Ladies and gentlemen, good day and welcome to the Q3 FY23 Earnings Conference Call of Page Industries Limited. As a reminder, all participants' lines will be in 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, please signal an operator by pressing star then zero on your touch-tone phone. Please note this conference is being recorded. I would like to hand the conference over to Mr. V.S. Ganesh, Managing Director of Page Industries Limited for his opening remarks. Thank you, and over to you, sir.
Thank you. Thank you, Vikram, and good evening, everyone. It is always a pleasure to talk to all of you, and thank you all for joining us on the call this evening. As you're aware, while we have reported a modest growth in revenue this quarter, we have continued our nine months momentum. We typically have a long-term view of the growth scenario given the consumption, industry, and economic drivers. Our focus remains on intensifying general trade distribution, modern trade expansion, including rapid expansion of exclusive brand outlets, growing online business, improving our customers' experience, strengthen the product portfolio, and ensuring a robust supply chain. Let me take you through some quick highlights before our CFO, Mr. Chandrasekar, details the financial performance for the quarter and for the nine months.
Our Q3 revenue has grown by 3% year-on-year but has shown a degrowth of -3% quarter-on-quarter. Volume has de-grown 7% year-on-year and 7% quarter-on-quarter. Our margins have de-degrown this quarter mainly because of the higher material cost resulting from utilization of raw materials which was purchased at a higher price in previous quarters. As you know, we built strategic stock during those disruptive months and those stocks is what we were utilizing. There was also a lower absorption of labor and factory overheads. The lower than expected sales did not allow us to optimally utilize our production capacities. We also reinstated normal advertising spend as we are very confident about the long-term view of the growth and therefore we are not holding back on that spend. A good share of that, however, was invested during Q3.
As of December end, we are present in 118,838 MBOs, 1,228 EBOs, and 2,967 LFS. Our channel expansion continues to be in line with our plans. The market is not as buoyant as we expected, and this is mainly what has impacted the overall performance. Moreover, with our inventory getting back to normal and having a good healthy inventory, we actually have reintroduced and rolled out ARS process across all product verticals to optimize inventory. While this is having a short-term impact on primary sales, we are confident that this will enable us to have a more robust and efficient distribution system over the long term. It is very important to note while primary sales declined in Q3, secondary sales volumes were not affected to the same extent.
During the pandemic, due to volatility created by changes in product demand mix and shortages in supply chain, we were compelled to pause the ARS. Distributors were free to order based on availability and based on their best judgment. This resulted in imbalance in channel partners' inventory. This quarter, we decided that it is better if we reinstate and implement ARS in full. This will help us to correct these imbalances as explained earlier. This not only streamlines supply chain, it will also help in improving the ROI of the channel partners while improving order fulfillment to retailers. We look forward to your questions after our CFO gives you further insights on our Q2 financial performance.
I would also like to inform you that today we have Mr. Gagan Sehgal, our COO, and Mr. Rahul Shukla, President and Chief Retail Officer, who have joined us in this call and who will be more than happy to answer any questions that you may have in their domain. Let me thank you once again for joining into the call today, and I would like to pass on to Mr. Chandrasekar, our CF, to give you further insights.
Thank you, Mr. Ganesh. Good evening, friends, I hope all of you are well. Thanks for participating this evening on the Page Industries earnings call. I will detail the financial performance starting with Q3. The revenues are, as most some of you would have read, it is INR 10,233 million, comparing with year-on-year INR 11,898 million, a growth of 3% on revenues. The quarter-on-quarter it is a degrowth of -3%. The EBITDA reported is INR 1,928 million compares with year-on-year INR 2,507 million. This is a degrowth of 23%. Also quarter-on-quarter, there is a degrowth of -19%. The EBITDA margins are 15.8% compares with 21.1% year-on-year and 19% quarter-on-quarter.
However, the nine months OpEx are in line with the historical trend of 23% of revenues. Q3 at the profit before tax is INR 1,237 million compares with INR 1,746 million year-on-year. This is a degrowth of -29%. On quarter-on-quarter, there is a degrowth of -22%. The PAT margins delivered are 10.1% compares with 14.7% year-on-year, and 12.9% quarter-on-quarter. The gross margins are about 2% less due to the absorption and part of the material cost, as explained. This compares to 37.5% for the quarter compares to 39.4% year-on-year. The nine-month volumes have shown a 23% growth from 141 million to 172 million.
The nine months revenues have shown 38% growth from INR 27,754 million to INR 38,195 million. The nine-month EBITDA similarly has grown by 41% from INR 5,184 to INR 7,284. The EBITDA margins of 19.1% for this quarter compares favorably with 18.7% year-on-year. Nine months PAT has shown a growth of 32% from INR 3,459 million to INR 4,929. The nine months PAT is healthy at 12.9% compares with 12.5% year-on-year. The cash and cash equivalent has come down to INR 40 million. It was INR 333 million in the previous quarter due to higher inventory. Our inventory stands close to INR 13,900 million. It was about INR 13,600 million in the previous quarter.
The net working capital is about INR 8,045 million, and compares with INR 7,886 million in the previous quarter. I now request the Q&A session to commence.
Thank you very much, sir. Ladies and gentlemen, we will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on your touch-tone 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 questions are assembled. To ask question, please press star one now. We have our first question from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, sir. Am I audible?
Yes, you are. Please go ahead.
Yeah. Hi. Thanks for the opportunity. Sir, I just wanted to better understand this ARS hit that you have quantified. Would you be able to give us some sense on the quantum of the hit that we saw this quarter from this shift, and whether the impact is more or less done, or it will take another quarter or a few more months to kinda stabilize? Just if you could kinda share some details on that. Thank you.
Yes, Mr. Mehta. You know, on the ARS front, you know, we reinstated category-wise. We started off with men's innerwear, the last category where we mitigated the ARS was the outerwear category. As we speak, we have actually cleaned up around 7 million pieces of excess inventory which was there in the system, and this is what has basically affected the primaries. As I told you before, this is something which is very essential for the long-term growth of the business, and because it is very important we have a very hygienic and healthy stock in the pipeline. We wire our systems in such a way that we go by the true demand as far as sales is concerned.
Coming back to your question as to whether this is fully done, I will say it is more or less done. There is little bit more of cleanup required, which is happening during the month of February.
Okay. It'll take probably, you know, fourth quarter also might see some impact then. That is the understanding.
Yes, to that extent as far as primaries are concerned, we are very happy to see that the secondary are doing well generally.
Mm-hmm.
You know, if you see the general retail environment, Q4 to date is not very different from Q3. We are hoping that things will improve from Q1 of next year, and we are geared up. Being a dominant market player, we will be the first
To take advantage of this. We are well prepared for it. In the meantime, as you rightly said, all brands, you know, and if you see generally there is a slackness, and therefore we are taking on measures of tightening our belts.
Got it, sir. If I may paraphrase, you're saying that, A, there was a slowdown in the environment itself.
Yes.
Plus we had this required need that, you know, ARS had to be done, both of which is the reason. Out of that ARS might be at a lower level, but the environment will probably take, you know, we are hopeful that it should kind of come back by one Q. That's the.
Correct. Correct. That is what we are hoping. You know, we hope, you know, it can't last more than Q3. We are closely monitoring that. Sorry, Q4. I think by Q1 things should normalize. That is what we expect. We are closely monitoring, and in the meantime, we are taking all necessary measures to be very conservative as soon as our strengths are concerned for next year, and make sure that we have only the need to have spends concentrate on the core and maybe watch how the situation turns out next year for making investments for future. However, our long-term view is very optimistic, we will be continuing to have our share of marketing strength as we usually do, because that is very essential for the brand. Our outlook, long-term outlook is very, very positive.
Got it, sir. Sir, I have two more questions, but I'll just ask the second one and probably come back to the queue. Was on the high-cost inventory. This was essentially the impact of this high-cost inventory is done, sir, and hence fourth quarter should move back to the 20%-21% EBITDA margin. Is that a fair estimate to kind of assume or is there any change in that expectation as well?
So you know, as I told you before, as far as the impact in margin is concerned, it is not only the high-cost inventory or the material cost, it is also the lower absorption of the factory overheads. Compared to last year, if you look our advertisement spend, we are normalized. We can't be media dark forever. We are restating those spends. To answer your specific question on inventory, yes, we, you know, now the inventory which we bought at an overprice should start flowing in from Q4, and we should be able to see the benefits of that flowing into our systems.
The second part, sir, is on the price hikes. We've not taken any price hikes, or have we in this quarter because of, you know, the factory overheads, because we need for investment? Have you taken any product pricing that we should be aware of?
No, we have not taken any calls as far as price hike is concerned.
Okay, sir. Okay, I'll come back for the next question afterwards. I'll come back in the queue. Thank you very much, sir.
Thank you.
Thank you. We have next question from the line of Varun Singh from ICICI Securities. Please go ahead.
Am I audible?
Yes, you are. Please go ahead.
Okay. Yeah. Thank you very much for the opportunity, sir. I just wanted to understand that how much would be our revenue contribution from the EBO?
If you want to take that.
Sorry, sir?
Okay. Varun, sorry. We don't share those final product category information in detail on the call.
Okay. Okay.
Do you have any other question, please?
Yes, yes. Sir, my second question is, sir, if I look at your total distribution, so we see that there is a 13% year-on-year increase, but the revenue growth is only 3%. Just wanted to know that how should we read these two numbers?
Overall, on the store growth, the revenue per store is around INR 1 lakh, and that has been more or less maintained, be a little bit plus-minus across the quarters. The store growth and the revenue growth is more or less in sync.
I understand that, sir, like our current numbers there is a big difference, like 13% versus 3%. Even EBOs there is 19% increase year-on-year, compared to 3% revenue growth. Just wanted to reconcile that. How should we kind of understand the difference between these two numbers?
There is always an age and gestation for every store to reach full scale or mature. One should use a lag. What we typically do is a same store growth, those kind of metrics. I will, you know, request Mr. Ganesh to explain this in more detail.
Sure. Sure. sir, that will be very much helpful. that is for myself. Thank you very much.
Okay. Mr. Varun, just to clarify, you know, you see that growth you are talking about is only for this quarter, which is more of a one-off. If you see our year-to-date performance, you know, Our growth is in line with the retail expansion, whether it's EBO or MBO expansion, it is in line. This particular quarter, the primary business mainly because of the ARS is also the secondaries are in line. You know, It is not a big concern as this is a temporary glitch which we are going through.
Okay. Got it, sir. Yeah. Understood. Thank you very much.
Thank you. Thank you, Varun.
Thank you. Your next question from the line of Devanshu Bansal from Emkay Global Financial Services. Please go ahead.
Yes, sir. Thanks for the opportunity. Q4 had several tailwinds like delayed winters, as well as the base is low due to Omicron and GST hike that was there last year. Still the commentary is not so encouraging. How should we see this? Have you seen a similar to Q3 kind of a decline in demand as well?
Much to, you know, if you look at last Q3 and this Q3, the base itself, there was a small challenge because the sales in December of last Q3 was so high because of the expected GST increase and that higher base happened. That also has slightly impacted us when we compare quarter-to-quarter performance. Of course, the main reasons are the ones which I've stated before. As I told before also, you know, if I look at month to date, Q4 is looking similar to Q3 as far as the volume in the market is concerned. It's not as expected. We are watching for signs of recovery, closely monitoring.
In the meantime, we are also taking necessary action in the long term, to preserve cash, tighten our belts, and to focus only on the core, so that we can improve and maintain our margins in the long run.
Sir, still I just want to understand this, in more clarity. You said, in Q3, secondary sales were good, but primary lagged, due to ARS implementation. Now in Q4 there is similar sort of a demand in ground then. That primary billing should have helped us, for Jockey sales growth, right? Why is that getting impacted in Q4?
No. See, Q4 we are only midway through Q4, so we need to closely monitor. What I'm saying is generally in the market, we are not seeing any recovery in the market. It is not as buoyant as we expected. That, that trend which was there in Q3, we are seeing it in one Q4. That is what I meant. As far as primary sales are concerned, it all depends on how the secondary shape up from now. That is what we are basically watching.
Got it. This demand slowdown is across categories or it is specific to some of the categories which we operate in?
I can say it is across categories that, the heartening thing, some of our core categories like men's innerwears has shown a very good growth. Growth of course is softer than past, but it has recorded a double-digit growth, and that's our core of the business. That is very heartening. Categories like our bras are well accepted. It has shown a very good growth. It is not across categories. You know, we have categories which has grown pretty well.
Got it, sir. Last question from my side, sir. Other players in the market are operating at very thin margins and some are making losses as well, in this category. How are we trying to protect our shelf space from such competition in the general trade?
I think, you know, ARS and make sure that the inventory turns out pretty high as far as the distributor is concerned. The distributor's inventory health when it improves, it will definitely help him to serve the retailers. You know, ARS is a very, very critical initiative which we have taken. The second is, we are the dominant player in the market, you know, as far as C-trade is concerned, this is going to be a fast-moving product for them compared to others, and that should really help. I think, Gagan, if you want, you can add more clarity to this.
Thanks, Mr. Ganesh. Yes, I think more or less, you have answered. One, you know, one key thing, as Mr. Ganesh has said that, you know, by implementing ARS, we are able to give the consumer exactly what he wants rather than the distributor placing the order as per his intelligence. That is something, you know, we are far closer to the consumer in terms of, you know, placing right at the retail point, what he wants. Second, our distribution. If you look at our entire network, while, you know, you are saying that there are players with lesser margins, but they do not have the kind of the distribution footprint that we have, and which is serviced directly by our employees and by the distributor employees, right?
Being the dominant player, the retailer obviously, you know, keeps the share of Jockey what is required as per the market, so it cannot go to somebody else just like that. Because of that, we are very confident. Lastly, you know, consumers do recognize our entire product quality, you know. It is not just on the margins which other players are playing on, but they truly believe in the quality of the product, both the retailer and the consumer. As long as we are present near the consumer and we are delivering to the consumer what he wants-
We are a, you know, value product, though being premium, affordable premium. I don't think there is any crossover really there.
Got it. Just a follow-up, small follow-up. Is the competitive intensity higher post-COVID? Just a small comment here would be helpful.
Yes, it has become more intense because during COVID none of players were not able to really supply, you know. At that point of time, you know. Now everybody has come back, everybody has ample supply. Also, if you look at the athleisure category and all, there are more and more players who are, you know, entering into this space. The competition has become intense. We are very, very confident of our product and, you know, and we will continue to grow. We are very optimistic of the future despite the competition, and the competition keeps us on our feet, which is important.
Thank you, sir. That's it from me. Thanks.
Thank you. We have next question from the line of Gaurav Jogani from Axis Capital. Please go ahead.
Thank you for the opportunity, sir. Sir, sorry to harp on the previous question. You know, my question again is more in terms of the demand. You know, while we are recognizing that, you know, there was an ARS mismatch, leading to a primary, secondary disconnect. If you can qualitatively comment more on the demand front. Again, what is leading to this demand slowdown? Is it that there was a high base of some COVID products, which is, you know, now getting normalized leading to this Y-o-Y declines? Any color of this would be helpful.
Gaurav, what we see is generally the spends have come down and the basket size has also reduced. You know, if somebody used to buy four pieces or three pieces, it has come down to two pieces. Maybe I think this is because of the general economic environment and, you know, it is bit sluggish and people are conservative, I think very tight on the spends. I think the share of the wallet is a temporary thing. You know, with back to office, back to work, there's also a huge spend when it comes to the outerwear. You know, It's the formal wear which people are buying now because they have to refresh their wardrobes. When you have a limited wallet, your athleisure will be something which will be postponed as far as buy is concerned.
We do see that trend also as far as the outerwear is concerned. Even though over the year, for nine months it has shown growth. During this quarter we are seeing that trend which we feel is temporary.
Sure. Sure, sir. Sir, and my other question is again with regards to this, the high cost inventory that is now getting over. In terms of pricing, if I remember it right, you had taken a 8% price increase around in the December last year. I believe that is going to overlap now in Q4. What kind of pricing are we looking ahead from Q4 onwards on a year-over-year basis? Especially in the context where, you know, the raw material prices have come down sharply.
Yes, sir. You know, Gaurav, when we looked at the pricing intervention last time, if you see, we didn't touch the prices like everybody else because we took a long-term view. We wanted to continue to be a value for money brand for our consumers. We took a projection of the... how the raw material trends will work and then we touched the price accordingly. Things more or less have happened as we expected, so this is something which we have considered. As we speak, we are not looking at any immediate pricing interventions.
Sir, if I get it right, I mean, you generally take a 3%-5% price increases every year. Will the same trend be maintained in the coming year as well?
You mean, you are asking whether we'll be increasing the price by 2% or 3% next year? Am I right?
Yeah. Yes. That, the regular ones that you do usually.
We need to watch. It all depends on the raw material price movements. As you rightly said, it has softened over last year. If the trend continues, we can be more conservative on that. This is. Only time can answer. We are just watching how the input costs are going to move. We will take appropriate call at the right time based on the input costs movement.
Just lastly, two more questions from my end. One is on the distribution trend. You know, given that you have been aggressively expanding distribution over the last 1.5 to two years. In the wake of this, recent slowdown in demand, would you also consider some slowing down in the distribution expansion as well?
We are looking at a normal expansion because we are not present everywhere. There is so much headroom. As I told you, our long-term view is very, very positive. We are actually not slowing down on those aspects because there is so much potential out there. We are continuing to be aggressive as far as retail expansion is concerned, both in EBO and in LFS space. Gagan, would you like to add anything more? Hello?
Yeah. Sorry, sir. In case Mr. Gagan is not there.
I think Mr. V.S. Ganesh. Sorry, it was on mute. You, you've answered it. And you know, as Mr. V.S. s aid that we are also building for the future. We are very, very optimistic. And wherever we see that there is a gap and an opportunity where we can be present and be nearer to the consumer, we will not hold ourselves back. This is temporarily one or two quarters, but, you know, we need to be near to the consumer, so the distribution footprint expansion will continue. Yes, we will not go on a rampant drive keeping that, you know, we have to open X number of outlets and, you know, there is a certain target that we have in mind.
We will go slow and steady in terms of wherever there is an opportunity, we'll make sure that we move there faster than ever. It will continue. This year also you've seen there's been a 10% increase in terms of our distribution footprint. There's no reason this will not continue in the future.
Sure. Thank you, Mr. Gagan. Just one last bit, sir. If you can clarify the volume in pieces for this particular quarter, or maybe the nine months that you called out for nine months as of Y-t-D, I just missed that.
You want to have the volume for a quarter?
Yeah. Yeah. The fourth quarter and for nine months, exact volume in pieces if you can highlight?
The volume for a quarter is 52.8. I hope you can hear me.
I can hear you.
The volume for the nine months is 172.4.
Thank you, sir. Thank you. That's all for me.
Yeah.
Thank you. We have our next question from the line of Rishi Mody with from Marcellus Investment Managers. Please go ahead.
Hello, am I audible? Hello.
Yes, we can hear you. Please go ahead.
Yeah. My question is on the attrition part, right? Your channel sales team seems to have decreased from 759 to 714 in this quarter. This is a QOQ number. Just wanted to understand what's happened here. Have there been layoffs? Has it been a natural attrition where people are going to our competitors?
Gagan, you want to take that?
Yeah. I mean, it's a natural attrition that's happened during the course. It's nothing to do with the primary sales as such. It is something that's temporary and obviously, you know, we will as and when we will get the replacement. As Mr. Ganesh had mentioned earlier also that we have been, you know, very, very prudent when it comes to our expenses. Wherever there is a requirement, we'll obviously plug in the gap. It's a natural attrition. There is nothing by design or, you know. People do move during this time. Somebody would have changed industry, somebody would have gone to competition. It is something that's happened, you know, earlier as well. There's no cause of worry there.
And, uh-
Sorry. Add to what Gagan said. We also taken lot of initiatives on productivity improvement. With that initiatives in place, we need not have a one-to-one attrition replacement because we are seeing signs of improvement on the actions which we are taking. The productivity of the sales team is improving, and there's much more work which is happening on that front. We can afford to be more prudent as far as investment in people is concerned without affecting the business growth.
Got it. Basically, your ARS should help you free up some resources.
Simply put.
All right. Staying on the sales line, right? I see that our MBO or our LFS touchpoints have been volatile in the past four quarters, wherein, in Q2 we dropped down from 3,000 odd touchpoints to 2,700 odd touchpoints, and now we've got back some 225 odds touchpoints. Could you explain the trajectory, what's happening here? Are we not getting acceptability in certain type of LFS stores, or what's happened? Why is there such sort of a volatility in the LFS sector?
Thank you. Thank you for asking that. I have Rahul Shukla, who with us today, and he'll be the right person to give you clarity on this.
Thank you, Mr. Ganesh. Thanks for this question, Rishi. There's no volatility as such. As an ongoing process, we do keep looking at critically evaluating our relationships and wherever there's a synergy with shared values and the aspirations. We continue with our expansions with these point of sale. They need to be profitable, viable and meaningful for both the partner as well for us. We are the preferred partner for expansion for practically every player in the LFS ecosystem.
You know, coming out of the COVID, there were some rationalization that the LFS partners themselves had done with some of their stores which were thought to be not viable or not working because in the LFS ecosystem, we operate on the expansion that the partners do, not that we. We remain very buoyant and very upbeat on the prospects of our growth in the LFS ecosystem. We are the preferred partners. We occupy a leadership position in the segment that we operate in the LFS. There is no such concern of any volatility on that front.
Okay. like what explains that drop in 280 LFS points in Q2?
There are whole different types of Large Format Stores. Without getting into the names of those partners, there are some regional, you know, players who might not be a viable proposition. They might be rationalizing their own stores.
Wherever we don't see synergy with the partners, we rationalize and we look at only those partners where there's a mutual, you know, synergy between the two.
Okay. If I'm to read into this, I'm guessing the value format is where we would be struggling because the customer base is not really.
Not necessarily. If you look at the... No, not necessarily because of the value for many proposition that Jockey offers, even in the value format, we are doing quite well. I'm talking about more some regional players that probably themselves might be finding it difficult to sustain their chains, and hence would be rationalizing their own chain of stores, not the national chains as such. With all the national chains, we have a very robust relationship.
Understood. My next question is, you mentioned that there's been some factory overheads, and hence we were underutilized on the factory front. Could you give more color or more details on that, what happened?
Yeah. I can take that. You know, for example, we produced about last year, this time about, you know, 38 million, and this time we produced about 42 million pieces. The production was less because the sales were less, as explained by Mr. Ganesh. Invariably we have an absorption at a standard rate into the costs. We had last year a good absorption, which means that there was about a 3% better absorption of the labor and factory overhead. This time we didn't have it. It was almost flat. In comparison, there is about a 2.8% lower absorption of the labor and factory overhead.
You know, if you don't produce enough, what you actually pay out to labor and factory overhead, a part of that remains in your P&L.
Understood. Okay. Okay. Now that our ARS system is in place, right? And I think last quarter also you said that we are in line, our primary sales and secondary sales were largely flowing in line. Going forward, we should be seeing inventory reduction at our end as well as the retailers or the distributors' end. This quarter, what are the inventory days versus, let's say, last quarter and Q3 FY 2022? Like, how much of inventory days savings have we done because of our ARS?
You're talking about Page inventory, right? Not the channel inventory.
Yeah, our inventory. Company's inventory.
Yeah. Overall, including raw materials, we have, we are at the highest point, as I mentioned. From here, we will only see the inventory come down quarter-on-quarter and then at an optimum, balance level. Right now we are carrying close to about three and a half months of inventory we have.
What was it, let's say, last year, same quarter?
Last year same quarter was about half of that because we didn't have inventory, and that is why this buildup happened over this, you know, in the past three, four quarters. Last year we had almost half of that in terms of number of days, I'm saying.
Yeah. Because, let me just give you the perspective here. Last year we were struggling as far as inventory is concerned because of supply chain disruption and the huge demand which we had. Our number of days inventory was very low. In fact, we had some lost opportunities because we were not able to fulfill all the demand which was flowing in. It is not comparable. Now we have additional inventory because we built some strategic raw material stock because it was very volatile out there. You know, even if we are willing to pay price, the supplies were not coming through. You know, that those were times when the demand were also high and we actually invested in stock, which we felt we believe it's the right thing to do, and that is what is now getting utilized.
You will see as we move forward, the inventory is reducing and normalizing. What would be our, you know, long-term target for inventory days? Like, where can we be on a sustainable basis?
About two and a half months on an average, our inventory on revenues, you know, to just to add to what Mr. Ganesh said and clarifying. For example, if you go back to last year Q1, we had about 110 days of inventory, and then it came down to below 60 because Q2 and Q3 last year were better than expected and we almost were very, very low on inventory. That's why we came to that. Two and a half months is about the right time, I mean, number of days that we would plan, and more importantly, to have the relevant inventory to maximize the sale. Those kind of efforts, yeah.
Understood. Okay. final question-
Mody, could you please come back in the question queue?
Sure.
Thank you. We take next question from the line of Sameer Gupta from India Infoline. Please go ahead.
Hi. Good afternoon, sir, thanks for taking my question. I have two questions. First question on the gross margin, this is the COGS line that you report in the reported SEBI format. I see that there is a contraction of 340 basis points on a sequential basis. There is a high price inventory which we had and which was getting normalized this quarter, and there is more to go. I don't understand why sequentially our gross margin should reduce unless there is a very adverse revenue mix that we have seen this quarter. You also clarified during the call that the men's innerwear, which is which I assume is the higher margin product, that has seen a double-digit growth.
I'm not able to understand why GM contraction should happen on a sequential basis. Thanks, sir. That will be my first question.
Good question. Thanks. Let me take that. I explained, I think, you know, you may have missed in the earlier in the call couple of questions before, we had about 2.9% lower absorption this quarter. That is why we are seeing this. When the production and the resourcing, which is the labor and the factory overhead together, are balanced, typically we should have the production should absorb all the cost being incurred. That is the reason, main reason I would say. Am I audible?
Yes, you are.
Okay.
Thank you. We take next question from the line of Akhil Parekh from Centrum Broking. Please go ahead.
Hi. Thanks for the opportunity. Sir, if I look our performance versus apparel retailer or footwear retailer who is operating into mid, premium segment, they have continued to deliver very strong even in the third quarter, and there is no sense of weaker retail demand. The question is, our lower performance, has it to do with the increased competitive intensity in certain pockets, and not much to do with the overall weaker retail demand? That's my first question. Hello?
Members of the management, we are unable to hear you.
I'm sorry. Mr. Parekh, what I was clarifying was like when we look at the competition, we can see that we have done much better than all the competition. I was just trying to clarify that it's very, very important that we look at it at a category level rather than at an apparel industry level. If you look at it that way, you'll find us performing much better than the competition.
Okay. Okay. There's no meaningful change in the competitive landscape as such, basically, that is what you're trying to imply.
Yes. Yes.
Okay. My second and last question is, could you give some color in terms of demand slowdown across Tier 1, Tier 2 and Tier 3 towns? Is it same across all three or is it different across different tiers?
Mr. Parekh, your line was not clear. I couldn't make out the question.
My question is whether the demand weakness is democratized across different tiers of towns, or is it more specific to, say, Tier 2 and Tier 3, and probably Tier 1 is doing relatively okay as compared to the Tier 2, Tier 3 towns?
What we see is generally across the board is we couldn't see any particular rural or urban. One thing we are seeing, the premium consumers who are buying a premium product, that we don't see any slackness there. Overall, if you look at it, there's not much difference between the tiers of town.
Okay, sure. Fair enough. That's all from my side. Thank you so much.
Thank you. We take next question from the line of Samir Gupta from India Infoline. Please go ahead, sir.
Hi sir, I'm sorry I got disconnected. Just on that follow-up on the GM question. When I'm looking at the 340 basis points contraction, I'm basically looking at the raw material consumed line and the change in inventory line that you report in the SEBI format. There the overhead absorption should not make a difference, right? This is purely the sales that you do and the raw materials that you consume.
Correct. Correct. This is what Mr. Ganesh also explained at the beginning of the call that there is a higher price raw material which is coming in. We had gone pretty low on inventory in Q3 of last year because the demand was better than expected. Therefore, there was an in-inventory buildup at higher price during Q4, Q1. So those inventories are now reflecting into the Q3 at the contribution level.
Again, sir, just a follow-up. I am looking at from 2 Q to 3 Q. If at all the consumption of high inventory is happening, probably it should reduce in 3 Q versus 2 Q, right?
again, it is, you know, the weighted average of the inventory, start reflecting more in Q3 than in Q2.
Okay, sir. second question, sir. Now we are seeing a general slowdown in discretionary consumption. This is across companies. This is not only with Page. In this context, what, what do you envisage? I mean, when can we get back to a double-digit growth trajectory? I mean, I would still assume that the macro or the consumption environment would need to pick up even with the primaries and the secondary difference that you are having. Getting back to a double-digit growth trajectory would still require overall consumption pickup, and what could be the drivers for that?
Sameer, you know, few things which we need to. One is to have a close look at the market and see because we need to bounce back the moment we get the opportunity. From our side, you know, we expect things should normalize by Q1. What we are looking at as an organization is even if we have only a modest growth, and if this continues even in Q1, Q2, how can we maintain our margin? We are looking inward and see what all cost controls we can put in place and what all are the governance measures that we should incorporate in our system so that we can protect our margins. If the market recovers faster, then it is as a bonus. That is the outlook we have.
We are looking at the very essential expenses, focusing on the core of the business and postponing other investments which can be postponed, so that we can maintain the margins, watch how the market recovers, and invest for growth when the market normalizes.
That's very clear, sir. That's all from me. Thanks. All the best.
Thank you. Thank you, Sameer.
Thank you. We have next question from the line of Resham Jain from DSP Investment Managers. Please go ahead.
Yeah. Hi. Good evening. Just to clarify, you mentioned about INR 5.28 crore of inventory. Does this mean that this quarter you had 11% kind of volume degrowth? Is that the right number I'm looking at? Hello?
KC, you want to take that?
Sir, you mentioned about 11% year-on-year. Is that the question, Resham?
Yeah. My question was 11% volume degrowth, is that the right number?
It is.
Okay. Secondly, my question is on EBOs. The ARS system which you have implemented in this quarter or you have reintroduced from last few months, is it applicable for EBOs also or does this more to do with MBOs?
Jain, this is more to do with the MBOs. EBOs we are always following this work, you know, so this is more to do with MBOs.
Just to get a sense on how the secondary movement might have been, can you help us with the EBO growth number in this quarter?
Jain, as Mr. Chandrasekar clarified last time, we don't give channel-wise breakup. It is, you know, it is good for all of us to not share those information which is competition sensitive.
Why I'm asking this specifically is because, let's say if EBO secondary sales and ARS is implemented, then the MBO might have actually degrown much higher than from volume perspective, higher than what we actually see for a company as a whole. In the past, you did mention about EBO being 20% of your sales. Is that statement correct?
Yeah. The impact, as you rightly said, is you are right in your judgment as far as impact is concerned because if you look at the primaries. The secondaries is what we need to look at when we are doing this correction. Secondaries has been now getting in line with primaries. That shows that inventory correction has more or less happened. You are right. The impact has been more on the MBO side because of the correction which we undertook through the ARS system.
Okay. The last one is on in-house versus outsourcing mix. Because what we could see from numbers, and I could be wrong here, that your purchase of traded goods number as a percentage of sales has been going up consistently since last few years. As your own manufacturing contribution has come down, if you can just give a sense of how it has moved over the last three years, that would just help to understand the trajectory. That's it.
Mr. Jain, we always have been around 33%-35% of what we sell has been outsourced. We have always maintained that. We have not increased it. There was a slight increase during the pandemic time because the demand was very high and the quickest way to augment capacity is the way through outsourcing. We are back to the same 66, 33, 34 ratio. Long term we may we will continue to expand because you should also understand it's a growing concern. While we internally grow, outsourcing also grows because the overall demand, if you see the month, year- to- date growth also, it is significantly high growth which we have had.
As the relationship with our supply partners improves, and they are like extended arm of Page, we may look at a higher ratio also because they are just like another factory of ours. They are like franchisee factories, you know. That's the kind of relationship with which we have built this. We continue to look at that so that we have a good balance between in-house and outsourcing. This is very important to have agility with more and more volatility in the business. If there's a quick upside which we need to look at, we need to have both the levers in our hands.
Okay. Very well explained, sir. Thank you. Can I squeeze one more? One last one.
Please go ahead, sir.
Sir, just one is on kids. Just based on what we understand from the market, kids which we were expanding quite rapidly since last two, three years or two years specifically. We have seen some slackness there at the marketplace and some slowness. If you can just explain what's happening on the kids side. Has there been any change in strategy or are you seeing anything in the marketplace specifically? Thank you. That's it. That's all.
Yeah. Jain, you know, we are seeing good growth in kids. I'm not talking about Q3, if you see year-on-year, we have grown significantly, there is no slackness as we see. Of course, we are taking measures to see how we can further accelerate the growth of this category. It has grown to our plan.
Okay, sir. Thank you. All the best.
Thank you. We have next question from lineup Ashish Kanodia from Citi. Please go ahead.
Sir, the first question is on the gross margin. If I look at the 4Q 2022 gross margin, my understanding is, it benefited because of the price hike you took in anticipation of the GST rate hike which never happened. Is that understanding correct that, you know, the 4Q 2022 gross margin was actually higher?
Not exactly. The price corrections which we took because of the input cost pressures, because of the cotton price. There also we didn't want to cover the entire expenses, because of the input cost pressure. We were looking at taking a long-term view, and we were looking at how the projected cotton price is going to move and priced accordingly. This, this price increase was not purely because of the GST.
Sure, sir. Secondly, you know, if you can highlight, you know, what is the costing approach for raw material, or for the COGS, is it first in, first out or is it a weighted average?
The method is weighted average.
Sure, sir. The last question is, you know, you talked about the lower absorption of overhead in 3Q. Now, you know, if I just read through the, you know, the some of the earlier commentary, we are already at highest point of inventory, and then there is some slowdown as well in demand. Is it fair to say that, you know, when we look at 4Q maybe, you know, again that because we are already carrying some inventory, so the production level would be lower than maybe sales purely because demands are, you know, expected to be slightly muted and you have already high inventory, and we may see some, you know, lower absorption in 4Q as well?
Again what we are doing is, you know, we have raw material and see, as I told you, because our long-term outlook is very, very positive. What we are doing is to utilize the capacity and produce what is safe. We are looking at the core products, the 80/20 rule, the 20% of the volumes gives 80% of the revenue. Those products we are producing so that we can utilize the capacity, which we have installed. We are also work with our vendor partners who from the outsourcing side, and they since they most of them work for multiple buyers, they are able to manage their capacities and we are in a position to slow down the off take from there.
This is where, as I told you before, it is very important as a company we have both the levers in our hands so that we can manage this well.
Sure. This is very helpful. Thank you.
Thank you. We take next question from line of Vikas Jain from Equirus Securities. Please go ahead.
Thank you, sir. Thank you for the opportunity. My first question is with respect to your outlook, in the growth that we estimate for FY 2024. Can you like elaborate as to like which category segments will deliver the growth for us in FY 2024 as a whole? Also, color as to like how will it be like men, womenswear or kidswear that will be the chief front runners, or will it be equally contributed by our menswear as well as athleisure also? Some color there, please.
Because, it will, it definitely has to be across the board because, you know, from, if you look at the market share which we have and the potential headroom we have, there is tremendous potential to grow in all our categories. That has been the case if you look at, year- to- date, all our categories have grown, and that will be the trend going forward as well.
We want more so from the perspective of men's and athleisure wear as well, right? Because last year in FY 2023 we have seen a very good growth in the athleisure as well as the menswear category, whereas we are making incremental efforts to grow in our womenswear and as well as the kidswear category. More so from the perspective of will it be like a base effect that will be coming here and hence the growth will be much higher in the new emerging categories or it will be like even in terms of % and also men's and athleisure will be growing at a similar pace that we were witnessing at the 2023 trend date?
I think the emerging categories like outerwear, especially women bras, they should have an accelerated growth because we have less penetration and there is much more headroom. Overall, all categories should grow. Athleisure, yes, during the pandemic, as the consumption pattern was such that there was a higher demand for it and it softened post-pandemic. Long term, that should definitely grow because pandemic was a great opportunity for many of our consumers to discover our product on athleisure. It was something wherein we were able to enrich lot of new customers. This is definitely going to help us in the long run.
Correct. Sir, and some color with respect to the current quarter, that is 3Q 23. Any color as to like which category did well and which category was, like, under pressure?
As I told you, men's innerwear category did comparatively well. It's recorded a double-digit growth. Our bras category is well-received. It has also shown a good growth. Softer than usual, but it has grown.
Sure. Sure. athleisure?
Athleisure, if you look at year-to-date, it has definitely shown a decent growth, in line with our expectations. Yes, quarter three was challenging.
Sure. In the last question, in last call we did mention that we are now focusing on the export market as well. Any meaningful progress that we have achieved this quarter?
Sorry, Mr. Vikas. Was not able to make out this time.
I was talking about that in last earnings call we did mention our increased focus on growing in the Middle East and other export markets. Any meaningful progress that you have achieved there?
Yeah. In the last call, what I was saying is, we are concentrating more here. As far as overseas co-market is concerned, we are looking concentrating more on the Middle East because with the economic situation in Sri Lanka and Nepal, you know, it is, it's not so buoyant. Therefore, whatever effort we are putting in, it's more focused on the Middle East market.
Okay.
For the time being, we are closely watching how these markets will be recovering in the other territories.
Right. Okay, sir. Thank you so much.
Thank you.
Thank you. We have next question from the line of Rahul Jain from PhillipCapital. Please go ahead.
Hi, this is Ankit here. Just wanted to understand, sir, our new capacity from Odisha is expected to come in the month of April or May. You know, from the rural distribution side, we have done a lot of good work, and broadly this is gonna be for Modern Classic. How are we looking at, you know, rural distribution to take care of this capacity? Would we initially start with double shift or single shift only given the current demand environment we are in for this capacity?
Odisha, when we commence operations, it will be in single shift. We always will have the option to go to double shift there. The commencement of operation would be on single shift because there is a huge effort required as far as training the operators and getting the efficiencies. It is much more easier to manage it if it's in the general shift.
Mm-hmm.
As we move forward, if there's a need, we can always explore the double shift opportunity.
Sir, can you elaborate on the rural distribution? What has been the progress and how do we plan to utilize this incremental capacity? Because, you know, few questions back you answered you want to be, you know, 65, 35 in outsourced and own manufacturing. With own manufacturing share increasing significantly with this capacity coming in, where do you plan to use this product? Which products are you looking to manufacture and, from a distribution perspective?
Okay. Odisha is going to manufacture the men's innerwear product. As far as capacities are concerned, Odisha capacities, it's more of a replacement of some of the capacities which are here in Bangalore as a modernization project. Some of our units here are getting rationalized for the operations, and we are moving some of our sewing capacity to Odisha.
Sure. Sure. Sir, can you also talk on the rural distribution?
Yes. Gagan, you want to take that?
Yes. Yes, Mr. Vikas. Yeah, we currently have around 160 distributors who are purely in rural, you know, whom we call the RDHC distributors. We have made some rapid expansion. This used to be almost half the number, you know, couple of years back. Currently we are present and we are servicing till the last taluka. And also if you look at because of these exclusive distributors for rural, in the last two years we've opened almost 50,000 new outlets, out of which 50% almost have come in Tier 3 and Tier 4 and in rural. Our focus on rural continues in terms of both our retail expansion as well as exclusive distributor who will focus on limited styles for the rural markets.
The journey will continue. We're very optimistic of, you know, continuing here and we have the markets already planned out where we'll be opening more distributors as well, for exclusive rural distribution.
Did I hear right, you have 150 distributors, for the rural market today?
Yes.
Understood.
These are distributors who are only focusing on rural markets. There might be some other distributors who might be in the city and if there is a rural market nearby, they might be servicing. These 150 are exclusive only for rural.
Typically these would be catering to 150 towns, in their small geography wherever they are.
Yes.
Understood. That's helpful. Thank you so much.
Thanks.
Thank you. We take next question from the line of Avi Mehta from Macquarie. Please go ahead.
Hi, sir. Sir, I just wanted to check on the inventory bit. Now, what drove the sequential increase in inventory? Was it more to do with demand being lower than what we were expecting or was it more linked to ARS?
Mr. Mehta, I will say it's both. There is also a movement of inventory from raw material to finished goods because we're utilizing the raw material which we had pre-positioned as a strategic stock. You know, the demand has been lower than what we planned, so that definitely is one of the reasons.
Okay. Essentially sir, but the finished goods was already high in 2Q. Did the finished inventory, this inventory rose further? And that is the update I'm assuming.
Yeah. The way we abide ourselves, you will see getting reduced and normalizing the coming quarters.
Mm-hmm.
We start seeing improvements from Q4.
Okay. To ensure that this similar thing doesn't happen because, you know, we expected something similar to happen in Q2, it's just that you will watch how the demand pans out and that's how the production going to be possibly. Related to you, that's how you would. That is what would be the reason that gives you more confidence in moderation this time, right, sir?
Yes, because we can always manage the capacities with outsourcing vendor partners also.
Okay.
That's where we have done significant corrections as far as outsource quantities are concerned. This is why I said that, you know, you would see us improving on this front. From Q4 onwards you will see improvement.
Okay, sir. Second bit, sir, just following up on the margin bits. The way we see a, you know, inventory being, let us say the possible peak of the inventory, would it also be fair that this is probably the bottom of the gross margin and EBITDA margin because things will only improve? It's nothing incremental cost that is coming in, it's the high cost inventory that is going away. Is that understanding correct, sir?
More or less, because, you know, we have been utilizing the high-cost inventory. You know, the main thing we need to see is also how the market recovers because it's important we get our top line, and that's where we are working very, very hard on.
Okay. The margin performance will be dependent on how the growth and is what we would kind of argue for. Okay, sir. That's all from my side. Thank you very much, sir.
Thank you very much. Bye.
Thank you. We have next question from the line of Prerna Jhunjhunwala from Elara Capital. Please go ahead.
Thank you for the opportunity. I had a question on penetration levels. With the increase in our distribution network over the last few years, would you just like to understand the penetration levels across categories that you used to talk about pre-pandemic?
Gagan, you want to take that?
Yes. Yes, Mr. Ganesh. You know, as, we have been mentioning that, you know, while we have grown but we also see a lot of headroom. Because when it comes to penetration, you know, even when it comes to the lingerie wear piece, you know, we currently look at a 20%-22% penetration. When we look at athleisure and when we look at juniors, and when we look at women lingerie business, there's a huge headroom because the penetration what we would have reached by now is around 78%. That is the reason why we have expanded our presence in Tier 3, Tier 4 markets and also in metros as well.
Because there is a lot of headroom, because when it comes to penetration, I think, there is a lot more to do and, there is market still with us, hence we are very optimistic for our growth in the future as well.
Okay. Sir, my next question is on the womenswear segment. How is the response in the Tier 2, Tier 3 in rural area for the products that we are present and expanding in these areas? We know Tier 1 is anyways aware of Jockey as a brand and in the womenswear. How is this response in the newer areas that we are penetrating?
Yeah, great question. In fact, it is equally good, and I should thank the initiatives we took as far as marketing campaigns are concerned, which has created a great awareness across Tier 1, 2, 3 and 4 cities. When it comes to bras or women's innerwear, see, what we need to understand is our TV is the same. They just happen to be there in the rural, but you know, they have the appetite to buy our product and they just geographically happen to be there. Therefore it is very important we are present closer to our consumers, and that's why we are having a very healthy expansion as far as retail footprint is concerned. Coming to consumption, it has been increasing across the tiers.
Of course, there is higher affinity towards Tier 1 and metros, but the growth even in the Tier 2, 3, 4 cities are as per our expectations.
Do you find any resilience in terms of price points, versus whatever is available in those markets?
Actually, no. If you see even during these tough times our bras category, which is a high ASP premium product comparatively, has done very well. It is well received. It's a clear indication that the consumer respects the value for money proposition which we are offering.
Okay. Sir, I understand we've been talking on this call about inventory and movement of raw material to finished goods and stuff. Just wanted to understand whether, you know, we can see sequential improvement in margins or it should be near to these levels only, at least for a few quarters because we are not able to understand when this high-cost raw material and finished goods that you are holding should actually exhaust.
I think we'll start seeing that, you know, this is improving across the next quarters because, you know, we have almost consumed the high-cost inventory. If you look at overall margins, you know, it all depends on how the overall market is. What is giving immense satisfaction for us is despite all the challenges which we are seeing in the marketplace, we continue to dominate. Compared to the competition, we have performed exceedingly well. We will continue to focus on that, and we'll be obsessed with what our consumer needs. That, in the long run, should pay the dividends.
My last question is on ad spends and promotion spends. Any increase over there, in this quarter? Strategically, are we looking at some increase till the time demand improves?
Well, this quarter, yes, there has been increase because, you know, the market needs spend. The campaigns, they have their timeliness. They need to plan it and therefore the outlay was comparatively higher in Q3. As far as overall marketing spends are concerned, we are now normalizing it to pre-COVID levels. We used to spend around 4% of our top line for marketing. We are planning to be in that zone, and there is no need for us to be media dark any longer.
Sounds good. Thank you so much, sir, and all the best.
Thank you.
Thank you. Ladies and gentlemen, we have reached the end of the question- and- answer session, and I'd like to turn the call back over to Mr. Chandrasekar K, CFO, Page Industries Limited, for closing comments. Over to you, sir.
Thank you. Thank you so much, to all of you for dialing in and so many engaging questions and very educative and supporting the journey of Page. You all have a good day.
Thank you very much, sir. Ladies and gentlemen, on behalf of Page Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.