merchandise capability to fill that space.
Absolutely. The only thought or understanding was that maybe Pantaloons had a high share of collections in women's ethnic, which was targeted at this price point, maybe starting at INR 500. Is it that this is gonna be more premium, regular wear, in addition to what we were already serving?
No, you'll be surprised the amount of premium ethnic wear that Pantaloons sells, between INR 1,200, INR 1,500, and INR 2,000. It's largely done through external brands. It's a part of increasing share of private label, and therefore, this brand is a premium brand, not competing at INR 500, INR 8,000, but more at INR 1,500, INR 2,000, INR 2,500.
Understood. That's helpful. Just one last question on the innerwear side. What I noticed is that last year when we ended, we had around 28,000 outlets in innerwear. I don't know, the presentation says currently we are having a reach of 23,000. I just wanted to understand, is that a reduction in the number of touchpoints you're having on the innerwear side?
No. What had happened is, earlier we used to report men's and women's separately, and the team used to add up those numbers. This year we did a reconciliation of common outlets, and we realized actually we should report one number, where one outlet appears once. Earlier, we were reporting separately for men and women, and therefore, as we used to add up that number, very often these outlets were common.
That is helpful. Exclusively for women, what would be the touch base out of these 23,000?
Don't have the number, but it'll be definitely north of 5,000, 6,000.
Sure, Ashish. Thank you so much. I wish you all the best.
Thanks. Thank you.
Thank you. The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.
Hi, team. Thanks for the opportunity. My first question pertains to debt. I missed the number. Debt of INR 1,100 crore was as on June or as on today?
June.
This is before the last tranche of rights money would have come in.
Yes.
Okay. Second, Ashish, aspirationally and philosophically, just wanted to understand our view on debt from here on, because we have just come out from a very bad cycle, pandemic and the debt also when we entered the cycle was very high. Obviously with dilution and interventions that we made of strategic investments, we brought it down to a very good level. Now as we again come into growth phase, incrementally would you like to deploy more capital to chase growth first, or would you like to settle the debt at certain level and then chase growth? Debt number will be a goal seek function or it will be a residual number for us?
I think we'll have to stay balanced on that, Tejas. I wouldn't take one position or the other. I think we need to stay balanced. Remember, we have now a portfolio where there are multiple opportunities that we're chasing. You look at the opportunities for lifestyle brands, Pantaloons, innerwear, the new ethnic business that we are building. There is an acceleration of digital play that's going on. We feel very well-positioned. In fact, probably the only company in the industry which has such a wide portfolio and such a large canvas to play on. We are very confident of our future, and therefore, we don't want to also start with debt as an operating constraint. We also understand the level of limits at which we need to operate.
We feel very comfortable in our current sense of projection on where, let's say, debt to EBITDA will play a year from now. This year is hard to predict, but whichever way it goes, even if it gets a little worse, we will still be in a reasonably good debt to EBITDA position as far as FY 2023 is concerned. I wouldn't say that we don't care about debt. I think it's important. We need to keep a ratio and that in mind. Really, we are very well positioned to accelerate. We are well positioned competitively. The portfolio of our brands, the opportunity in front of us. That remains sort of north star for us.
Sure. If you can give an objective number there on debt to EBITDA, where would you like to stop that number?
See, in the past, we've gone up to 2.73, but we would be more comfortable between one and two at best, and that's really the maximum range that we should look at.
Sure. Speaking on demand, you mentioned in the PPT that we are expecting full recovery by festive season. Hypothetically, if this quarter has to open up, and as Mr. Jagdish Bajaj also said that today, Maharashtra has also given some good news on opening up. Hypothetically, if we have to open up from today or next week onwards, do you think that pent-up element can actually bring back recovery faster than the festive quarter? Do you believe that the underlying economic environment needs festive push to go back to normal?
No, there is a certain element of pent-up demand which will show up in this quarter also. Like every year, I think the real boost and trigger to demand uplift happens during the festive period. This time it got pushed a little bit in terms of closer to October than September, and therefore, to that extent, maybe month-wise, it may sort of move over more to Q3. I do believe that even quarter two, if there is no third wave, I think we'll have a reasonably good recovery. For a full recovery with the combination of all stores operating fully, because even today, if you look at it, a lot of stores are operating on weekdays. There are stores that need to shut early in the evening. We are operating with extremely difficult retail environment in that sense.
Sure. The last one on the Lifestyle Brand, recovery in wholesale is slower than the system recovery there. Any insights there to share?
Yeah. I think it's always been a slight lag between smaller formats of retail recovery and then larger formats of retail recovery. There is that bit of a lag. In fact, if I were to tell you in July, it's a lot more significant recovery in the wholesale part as well. Okay. There is just that little bit in the Q1 piece, which in the end of Q1 period. Maybe I would say the lag is about a month between wholesale and retail.
Fair enough. That's all from my side, and thanks, and all the best.
Okay, thank you, Tejas.
Thank you. Participants, you may press star and one to ask the question. The next question is from the line of Ankit Kedia from Phillip Capital. Please go ahead.
Thank you. My first question is on your new e-commerce strategy. In the presentation, you have alluded on the multi-brand app. A couple of quarters back, you were talking of launching individual brand apps for the Madura brands. Now we have separate loyalty programs for the four brands as well. How does the change in strategy come about now, and will it also include Pantaloons on all the other international brands as well?
First part, we remain focused on individual brands. We are not planning to launch a platform where all brands sell across each other. We are looking for an architecture where consumers can easily shop from one brand to another and switch over to that. Within each, he will have a very unique and deep experience of that brand, because at the end of the day, we are a branded company and our biggest strength is the brand. The experience will be rich and unique and distinctive for each brand, but it will allow consumers to swap across brands as we move forward. At this stage, the idea is to take lifestyle brands and similar brands. Next stage will get extended where some of the international brands can get added.
The current intent is to build that and have a second platform for Pantaloons, because that's more transaction-heavy business. While the nature of the brands is more content driven, engagement driven. There is slight nature in the way architecture plays out. Therefore, at this stage 2 points I would make, separate pantaloons.com and a separate brand.com. Brand.com, although multiple brands is what you can access, but it's not that you can shop, let's say, trousers of all one brand together. This is not a multi-brand site in that sense. It's a combination of single brand sites coming together where we get synergy of data, consumer traffic. Consumer also gets option to switch across that. Some of the details are still to be worked around loyalty and other pieces. I think that will unfold as we go forward.
Sir, my second was on launching e-commerce only brands. Could you talk a bit on that as well? Which category, what price points are we looking at, and will it also be on our own app or purely from a marketplace perspective?
First of all, in terms of where it will be, while it can be on our own app, and it will eventually be, I think the opportunity that we are seeing is our ability to create appropriate consumer-facing merchandise design is our strength. In partnership with large platforms who have consumers, we find many white spaces where this can be done. We look at it in women's fashion, in some of the casual segments of the market, but the list of where such white spaces is larger, and we are in constant engagement. We will build a reasonably large business, which will be digitally heavy. The proposition, the price structure, the cost structure, gross margin structure, et cetera, will be designed for pure e-commerce. That's really the thought. I think there are multiple white spaces.
We are starting to look at one or two of them now. I think by end of the year, we'll start to see the impact of these.
Sir, my last question is on the Pantaloons. In the last two years, we have taken people to Pantaloons, home, saree, kids, and now we're talking of a premium women's wear brand. You would have also removed some other low throughput brands out of Pantaloons. The question is, during the pilot phase in certain 40, 50 doors, how is the response of these new categories? How many months do you see the throughput coming back to the normalized levels or the company averages? If you can share some highlights.
Okay. Many of these categories, homes, sarees, were launched just before COVID, and therefore, we haven't seen even one full season of stable performance, because Pantaloons has been more affected right through last 15, 16 months. I would say at this stage, while we have launched many of these categories and we are also launching some brands in replace, we are doing both things. We are rationalizing our internal brand architecture to simplify it for customers, and we are, of course, replacing the lower throughput, low productivity, lower profitable external brands. Both these are getting played out at this point of time.
I don't think today we are in a position to definitively comment on how they're performing because we need to give them at least one season, and hopefully this coming season will be a good place where you would have sarees in 50, 60 stores, home in 50, 60 stores, if not more. As far as new premium brand is concerned, again, it is going to, over a period of time, take shares from existing external brands that we have, because Pantaloons has a large franchise and a very large business of premium women's ethnic wear. We have not created our own brand. This is primarily a step to increase the private label share.
That's helpful, sir. Thank you so much, and all the best.
Thank you. The next question is from the line of Priyam Khimawat from Infinity Alternatives. Please go ahead.
Hi, team. Thanks for the opportunity. Firstly, on our EBITDA margin at the company level going forward. If I look at the last four, six quarters, we've almost closed out 30-35 loss-making Pantaloons and 150 odd loss-making stores. These stores not being a drag on profitability anymore. With the cost reduce, which we would have done on account of the pandemic, shouldn't our pre-interest EBITDA margin at the company level structurally improve by, say, 100-150 basis points and reach to that 10% level mark whenever we achieve full recovery? What is your take on that?
I think it's a very broad question. I wouldn't want to speculate right now because there are multiple elements in this. You're absolutely right. What we have done in last 15 months is pushed very hard to structurally correct the cost of unviable stores. Some places we have got a deal which keeps us going, and not just for this period, but going forward. In some cases, we couldn't get that, and therefore, we've been quite sharp in terms of shutting or pruning that part of the network. As we emerge from the whole situation, going forward, obviously, we are looking at intrinsically both some of the structural costs at an operating level coming down, as well as the health of network improving. I think, because it's so phased and differentially sort of timed, it's hard for me to put the number right now on that.
You have seen, if you look at our businesses, our Lifestyle brands has been reasonably consistent in the margin profile. Pantaloons for last pre-COVID, for every single year for previous three year was delivering between 100-150 basis point improvements in margin, and we were close to about 8% when we ended December of FY20. We were quite hopeful that that performance will get us to 10% there. Lifestyle brands is already above that and fairly consistent and robust on that. I think amongst our loss-making businesses, if you go back, Forever 21, which used to lose at its peak about INR 35-40 crores, has become breakeven business. Innerwear, where losses were initially high, continues to be at this point of time, hasn't reached breakeven, but that's primarily because of COVID effect. I think a year from now, that will also come back.
If you look at, therefore, the various elements of individual businesses, the profit profile was improving sharply, and I think it will continue to improve as soon as recovery comes back. It's hard for us to put a number right now on when that could happen.
Okay. Yeah, exactly what I'm taking what you said. When I do a basic back of the envelope calc for our businesses. If a COVID third wave not to return, when we reach a INR 10,000 crore revenue mark, would it be safe to assume INR 1,000 crore-INR 1,100 crore pre-interest EBITDA? Is that what we are working towards?
Definitely. Our aspiration is, because we think for a company with our profile, with our portfolio of businesses, INR 1,000 crore EBITDA is not a number which is outside, and this is pre-interest number I presume you're referring to.
Sure.
It's not out of reach. That's something that when normalcy restores, will definitely be one of the immediate targets that we will have.
Okay. My second question is on the size of our innerwear and athleisure business right now, with unorganized players still facing the heat, especially in this segment. Our growth seems to be a little tad underwhelming. What do you see? When we look at a two, three-year perspective from this, what is the size of our current innerwear business, and how do you see it going forward from here?
I think, because of COVID, our momentum sort of got stopped at the peak of where the journey was beginning. As I have said, our first target was to get to INR 500 crore. Realistically, we would have got there by now if things were normal. I think that underlying size of the business, although it's not showing up in numbers at that level, our immediate next goal in next two years would be to target closer to INR 1,000 crore, because that's the next number that we have. We know how to get there, as in, we know what it would take to get there, and I think we'll have to execute on that. That's our immediate INR 500 crore, and I think two years from now, about INR 1,000 crore is the goal that we have for that business.
Okay, got it. Thanks a lot. I'll come back in the queue for the question or take them up separately. Thank you. All the best.
Thank you. The next question is from the line of Vikas Jain from Equirus Securities. Please go ahead.
Hi, sir. Thanks for the opportunity. My first question is with respect to our rental costs. Of course, we have received few concessions in this quarter, and also we will receive some in the next, that is Q of FY 2022. I just wanted to understand from a normalized basis, given that we don't receive any concessions and the demand is normal, what would be our quarterly run rate for our rental cost that will occur in this year or probably going ahead as well?
I think on a base, and these are slightly rounded numbers, we are a network of about INR 300 crores rental that pays, yes, for a quarter.
Yes.
It's about INR 1,100 crore-INR 1,200 crore is the rental that comes in. It comes largely as fixed, but there are variable components of that. If you were to put one number, it will be around that.
Got it.
This is without any rebate and base level of number.
Despite increasing 2x to 4x of revenue, we could reduce.
No, just wanted to know the rent number.
Yeah.
Is that the question or you want to know rent [percentage] sales?
No, sir. You answered my question with respect to the absolute amount.
Okay.
Sir, my second question was also with respect to our finance costs. This quarter, we did INR 85 crores. Out of that, can you split, are those the actual interest cost or was there some element of the lease into it? Can you clarify, please?
It includes the lease impact also. Otherwise, the effective interest rate in the business is around 7.75%.
What would be the absolute amount this quarter?
This quarter, I have to split up again. I have to go into detail. I have given you the number, INR 1,200 crore is my debt, which has built up in this quarter, month-on-month.
Sure. Okay. All right, sir. Thank you.
Thank you. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Just a small clarification first. This 85% recovery that you have indicated for July, is it for stores that are open or a system-wide recovery?
No, this is for the full business.
Business.
Not stores, nothing. This is for full Lifestyle Business.
You are saying that since 65% network is open, and with that 65%, we are seeing 85% recovery?
No. You're wrong. More than 85% of network is open. The number that we have indicated is the total number across all channels. Obviously, the share of e-commerce, retail, all channels put together, that's the number.
Okay. Secondly, for ethnic wear, currently based on industry performance, the recovery in this category has been relatively slower. In terms of consumer preference, in women category, where ethnic has a larger share at about 70%, what according to you are the drivers for this category to maintain this higher share and continue growing faster?
I think the underlying reason is like most categories, but let me specifically talk about women's ethnic wear. What are the usage? There is a regular daily usage that women does at home or for casual occasions. There is an office wear usage in ethnic wear, there is a festival going out, those kind of usage. As you can make out in last 12-15 months, both festivity has been subdued and going out has been constrained. Therefore, there are strong reasons why, from demand point of view, this category has suffered in the medium term. I think as normalcy comes back, all the three elements of it, which is women going to work, women buying clothes for festivals and special occasions or for going out, will come back in a strong way.
We think it's quite directly linked to how last 15 months have played out in life of women or generally most consumers in absence of occasions.
Sir, do we maintain that industry percentage of 70% this category can retain this much and even grow the share?
Sorry, I didn't get your question. What's the point?
I'm saying ethnic wear is currently 70% in women's wear, so with these growth drivers, this amount of market share is sustainable?
Two parts. One is, there is undeniable rapid growth of women's Western wear, but it's happening at the lowest end of the market. Women are buying cheap, young girls buying cheap tops and skirts and so on. There is a large growth of women's Western wear at the bottom end of the market. On the ethnic side, however, the value equation is changing. People are paying more to buy ethnic wear and less for Western wear. Therefore, they're basically counter factors. There is a share of women's wear that will grow in Western, but will happen at lower price point. Probably the value share may not grow as much. Organically, I think over a longer period of time, that will grow from the current levels.
What it has done, therefore, because of increase in value in ethnic wear, as more and more better brands, better products, designer-led products, special occasions, lot of interest in design and merchandising in this category has grown. Women are finding that they pay a lot more for ethnic wear today than Western wear. I think there is therefore a value migration upwards, which is happening. That perhaps may allow that share to drop much slower than what was anticipated earlier.
Thank you.
Thanks.
Ladies and gentlemen, we'll take the final question from the line of Niket Shah from Motilal Oswal Mutual Fund. Please go ahead.
Thanks for the opportunity. Just couple of questions. You mentioned about ethnic wear launch, women wear. Is it going to be in a price point of INR 1,000-INR 3,000, somewhere where the likes of TCNS and SOPEX? That's the first question. The second question is, when you mentioned 85% of the pre-COVID levels being achieved in July, are you referring to the July base of last year when you said 85% of pre-COVID levels?
Okay. Two questions. The first question, what would be the price point of the female ethnic wear line? This would be more between INR 1,500-INR 3,000, INR 2.5, INR 3,000. Maybe some entry price point products, maybe INR 1,200, INR 1,300. It's right at the heart of the business. The second question on when I mentioned 85% business recovery in lifestyle brands, that is with reference to pre-COVID times, which means July 2020, not July 2021.
2019, I suppose.
2019.
2019.
Sorry, 2019.
Yeah.
Which is pre-COVID times.
Okay, perfect. One final question is, given the fact that more e-commerce is moving up, you would have a lot of data offline as well as online now coming through. What is the strategy on cross-selling some of your products to multiple customers? You have a very rich base of database now in terms of their preference and so on and so forth.
I think you will hear more about it as we sort of progress on our multi-brand app. Most of this consumer data is consolidated at the central server. Our customer knowledge is very deep. We know if somebody has bought across our brands, product categories which he or she buys from one brand and how many brands does she have in her portfolio and so on. There's a lot of opportunity in that. I think because our share of e-commerce and our overall revenue in e-commerce at brand.com was too small, we were not leveraging some of these things. In last 12-15 months, we've picked up both capability, IT architecture, and ways of actually understanding this data better.
When we have our websites and apps fully in place where a lot of these cross-selling and cross sort of upgrading opportunities will come up, I think that's when it'll get played out fully. We're still doing it. Each of our brands have access to the full data. It's consolidated and centralized, but I think the real effect of it will start playing out in 6 to 12 months from now when there is an enabling sort of technology infrastructure behind it.
Got it. If I may just squeeze in one more question on ethnic. Would it be possible for you to give us some sense on medium-term guidance on what margins can we make, either pre-Ind AS, post-Ind AS, whichever number you want to give it, at some reasonable scale? What we generally thought that this would be a reasonable business, and obviously because of COVID stopping and that way. Some sense on that would be helpful.
Which business?
Ethnic business.
Ethnic business. See, we have a wide profile of ethnic businesses. There are established ethnic business at super premium level, which is Sabyasachi and Tarun and all that. Pre-COVID, they were very profitable businesses, though very small. I will leave that aside. I think they will come back to where they are, which is a reasonably healthy profitability, but they wouldn't sort of swing the needle for a company of our size. It will come down to these two brands that I talked about. In terms of our men's ethnic wear brand, we expect we should get to double-digit number in three years from now, because we'll be investing to build scale and sort of build equity for that brand. That's what it'll take.
I think we'll get to a healthy double-digit in this business because in many ways, this business is less susceptible to fashion, and therefore obsolescence is much lower. We'll still need to invest to build the brand, build customer franchise, et cetera. It's a one-player market in which we'll have to create presence. We are quite confident that this will be a profitable business. On the women's wear side, we are playing both sides, which is to build the brand inside Pantaloons and improve gross margins of Pantaloons through increased share of private label. That, of course, is a sort of clear strategy. As we go out, we will see how profitable is it, and the retail expansion on the physical side as exclusive stores will be managed depending on the profitability that plays out in that.
That we will have to evaluate more closely as we go along, and depending on how well we find the intrinsic profitability, we'll scale that business. Otherwise, it can always remain as a Pantaloons led brand.
Sure. On an overall basis, on a consolidated ethnic revenue, we wouldn't have any negative EBITDA, because the reason I'm asking is, if you look at historically, right, we had some or the other way where we had some drag coming from some business, whether it is innerwear in the past, and now when innerwear is likely to break even or move to profitable territory, we now have ethnic. Safe to assume that everything will become profitable, depends on margins. I mean, it can be 2%-3% margin to start with and then over a period of time moving to double-digit in next three years as you guided. Everything will be profitable. There will not be any drag from any businesses over the medium term.
I would hesitate to make that point for immediate term. I think even as we recover, let's say FY 2023, I think our new ethnic business, whether it's menswear brand or the existing business, which is Jaypore, and I would just call out these two, I think others will be profitable. These two will probably take a year or 2 to turn around.
Got it.
We'll have losses for two years in these businesses.
Understood, sir. Perfect. That's all from my side. Thank you.
Thank you very much. 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 connect and get in touch with Mr. Rahul Desai or Mr. Amit Dwivedi. You may now disconnect your lines. Thank you.