Ladies and gentlemen, good day and welcome to Q3FY25 post-earnings calls of Sai Silks (Kalamandir) Limited, h osted by HDFC Securities 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 the star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Vedant Mulik from HDFC Securities Limited. Thank you, and over to you.
Thank you. Hello everyone. Welcome to Sai Silks (Kalamandir) Q3FY25 conference call. From the management, today we have Mr. Bharadwaj, Senior Vice President, and Mr. K.V.L.N. Sarma, Chief Financial Officer. I now hand over the call to Mr. Bharadwaj for his opening remarks. Over to you, sir.
Thank you, Vedant. Good morning, ladies and gentlemen. Wish you all season's greetings. Thank you for joining us today to discuss Sai Silks (Kalamandir) Limited results for the third quarter and year-to-date FY24-25 results. I am Bharadwaj Raj Mandigu, Senior Vice President, Sai Silks (Kalamandir). I presume that everybody has got a chance to review the financial results and investor presentation that we've uploaded on the company website as well as on the stock exchanges yesterday. I also have with me Mr. K.V.L.N. Sarma, our CFO of the company. To begin with, I'd first like to throw some light in terms of what happened in the Indian retail ethnic market scenario.
See, the overall retail market in the quarter showed a good sigh of relief from the previous quarters on account of how Pitru Paksha actually ended in Q2 itself and kickstarted the festival season right from the beginning of quarter three. With Dussehra Navratri festival season starting from the second of October itself, we've seen a good amount of traction come into our stores, especially in the ethnic segment, and the end of the month, in the month of October also, was followed upon Diwali, and so that the entire October as a month had a good lineup of festivities as well as events that helped us get good traction in the market. Further, in the month of November, on account of wedding muhurtams and the wedding calendar demand picking up, the same thing continued in the month of December as well.
In the month of December, we have also seen some more traction with regards to big events such as this festival, such as Christmas, New Year, and Pongal, while purchasing has already started. For the whole quarter, if you see, the demand since the first two quarters did not have much of the auspicious Muhurtam dates, and everything has shifted to Q3 and Q4. The same thing actually took place, and we have seen a good amount of footfalls, tractions coming into our stores, and therefore we have seen a good recovery when compared to the previous quarters. In addition to this, this was the overall market scenario. What we've also observed is in this particular quarter, we have seen good traction coming from Tier 2 cities compared to Tier 1 cities.
This phenomenon generally occurs because the festivities are majorly prominent in the AP and Tamil Nadu region, and also combined with the new store additions also coming up in tier 2 locations. With respect to the numbers, in this quarter, our company did a revenue of about INR 448.6 crores compared to last year of INR 382.5 crores, which is a growth of about 17.5%. Our gross margins this quarter stood at 41.8% compared to 39.9% last year, an increase of about almost 190 basis points. Our EBITDA for the quarter stood at 17.59% compared to 15.22% last year, quarter three, showing good signs of recovery and growth of about almost 235 basis points. Needless to say, our PAT actually grew by 43%.
For the whole nine-month period, we've achieved a revenue of about INR 1,063 crores compared to INR 1,014 crores last year, a growth of about 5% this year compared to last year. Majority of this recovery has come in quarter three because the entire first half of this year has been a weak half. With regards to the store strategy and expansion moving forward, in this particular quarter, we have opened three Varamahalakshmi company-owned, company-operated stores, totaling of about 15,700 sq ft, which takes the company's total company-owned, company-operated retail square feet close to 686,000 sq ft. And as of today, we have about 67 retail outlets. We are focused to open each and every store carefully, assessing the demand and paving more emphasis on the location of the store. This is part of our expansion strategy, and we continue to do so.
As we currently stand at the middle of the quarter four, and as for the wedding calendar dates, we do have a good traction in terms of the wedding dates in the quarter four as well. And these wedding dates also are distributed, not very confined to a particular month or so. And therefore, this spread-out calendar generally historically has worked in our favor, and we believe that this same performance growth will continue in quarter four as well. And that same should be able to reflect in the entire Indian ethnic wear market as well. I now hand it over to the operator, and I'll be happy to answer any questions. Thank you all.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset 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 Rishabh Gang from Sacheti Family Office. Please go ahead.
Yeah. Thank you for the opportunity, am I audible?
Hi, Rishabh. Yes, you're audible, Rishabh.
Yeah. So a good set of numbers. Maybe if you can throw some light on the same store sales growth as well. Also, I wanted to understand more on the strategy part, right? So women usually come to shop sarees with their family members, right, such as husband and kids. But for our stores, except KLM, we are not targeting men and kids, to what I can understand from the PPT. So the kind of sarees you sell, most probably they are being bought for a particular event, such as wedding, where the other family members also have a very specific use case for buying clothes, such as wedding. And most probably, for the entire time the wife is in the store, other members of the family are in store as well.
But we are not monetizing that part of wallet share that would be spent by them, the other family members, right? So by putting some space for men's and kids' ethnic wear, we can boost some SSG, right, and also the time they spend in the store. So what do you think about that? How do you think about this?
Okay. So in terms of strategy, I'll try to address the strategy part, and then I'll move to SSGs. So first and foremost, I think, as you rightly said, apart from KLM, everything, the other three formats, major emphasis is towards women's wear only. And even in KLM, there's a women's wear component, but let's just keep that aside for now. See, what happens is, in an average consumer behavior, when they come to store, they come not just one or two people, they come in a group. So let's say a mother, daughter, or maybe like three to four people group is what they come. And what generally happens is people who come to the store generally don't end up selecting just one saree for the person who is willing to buy.
But what they end up is they try to see a whole collection of sarees, basically a comparative analysis between one saree and other sarees. The entire family goes on a discussion of which color, what blouse. There's a lot of active discussions that go on. So with respect to who ends up buying, they end up selecting three, four, five sarees also. And not just for the person who's selecting the saree, but for the other occasions. Let's say, for example, the bride's mother or maybe the bride's friend, whoever is trying to come there, will also end up selecting sarees for themselves as well. So in terms of the people who are sitting idle, that generally doesn't happen. Most of our stores, the way we calculate our footfalls is based on group footfalls, not just by individual footfalls.
When a group comes, there will be an active discussion because there are a lot of discussion points with respect to what to be worn, what kind of matching needs to be there, what kind of jewelry needs to be there. When such active discussion comes, then generally, there is no such scenario where people are just walking out without having any selections. To be honest, if you actually take the conversion metrics in terms of how many groups are coming versus how many people are ending up buying, our conversion ratios are almost about 85%. If you take Varamahalakshmi, it's more than that. We believe that this is going to be a comfortable way moving forward. Now, majority of in these stores, the people who actually accompany women are considerably less.
Our stores, if you look at our store vibes and store ambience, these are all small stores, and these are all curated stores wherein we have the entire ambience is as per a very, very divinity focus or very occasion focus with a large number of SKU offerings. The moment we start adding men's wear and kids' wear, it will actually dilute the whole essence of what we are trying to do. For now, we are comfortable with what we're currently going ahead with an average of about 5,000, 6,000 kind of a sq ft store, we are able to monetize it much better. The moment we start expanding and adding more categories into the store, it will actually dilute it.
We prefer all of the other KLM formats will be women-centric only because the majority of these people who walk into our stores, maybe there'll be a very few components of men who's coming and accompanying women to buy these. But mostly what you see is women who come and end up taking active part in terms of the decision-making. So that's with that. And if that answers your question, then probably in terms of SSGs, I think we have seen an SSG growth of about 6.8%.
Yeah. But how do we get to a same-store sales growth of maybe a double digit, right? And because the 6.8% is a good one, I think. So how do we boost it? I think adding some categories or something, it's not need to be done for a double digit, right? What do you think about that?
See, currently, historically also, our SSGs growth were in around 4% to 5% of the average SSG growth on a year basis. I'm just talking about a full year. It's the kind of number that we actually end up targeting. See, the reason why this SSG growth is still fine and it doesn't get crushed under the inflation is because the variable expenditure under this is very, very efficient. So for example, in the overall company level, the employee component, the employee cost for us is around 8.5%. See, the rent-to-revenue ratio is around 4% or less than 4%. These are pretty much the costs that we oversee, and the moment, even if we have to take an SSG growth of about 4, 4.5% on a year, the amount of impact that this will have is comparatively less. So we are still, every store is still doing better.
So achieving 10%-11% kind of SSGs generally don't happen in our kind of industry. An average of about 4-4.5% is fair enough. And we will still be profitable year on year because these costs, what we anticipate, is foreseeable. It's not a new random cost that comes up. See, the idea is our employee costs will range around 8.5%-9% in and around because these are something that we always budget for. And we ensure that this kind of healthy balance is actually maintained in any store and every store. So the moment we start moving the staff from one store to the other store, thanks to the network of stores that we have, we're able to ensure that the employee cost is met under certain capabilities. And even with respect to rent, we know the kind of appreciation the rent has year on year.
It's about a 5% appreciation year on year. Taking this into consideration also, even if you do a 4% growth in terms of SSGs, the store contribution to the bottom line will still be positive.
Also, I can see you're focusing on online mode as well now. So how are we using tools like Instagram and YouTube, right? So are we doing any influencer marketing? And how much of our revenue is coming from online mode? And how does the margins compare to the offline sales? Yeah.
If you talk about online e-commerce as a business, the entire online contribution is not going to be more than 1.5% to 1.7%. So it's a very small component in the overall revenue sense. But in terms of using digital platforms such as Instagram or maybe Meta or Google, we are very actively pursuing this as a method of communication. See, earlier, two years or three years back, or maybe even before COVID, or maybe even last year also, the majority of our emphasis was into print and radio advertisement as well. So this year, the conscious decision that we have taken is to reduce the overall offline spend, meaning print and radio advertising spend, and focus more on digital marketing as well. So with respect to influencer marketing, I think influencer marketing is helping us to a great extent.
We are able to now focally target a particular market, a particular geographical segment, which is targeting to a particular store, and therefore run curated campaigns, and we have been doing a great amount of work with this, and we've also been able to leverage Salesforce to help us narrow down, target the kind of segments that we need to focus on at any given point of time, so it's actually helping us a lot. As a matter of fact, I think I have also mentioned in my last earnings call as well, even in the last earnings call at the back end of Q2, we started putting more emphasis on digital marketing and influencer marketing and using much more sophisticated tools to go online. The same thing has continued in quarter three as well, and we will continue to see the same trends in Q4 as well.
One other point I want to mention is not just in the core market, even with respect to our Varamahalakshmi format, even in Tamil Nadu market, digital marketing has helped us create a lot of brand awareness, both in terms of ATL and BTL.
So got it. So today, we are largely focused on South India, right, where there's a sizable market. But what do we think about targeting very specific micro markets, right, in other parts of the country where people have a shopping pattern similar to our existing customers, right? Because that would also help in creating a lot of brand awareness across the country as well. So how do we think about that? Or have we consulted any third party to identify such specific micro markets?
When we speak about our limited presence of e-commerce, we are getting a great amount of insights in terms of what micro market is working for what kind of product. So these insights are something that we already have been capturing, and we will continue to capture. But as a part of our strategy, we wanted to focus currently in a cluster model and adding few stores once and all in a specific South Indian market. So now, in the last one year, if you see, our focus has entirely been in Tamil Nadu. So the moment we start identifying these pockets, slowly we'll start adding new pockets of areas.
With respect to our demand, so we have been getting the kind of picks that we get on social media, the kind of analytics that we have. We already have identified three, four markets that we believe will be the next in terms of how we need to expand. So there is a good amount of data. We already have been identifying these markets. As we speak, we are also looking at a few new states where we need to look at. But again, we are in very early stages of discussions. We will start acting upon these things probably in the next one to two quarters. But yes, I think, see, when we try to advertise, right, we don't try to advertise just for the sake of advertisement in pan-India because our entire focus is offline stores.
These offline stores are located in the four, five states of South India. It makes sense for us to market through entire advertisement spends in this particular market. However, in terms of awareness, in terms of reach, our online e-commerce is one channel that basically targets not just India, but other countries in the world as well. Using the e-commerce, we are capturing a lot of data points, and that has been one of our leading factors in terms of when do we expand, how do we expand into newer markets as well.
Just one last question, right? On the cluster-based model, right, how do we ensure?
Mr. Rishabh, can you please fall back in the question queue for further questions?
Absolutely fine. Thank you so much for your insights, sir.
Thank you.
Thank you.
Participants, please limit your questions to two or three. The next question is from the line of Aradhana Jain from B&K Securities. Please go ahead.
Hi. Thank you for taking my question, and congratulations on the good set of numbers. The first question is on what has led to the improvement in gross margin?
Okay. Aradhana, thanks for the question. So see, I think we've been trying to address this point in the last quarter as well. So post the IPO, we started actively working in terms of efficiencies in terms of the procurement. So the good thing is our payable cycle to our vendors has decreased. Therefore, we are able to get some advantage in terms of the overall discounting on the product itself, and that's directly giving us in terms of the efficiencies. Now, so this efficiency that we've bought in is entirely at the cost of the company, and it does not actually translate to the customers. So this is one point that is helping us enable the margins. Along with this point, the new stores that we are adding is Varamahalakshmi Silks stores. Varamahalakshmi Silks as a format has a higher gross margin compared to KLM format.
This also is a major factor in terms of the overall growth in terms of the gross margins. These two factors on a whole is what is the reason why we are able to expand our gross margins.
Understood. Could you throw some light on how has the working capital been in the last nine months?
Yeah. There has been a consistent improvement in the working capital status, mainly because of the better turnovers, better movement of the funds along with premium format in this sense, and then the entire expansions are being done through the IPO process, so we have good internal generations, which we were able to reduce the borrowings as such. In fact, to tell you the broader figure, during these nine months, our debt has come down by approximately INR 98 crores, and of course, among the working capital cycles, the payable base are also decreasing because one is by way of our own strategy of making earlier payments and getting cash discounts is one, and the second is compulsion on account of MSMEs being paid within the statutory period and all that, so the working capital cycle also is improving. The borrowings have come down substantially.
In fact, to give you a comparison, we have broadened the working capital borrowings from INR 230 crores last year to INR 125 crores as of 31st December. So the company is moving towards a debt-free status at this point of time. Based on the balance sheet, definitely is improving, which currently the working capital status is showing major improvement within the balance sheet also.
Understood. That was helpful. Just on the previous participant's question on SSSG, the 6.8% growth is in Q3, right? So what would be the SSSG for nine months, and do we maintain the guidance of 1%-2% guidance for FY25?
SSSG for the quarter was 6.8%. I mean, that's the figure that was told to us for the quarter and still, at this point of time, because of the substantial reduction in SSSGs in the first quarter and some part of the second quarter, we are still lagging by -6% on the overall at the end of nine months on SSSGs. We are hoping that since January also has a good amount, I mean, the festival, Sankranti festival and all that, and March, we are expecting that the wedding dates are there in good numbers, so by the year end, we are expecting that we would close at a neutral level on SSSGs, and the growth will be delivered by the new stores that have come in.
Understood. Just one last question from my end. How has the KLM store format performed during the quarter, especially the newer categories that we had entered into like Innerwear? Which would be the categories which are aiding for better profit?
Currently, Q3, KLM on SSSGs has come close to neutrality. If I have to give a specific figure, the SSG was -1%. And things look to be better, at least on KLM part, which would be able to come to, I mean, it should also contribute to the neutralization by the year end. If you take the overall picture, at least in the current year, the KLM should be neutral or slightly lesser, let's say -2% to -3% on SSSGs by the year end.
Aradhana ma'am, does that answer your question?
Yeah, that's all from me. Thank you.
Thank you. The next question is from the line of Aniket Nikumb from ABN Capital. Please go ahead.
Hello. Am I audible?
Hi, Aniket. You're audible, yes?
Yes. Thank you for taking my question, and congratulations on a great set of numbers. My first question was, we've seen a lot of commentary just generally in the news and so on on just overall consumer slowdown and stuff like that. Obviously, you've sort of defied that a little bit. So can you tell us what have you experienced and what have you done differently where you've been able to achieve sort of quite a solid set of numbers in the context of overall consumer sentiment?
Yeah. So Aniket, thanks for the question. So yes, still, as you rightly pointed out, there are still reports that consumer slowdown is happening, and that's what we are seeing. But generally, what happens is, especially in ethnic and wedding wear markets, the kind of impact that this will have is not to that extent. It does definitely have an amount of implication on that. But generally, the majority of our product offering is catering to weddings as a target segment. And of course, festivities also have a major part, but weddings are one single big component of what we try to do. So the impact of wedding date calendar, the auspicious date or Moodam as they call, has a greater impact on our company's performance rather than the overall demand per se. And that's one of the first points.
The second point is, this quarter, we have taken active decisions in terms of focusing on the advertisements targeting to a store. So historically, we had the majority of our advertisement in the ATL activity itself. This particular quarter, at the back end of Q2 and Q3, I mean, in the entire Q3, we focused more on specific stores, creating more segments and targeting people to drive to stores. So if I have to give you, probably in the 67-store format, more than 25, 30 stores, we started doing focused campaigns by using influencers, by creating product awareness, by creating and showcasing the products. What we've understood is our category, our products generally in a shelf, are actually stacked in a shelf.
So because there's no such mechanism to go ahead openly explain about what happened, what kind of products we host, that has been one of the limitation factors from the past. So this was the case till last year because most of our designs, the majority of the designs that we have are very, very private to us, are our own designs. The moment we wanted to showcase our designs to people, there's a slight amount of competition that there's a chance of copying. But we've changed gears right now, and we focused on target marketing. And ethnic segment in terms of the wedding buying generally go a little bit overboard. They don't generally go too much in terms of the wallet size. They go a little bit overboard in terms of spending in terms of the weddings.
So that is one of the major reasons why we have seen some improvements. Additionally, one other improvement that we have done is we started actively focusing in terms of the shuffling. So we bought a new algorithm, a new logic in place to help us do more shuffling in terms of the product offering. So these are a few factors that have overall helped us to make sure the freshness of the stock is there in every store, and therefore, the conversions are also much more increased compared to last year. Even if you have to talk about KLM as a format and other formats also, the conversions, the walk-ins versus the number of billed conversions have increased.
Got it. So very helpful, sir. Very helpful. Just another follow-up question from maybe what a previous participant also asked. So would you consider expansion into sort of specific high-income geographies around India where there would be demand for such products? So for example, I'm from Bombay, and now there are three Nalli stores here. There's a Sundari Silk here. There's a Tulshi Silk here. And obviously, there is a fairly large sort of South Indian community here. So have you thought about that? What do you think about such an expansion? Because obviously, there's a lot of purchasing power, and people want to celebrate their occasions with a fair bit of traditionality.
Yeah. See, absolutely, Aniket. See, the reason why I do not want to comment upon where exactly I'm going is because the focus had been in the entire since the IPO, the next one, one and a half years, the focus has considerably been in terms of the Tamil Nadu expansion. As we speak right now, we have identified potential pockets, a few pockets in Karnataka, in AP, Telangana as well. But moving forward, as we speak, we are looking at Maharashtra as a state, Odisha as a state, and one to probably a new state entry is what we will try to do. So the reason the way we want to go forward is to probably open very, very select stores and see and understand the consumer preferences, purchasing patterns, and capture a lot of data points and probably expand further.
So the same strategy we have followed for Karnataka. We have followed for Tamil Nadu. We wanted to, again, the fifth state probably is not a state, but it's really intended for Pondicherry, so extension of Tamil Nadu. But we will try to do the same thing for this newer market as well. Definitely, yes. And when we try to move there, we want it to be a little bit more careful and cautious in terms of what we do because most of our Varamahalakshmi Silks stores, like 95% of our product offering, is in sarees only. The moment we start expanding our geographies, the composition of sarees versus lehengas or Kurta-Kurti composition will change. So the plan is definitely that probably in the next one year, you should be able to see us entering into these newer state markets as well.
Got it, sir. Makes sense, and just one last maybe bookkeeping question. Can you share what was the operating cash flow for this quarter?
Approximate. I think it is minus seven plus 48, INR 45 crores plus.
So we have generated INR 45 crores this quarter?
Correct. It was -7% last quarter. On this quarter, it is 38.5%. So it is about INR 45 crores for the current quarter.
Oh, fantastic. That's great. Sir, thanks a lot for taking my questions, and all the best to you.
Thank you, Aniket.
The next question is from the line of Yash Dedhia from Maximal Capital. Please go ahead.
Good morning, sir. So congratulations on a good set of numbers. So first question is that, let's say for 9M, in your Varamahalakshmi format, the EBITDA that you have got at a store level without the corporate overheads, how much more it is compared to the company average?
Varamahalakshmi format, as again, as the company's average, is always higher. At store level, if you take, it is approximately 3%-4%. It remains at this level only because much of the store expansion, I mean, as square footage has come in during the current year, wherein we have also had expenses like store launching expenses, manpower, additional manpower, manpower for payment, and all that. So on a generalized basis, the margin profile for Varamahalakshmi over the company average is around 4%-5%, and this year it is going to be single. By next year, perhaps because we will be underwriting the launching expenses and other store-level expenses, the premiumization should kick in, and then we should see a better margin from the Varamahalakshmi format as well as consequentially in the overall company.
And the Varamahalakshmi format, as it is, has become approximately 50% of the total revenue from what it was 40% pre-IPO. So as the premiumization is kicking in continuously, this margin profile is improving even at the company level.
So this 400-500 basis points is the actual achieved store-level EBITDA for Varamahalakshmi for 9M, right?
Over the company's?
Over the company number.
Correct.
Okay. So that's good. And secondly, can you comment on your store expansion plans as things stand now? Because I think we have had a few instances where we had to adjust our growth plans. So where do we stand now in terms of store expansion? Let's say for the fourth quarter in next year.
Yeah. So yes, I think as per the plan, what we are anticipating in fourth quarter is to open an additional about 18,000-20,000 sq ft by end of Q4. And probably the remaining expansion will jump still over to Q1. As I rightly said, all these stores are COCO stores, and we had a little bit of a setback in second quarter with two of our top stores that we wanted to open in Tier 2 locations of Tamil Nadu. There has been some limitations there, so we do not want to go overboard and try to open into locations where we feel like just to open the store. So what we're trying to do right now is carefully waiting for an opportunity to open it in the right market. So basically, we are having three, four teams trying to work in terms of finalizing these stores.
For fourth quarter, this is what we should be able to expect, around 18-20,000 sq ft. Remaining everything will fall under Q1 of next year. But in terms of locations, as I did tell you, we have identified one or two potential areas in Karnataka as well, and in Tamil Nadu we have, and one or two locations in AP as well in Tier 2 kind of markets. The opportunities are there. We have not expanded into those stores, and we see a very good purchasing power in these areas. So that's the case. Beyond this, we are also looking at expanding into new states very soon.
So by end of FY26, how much more sq ft we want to have in FY26 apart from Q4?
So from this point, as we from Q3 onward, from Q4 onward, if you take, we should be able to add addition of about 70,000 to 75,000, 80,000 sq ft.
12%-13% on your current base.
Hello?
Yes.
Hello.
Correct.
Yeah.
In Varamahalakshmi format, your SSSG is how much approximately that is compared to the company average?
Varamahalakshmi for the quarter is 6.5%.
Okay. Okay. And sir, generally, what we have seen in the value fashion side that some of the players who are now reporting numbers, they have reported far superior numbers for nine months at least. Although Q3, we have seen a bit of slowdown. So because in a bad economic environment, people also tend to downgrade, and that's where the value fashion players tend to do better. But the same is not exhibited in the performance of KLM Fashion Mall, where we have got negative SSSG. So why are we not able to capitalize in a year when this was a year when because of lack of consumer sentiment positively? I mean, this was a year where we could have had a very good year in KLM.
Yes, sir. See, technically, when you say KLM, I try to highlight this again and again. We consider KLM more to be an ethnic value fashion mall, not just a pure value fashion mall. The kind of offering still defines KLM positioning is in a way where no other retail players have a kind of positioning like what we have. It still is dominated by ethnic wear in men's, sarees and women's, all of that kind of a one-stop destination is a gap that we still feel no other entrant in other geographies have played. However, KLM as a format is still showing signs of recovery because at the end of the day, we feel the impact of the ethnic wear is still there in KLM. When we talk about ethnic wear, what becomes important is the seasonality in terms of the wedding occasion calendar.
So that has been one of the major reasons. Most of the other players in this particular market not to compete, but they have a very different model altogether. If we talk about any of the number of styles that they have, number of SKUs that they have versus the number of SKUs that I have are far more compared to the other competitors that are there in the market. So it becomes extremely important for me to balance out and give this entire one-stop destination for families to come and shop with us. And so that has been the case majorly. However, there have been one or two categories in KLM that needed attention. For example, men's wear and kids' wear is one such or one or two such categories that had a degrowth, particularly per se. It could be of various reasons.
It could be new competition or maybe change in the merchandising structure that we have. So we are working on that, and we'll probably be able to show some results in the further quarters to come. But otherwise, KLM as a format as such, it's still doing better. See, the KLM average revenue per sq ft still falls under INR 16,000 per sq ft, which is much higher compared to any of the other players that we currently have. It's just that the efficiencies have to play in a little bit more and kick in, and we are trying to consistently keep it. And in the next quarter, we should be able to see some progress coming in there.
Okay. You said that 4%-5% SSSG we can sort of expect over the long term. So I mean, how much in general for the ethnic which sells in Southern Indian market, can you expect the inflation itself to be in that range so that we can be sort of I mean, in your business, what sort of an inflation per sq ft, for example, can we expect over the long term? Is it similar to SSSG, or how do you look at that figure?
Yeah. I'll explain this. As you explained earlier, the store-level expenses at the company level, all format put together for us, is approximately 15%. In fact, in Varamahalakshmi, they are slightly lesser, and in KLM, they are slightly more. But on a company level, the store-level expenses are only to the extent of 15%, which includes those manpower costs, those rental velocity, all those things which are subjected to inflation and all that. So among this 15%, even if there is an inflationary trend of, say, 10% also, the net effect would be approximately 1.5% overall. So if we are realizing at the 3%-4% of SSGs, obviously, the inflation part could be absorbed to the extent of 1.5%, and the balance 2 or 2.5% would add to the profitability.
That is how we expect that the SSGs of 4%-5% also will contribute to the growth of the company.
Sir, that is well understood. But inflation, what kind of inflation do we see in our selling prices, let's say, in the ethnic market in South India per piece? What sort of inflation history have we seen?
Inflation?
I mean, the increase in the price per piece that you are selling. If you are selling a saree today for INR 1,000, do we expect next year to be or the similar piece to be sold at INR 1,040, INR 1,050, or something like that? What's been the trend, long-term trend?
See, on a three-year average, we should be able to see an inflation increase of about 10%. That is the average inflation that we should be able to see on a three-year average. Again, one year up, one year down, but we could average it out. This is the kind of numbers that we see. But I would like to highlight one point here. That is that we only try to deal within the finished goods stage. So therefore, the end price that we get is the cost price that we receive considering all of these inflationary trends, and we try to pass the same thing back to the customer in whatever way we can.
Okay.
SSG is a combination of both volume and the prices. It's not just that we are able to increase price and then get the SSGs. It is a combination of both volumes and increase, volumes and price as well, and whenever there are new designs coming into the market, our designing group comes with the latest ideas and all that, then obviously, we will have a cushion to be able to push a little better price there. And also, because of the new designs that are coming in, which are our marketing getting fast moving in the thing, volumes are also increasing, so it's a combination of volume and price that we would push. We have a mechanism in the system where we get an equilibrium on, I mean, we try to achieve an equilibrium on price with our volumes and accordingly procure the merchandise.
So this is one particular pattern through which we will be able to achieve the SSGs of around 4%-5%, which are satisfactory for us for the growth that we are envisaging.
Thank you, sir, and all the best.
Thank you. The next question is from the line of Sunil Jain from Nirmal Bang Securities. Please go ahead.
Yes. Congrats for a good set of numbers, sir. My first question relates to KLM. Can you talk a bit how you are trying to improve the KLM performance? What steps you are taking?
Yes, sir. Hi. So with respect to KLM, I think the majority of the degrowth that we have seen is in two specific categories, as I mentioned, which is men's wear and kids' wear. There's a lot of competition in this particular space as well. So what we're trying to do here is to readjust the entire procurement strategy as well. So we are trying to bring in new talent to help us plan the merchandising in a much better fashion and distribute it across multiple stores. And also, what we have seen is to focus a little bit more in terms of the advertisement and campaigns that we've created. I think over the past, we have been able to onboard Salesforce to help us do that.
Last year, what also happened with respect to KLM, and this year what did not happen is last year, we did a few extra promotions in KLM during the Dussehra Diwali time, wherein they have vouchers that they can continuously come and buy in the mall every month. So this year, first time we have discontinued that. Keeping in mind the long-term brand value of the KLM, we did not stop issuing these vouchers. This also had a little bit of an impact. So on the overall sense, there are three things on a broader perspective. One is to refocus on the entire merchandising and the product planning. Second thing is to focus on the product advertisement and store advertisement at a store level. And the third thing is to ensure that the employees are taken care of in terms of the trainings and meetings.
These are the three different things that we are doing, and additionally, I have also mentioned that we have added a category called Innerwear, so there are still scope for one or two other categories that we would ideally add that can improvise the overall margin profile of KLM per se.
Yes. Thank you. And second thing about Varamahalakshmi, the next stores which will be coming in the fourth quarter will be all of Varamahalakshmi. And how many wedding seasons are there in the fourth quarter as compared to third quarter?
Yes, to your question, sir, I think all the new stores that are going to come in fourth Q will be Varamahalakshmi only. When you compare third quarter to fourth quarter, I think third quarter. I think on almost about eight wedding days extra, we have in fourth quarter.
Eight wedding days. Okay. Okay.
Eight wedding days extra we have in fourth quarter.
What we see is that you had the opening of two stores towards the end of the third quarter. The benefit of that will also be there in the fourth quarter.
Correct. Yes, correct.
Okay. So generally, what we see that fourth quarter is lower than third quarter. But this time, can it be different?
Yes. Generally, you're right, sir. I think third quarter is the best quarter for the entire calendar year, followed by Q4, Q1, and Q2. This is how the sequence has been there historically. This year, because H1 has been weak, so the more emphasis will be there. But however, third quarter we have seen, I think we should be able to see a similar kind of trend in Q4 as well.
Okay. Great, sir. Thank you very much.
Thank you, sir.
The next question is from the line of Resha Mehta from Green Edge Wealth. Please go ahead.
Yeah. Congratulations for Q3 on a very healthy top-line growth and SSSG revival there. So on the gross margin part, right, so while you did comment on the two reasons for the improvement in gross margins, but would it be possible to attribute, let's say, the 200 basis points improvement in gross margins that you've seen of that? How much is attributable to the early payments to vendors and hence getting discounts from them? And second, what would be the contribution from the premiumization?
We can, I mean, at this point of time, we can attribute almost everything to the premiumization. Because what happened in between is that earlier, we were having a credit period of 60 days, 90 days, and all that, where we thought we would be able to prepone payments, improve the payment date, and get cash discounts, etc. But in between, there is a statutory compulsion that's come for us to make payments to MSMEs within 45 days and all that. So slight part of that advantage that we thought we would have by improving the payment date, etc., is lost because of this statute. And now that we have to, we are in fact complying with that statute of paying MSMEs. And you would agree that in our case, most of our vendors will be MSMEs only. So that advantage is missed at this point of time.
The growth that has come and that is going to come going forward also will be majorly on premiumization. Already, Varamahalakshmi format has come to approximately 50% of it. And as it grows, the component of Varamahalakshmi grows in our turnover levels. The margin levels should improve.
Okay. So just two follow-ups here. So one, what would be the payable days that we are at for nine months? And also, earlier, we had spoken about the gross margin improving to, let's say, 43%-44% levels, also being driven by the discounts that we were expecting from the vendors. But since now that is not expected to play out, where would we see our gross margins going up from the current 42% kind of levels? Can we go up to 43%-44% purely driven by premiumization?
Yeah. We were explaining that there will be two kinds of discounts on which we are banking upon. One is the cash discounts by improving the payable, reducing the payable date, etc. And the other is that since we are going substantially on expansion in Varamahalakshmi format, we would be procuring almost two years, three years of the current level of procurement levels, and that we would be able to get volume discounts. So the story on the volume discounts still is intact. So we would be able to get those volume discounts in addition to the premiumization going ahead. Cash discounts are a small deterrent because of this statute that has come in. So since we have already almost positioned ourselves in the entire Tamil Nadu, now the volumes have also gone up in this format.
There is a combination of volume discounts and premiumization that will drive the margin profile. And whatever we have said, barring approximately 0.50 basis points or so, we should be able to achieve by the year FY26.
You're saying by FY26, we should be at least 43% kind of gross margins. Is that understanding right?
By the end of FY26, we should be at that level.
Right. And on the inventory days, so for nine months, would it be possible to call up what kind of inventory days have we seen? Because earlier, it used to hover around 180 days, and we were targeting to reach around 135, 140 days in two years. So where are we in that journey from 180 days to, let's say, reducing it to 140 days?
It remained at those levels at this point of time because Q3 being Q3 and Q4, particularly January also, is high intent on wedding dates and the festivities, so we need to maintain those higher levels of inventory by September end, December end, and perhaps up to January end also. It will remain at the same levels, and subsequently, by the year end, we are hoping that we would reduce it to approximately this time by around 160 days also.
What are the initiatives that we are taking which will guide this kind of reduction from 180 to 160 days? Because as we see, the core wedding season will be for about six months of the year, so where we'll need to have higher inventory, and then also, in general, with the store expansion that we'll keep seeing, we'll need to keep adding inventory. What exactly will drive the reduction in inventory from 180 to 160 days?
One is, as I told you, on the value side, when we get a volume discount, the cost per COGS will come down. Secondly, in Tamil Nadu, since we are expanding in a cluster format now, approximately to give you an idea, within Tamil Nadu itself, we have about 1 lakh sq ft of Varamahalakshmi, while other three states, Varamahalakshmi has 1 lakh. So the cluster of Tamil Nadu itself has about 1 lakh sq ft, and the movement of goods between the stores would be easier. Second is the volumes by the procurement also. The procurement of silk, particularly, is within South, and just-in-time approach is one aspect whereby we are able to reduce the inventory backup requirement at the warehouse. Because earlier, in all other three states, we were maintaining godowns, and all three states will have separate backup inventories.
Whereas in Tamil Nadu, since we are having 1 lakh sq ft and going ahead, it would be about 1.5 lakh sq ft. And that will have a lesser backup inventory requirement. So these things, improvement in cost of goods and then improvement in the volumes that we will have for a backup and the ability to move the products between the stores wherever we have a module, as you are aware, where it throws a suggestion as to which of the products are moving faster in which areas and all that. And accordingly, on a dynamic basis, we will be shuffling the products between the stores instead of buying the new products for each of the stores. So these two, three parameters would enable us to reduce the inventory levels and on a company level overall also.
One additional point I'd like to mention here is one of the key metrics and the key KPIs that we look at is MBQs. So every quarter, we do a revision of these MBQs, MBQs meaning minimum base quantities. So what has happened is the moment when a store starts, especially in the last year, we have opened additionally about nine to 10 stores. We have done a revision of these MBQs because once we start putting up a store, these revisions generally don't happen. So after seeing the store progress after three to six months, we start making these changes. So we are actively working on this particular KPI in a much better fashion. And for us to make sure the MBQ levels are adequately maintained, the importance of stock refillment as well as stock shuffling is a major piece here.
With the help of these two attributes is the reason why we are trying to bring it down. One of the most interesting points that we were able to understand is, though in the particular price range in a particular category, we still do have products, the importance of color availability and the importance of the product availability is at the topmost level. We're bringing in systems. We're bringing in teams to ensure the color chart is maintained at any store in the way that we would ideally want us to have. These are just on the operation front, beyond whatever has been told. On the operation side, these are also additionally the factors that we try to use on a daily basis to ensure the overall inventory holding in every store is reduced and therefore not affecting the sales as well.
Right. And on the e-commerce website, right, so I went through your various different format e-commerce websites. There was one interesting observation that the sarees are not actually draped on the female models, right? So hence, to that extent, I would imagine the purchase decision would become extremely difficult, right, just by looking at the website online. However, I do see at the same time that you have a video appointment option as well. So just wanted to understand, in the saree space, typically what would be how important is the e-commerce channel, especially for a wedding ethnic saree retailer like us? How big is it in the industry, or do we expect this to remain a marginal channel and probably just use it as a tool to create awareness and probably get them, after the video call, get the customer actually into the store?
Just your perspective on cost, yeah.
Sure, sure. So as of today, in the entire revenue, 90% of our revenue is coming from social media where we use live commerce. Wherein using our Facebook, YouTube, and Instagram, every day we do two to three live shows which run about 20 minutes each to 30 minutes each, wherein a person is explaining the saree, how it will look once you drape it. This is one of the most easiest ways to drive a purchase decision because it actually gives you a look and feel in terms of the exact colors because there's somebody trying to explain this. So in terms of pure play e-commerce where people find my website, go to the website, and search for the products, the kind of revenue that we are seeing there is marginally less in the overall e-commerce space itself.
So if you had probably gotten an opportunity to go to one of our Facebook or Instagram, you should be able to see hours and hours of content that we try to do, and we are able to drive sales there. So today, by using that, our ASP, especially if you have to talk about one of our formats called Brand Mandir, the e-commerce ASP is also INR 10,000, which is much, much higher to the average e-commerce ASP that are out there. Majority of the saree players, when you talk about the ASPs, if you talk about any marketplace as such, is around INR 750-INR 800. But in contrast to that, our ASPs are almost INR 10,000 when we come to these premium brands.
We will continuously focus on creating content that will be the major purchase decision for people to understand how it will look once you drape it, how the body, how the pallu is like. On the other end, we have also had, say, Kalamandir website if you go through, we have used a software which basically does draping. So all we need to do is take a picture, and that picture will enable automatically drape it to a model or something, and that's what we showcase in the website. One of the key essence here is our USP is offering a wide variety of products. So across the board in the company, we don't have similar products in multiple quantities. We hardly have two, three quantities. So the challenge becomes for every product, you cannot take an image or a photo shoot done.
We are using this metric to navigate our way towards our e-commerce business. Now, with this being said, the overall strategy, the overall consumer preferences, especially in saree as a category, is still touch, feel. People come to the store. It's more like an occasion. It's more like a celebration for them where they spend a good amount of time in the store trying to purchase, trying to figure out what are the different options, trying to mix match, have a good chatter with the family. A lot more active discussions happen. In many of the cases, I also see people come and do their wedding discussions over there. It's an entirely different vibe altogether, and that will continue to do so, not just with me.
The industry per se itself, the presence of e-commerce and the growth rate where the offline expansion is versus the online expansion is, online is much lesser to compare to the online, and we believe that this will stay as is only.
Understood. Very helpful. And lastly, just on this employee bit, right? So typically, for the industry in the saree stores, right, how much would be the fixed component and the variable component of the salaries of, let's say, the store managers and the sales employees? And would that trend be similar for us also?
We as a company are very much focused on performance-driven pay. I think on an average, our 20% is the variable component of the overall component. Majority of the retailers do have a variable component, but the way we are different is the efficiencies in how you disperse. Every bill, we know which salesman has sold how many products, what's the value. As much as I'd like to go in terms of which product is getting sold in which store at what time, the same drill down I can also do in terms of the employee-wise as well. Everything is systematically calculated, and we disperse these incentives on a daily basis, weekly basis, monthly basis. That has been one of the major instances where we are able to recover or retrieve the top-performing employees and not stacking upon the lower end of the pyramid.
So that's how it is. And this should be pretty much same in terms of the value-wise, but the details, I mean, the way we are different is in terms of getting down to the bottom of it by identifying who exactly is the person who actually sold it and therefore give the incentive vice versa to it. And not just the salesperson, the entire value chain gets incentivized based on the store, the sales, then the supervisor, then the floor manager, the area manager, etc., etc. Everybody in this process gets incentivized.
Understood. And just a clarification on one data point that you all said. So Varamahalakshmi as a format for nine months would be contributing to 50% of revenues. Is that what I heard correctly?
Yes, correct.
Okay. What was this, let's say, three years ago?
Back then, it was 40%. Now it became 50%. 40% was KLM, 40% was Varamahalakshmi, 60% was Kalamandir, 4% was Mandir. This was back two years back. Now Varamahalakshmi is 50%, and KLM component reduced. Kalamandir and Varamahalakshmi pretty much are in the same lines. There's no changes there.
Got it. Got it. All right. Thanks a lot and best wishes.
Thank you so much.
Thank you. Ladies and gentlemen, due to time constraint, this was the last question for today's conference call. I now hand the conference over to the management for their closing comments.
Yeah. Thank you all for taking time to reach out to us and being a part of this conference call. Looking forward to a healthy Q4 as well and looking forward to meeting you in the next quarter results. If you do have any questions, please feel free to reach out to us. Thank you so much.
On behalf of HDFC Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.