Good day, and welcome to the Arvind Fashions Limited Q1 FY 2024 earnings conference call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing Star and then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ankit Arora, Head of Investor Relations at Arvind Fashions Limited. Thank you, and over to you, sir.
Thanks, Tobin. Hello, welcome everyone, and thank you for joining us on Arvind Fashions Limited earnings conference call for the first quarter ended June 30, 2023. I'm joined here today by Kulin Lalbhai, Vice Chairman and Non-Executive Director; Shailesh Chaturvedi, Managing Director and CEO; and Girdhar Chitlangia, our Chief Financial Officer. Please note that results, press release, and earnings presentation had been mailed across to you yesterday, and these are also available on our website, www.arvindfashions.com. I hope you had the opportunity to browse through the highlights of the performance. We'll commence the call today with Kulin providing his key thoughts on our business performance for the first quarter. He will be followed by Shailesh, who will share insights into key highlights and financial performance. At the end of the management discussion, we will have a Q&A session.
Before we start, I would like to remind you that some of the statements made or discussed on this call today may be forward-looking in nature and must be viewed in conjunction with risks and uncertainties we face. A detailed statement of these risks is available in this quarter's earnings presentation. The company does not undertake to update these forward-looking statements publicly. With that said, I would now turn the call over to Kulin to share his views. Thank you, and over to you, Kulin.
Thanks, Ankit. A very good afternoon to you all. Thank you for joining us for the Q1 results. We are pleased to continue our trajectory of delivering improved financial performance, even though the overall demand environment has remained challenging during the quarter. While overall sales grew by 4%, largely driven by the retail and department store channel, we have been able to improve our EBITDA margin by over 190 basis points over the same quarter last year. Our sharp focus on continuing profitability improvement has been aided by operating leverage and higher gross margin through healthy sell-through. We have seen premiumization across categories and brands like Tommy Hilfiger and Calvin Klein, which have benefited from this trend and have delivered excellent performance.
We have invested a lot of efforts over the last two years in putting sharper controls over inventory and debtors, which is yielding strong results in managing overall working capital. In response to the slowdown, we managed our inventory in an agile manner, which helped lower our inventory days by four days, and the stronger retail mix helped us lower our receivables by 11 days, leading to an overall lower gross working capital cycle of 15 days. While we expect the demand environment to gradually improve by the festive season, we have multiple growth drivers, such as strong, a strong store opening pipeline, the scale-up of our direct-to-consumer online business, and high growth in adjacent categories.
We continue to remain focused on improving profitability this year through efficiency improvement and healthy sell-through, and also in controlling our working capital, thereby leading to a higher return on capital employed in the near to medium term. I would like to now hand it over to Shailesh Chaturvedi to take us through the specifics and more details on our financial performance.
Thank you, Kulin. Good afternoon, everyone. Under the background of high base of last year and amidst soft market conditions, AFL delivered an NSP of INR 957 crore in this quarter 1, with a growth of 4%. The like-to-like retail growth in this quarter is 4%, which has come on a high base of last year, where the retail like-to-like last year in the same quarter had grown a huge 25% over pre-COVID level. EBITDA has reached INR 116 crore, an increase of 24% over last year, quarter 1. As we launch the new Fall/Holiday season this week, let's discuss AFL performance for the full season of Spring/Summer 2023, with calendar dates going from January to June 2023, incorporating two financial quarters, quarter 4 of the last year and quarter 1 now of this financial year.
Performance in season is key because business is run on seasons. We have to execute rigorously to win the season. In that sense, we had a very good Spring/Summer 2023 season, where AFL PBT grew 115% in 6 months of January to June 2023. We had launched Spring/Summer season in February 2023, on time, with good quality rigor, and had completed bulk of wholesale trade billing by March. This timely execution led to good NSP growth, healthy like-to-like retail growth, and doubling of PBT over last year's same period. The bulk of wholesale billing was in January to March quarter, where PBT grew by 255%. In this quarter, this quarter Q1 of April to June 2023, PBT has grown at 9%.
This doubling of PBT in just concluded spring/summer 2023 season has been very encouraging. We will launch fall/Holiday season with a lot of energy. Coming to this quarter, Q1 FY 2024, we started the business with good stock levels in the market since we had executed season launch well. This led to good retail growth of more than 15% in this quarter in both retail as well as in department store channels over last year Q1. Under the current muted condition, this mid-teen growth came with a 2% higher discounting, although we did not go early on sale. While industry saw preponement of sales, but we stuck to our calendar and our seasonal rhythm. The overall sell-through for the season has been industry leading. That has helped us keep our inventory levels under check and deliver stock turns close to four as guided.
Good retail throughput also helped us with receivables, which are down by a good INR 100 crore over last year, despite difficult market conditions. Overall, balance sheet KPIs were met with tight control. While retail and department stores grew very well, there was a muted number in this quarter in MBO wholesale channel because we had completed most of the billing of our season orders in the previous quarter. This business had grown more than 50% in January-March quarter. This key channel has grown at a healthy pace of more than 20% in the full season, Spring/Summer, January to June. With efficient season launch, we had hoped to get repeat orders in April to June quarter from this channel. These repeat orders did not materialize this year because of stock market conditions, and our tight trade policies did not allow any further billing.
We continue to expand our distribution, we opened 45 monobrand stores in this quarter. Adjacent category expansion also continued well, especially in a U.S. Polo Assn., which remains a key, strong, and vibrant brand. In this category, category expansion, I want to call out the fantastic performance of USPA footwear, which has grown more than 30% and delivered healthy double-digit operating EBITDA in this quarter. The thrust of online business, which contributed nearly 35% revenue, is on rapidly building scale in B2C marketplace model, where we curate the whole experience for online consumers, including product assortment and pricing. Builder of marketplace and only network is the priority of B2C part of online, which has grown by more than 70% and has contributed to nearly 35% of overall online business. The wholesale online business has remained muted in the current market condition.
With get good sell-throughs and tight control of sourcing costs, the GP has moved up to 52.8%, an increase of 340 basis points. Greater than 15% growth in retail, the share of retail in revenue mix has gone up by nearly 5%, and that has also helped increase GP % because retail channel has higher GP, whereas some variable expenses like commission, royalty, and supply chain expenses come below GP. Of this gain in GP, a healthy 190 basis point has flown into EBITDA, which has grown in value by 24%, reaching margin level of 12.1% in this quarter. This 1.9 gain in EBITDA has come after we had 3.3% increase, 330 basis point increase in EBITDA in the last full year, as we continue our journey of improving profitability.
In this quarter, besides gain in GP percentage, the EBITDA has also been helped by 50 basis points by scale leverage coming from lower manpower costs. Our investment in advertising has been slightly above budget. In this stock market condition, we continue to invest behind marketing wholeheartedly. PBT had more than double digits in summer season, this quarter saw 9% growth in PBT, partly affected by increase in interest costs, which are in line with increase in repo rates, while debt levels have remained stable. To summarize, we have seen stock market conditions, slower wedding dates, higher base of last quarter, last year, and early phasing of wholesale billings, we are enthused by the spring, summer performance, where AFL has delivered industry-leading sell-through, has doubled PBT, and has kept balance sheet under tight control. We can open up for question and answer.
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 the 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 Varun Singh from ICICI Securities. Please go ahead.
Am I audible?
Yes.
Okay. Yeah, thanks for the opportunity. My, so first of all, congratulations on a good set of performance. Especially your performance in emerging business has been very, very much heartening, looking at both the revenue growth as well as the margins, et cetera. So my first question is on emerging brand itself, that this strong performance, 14%, 15% growth and a strong EBITDA margin. I mean, if you can help us uncover the reasoning that where has it come from? And also with regards to same store, same growth, if you can highlight, I mean, any of our strengths out here.
As far as emerging brand portfolio is concerned, most of the impact is because of very good performance of Calvin Klein, CK. I want to just add one point here is that we've been doing a lot of cleaning up of our brand portfolio, and, you know, the tail brand portfolio has been sort of cut down, and we stopped losing money. We in this quarter, we have benefited from reduction in tail brand losses that we have seen in the previous quarter, so that has also helped.
On top of that, the main reason is the Calvin Klein performance, which has grown really well in this quarter. Despite market conditions, the like-to-like growth is in double-digit, and the overall growth is higher than that. Also, you know, the profitability of CK is very good. To summarize, Calvin Klein is the performance of, good performance of Calvin Klein is the main reason for improvement in the emerging brand portfolio.
Understood. Got it, sir. Sir, Calvin Klein would be roughly now, what, it would be contributing what % of our total emerging brand revenue? A ballpark number should help, sir.
See, if you, see the number. Just one second.
Yeah.
It's slightly higher than 50% of the emerging brand portfolio.
Okay, got it. Understood, sir. Sir, the second question is on the profitability in the emerging brand segment. How sustainable is the current level of margins? If you can write something out here.
See, I would say that CK is on a strong footing. There is a good momentum, you know, in Calvin Klein brand growth. The sell-throughs are industry-leading there. The sales density, one of the best in the industry. There is a good scope to expand that brand further in many more towns, et cetera. There is a good momentum, you know, in that brand, and that would really positively impact the emerging brand profitability. The losses on the tail brand will continue to reduce, right? I mean, you know, that portfolio, that part is getting cleaned up. The emerging brands profitability will remain healthy and because of both the reason of tail brand losses coming down and good performance of Calvin Klein.
Understood, sir. This performance would be sustainable going forward. Got it.
Absolutely.
Yeah, understood. Sir, my second question is on the power brand front, I mean, which is a significant chunk of our total revenue. That portfolio, I mean, there was a little bit of underperformance. Of course, I understand due to high base and slowdown in the discretionary consumption. Still, I mean, how are you looking in this segment, the overall business outlook for next quarter, which is again likely to be relatively subdued? Given our prioritizing of profitability over revenue growth, which is not participating much into EOSs and discounting, et cetera. How should we look at the revenue growth in the power brand segment? I mean, if you can highlight both, I mean, in terms of SSG and retail expansion from both, angle, given the profitability focus on, on that front end.
Let's look at our power brand portfolio. I'll put my comments in three parts. I'll start still with profitability, then about the, you know, the sales part of this and the distribution expansion coming to that. If you really look at power brand, they've done really well, you know, if you look at compared to the last year, if you look at last quarter, last year, same quarter last year, the swing in EBITDA was almost INR 100 crore. You know, we have grown the profitability of the power brand. Last year, we increased by almost 300 basis points. Now, today, we are at an EBITDA base of close to 12.5% in the power brand portfolio.
This quarter is also close to that base in that. We have grown the profitability of power brand in this quarter also by 130 basis points. That focus on profitability, the rigor on launching seasons properly, the advertising, retailing, so that the full price sell-through happen, discount control, that rigor will continue. We hope to sort of continue to expand from this current base of around 12.5% going forward. Some of the brands are already at high double-digit at already at a double-digit pre-Ind AS EBITDA. Others will improve.
As far as your question on the top line, on the revenue is concerned, this quarter, we do understand that the base effect has sort of hit the power brand a lot more, because last year, the base was very, very strong, and, you know, the business had done really well last quarter. We had grown in the last quarter, almost like 40% of the pre-COVID level in Q1 last year. On that base now, we are reviewing the data that it has grown further under market conditions we are at par. If you look at our growth drivers, I mean, I can talk about top three, four drivers, and we believe that all those drivers are still intact. The market may be soft for a quarter or two, may come back as the industry says towards the festival time.
In the medium term, we are very confident that we continue to grow our portfolio. You know, we've been guiding between 10%-15% range, and we continue to grow at that pace. As far as the store expansion, you asked that specific point, we opened 45 stores, a lot of them in the power brand, in this quarter. The last quarter also, we had grown almost 35 stores. We have a guidance of around 200 stores. A bulk of those stores come in the power brand, and we see a lot of opportunity to expand in many more markets and, you know, the satellite towns of big metros. We see huge energy for expansion in our power brand, and that, that part should continue. Second part is the adjacent category.
We continue to add more categories into power brands and grow with them. For example, U.S. Polo Assn. footwear has been a very, very good example in the industry. Footwear in this quarter has grown more than 30% with a, you know, pre-Ind AS double-digit EBITDA. We adding more categories like innerwear, we're growing it. We're growing small leather goods. We have a kids-wear is a big focus, which has also grown double digit in this quarter. We keep looking for opportunities to expand adjacent category in our power brands. Tommy Hilfiger has a very wide portfolio of adjacent category, and the revenue share from store is more than 20% from the adjacent category. CK has very strong underwear line and a bed line and a footwear line. Likewise, now we're adding other categories in Arrow and Flying Machine also.
We believe that the adjacent category will also continue to grow, you know, this business of power brand. Lastly, digitalization. I just mentioned that we are really, we grew our B2C part online by 70%. We are linking our store with Omni, that will also give fillip to the growth of that we're building scale in the B2C Omni play here in marketplace also. We see that whether it's digitalization, whether it's adjacent category, or whether it's store expansion and the like-to-like growth, we grew at 4% retail. All those factors are very, very full of energy. Few, few quarters here and there, sometimes the market may be very tough, or the base may be very large, or phasing may get impact, may impact.
for example, in this quarter, you know, our MBO billing got impacted because, like I mentioned, the previous quarter, we did huge billing and we grew at 50%. Overall, in the season, we grew spring, summer, six months by 20% in that channel. I believe that our brand has a lot of energy ahead for growth.
Got it. Got it, sir. Sir, in the category extension, which you spoke about of our relative success, which, category extension as per, I mean, looking at the overall revenue, would you say that has been most successful in terms of revenue size? Will that be innerwear, or will that be footwear, in terms of overall, whatever category extension that you have done so far?
Footwear, clearly, as a business, has crossed, you know, as a scale, which is more than INR 300 crore, looking like somewhere in that zone and plus of that. Kids-wear is another category which has already got scale, and it's a very healthy, you know, business, running into hundreds of INR crore. Those two categories have already got the traction, and we are building many more categories. You know, inner-wears, another category, which is also has a, INR 100+ crore of revenue in that. All these are, you know, multi-INR hundred crore sort of, kind of categories, and we keep looking at other opportunities to grow adjacent categories.
I'm sorry, sir, you said innerwear, INR 100 crore? Did I hear it?
Innerwear also, at this rate, will be upward of INR 150 crore, you know, that scale, and the adjacent category will continue to grow.
Understood. We will also be profitable in almost all the adjacent categories?
You know, very clearly, we don't have a burn model. You know, even in a innerwear category where we have seen a lot of players, you know, investing ahead and burning money, we, we never followed that model because we, our job is to increase the percentage profitability of AFL. Being very, very cautious on profitability front, and we would always, you know, between scale and profitability, we'll always be on the side of the profitability.
Got it. Got it, sir. That's it from my side, sir. Thank you very much.
Thank you. The next question is from the line of Shreyansh Jain from Swan Investments. Please go ahead.
Hello?
You are audible, sir. You may proceed with your question.
Yeah. Congratulations on a good set. My first question is, to be able to better understand the quality of growth that you've done in your power brands, could you help us understand how did we do in USPA, Arrow, and Tommy specifically?
See, business has been growing well. You know, like we said in this brand, retail and the department store as channel have grown, close to 15% and above. We have seen, you know, a little bit of a muted response, from the MBO channel, which I mentioned, but that's a quarter-to-quarter phasing issue. Overall, the season, that channel has grown really well at more than 20%. These brands are on a good growth path. The issue right now has been, scale. You know, a lot of these brands have really grown very large scale last year, and the market conditions have been a little muted, and the wholesale billings are impacted. All these brands are growing well, and in last two years, if you really see our revenue, we've grown our revenue by more than INR 2,500 crore in last two years.
Sir, if retail has done well, would our understanding be that Arrow would have faced some compression in terms of demand?
When it comes to specific to Arrow and specific to 1 quarter, you know, this season, the wedding dates were less. We saw less number of weddings in the market, and we have seen in the discussion with the industry players also. Yes, for a if you look at a 3-month quarterly basis, yes, there has been a pressure on brand which has wedding as a key part of the, you know, occasion. But other than that, you know, Arrow has been growing well. Last year, also grew really well.
All right. My second question is, we've seen improvement in the gross margin. Now, what I want to understand is, how much of this was related to raw material? Second is, we mentioned in the presentation that there were higher like-to-like and full price sales. I just wanted to understand the gross margin expansion. Secondly, we've also not done EOSS in this quarter. How should we look at gross margins going ahead for the year?
See, the, we've increased our GP by 3 point basis point in this quarter. I would say very simply put, I mean, if I take 3 odd % increase, 2% increase has come from cost, what you just said, the raw material prices. We've worked very hard to, you know, manage the cost of. We benefited from the softening of cotton prices, but then there are also further rigor on the cost management and new methods of costing. Out of the 3.4%, 2 odd % has come from cost improvement, and 1% has come through a richer channel mix. Our revenue share from retail this quarter went up by nearly 5%, because the retail grew at 15%+, and retail is a higher GP channel.
Of course, there are some costs which then come below GP as variables in terms of royalty and commission, but at the GP level, we got 1 odd % benefit from channel mix, richer channel mix, higher revenue of retail, and the balance 2 odd % came from cost management.
All right. All right. Sir, my last question is, just if I, if I look at your PVH profitability, so we've done about INR 12 odd crores. If I just do a back of the envelope calculation, we come with about INR 28, 30 odd crores of loss in the other businesses. Our understanding is, obviously, USPA is profitable. Flying Machine and Arrow would be the laggards in our sense. Just wanted to understand, how should we look at this number, and is, is, is INR 30 crores the, the, the number that we are looking at?
See, if you I'm assuming your question is on this particular quarter, right? I mean, and not a little more fundamental. If you look at our portfolio, it's a fact that Arrow and Flying Machine are at a low, you know, close to breakeven profitability, whereas US Polo and Tommy, and CK, and footwear, they're all at a double-digit pre-Ind AS EBITDA. That's where we are. Now, if you talk about this particular quarter, you know, we saw three issues in our couple of brand businesses. One is the base of last year, so base is very, very large last year, but I'll leave that for the time being. I'll come to this season.
Because of the soft conditions, our discounting went up by 2%, and that had impact on the EBITDA, because discounting went up by 2%, so the EBITDA came by down by that amount. I also mentioned that the MBO, bulk of the billing happened in the previous quarter, where the MBO channel grew by 50%, whereas the overall Spring/Summer, it grew at 20%. We had a hit from that channel, which is an encouraging. I know the order flow for Fall/Holiday and the channel is really vibrant, and it's a key channel, so that will come back. If you talk very specifically to just this quarter, three months, then we had a hit from this channel in the brands that we are talking about.
Our journey is that, you know, we have these couple of brands where double-digit, pre-Ind AS EBITDA includes, like, all the brands that you mentioned. And in Arrow and Flying Machine, we have a low profitability. Arrow used to lose a lot of money. Last year, we had a very large swing in Arrow, almost INR 80 crore EBITDA swing in the previous year, and we brought it down to breakeven level. This top market condition, despite increase in discounting, despite MBO phasing and bulk of the MBO coming in the previous quarter, Arrow has remained breakeven brand. It's not lost money. That's encouraging, and we believe that as the market improves and as the wholesale, again, billing picks up, the business will go further for Arrow.
All right. Then just to squeeze one last question is, we've seen 300 basis points of gross margin expansion, but if I look at your EBITDA, ex of other income, we, we see 100 basis points expansion. We've done about 50 basis points of compression in the staff cost as well. Since you mentioned that retail has grown by 15%, so, when like, what kind of operating levels do we actually see in our other expenses? Because the 300 basis points does not flow down, you know, it actually just ends up with 100 odd basis points of EBITDA improvement. How should we look at this?
I think in the past few calls, you have clearly guided that whenever your retail mix will improve, your other expenses, because of commission brokerage, will also keep increasing. But our sense was, it should be lesser than the growth that we see in retail. But, and, and this.
Sorry, go ahead, please. Sorry, I interrupted. Apology.
No . That was my question. Fundamentally, just wanted to understand if retail is grown by 15%, so your other expenses, should not technically grow by 15%, right?
Yeah. You know, let's talk about profitability and the leverage, and then I'll also come second part to GP to EBITDA flow, right? Now, if you look at our last year performance, we grew our EBITDA by almost, like, 300 basis points. Of course, we had a COVID bump also, but our efficiency also went up. This year also, this quarter also, if you see that we have, you know, talking about increase in EBITDA this year also, 1.9%. You know, we are very clear that this increase in profitability has to continue, and we internally say, in the worst case also, we must sort of increase our EBITDA by at least 100 basis points. Good times, like last year, we grew 300 basis, maybe 150 going forward.
Somewhere in that zone, in normal times, at least 100 basis points, in good times, maybe closer to 150 basis points, our EBITDA will go. That's a fundamental increase in EBITDA that we are chasing, and it'll come from the leverage, it'll come from brand improvement in the brand profitability, it'll come from the core value, it come from the business rigor that we will keep pushing the full price sell-through and keep reducing the discount, not go on early discount in your industry go. That's a fundamental point, that we are very clearly going after a increase in profitability, and that 100 per basis point to 100 basis points is we are committed, and we have done better than that. Even in the tough case, even this quarter, which is a very, very tough quarter, we have grown at 190 basis points.
That's, you know, our base profitability, you know, last year, we were at average full year, AFL, EBITDA was 11.4%. This quarter is at 12.0%. My sense is now our bases are around 12% for a couple of quarters, and we keep improving our EBITDA, and like I said, between 100 basis points normally and 150 odd basis points in good time. That will happen. That's a fundamental. It come from all the leverage and all the hard work that we have to do. Coming to this specific quarter, our GP went up by 340%, where the EBITDA has gone up by 190 basis points. Now, what happened, and I explained this in the past, this is a retail-heavy quarter. The retail contribution is more than 50%.
The revenue mix has gone up, of retail by more than 5%. What happened is that for the 3.4%, almost 2.8% is a variable which is your commission, which is your royalty, because if the sale goes up, the royalty goes up. There is a supply chain, warehousing activity, transportation that goes up. A good part of that has gone into the variable, which comes below the GP. We have other leverage also that, you know, we have manpower costs, which is giving us leverage. We are always looking for cutting down discounting. Unfortunately, this, this quarter, the discounting has gone up, otherwise GP would have gone up even higher than what it has gone up.
There is a fundamental, you know, base of increase in EBITDA, and we are going to increase our EBITDA by 100 basis points normally to 150 basis points in good times. That has to happen. Our fixed costs, we are clearly seeing there is a leverage coming in where, you know, in this quarter, almost 70 basis points we have benefited from fixed cost reduction. That leverage happens. Employee costs, this quarter has come, you know, given us a benefit of 50 basis points as a fixed cost, which is coming down, it's giving us a 70 basis points. That's why our EBITDA has gone up by 190 basis points.
All right, sir, that helps. Thank you so much. All the best.
Thank you. The next question is from the line of Lokesh Manik from Vallum Capital. Please go ahead.
Yes, good afternoon to the team. My question, I have only one question, which is on the FY 2022 annual numbers. In the other expenses, there is a line entry for commission and brokerages, which is about INR 200 odd crore. If you can please let me know the nature of those expenses, that will be great.
Lokesh, Ankit here. It's basically pertaining to the same, you know, which the business, which is what we do it on, sales or returns. It's all the entire franchise commission and the department stores is what we do a business on. It's related to that, the entire line item of commission and brokerage.
Okay. That's it from my side. Thank you so much.
Thank you. We have the next question from the line of Alia sgar Shakir from Motilal Oswal. Go ahead, please.
Yeah, thanks for the opportunity, actually congratulations, very good discipline in this quarter. Shailesh, my question is on the, you know, the this quarter's discipline that we have kept in terms of, you know, focusing on margin instead of growth. Now, what we gather is, you know, in the market right now, given the softening of RM prices, a lot of retailers are, you know, increasing the discount, as you also mentioned. Also for the new season, there has been some price reduction that has taken place. How do we think we will, you know, want to work going forward? Do you think we will prioritize margin over growth, as even in this quarter, you know, our growth has been slightly lower because we focused on our gross margin? You think that given the softening of RM prices further, we may probably reduce our prices so that we could drive a higher growth like gross margin? Yeah, that's-
Thank you for your comment on discipline. Really appreciate. As far as, you know, the pricing strategy, we are very clear. I said this previous in this call that we will always prioritize profitability over scale or growth. For AFL, EBITDA percentage is the mantra, right? That is what will, you know, guide us and, you know, and help us to take decisions. That's the stated policy, and we have a 100 odd basis point increase in EBITDA margin as a key task for us, and we will execute that, hopefully. Now, market conditions. In the current market condition, we have two pricing philosophy. One is that, one is stability.
You know, we have sort of looked at our pricing for the year, and as, as things stand today, with the current market condition, we, we believe that we will continue with the stable pricing. We are not looking for a major change in dropping the price or upping the price. Some minor tweaking in our business that we have to do, that will happen, some entry price point, but that, that's very marginal. It's not a strategy. The strategy is for stable pricing. Second strategy, we are seeing opportunity for differentiated product, and whenever we have done something which is differentiated, in Arrow, we've just recently done a line called Auto Press, which are these imported wrinkle-free shirts. We've done a super premium line in Arrow called 1851. They've got fantastic response.
Their sell-throughs are very, very good. Our focus is to premiumize our brands through differentiated products, because we see, you know, better sell-through for those products, and we deliver good sales density per square foot. That is another, you know, guiding principle that, of course, those premium products will be priced right for that product quality and that MRP for that consumer and for that competition in the market. Overall, if I have to say, to summarize, we will definitely prioritize profitability over anything else. Second, our pricing will be stable, minor changes here and there. Third is, premiumization is a key force for our brands.
Got it. Are you saying that basically, we will not pass on the softening of RM prices, even if the industry does? You know, I mean, to what extent if we, we think, that is, you know, hurting our growth?
Yeah, I mean, also, we have to remain competitive, right? Somewhere, we have to also see how industry responds to these kind of things. You know, minor tweaking here, there, entry price points, strengthening some consumer segment we are not, you know, capturing, all that will happen, and we'll have to eventually follow what competition does. Strategy is stability and premiumization of our brands.
Got it. Okay. Second question is on this, you know, EBITDA margin that we have seen, pretty decent in this quarter. You know, pass-through of that in the PAT is not very strong. Of course, our tax has gone up, which, I understand could probably be because, of the CK brand doing well, I understand. How do you see the, you know, PAT, margin, PAT growth going forward? I think, is my understanding correct, that that will more depend on Arrow and Flying Machine growth? Because, as the growth, is mostly in the JV brands, you know, there is increasing contribution from minority interest, and therefore, our PAT growth is not very strong.
See, you know, I'll take this into three parts. One is the fundamental EBITDA that, you know, we have to grow, and I mentioned certain margin increase that we have to deliver, some brands have to improve. That's a, to me, a larger task ahead to make the overall portfolio more profitable, grow at a certain basis point every year, make some brands more profitable. That's the fundamental part. Below the EBITDA, if you have to go to that journey of to PAT, I would say in this quarter, our interest costs have gone up in proportion to the increase in the repo rate. Our debt levels have remained stable, stable, but the interest rates have gone up, and that by that proportion, our interest costs have gone up.
You know, that our debt levels are remaining very, very stable, so our interest cost will fluctuate based on the repo rates in the market. That's something, I think we will continue to manage that fairly well. I, I'm not... I'm confident that there will be no reduction on towards the PBT from that side. It will be linked to the repo rates in the market. Then below PBT, this time, the tax has gone up because there's a higher tax in this current quarter because the PVH Arvind Fashion Private Limited, that has declared a INR 100 crore dividend in the quarter one, and out of which INR 50 crore was received by AFL. Of this INR 50 crore dividend that we received, AFL has made a tax provision of around INR 7.5 crore.
The balance tax is also coming from the PVH part of the business that you mentioned, from CK. That, you know, is there is a one-off part in this quarter. Yes, some businesses are more profitable, and we pay tax back. That's, you know, will continue. If I have to say, the interest rates will be no surprise from our side because we don't see major changes in the gross debt level. The tax will follow whatever the tax policy is there. I think our fundamental philosophy to improve PAT will be to improve our EBITDA and EBITDA percentage, and that's what I've been saying in this call, you know, time again.
Got it. Thanks for that detailed explanation. In quick summary, you're saying basically that tax item should be lower in coming quarters, so accordingly, that, PAT flow-through will be relatively higher, hopefully, in the coming quarters.
Yes, there is Surely, there is a one-off, tax component in this quarter.
Got it. Just, if you could help with the Pre-Ind AS EBITDA margin in this quarter?
See, we won't discuss, specific. In the previous calls also, we have indicated that there is a around close to 4% difference between the post-Ind AS and the pre-Ind AS, and, you know, that's where we are. That's the industry practice, and we also follow that.
Got it. This is what we have a guidance of reaching double digit, by the end of this year, right?
Yeah. You know, what, if you really look at our EBITDA, like I said earlier on, we are at a Powerbrand EBITDA base of 12.5%. We are not very far from, you know, that in the quarter four was even 13%. We are at, you know, not very far in the journey. We have made good progress last year and even this quarter. Some of our brands are already in that journey, and they've achieved, and they will continue to achieve. We have a specific task with Arrow and FM, who are at a very low single-digit, break-even level kind of profitability. Our job is to now, you know, continue to work. Arrow had a very large swing last year.
With the current market conditions, I think it's, you know, come in the way. We see both FM and Arrow profitability growing up, and there's a lot of hard work that we are putting behind that, and that should help.
Got it. This is very helpful. Thank you so much.
Thank you. Ladies and gentlemen, if you wish to ask a question, you may please press star and one. The next question is from the line of Ritesh Chaudhary from Molecule Ventures. Please go ahead.
Hello? Hello.
Hello. Yes, you are audible, sir. You may proceed.
Yeah. First of all, congratulations on the margin side, right? It's really nice to see margin and emerging brands shaping upwards. Just on that, on that side of question, how much would be margin expansion would be from, you know, closing our Aeropostale and Ed Hardy? And what would be the contribution of scaling of CK in that segment?
I would say, as we go along, the tail brand losses will keep coming down. It'll be largely the future gains will come from gain in Calvin Klein profitability, and Calvin Klein has a very good momentum today. We are very confident about that brand's performance in both in terms of sales and margin.
Okay, okay. My next question is regarding U.S. Polo Assn. Right, last year, U.S. Polo Assn. was phenomenal for us, right? It added up around INR 600 odd crore in our top line, which was very good, and that too, profitably. Can we see or any thoughts that this momentum will continue in this year as well?
See, U.S. Polo is a very special brand. You know, it's a leading brand in India. It's an up to men casual brand, and we believe it's number one brand, but it's in that up to a position done really well. The throughput is good. The desire for current brand with consumer is very good across the channel, be it online, offline, department store, every channel. U.S. Polo is a leading brand in department store and online portal, ranked one brand. It's a very, very special brand that is created. Scale is very nice, and whole plan now is to, you know, take it to beyond INR 2,000 crore top line. You know, and it's already a very good, you know, double-digit, pre-Ind AS brand. We also seeing opportunity to extend this brand.
I mentioned, footwear being a very large business, innerwear is a healthy business. Kids is a, you know, in boys, we are leading here in the country. There are a lot of opportunities to extend this brand, expand store. You will see in the next 60 days, you will see a very large investment in advertising in this brand to prepare the consumers and influence the consumers for the coming Diwali season, festival season. It remains a very, very key brand for us, and we see very good sort of momentum, 2, you know, quarter here and there. We did NBO billing in the previous quarter and this quarter be less. Overall, brand is on a very, very strong wicket.
Okay, we can expect the momentum to continue in U.S. Polo, right?
Absolutely.
Can you give a rough ballpark figure, like, what would be the, you know, adjacent categories in the USPA segment, like in % terms?
If you look at adjacent category, the 3 big ones are footwear, kidswear, and innerwear. We also developing, like recently, we launched small leather goods, which is belt and wallets. We keep trying out new categories in this brand. The adjacent categories have already reached 15% of the brand, and we believe that could even hit Tommy kind of level of 20%, you know, share. There is a traction in growing the adjacent category even more in U.S. Polo Assn.
Right. One more thing. When can we see other brands like, you know, our Arrow or Tommy can get that momentum, like with USPA, you know, witnessed last year, or certain scale after that, we can, you know, able to do better on different brands as well?
I think, Tommy is very special, doing extremely well, and this quarter also has done remarkably well, both in terms of top line growth and margin structure. Tommy is leading it. You know, the Tommy plus CK market share is unreal in that segment, dominates that segment, and Tommy is doing really well. CK, I've already mentioned. You know, it comes back to our ability to take Arrow and Flying Machine to better profitability, and we need even bigger scale. Arrow, the first phase happened last year, where we really took it from a very large losses to break even losses, low single digit. The journey will continue from low single digit to mid single digit, to high single digit, to double digit.
You know, that's a journey that, you know, we are on, and that's the same, what I'm talking for Arrow is also true for Flying Machine. We need to increase the scale, get scale leverage, improve, launch new categories, open more stores. I think eventually we'll come back to improving the margin profile of Arrow and also scaling them up little more.
Yeah, perfect. One last question regarding Sephora. Do we got any clarity from parent regarding this? I can see, we have opened a 1 additional store addition in Sephora. We have 26 reviews as of now, used to have 25.
We have, we have no, no further comment to make on Sephora than what we made in the last investor call. I repeat that, that it's a, you know, a brand in our portfolio that's in the prestige beauty segment, only offline stores, where, you know, consumers are also doing online. We are in touch with the principal to, you know, work on the next steps on this brand, and we have frankly nothing further to add.
Okay, okay. Thanks, Alex. Thanks for the answer, and I really appreciate your, your team's effort towards the margin improvement and hoping to continue this to continue. Thank you. Thank you. That's all from my side.
Thanks a lot. Appreciate it.
Thank you. The next question is from the line of Yash Bajaj from Lucky Investment Managers. Please go ahead.
Hi. Thanks for the opportunity. I had 2 questions. First question is on the expense amount on the licensed brands, which we incur. How much would that be on a quantum absolute basis and as a percentage of sales?
Yash, just to clarify, are you asking about the royalty, which is what we pay for the licensed brand?
Yes, yes.
It's in the range of about 4%-5%. It will vary brand by brand. Won't be able to share specifically on the brand wise, but it'll be in the ballpark range of four, four.
Okay . My second question was, like you alluded, that, Flying Machine and Arrow are close to breakeven. Is that post-Ind AS or pre-Ind AS? If it is pre-
pre-Ind AS.
It is pre-Ind AS.
Pre-Ind AS.
we would be around either, like, around -1% to 0% EBITDA margin, I mean.
No, it's a breakeven or low, low single digit, breakeven, that kind of thing.
Low single digit breakeven. Okay, okay. That's all from my side. Thank you.
Thank you.
Thank you. Ladies and gentlemen, we will take that as the last question for today. I now hand the conference over to Mr. Ankit Arora for closing comments. Over to you, sir.
Thank you, everybody, for joining us on the call today. If any of your questions have been unanswered, please feel free to reach out to me separately, and I'd be happy to answer them offline. Thanks so much, look forward to seeing your participation again next quarter.
Thank you. On behalf of Arvind Fashions Limited, that concludes this conference. Thank you for joining us. You may now disconnect your-