Ladies and gentlemen, good day and welcome to the Q1 FY 2023 earnings conference call of Arvind Fashions Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Ankit Arora. Thank you, and over to you, sir.
Thanks, Sujata. Hello. Welcome, everyone, and thank you for joining us on Arvind Fashions Limited earnings conference call for the first quarter ended June 30, 2022. I'm joined here today by Kulin Lalbhai, Non-Executive Director, Shailesh Chaturvedi, Managing Director and CEO, and Piyush Gupta, Chief Financial Officer of Arvind Fashions Limited. Please note that results, press release, and earnings presentation had been mailed across to you yesterday, and these are also now available on our website, www.arvindfashions.com. I hope you had the opportunity to browse through the highlights of the performance. We will commence the call with Kulin providing his key thoughts on our financial performance for the first quarter. He shall be followed by Shailesh, who will share brand-level insights into business and financial performance. At the end of 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 will 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. Thanks for joining us for the Q1 result. We witnessed a very strong momentum across channels in Q1, building on the strong demand which we had witnessed in H2 FY 2022. This robust demand reflects the strong affinity amongst customers for our portfolio of market-leading brands. Q1 FY 2023 is our best Q1 result in terms of sales and profitability, with revenues growing by 40% over pre-COVID to INR 920 crores and an EBITDA growth of 52% compared to pre-COVID levels at INR 94 crores. Sharp execution on the retail channel continued in this quarter as well, registering around 25% like-for-like growth despite our conscious decision to push out the OSS window for our brand.
We registered a highest ever full price sell-through in our business across brands in Q1, and lower discounting helped deliver a sharp jump in gross margins of 39.4% for the quarter, which is an improvement of 640 basis points compared to the same quarter last year. The MBO channel witnessed robust demand as well, with channel sales growing by 2.5 x pre-COVID. Our investments in omni-channel and marketplace aided strong performance in online channel, with sales almost doubling compared to pre-COVID levels and a 20% growth on a significant base in quarter one of last year. Our working capital continues to remain under control, with an improvement in debtors led by higher retail channel mix and better collections during the quarter.
We continue to target having inventory turns of more than 4 x in FY 2023, leading to free cash flow generation. We remain optimistic about the rest of the year, with revenue momentum likely to stay strong, with a great autumn/winter 2022 launch, coupled with continued growth in online and other channels and a further boost expected in the festive season. Our focus on expanding adjacent pieces like footwear, innerwear, and kidswear across our existing portfolio will remain one of our growth drivers, and we are already seeing rapid growth there. Profitable growth will remain our mantra going forward, and the focus will be on improving operating margins and a significant improvement in our return on capital employed. I would like to now hand it over to Shailesh Chaturvedi to take us through more details.
Thanks, Kulin. Hi and good afternoon, everyone. With 40% growth in revenue over pre-COVID quarter one FY 2020 and a 52% growth in EBITDA, the quarter one saw very strong execution of brand promises of our market-leading brands with their consumers. It was very heartening for the industry that finally, after two full years, we saw a full season, starting with season launch in February 2022 to start of end of season sale in July and now launch of the new season in August 2022. Till now, in the last two years, we had seen COVID impacting one part or the other or the bulk of the season, but we are finally happy to see finally a full season. This full canvas of season also gave us opportunity to execute our work in online and offline world, resulting in very strong business KPIs.
The scale of INR 920 crores in Q1 is nearly INR 600 crores higher than last year's quarter one. This was possible because all major channels, be it retail, online, trade, they were all firing. We saw INR 100 crore revenue gain in retail channel alone in this quarter over pre-COVID quarter one. We saw INR 100 crore revenue gained in online in quarter one versus the pre-COVID quarter one FY 2020 and the trade channel also grew close to INR 80 crores. We saw multi-channel growth in this quarter resulting in INR 600 crore higher revenue than last year leading to INR 920 crores NSV in this quarter. Retail has become a very large channel for almost half of our company's revenue and this has been pushing our GP percentage higher because to have a higher GP percentage.
With very high quality focus and systematic execution, we saw retail KPIs improve like-for-like store growth of 25%. I must say our stores have never looked better. April 2022 saw 50% growth over pre-COVID April 2019. May also saw another 50% growth while June growth reduced because we decided to postpone end-of-season sale to July to limit the number of weeks in a year under sale and improve our margins through lower discounting. Online continues growth momentum. It has nearly doubled in quarter one over pre-COVID times. Online business has accounted for 25% of revenue for the company in Q1 and has grown by more than 20% on a large base. It continues to help us serve demand in a more robust omnichannel way.
Majority of our stores are now omni enabled and omni contributes nearly 10% of store sales at the connected stores. Well, let's talk about the marketplace. With strong investment in fulfillment capabilities across India with higher degree of online specific products in marketplace and with bigger assortment for our brand, marketplace business has grown by 50% in quarter one. Our GP percentage of 49.4% is the highest in recent times. Over the last couple of quarters we have seen a jump of around 4% in GP due to sharper execution focus on like-for-like growth, better full price sell through and after accounting for commensurate increase in the variable cost in channel like retail, a good part of this gain flows into EBITDA margin.
You see our EBITDA margin have gone up by 1.5% in this quarter versus the pre-COVID quarter one FY 2020. This has resulted in PBT positive performance for the company. This is the third straight quarter of PBT positive performance at AFL. Our focus remains to grow the business at 12%-15% annual rate net of COVID, and we remain focused on strong, sustainable, consistent and profitable growth of business. On the brand front, our uniquely powerful portfolio of market leading brands has gained momentum further post-COVID. USPA, U.S. Polo Assn., has become an even higher ranked casual, brand in India and is galloping towards the top rank here.
Tommy Hilfiger and Calvin Klein have also performed exceedingly well in terms of reduction in discounting, increase in full price sell-throughs and have delivered double-digit pre-Ind AS EBITDA. This portfolio of U.S. Polo Assn., Tommy Hilfiger and Calvin Klein is a very powerful set of brands in the market and is delivering very healthy profitability and growth for AFL. Another good news is that Arrow is EBITDA positive. With market revival post-COVID and improvement in supplies to different channels, Arrow has gained scale and is delivering fantastic business KPIs. We've also seen in the market revival of weddings, festivals, business travel and celebration of special occasions which augurs very well for further strengthening of Arrow business especially its profitability.
As the business continues to generate cash even with impressive growth ahead, we expect our net debt levels to remain close to the levels we ended last year at. At June end, our net debt was INR 427 crore. With continued tight control on inventory, business remains in the zone of four stock turn. With improvements in margin, we have seen return on capital employed move up in this quarter to a high single-digit percentage and we will continue to step up effort to take ROCE to higher level in future. Thank you, friends. Over to Ankit.
Sujata, we can open it now for Q&A.
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 Nishit Shah from Ambika Fincap Consultants. Please go ahead.
Yeah. Thank you for taking my questions. Congratulations to the team on a good set of numbers. Hello, am I audible?
Yes, Nishit, you are audible. Thank you.
Yeah.
Please go ahead.
You know, this question is addressed to the top management. Now, you have got an incremental, as I think, Shailesh mentioned it in his remarks, incremental 600 crore of sales have come. Now, if you look at your gross margins, I mean, in your industry, the gross margins anyway should be substantially higher than it is not translating into the properly into the operating margins as well as at the net level. My second question is, when you benchmark and look at the competitors, some of the competitors who are slightly bigger than in size to you, I'm referring to Page Industries. They have an ROCE of 67% and an operating margin of 20% and all. Where do you do benchmarking and where are we needing to improve to get back to that kind of industry-leading numbers in terms of profitability and efficiency?
Nishit, very interesting question coming to the scale and the margin. We in the COVID impacted last quarter, last year's quarter, we've grown, you know, INR 600 crore, but then also there's a delta of close to INR 120 crore in the EBITDA. In a weaker quarter call, like quarter one, which in our industry tends to be low, we have done INR 94 crore of EBITDA, 10.5%. There is definitely improvement in the margin scenario. Compared to pre-COVID also, our EBITDA margin has gone up by 150 basis points. It's a journey.
We are not at the pace some of the benchmark companies that you mentioned, but if you look at last three quarters, we have consistently improved our margins, our KPIs, and we are on that journey from a, you know, loss-making company. In the last three quarters, we've become EBITDA positive, and I'm sure this journey will continue and take us to the heights that you're mentioning, Nishit.
Yeah. Shailesh, just taking over from there, and I'm glad you mentioned that. Actually, if I look at your annual run rate and Page Industries' annual run rate, the difference is only about INR 1,000-odd crores. I mean, I'm sure you and Kulin both are cognizant of the fact that there is a huge, huge gap in terms of where Page Industries is in terms of market cap of INR 54,000 crores and where we stand today in terms of a market cap of almost INR 4,000-odd crores. I'm saying top line is coming. You guys have done a wonderful job. Now is it that we are now going to focus on the efficiency parameters and also on the profitability aspect?
The other thing is, if you look at the working capital days, they have a working capital days of 36 days. We still have to improve on the working capital and improve our inventory churn. Would you like to expand on that?
You know, I won't talk about a specific industry player because their realities will be different. You know, the level of discounting in underwear business versus our fashion business will be different. I would definitely agree to what you said that our focus remains on profitability. I think if we have to say a single mantra for us to take our margin model to, you know, for Power Brand to a double-digit EBITDA in next 12 to 18 months is a single-minded agenda that we have. The ROCE improvement, you know, we've turned ROCE positive and now reaching high single digits. What we have promised, we are delivering, and it's a journey step by step. We will continue to improve our profitability, and that's our single objective.
Also, on stock turns, you know, we have improved our stock turn from three to close to four now, and that's a journey again, that we will keep an eye that improving stock turns from beyond four will be a target for us, and we will work hard towards that. I couldn't agree more with Nishit. What you are talking about in terms of stock turn, in terms of the margin model, that will remain our focus. We made good progress. We are very pleased with our performance in quarter one, and we'll continue to work hard towards that.
Yeah. I mean, I can see there is a substantial improvement. All I was saying is that, you know, we need to improve on the profitability aspect. Now, the last question is on the Sephora. We have discussed this in the past. Is there any progress on the Sephora on the online side, or are we going to focus only on the in-store side?
Kulin, you want to
Yeah, I think, I mean, see in Sephora, the business is doing very well now. I mean, the offline business is currently performing exceedingly well post-COVID. The segment also is doing well. On your question on online strategy, we are still working with our partners on, you know, how we should plan that out. For the time being, we are in the process of expanding the retail network and the like-for-like productivities are going from strength to strength. As we work and get clarity on the other side, we will roll things out.
Yeah. Thanks. Thanks for that. That was my question.
Thank you, sir.
Thank you.
The next question is from the line of Pritesh Chheda from Lucky Investment Managers. Please go ahead.
Sir, our growth versus quarter one FY 2020 seems to be different from what peers have reported. We are on a slightly lower side. Whichever peers we can compare in the apparel space. Is it to do with the end of season sale timing issues for which the growth looks different? That's one question. My second question is, sir, the pre-Ind AS margin, if you could give some comments there. You know, at this revenue scale of INR 900 crore, which means an annualized number of, let's say, INR 3,500 crore. If I recall in our past presentations, at about INR 800 crore of sale or INR 700-800 crore of sale in our Power Brands, we were already at about 8% pre-Ind AS EBITDA margin.
Why is it that the, you know, margin number looks lower even if we have achieved INR 900 crore? If you could guide us on the pre-Ind AS margin direction for the company.
Now, as far as the growth is concerned, our growth is close to 40% over the quarter one at INR 520. That across the channel, the revenue has fared very well. Now, if I look at the retail numbers for this quarter, April compared to the pre-COVID, we grew 50%. In May again, we grew at 50% and very good, almost 25% like to like. In June, that 50% growth came down close to 15% because we pushed the EOSS out to July. Because of that, the July or the June numbers, you know, growth came down, but our margins and discounting also came down significantly because of that our full price sell-throughs, which are very, very important for the margin model in our business.
July we pushed out. The growth is sort of robust, and EOSS had an impact on the June number, but that was planned by us and we saw similar thing done by many other players in the industry. As far as the pre-Ind AS, EBITDA margin is-
Sir, my question was we grew 40%. Peers have grown 50%. Is there any reason for this 10% differential where the tailwind for everyone was a similar tailwind? Is there any reason for this differential 10% we being lower?
I think, you know, we've been sort of doing well across the channel. Online has grown on a higher base. I don't know which player and, you know, I would not want to comment because.
Madura is +50%, Kiran is +50%.
Yeah, I mean, I've seen the related part of these companies because, you know, some of these companies you took names of have many businesses, not directly. They have some businesses which are directly comparable, and our numbers are quite sort of in tune, maybe better than some of them. I don't want to say specifically, yes, the EOSS is probably the only reason. Otherwise, we have done quite well.
Okay. On the margin side, sir, if you could help us understand?
Yeah. What happens in the margin between the post-Ind AS and Ind AS, there is a difference of close to 4%, and we've discussed this in the previous calls also. You know, the difference is around 4%. Now, Q1 is a seasonal quarter, the EBITDA margin differs based on the level of wholesaling, level of discounting. It's a very seasonal industry. Quarter one tends to be the weakest quarter in any company in terms of the margin. Historically also, quarter one, we are very happy with our margins in quarter one because this is historically the best margin in quarter one. If I look at the remaining part of the year, as we get into the festival season, our margins would be higher because it's a seasonal business.
If we are at 10.5% post-Ind AS, well, there'll be many quarters likely to have a higher EBITDA margin. We are improving our EBITDA every quarter. Whatever the number you took, you will see hopefully a higher percentage than that in this year. We are very confident of delivering. Also, I think if I was to say mid-term, 12-18 month period of our brand portfolio, we have a clear objective of reaching double-digit EBITDA in our brands. We had a slightly weaker EBITDA margin in Arrow. That brand has also broken even is EBITDA positive, but it's a journey ahead on that brand to improve to double-digit that, you know, overall portfolio will be.
U.S. Polo Assn., Tommy Hilfiger, Calvin Klein, these are all in that zone of pre-Ind AS double-digit EBITDA margin, and the whole portfolio will move forward. Also seasonally, you'll see higher EBITDA margin as we go along in this year.
Sir, just clarifying. When you had INR 900 crore sale and it was a pure full price sale, yet you could not achieve your earlier pre-Ind AS 8% EBITDA margin. Any comment there? I hope you got the question.
I think Amit here.
Why is seasonality an answer here when the absolute number is INR 900 crore, sir?
No, I think Shailesh was answering it. You know, 900 you cannot look at in an absolute sense. Every quarter will have a different channel mix.
Okay.
Channel profitability also changes in our business. Historically, quarter one is a quarter where there is no wholesale billing. It is a pure retail only quarter. You cannot take a quarterly revenue as a benchmark. When you look at it from an annual sense, what you are saying that logic would hold. As the other quarters come in, when the channel mix changes, you will see the bottom line profile changing.
In your business, if you could give the hierarchy of margin profile in an EBO to what EBO is the lowest vis-a-vis the wholesale?
You know, we don't get into channel level discussions. Historically, you know, retail in quarter one is not the highest productivity retail quarter. Retail in quarter three, for example, will be very, very profitable during their Diwali season. You have to look at it quarter specific. If you look at our historical performance over many, many years, you will always see quarter one is cyclically the lowest bottom line quarter in the year because of the channel mix and the kind of sales pattern you usually have in quarter one.
Quarter one is more retail and less wholesale. That's how it is.
Yeah.
The retail is also a summer season versus a festive.
I'll take it offline, sir. I was unable to understand, but I'll take it offline. Thank you very much.
Yeah. You can connect with Ankit offline to color on the channel-wide numbers, yeah?
Yeah.
Thank you.
Thank you. Participants who wishes to ask a question may press star and one. The next question is from the line of Rakesh Gandhi from Discovery Capital. Please go ahead.
Hi, sir. You know, we are reasonably looked at actually, I mean, the premium brands that we have, you know. I'm assuming on those the gross margin should be reasonably high. You know, again, just following up on the question of the previous participant. I just wanna understand, like structurally what is it that isn't allowing us to earn EBITDA or actually with margins in line with actually other retailers despite having done so well on the revenue and despite like not doing discounting. Like, is there something structural? Is it the royalties which we'll pay to the brands? Is it the kind of location where our stores are? Is it that our overheads are for a reasonably higher organization? Is it that we're overspending on advertising? Just wanna understand because something is structurally, like, off with regards to the kind of profitability even at this level of revenue.
Yeah. You know, like we said, that, you know, the quarter one, we do largely retail business and there's no wholesaling. You know, the primary billing that we do for the season beginning in, let's say February, March or January, February or in, July, August, where there is a full margin, et cetera. Retail expenses in the first quarter tends to be on a higher side. You know, quarter one has the kind of products we sell, the average selling price of that product versus what we sell in the festive season or in winter season per piece billing. The productivity of retail also is little lower towards this part of the summer season than in the remaining part of the year.
Eventually, the sales density tends to be little lower in the summer season compared to the winter season or the Diwali season, and that kicks in a little higher margin as we go along. You'll see in quarter two and quarter three, because of the seasonality, you'll see a higher, you know, margin for us. If I look at, you know, our entire performance, if I look at the GP, you know, increase in GP on an average around 4% in the last three, four quarters we have seen. Part of that, you know, in retail channel there is a commensurate variable cost because you have to pay the franchisees' commission. The entire gain of retail in GP doesn't necessarily flow into the EBITDA, but it still delivers a good EBITDA.
The second thing in this quarter, I can only see that we had a one-off, you know, employee expenses of around INR 7 crores because last year performance. You know, we used to have a March ending annual appraisal cycle, which has now become, so the new salaries come in July, earlier it used to happen in April. There is around INR 7, you know, performance bonus retention that we paid out, which will not happen in future. If I remove that INR 7 crores, then EBITDA would have been slightly higher. Other than that, structurally, we are, you know, in a phase where our GP and our EBITDA margins are going up.
You know, look, sir, I completely appreciate that, I mean, the first quarter seasonally is the weakest quarter. I understand that the EBITDA will go up in Q2, Q3, which are obviously stronger. Even though it's the weakest quarter, and I'm saying compared to almost all retailers we are seeing, we are still materially lower despite being on a reasonably high revenue.
See, you know, if you
Rakesh, if I could just come in here.
Yeah. Please, please.
Just explain one thing structurally in this business. It's a very
Yeah.
High operating leverage business. Now, we have a portfolio of six brands. Each of them are at different levels in their journey. You know, if a brand is typically, you know, nearing an INR 800,000 crore turnover, basically it is a brand with a high operating leverage, and correspondingly the profitability is high. You know, three of our brands are already in a
High, you know, double-digit pre-Ind AS profitability, which puts them broadly in line with, market profitability of large established brands. We have got a couple of brands which are still scaling up. You know, Arrow has been in a turnaround. It had gone into negative EBITDA, actually. It's come back into positive EBITDA, but the journey for it to get into double-digit EBITDA is still a journey which will take a little bit of time. It is about reskilling the brand. You know, Shailesh mentioned, a lot of positives in the KPI, but it's still a little bit of a journey. We have seen the beginning of that journey, and that journey is not complete. Similarly, Flying Machine and Sephora are still, in terms of real scale, subscale. They are also getting into their journey of moving towards double-digit profitability.
Large established brands have achieved the double-digit profitability, and the maturing part of the portfolio is scaling up. Overall, the company is also scaling up, which will bring operating leverage. It's a point in time in our journey where we will continue to see the benefits that will come from some of our brands scaling up and the company overall scaling.
Got it. Understood. Look, I think that's extremely helpful. The only thing I think which incrementally would actually help us, and I know you don't disclose the brand level details, but the reason it would be helpful is it will help us to actually understand this journey a lot better, right? Where we can see what has happened with other brands which you guys own, how those numbers have shaped up, and how your other brands are tracking as well in this similar direction. It gives us also comfort that we are heading at least ultimately in the right place, and it isn't being hidden in all of these other aspects, you know?
Sure. I think Ankit can also explain some of this. You know, generally, the way operating leverage behaves in our business is something that definitely should be understood. You know, I think Ankit can also shed some light on this offline with you.
Yeah. Okay. Sure. I will reach out offline and all of that. Thanks.
Yeah. Thank you.
Thank you. The next question is from the line of Yash Mandawewala from Mandawewala Family Office. Please go ahead.
Hi, am I audible?
Yes, Yash.
So can you talk through, you know, the gross margins for this quarter? How much of it is just, you know, a one-off due to maybe EOSS being pushed, you know, to the subsequent quarter? You know, if we take a medium-term view, where do we see really the gross margins on the portfolio as a whole ending up?
Yash, you know, the way our channel mix is behaving and the retail is becoming stronger, where our execution is sharper. There is a genuine, regular around 4% odd jump in gross margin in the recent quarter. This quarter, yes, I mean, EOSS would have also helped the pushing of that, but that's a one-time next year onwards till we wean it off. We are definitely in a situation with better focus on our sell-through with lower discounting. Our GP has gone up by 4%. Now, in some of the channels there is a variable cost below GP, like in retail, because of franchisee commission, employee cost, so the entire 4% doesn't flow into EBITDA, you know, that even if it's a higher scale, but in some channel it comes in.
Basically, you know, there is a sustained, genuine increase in GP of around 4% odd , and I think that should continue, you know, in terms of the progress into this year and next few quarters.
Got it. Basically, whichever quarters the retail sales are high, the GPs will sort of look higher, but the other expenses will sort of make up for that. The commission fees, you know, what does this commission fees look like that we give to the franchisees, you know, as a percentage of sales? How does that line item go?
I mean, that's a channel to channel in our books. If you see, there is a term called other expenses. If you see our P&L, you'll see other expenses are a large part of this operating expenses. You know, that's a INR 297.1 crore item in the June P&L. That you can track and see. You know, the other expenses and a lot of it is channel expenses below the gross margin that flows there.
Right. I mean, that's a variable.
It's a variable. You know, the franchisee commission is linked to sales, so a part of it is variable and some part where suppose we have our own staff, et cetera, in like departments. That becomes a fixed part. A large part of it is variable, franchisee commission.
Got it. Just next on Arrow.
Also there is a royalty component that comes which is also a variable linked to the sale.
Right. Just next on Arrow, you mentioned we're breakeven for this quarter, EBITDA breakeven. This is pre-Ind AS EBITDA or this is sort of post-Ind AS?
pre-Ind AS EBITDA.
Okay. We are just, you know, during COVID pivoted Arrow towards, you know, having slightly more casual or, you know, bit more sporty collection. Now that the offices are open and, you know, formal wear seems to be making a comeback, you know, how are you thinking about the positioning with regard to Arrow?
A very good question because, Yash, you know, what we have seen is that in the last, you know, since March, this year, the festivals, special occasion, weddings, all those business travel has really increased. As you know, you see the flight tickets and the hotel occupancy has really jumped up. We've also Arrow in COVID times when people were only working from home, we modified and we have a strong sportswear collection in Arrow. What we have seen in the quarter one, the sell-through of its core promise of the formal, which is the formal shirt, formal trousers, they have seen fantastic pull. That business has come back, and that, you know, is giving the scale because that scale was not coming during COVID.
Arrow is a very strong player in many department stores, is in the top two brands in a competitive space, and that business has now bounced back. That is giving scale, which is giving the leverage for the Arrow to sort of, you know, come back to EBITDA level, pre-net profitability. We will continue to work on its formal shirt, formal trousers, suit blazer. We still have a casual line, which is also growing well, because demand has been very strong in the Indian market of late. Arrow will benefit from this revival of the festive wedding special occasion demand.
There was also I mean, pre-COVID, there was this institutional channel that it seems Arrow was pretty strong in. You know, there is, I think, a structural hit to the profitability with regards to Arrow. You know, how much time really, you know, how are you guys thinking about how much time will you give this brand to turn around? You know, maybe is there a decision that needs to be made, you know, on the future of this brand over the next 12-18 months?
It's a very leading brand. If you do any consumer research, it's a very, very prized possession. It's a very, very top consumer brand. Arrow in its segment is a leading brand. I think the environment became very, very hostile during COVID because people were not traveling, the weddings were not allowed, special occasions were not happening. Today, as the world has come back and started to learn to live with COVID, we are seeing very good traction and buildup of scale. We just finished our booking for spring/summer 2023 season. Arrow is really a very highly desirable brand. When you look at the sell-through of Arrow, not just in our stores, but with the trade, consumers, the sell-throughs are very, very encouraging and very sort of market leading sell-throughs in the industry.
COVID was particularly bad for this one brand, but you know, that's behind us and we are building scale in this. You know, at just 2022, if I see versus pre-COVID times, there is a big improvement in sell-through, big improvement in reduction in discounting. I think it's a brand that we are very proud of having in our portfolio. This is the only wedding brand in our portfolio. Other brands are casual. When we go to customers in the market, it's a very important part of our bouquet that we offer to a customer or to a trade customer.
Got it. That's very helpful. Thanks a lot. That's it from me.
We are very strongly committed to Arrow, and we've seen the work, and I think, this brand should sort of accelerate.
Great. Thanks a lot. That's it from me.
Thank you. The next question is from the line of Nishit Rathi from CWC. Please go ahead.
Hi, this is Nishit here. Am I audible? Yes, Nishit. Yeah. I have a couple of questions. One, I just wanted to understand, if I'm just doing the math right, you know, if I understand it right, Tommy, CK and USP have all turned profitable on double-digit seem to be double-digit profitability on paid days. All the other brands also seem to be making money, right? Which is Sephora, Flying Machine and sorry, Arrow. None of them seem to be losing money, but somehow that doesn't add up in your numbers, right? Are you losing money somewhere? No, no.
I mean, you know, we did lose money in Arrow in the past, but that's behind us and it's now broken even in quarter one. Flying Machine is also profitable. Just that the scale, like Pulit said earlier, the brands are top scale. Arrow had a specific COVID impacted performance. I think with Tommy, CK and USP continue to do well both in terms of scale and profitability. Now, Arrow, Sephora and Flying Machine will need to add their scale and profitability. That's the journey for us ahead.
Yeah. Shailesh, my thought was that, you know, if I take those top three brands, they will be rough. You know, my rough assessment is roughly maybe 50% of your business, and if I give double-digit margins, you know, it's kind of there. You know, it's somewhere, you know, something has to lose money somewhere for you to be at that kind of profitability levels. Anyways, I can take it offline if that is.
No, no, but I assure you, I mean, you know, like I said earlier, we have seen losses in Arrow business, but that business has turned around. It's broken even now. The absolute profitability in these brand that you mentioned, Arrow, Flying Machine and Sephora, is still very small. You know, when we look at double digit and when some of them is low single digit and you look at the overall portfolio, it does impact the numbers. In a way, you're right that our task is to take the profitability of Arrow and Sephora and Flying Machine higher, and that's what we are all working on.
If you look at last three quarters, we have consistently step by step improved our execution, and we will also continue to improve the, you know, where Arrow was a year back versus now it's a much healthier space. Sephora, like industry, that business has, like, started gaining scale. I think in some sense, I agree with you that what you are indicating to us is the math part of it, is what is the job ahead for us.
Okay. Shailesh, how should I think about it? Because, you know, you know, historically in the consensus, it was, I had the belief that any brand that reached a scale of INR 300-INR 400 crores started giving extremely high ROCEs. You know, but that number seems to have gone up. What is the new level, you know, for you to kind of, you know, for us to just understand at what scale does the, do these three brands, start giving you double-digit kind of margins? Or what needs to change for you to kind of start getting those kind of margins there?
I think, I would say the answer for a double-digit EBITDA would be two parts, not just scale. Yes, scale is very important, and it gives you the scale leverage and your fixed costs get apportioned. But I think it's also the efficiency. It is also about the sell-through. It's also about the discounting level. You can be a very big brand, but with high discounting and still be loss-making, you know?
I think the whole rigor of executing right from right merchandise assortment to the right retailing standard, to right growth in the stores or online discounting, you know. We have to work on both the side. It's scale, yes, I agree with what you're saying, but, you know, there's no answer to that at this scale, you will 100% become profitable because you'll have to marry the scale with the efficiency. You know, you could be a INR 400 crore brand profitable, you could be a INR 600 crore brand loss-making. From there, we have to find both scale, which is important from a leverage point of view, but also efficiency.
That's why if you see our entire discussion is on sell-throughs, launching season properly, reducing discounting, and a lot of our effort is actually going in last three, four quarters that you've seen is to improve our KPIs on the execution. That's what we are doing a fairly decent job of, and that's what we'll have to continue doing so that every brand in the portfolio of Power Brand becomes a double-digit pre-Ind AS portfolio in next 12- 18 months.
Okay, fair. That was my third part, which I just wanted to understand. You are saying that in the next 12- 18 months, you see your entire portfolio moving towards that close to double-digit margins, right?
Yeah. That's our stated objective, and we are working hard towards that. Perfect. Great. Okay, that is fine.
My last question, you know, because I was unable to understand. You have INR 300 crore worth of other expenses, right? In that, you said a lot of it is also variable. Like, which is, you know, the commissions that you must be paying and royalty you might be paying. Can you just give us a sense, you know, what percentage of it is fixed so that, you know, we get a sense of, you know, when you actually get operating leverage, how can you get operating leverage?
Nishit Rathi, we can slice it for you and connect with you later, because we can definitely provide. We'll do the math and share it with you.
Sure. Thank you very much. Thank you very much.
Sure. Take care.
Thank you. The next question is from the line of Sagar Parekh from One Up Financial . Please go ahead.
Yeah, hi. Thanks for taking my question. My question is again on the pre-Ind AS EBITDA margin only. I mean, you'll have like sliced and diced everything, but just on a INR 3,600 crore-INR 4,000 crore top line base for this current year, we would still not be reaching double-digit kind of pre-Ind AS. Given the mix of brands that we have, for annually, at INR 4,000 crore, what could be like the pre-Ind AS EBITDA that we can achieve? And at what level of sales can we achieve like double-digit kind of pre-Ind AS EBITDA number?
See, Sagar, what we have stated, and we keep giving our guidance is that this year we will be in the high single digit EBITDA at an overall portfolio level. A lot of our brands are already pre-Ind AS double digit. We mentioned some of those brands. Some brands are not, like we discussed, the names clearly. That's what this year's journey is. What we also committed is that we continue to improve our GPs, continue to improve our contribution and EBITDA, so that we reach in 12-18 months whole Power Brand portfolio, which will be double digit. That's our plan, and we are sticking to it. That's our guidelines, and we are working hard towards that, Sagar.
Okay, got it. Just one suggestion. Actually, I know you generally mentioned in the call that the pre-Ind AS EBITDA is about 400 basis points lower than the reported EBITDA. If you can, in the presentation, give the breakup of EBITDA between Power Brands and emerging brands.
Yes.
This practice, you used to do it earlier. In case if you can, you know, possibly, do it again in terms of giving us pre-Ind AS EBITDA number for Power Brands and emerging brands separately, it would be really helpful and, it would be taken positively by the investor community in general. Because otherwise, you know, in the call, a lot of time gets wasted on, you know, asking the same questions about what is the pre-Ind AS EBITDA margin breakup, et cetera. That's just a suggestion from my side. Thank you.
Sure. We noted your suggestion, Sagar, and our team will connect with you, and we will definitely work on that, Sagar.
No, I've already spoken to Ankit about this. In case if, you know, you all can apply this, you know, from next quarter onwards, if you can give us pre- and post-EBITDA margin breakup, for different, like Power Brands and emerging brands separately, that would be really helpful. Thanks.
We'll definitely consider your suggestion. Definitely we'll come back. Yeah?
Yeah. Thanks.
Thank you. The next question is from the line of Pulavarthi Saikiran from Pulavarthi Advisors. Please go ahead.
Hi. Thanks a lot for taking my question. First of all, congratulations on a very good trajectory in terms of the numbers. Just, I think there is enough of discussion happened at the EBITDA level profitability. If I just change this profitability discussion at the net profit level, just wondering, like, how does different brands look like? Because when we look at the numbers, there is a minority interest which is there, which is essentially the Calvin Klein and Tommy Hilfiger are reasonably profitable when we look at even the long-term trends this year or last year. As we are suggesting, the other brands are mostly breakeven at the EBITDA level, but unfortunately, that is not getting translated at the PAT level.
If you can just explain us what is this holding it back, and also if you can just let us know how this profitability at the PAT level can improve for the next few years. Thank you.
I think, you know, valid question. There is a joint venture which is profitable and we have in the AFL a very strong, fast-growing, profitable brand in U.S. Polo. It's a market-leading brand. We have a couple of brands, you know, which are subscale where the profitability is low. We discussed in this call one of them we've turned around it's broken even now and some other brands like Flying Machine, Sephora are still subscale. The whole effort will be to build efficient scale, a profitable scale, so that the EBITDA margins go, as we said, that high single-digit% pre-Ind AS this year and you know, our brand double-digit EBITDA pre-Ind AS in 12-18 months.
Once that happens, the profitability comes because if you really see at an interest level or at a depreciation level, there has been a good sort of a reduction. You know, our debt levels are under control. Depreciation is going down this quarter versus previous quarter. Also last year you see a sharp reduction in the below EBITDA items are under control, so there's no interest cost or depreciation cost to worry and because it's balance sheet has already been tightly managed. I think the PBT level or at a PAT level, the gain will continue to happen when the EBITDA goes up, and we'll continue to manage our interest cost tightly the way we have done and our depreciation.
I think in which we see come back to our discussions on margin improvement and our guidance and, you know, our effort, our single point agenda is to improve the scale in an efficient manner so that the EBITDA margin goes up.
Sir, I understand, but if you look at it, just looking at the same commentary, right? The Tommy, Calvin and then U.S. Polo are highly profitable and probably in the double-digit margins at the EBITDA level. None of the brands are losing money at the EBITDA level, which is also reflected at the EBITDA side. Unfortunately, that is not getting translated to the PAT level. Are you suggesting that the depreciation and amortization finance costs are primarily fixed, hence whatever the gross margin expansion happens will flow to the EBITDA, hence the profitability should improve at the PBT level? Is that what you are hinting at?
Yes. Yes, sir. I mean, you know, like I said, below EBITDA, the items are already shown. If you look at historical last five, six quarter trend, interest cost, depreciation, sharp reduction. Now it's the. We were not even PBT positive. In last three quarters, we, because of all the improvement there in balance sheet and, cleaning up of the brand portfolio, we've turned PBT positive. This is third quarter where we've become PBT positive. It's a journey. I understand that, and we are, you know, committed to. Because this is all eventually comes back to cash generation, right? You know, we started generating cash this year also. The business will flow cash. This whole PBT improvement, cash generation at FCF level, this is a, you know, guiding principle for us.
We are working hard on that. As some of our brands become more efficiently and scaled up in an efficient manner, and we continue to keep a tight control on our balance sheet item and stock turns, et cetera, then the cash flow will happen. That's the agenda that we are focusing on.
Got it, sir. One last question from my side. When you say the Arrow is profitable, are you hinting that Arrow is profitable at pre-Ind AS EBITDA level or at the PAT level? Do you manage what do you say, brand level?
Pre-Ind AS EBITDA level.
Got it. Essentially the Flying Machine and Sephora also at EBITDA level they are profitable, but below EBITDA probably they might be losing some money. Is it a fair assumption to make?
Yes. I mean, they need efficient scale then only, you know, the overall game will change for us, and that's what we are focusing on.
Got it, sir. Last question, sir. In terms of the tax rate, how much accumulated losses we would be having on our balance sheet?
I think I don't have a ready answer, but I'll request Ankit to connect with you, and then we can. Ankit, you want to-
Saikiran , I will connect this with you offline and we will give you some color on the tax rate.
Perfect. Thanks, sir. Thank you very much. Thank you.
Thank you. Ladies and gentlemen, as this was the last question for today, I would now like to hand the conference over to Mr. Ankit Arora for closing comments.
Thank you, everybody, for joining us on the call today. I trust all of your questions would have been answered. If any of you have any further questions, please feel free to reach out to me offline, and I'll be more than happy to answer them. Thank you so much for your time, and look forward to interacting again next quarter.
Thank you. On behalf of Arvind Fashions, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.