Ladies and gentlemen, good day, and welcome to the Q3 FY 2022 Earnings Conference Call of V-Mart Retail, hosted by Motilal Oswal Financial Services. As a reminder, all participant 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 call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Aliasgar Shakir from Motilal Oswal Financial Services. Thank you, and over to you, sir.
Yeah. Thank you, Kevin. Good morning, everyone. On behalf of Motilal Oswal, we welcome you to Q3 FY22 Earnings Conference Call of V-Mart Retail Limited. On the call we have with us Mr. Lalit Agarwal, Chairman and Managing Director, and Mr. Anand Agarwal, the CFO of the company. Let me hand over the floor to Mr. Lalit Agarwal for his opening remarks, after which we will open the floor for Q&A. Thank you, and over to you, Lalitji.
Good morning, everyone. Welcome to the conference call. Thank you for being here. Thank you, Ali, for hosting us. Very good times. The sun is once again shining bright. We could see a clear sky. We could really hope things move in the right direction, especially in the northern part of India. We are able to see a very beautiful maybe chill as well as the sunshine, which gives us a very hope also that the good times are back, and then we could expect much more coming from what was so to call the chill in the last two years because of all the external environment.
We hope that the economy is recovering. The consumption is coming back. We are seeing that happening. We really got excited in the last quarter as well. We saw in the consumption space, so there is some, the both sides we are able to see. On one side, we are definitely able to see all those people who did not consume for last one and a half years since the first COVID wave in March, they all remained in the country. They never went out. The tourism went low. People who used to shop outside did not shop outside.
People who used to come out to shopping in the malls and the streets, they didn't come out. Most of the people remained home. Most of the people who could have worked from home, worked from home. That also impacted the consumption. Yeah, in the last quarter, I think, the fear came out and people, largely government people is what I call, and people who are in this, what we call the urban centers and the bigger cities, they all came out to shop. They all came out. We could hear things. We could hear news on, you know, long queues in the malls and long queues outside shopping complexes. That came in because in Q2 we did not see that coming out very much in open.
In Q3, large part of that came out. Compared to that, in the rural or in the semi-urban side, which is Tier 2, Tier 3 towns, we saw the things as similar because even Q2 people came out, because the fear factor came down right in the month of July and August. People were already there to consume, so people came out slowly, but still there is some kind of impact which we could see even on their income, on their potentiality to spend. Inflation is definitely hurting their pockets. There is lower spending as well we could see in the smaller part of the economy or in the lower part of the economy, and also in the smaller towns, which is visible.
Especially, I could see those kind of customer segment who earn between INR 20,000 to INR 40,000, there is a small dip in the kind of consumption that they would have done and they would do. That's what we are noticing. We are also seeing differentiated news coming in from both the competitive world as well as our own world. We are seeing people who have large part of operations in the bigger cities, in malls, have been benefited in this particular quarter. There is a good benefit coming in this particular quarter from them because of the similar thought process, because their consumer came back in heavy numbers. They all consumed within India. The consumption all spent, you know, accumulated here.
There was long due pending consumption which came in. Very good and benefiting news for most of our retailer friends. I think that has been good on those lines. Even we experienced similarly in certain stores which are more in the urban centers as well as in some southern India and in the stores that we have in the malls as well. Primarily what I want to convey is, you know, things are coming back to normal. We are looking at better side of the consumption. There is definitely still there is some pressure, and the pressure is getting escalated because of the inflation. There is an inflation in our raw material prices.
Our cost of product, our ASPs have gone up, some is due to inflation, others due to selection. There is a rise in the average selling price of the product in the industry. One good thing which happened that the GST which was supposed to go up from 5% to 12%. At the last moment, the government took a very good call, and thanks to the establishment for that. All in all, they did not go ahead with the GST rate increase, and it was curbed at 5%, below INR 1,000 of ASP of product. That's a good boon and that's a benefit that we got.
Yes, our new merchandise that we had ordered came in with those kind of, you know, extra MRP. Then we still wait because there's another merchandise going to come in in the next quarter. Otherwise, the cotton prices continues to rise. Overall commodity prices continues to rise. Overall, there is a rise in the fuel prices, energy prices. Job market, employment market is very, very tight. You can see a very huge churn in that particular side. In that sector, particularly in V-Mart, we did not notice so much of churn, but still the pressure is there. There is a huge demand for both the corporate side of the employees as well as the front-end side of employees. That's good news for the economy.
That's very good news for the economy. That means that business is back to normal. That means people are investing more money into the business, and that will definitely mean a much more better year for us coming forward. We are focusing very sharply on both sides, on our existing store, on our new acquisition that we had in the South India Unlimited space. You know, we only acquired four months back. We are slowly and gradually taking control of the operations, understanding about the customer segment, which still continues with the same brand. Our fresh range of merchandise, which is V-Mart merchandise, has started getting launched on the shop floor on those lines.
We will see some result coming in the coming quarters. We should also see that there'll be a lot of learning that we will have from there. We are also focusing similarly and heavily on the online space in the e-commerce channels, both in our own . com, vmartretail.com, as well as we have launched ourselves in Myntra, in Amazon and Myntra, where our products are placed, and we can start selling there as well.
As of now, the investment is happening in that particular space, acquiring those new customers at our, you know, sustaining that platform, building that tech, investing on the tech, investing in the people to manage those tech. There's a fixed cost which is there. We also continue to, you know, consolidate our operations in our existing territories. There are stores which are doing great, but there are few stores which are struggling to become profitable. We have taken some calls on certain of those stores. Maybe we would be, you know, planning to close down some seven to eight stores in this particular quarter.
So that you know we don't carry on stores which are not able to come up. That's our principle always that every store which is EBITDA positive is something that we continue. We work with those stores for over a year and six months, and if those doesn't perform, we'll try to not get married with those properties. That's what we are doing. We continue to organize new stores. We have our plans in place. Some plans got diluted because of the COVID situation in the year past. We came out of Omicron very well. Definitely there was an impact which got created towards the end of December and the full of January.
There was some impact in footfalls. A lot of regulations wherein normal operations were hindered, weekend operations were hindered, evening operations were hindered. Still, this time, thankfully, the government and the administration did not take any extreme measures. We definitely expect things to normalize, and they've normalized now as we are in February. Things have normalized almost 95% of the locations. We are getting the business back to normal and the operations are getting back to normal. We are able to receive footfalls now in the stores as well. Apart from that, I think one of the biggest state where we operate, Uttar Pradesh, is undergoing elections. We are very excited about it.
Because of the elections, there has been lot of growth activities which has gone in Uttar Pradesh in the last years, and that should continue. Lot of spending by political parties supposed to happen during this election period. Lot of activity will also disrupt some businesses in the current period because we all know that whenever there is an election going on, there are rallies and there are political disturbance which also get created, and during these disturbance which get created, there may be some disturbance in particular territories, but otherwise the economy is going to become better for Uttar Pradesh. People are going to spend more. They'll get more money, and they'll spend more. Overall, we expect Uttar Pradesh business to go up in the coming years, and that's what our expectation is.
Yeah, overall, the business will come back and then we should expect. We are working towards the growth in the coming quarters, and we will see that coming in. This particular quarter, I mean, we should expect a good Holi also coming in in the month of March. This particular quarter may not be great, but otherwise we expect the forecast forward years should be better and the best years in the last three, four years is what we expect to happen. Anyway, I will take your questions, but I'll first of all hand over to Anand for giving you the detailed insights into the numbers. Anand, please.
Thank you, Lalit, and good morning, everybody. It's been a very good quarter, a good festive demand and, I would say a very strong consumer sentiment. First, let me take you through some of the financial highlights from the quarter, and then we can open the floor for questions. Q3 , as we all know, is historically the biggest quarter for us and, as it is a congregation of a strong festive period, you know, Durga Puja, Dussehra, Diwali, and Chhath, the biggest festivals in all our markets, a vibrant marriage season, and also, it starts the, you know, the onset of winters. Despite a late start and a weak pujo in October, we saw very strong November due to a very high level of pent-up demand and a strong Diwali and marriage season.
November, in fact, became the highest sales month for us ever, with the South region also contributing very heavily in the overall growth. With almost no COVID-related restrictions and the heightened trust of customers in the safe and hygienic environment at V-Mart stores, the customer footfalls also recovered almost to pre-COVID levels. While on an overall quarter basis, the full footfall recovery for the V-Mart business was around 85%, while it remained only 57% for the Southern region. As Lalit also mentioned in his opening remarks, the initial part of the quarter did not see a lot of footfalls in the malls, but I think in the latter part we saw very strong footfalls coming in in the bigger towns.
While at an overall level, the quarter sales grew by 47% year-on-year, but on a comparable basis, excluding the contribution of the 74 Unlimited stores, the sales grew by 23% year-on-year. Unlimited business contributed to 17% of the total sales mix, Q3 also being the biggest quarter for the South and West regions. The total sales for V-Mart, excluding Unlimited, also exceeded pre-COVID levels by 4%, while the LTL or the SSG still remained at -9% for the V-Mart business.
The average selling price for the quarter grew by 12%, while the average bill size also grew by a healthy 13%, reflecting the impact of price increase which was put in to mitigate the impact of the cotton yarn price increase and also the higher ASP mix that we got from the Unlimited base. On the margin side, the gross profit for the quarter improved by 30 basis points despite the significant increase in cotton yarn prices and its impact on product costing. This was made possible by passing on the full impact of the price increase onto the consumer and also lower discounting.
Coming on to expenses, this has definitely been one of the most challenging quarters with a full-blown impact of very high inflationary pressures, whether it was on the raw material side or manpower costs or any other costs. There were very limited savings on rentals as there were no material COVID concessions available in the current year as compared to last year. Similarly, the people cost also went up significantly as we filled in all vacant positions from last year to prepare for normal sales and also at an overall level, we started preparing for a full normal, you know, future time. Higher marketing spend coupled with a higher cost base inherited in Unlimited also impacted this, the total expense and therefore the total cost went up by 76% for the quarter.
This compares also to a very low cost base of last year in the same quarter, where we had significantly cut down on all costs, including travel, rental, you know, low hiring. Going forward basis, the Unlimited business will still have slightly disproportionate cost structure, especially since the rental alone there are almost twice the D-Mart average. We are aiming to normalize this in the coming quarters by increasing the productivity in terms of sales throughput and also through opening of new stores at the lower D-Mart cost structures in the coming quarters, which should help us bring the overall cost percentage down in a phased manner for the South business also. As of now, all cost structures are fully back to pre-COVID level of operations, with no COVID-related savings available.
As a net result of the sales growing by 47%, margins increasing by 30 basis points, and the total expenses going up by 76%, the quarter ended with an increase in EBITDA by 30%. On the cash flow side, we remain very comfortable on the overall cash position. No major CapEx in the quarter apart from opening of nine new stores and some other store refurbishments. All the future major CapEx items remains the same. New store expansion, which are expected to be in the region of 10 to 12 stores in this quarter, and then probably 50 to 55 stores for the next year. Then again, in the next year, we will start construction on the new warehouse site, which should entail some you know big-ticket CapEx.
On the inventory side, at INR 546 crores, we remain in very, very comfortable range. This includes INR 109 crores of stocks in the South, Unlimited business, and INR 437 crores for rest of India. Inventory days came in at 74 for the quarter, while the full year number still looks optically high at 111 days due to lower throughput in the COVID impacted first and second quarters. The online business continues to grow, although still on a small base, with availability on vmartretail.com, iOS, Android and now also on Amazon and Myntra.
The contribution mix from online has grown to roughly around 1.5%, but we continue to build this business towards a 5% revenue mix in the coming two to three years, aided by hyperlocal delivery and lower cost to service nearby customers. The online business as of now still requires investments as the setup costs, cataloging costs, apart from the marketing cost and the logistics, which remain traditionally high, especially given the low ASPs of our product. We continue to remain very bullish on this channel and shall keep investing to make it a meaningful part of our overall business within the next two years. This business still entails a fixed expense of roughly around INR 1.5 crores per month. On the new store expansion plans, we remain optimistic to keep expanding.
So far this year, we have opened 25 new stores, acquired 74 stores and closed down four stores, and thus stand at a net tally of 374 stores as at December end. For the current quarter, we should be looking to open at least 10 to 12 more stores, while we may close down around six to seven more stores, one out of which is in South India. Similar new store opening activity should also start pretty soon in South India. Coming to the last part on Unlimited. On the Unlimited integration, things have been progressing as per plan, and all stores were operational under the V-Mart billing system right from first September without any challenges. The early signs in the last four months look very positive.
The team in South India remains very strong and is ensuring a very speedy recovery on sales and also the transition. We continue to strengthen the product offering in the Unlimited ecosystem by filling in gaps of missing categories and also sharpening the product pricing by combining the product offerings for both the brands and geographies. The Unlimited business is already profitable, although at a slightly lower scale as compared to V-Mart, owing to the high operating cost structures. We are targeting to bring the profitability at 7% to 8% EBITDA level in the next two years as part of a phased progression plan. We shall be sharing more details on the Unlimited P&L structures as the business completes at least one year of full business cycle.
Till then, I think we should be patient and just bear with us to make this transition much more successful. That's all from my side. I now request Ali to open the house for questions. Thank you.
Thank you very much. We will now begin the Q&A session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets for 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 Bharat Chhoda from ICICI Securities. Please go ahead.
Yeah. Sir, I had a query regarding our ASPs. Like, ASP has gone up by 10% to 12%, and the recovery has also been like around 4% positive. Has it impacted our volumes owing to the high inflation, and how do we look at the scenario going forward?
The recovery definitely is in. While you are comparing two different numbers for two different financial years. The ASPs have gone up from previous year. Yes, your point remains absolutely valid. There is a slight impact on volumes, but so far it is not very stark. For the coming, you know, seasons and the coming year, our estimation is that the inflationary pressures will continue to remain, and we should not rule out any further price increases. Thereby our estimation is that the ASPs might go up still a bit further from here. As of now, there is no very major or material impact on the volumes. We are building in a slight, you know, decline in the volumes for the next year from a planning perspective.
Okay. Sir, on the Unlimited brand, are we planning to open more stores for the Unlimited brand? What is the current level that we are making on the EBITDA on for the Unlimited?
Yes, we are already scouting for properties in South India, and there is a plan to open at least five to 10 stores in the next 12 months in South India. My guess is that in the Q1 itself we should see some store openings in, you know, southern and western regions. What is the second point on the question?
Sir, it was regarding what is the current EBITDA margin that we are making for the Unlimited brand and our outlook on that?
As of now, actually because it's just been four months, and these last three to four months have been pretty good, as far as the, you know, the business cycle or the season cycle for that business is concerned. We have not currently disclosed the, you know, the profitability numbers. Suffice to say that this business remains, you know, profitable, and we are hoping to reach EBITDA level of at least, you know, 5% to 6% in the next financial year.
Okay, sir. Thank you a lot for taking my question.
Thank you. The next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.
Yeah. Hi, sir. Good afternoon, and strong set of numbers. I have three questions. First is that we have seen a footfall which has gone up, but conversion rates has come down. Any qualitative comment how this is one should look at in our core markets like UP or. Because Lalitji did say that there were a lot of activities in and around Diwali, and we have seen it doesn't come with the numbers.
Yeah. Hi, Shirish . Good morning, sir. You are absolutely right. What you've seen is also right because see, we are now this time you will have to all see with one lens, because we have this Unlimited business also integrated in this business. Everything that we are seeing is definitely along with Unlimited. If you have seen the conversion as well as the ASP. The ASP is high because the Unlimited ASP, the Unlimited business' original ASP is right now at a high level, which is impacting the overall ASP of our business. Plus the conversion right now there is also low, so that is also impacting us.
We have seen both a drop in the footfall and little drop in the conversion, but our average bill value has gone up and our UP, which is unit per transaction, has also gone up. People have bought a little more. They did not do multiple billing. They did not come multiple number of times. That's what I've seen.
Okay. My second question is that traditionally we have a very high resiliency coming from the quarter three, and I think the numbers are very impressive. However, it's not reflected into the gross margin, and the gross margin has improved only 30 basis points, despite we have taken some price increases. How one should look at, I mean, in a medium to long term. I mean, if you can help me to understand what is the quantum of price increase we have taken, and also which would have gone in the month of January or February, and how we should look at the gross margin for the company in the next two to three quarters.
Shirish , you are absolutely right. As our policies are, we have not focused very highly on the gross margin side, and we never do that. As of now, in this period, our focus is also you know because you have not seen a very healthy period in the last one and a half years, and there has been lot of closures. There is definitely also a pressure that would have come on the inventory, and we did not want our inventory to get aged. We have taken very conscious call in also diluting and then discounting and liquidating inventory which are not required. We have taken all those measured calls because the freshness of the inventory has to be also maintained.
That's the important piece that we have done, because, you know, the, all those inventory which was bought in 2019 Diwali, after the Diwali or Dussehra, those inventories because we did not get a very ample chance to sell in the 2020 year. That is why those inventories were also something which were bearing the burden. We've started discounting. We gave lot of discounts on those inventory as well. We should see a healthy margin because whatever price increase that we have done, we have not encased anything extra. We have not taken anything as a part of our margin fee. We only increased the prices to the level so that our cost of raw material price increase could have been met. That's the overall thing that we did.
One quick follow-up for Lalitji. What is the OSS contribution in this quarter?
OSS contribution change?
You said that you have done some discounting. What is that portion which you would have achieved from that?
I think slightly above normal, but primarily it is normal. See, we did not do lot of discounting, but just we had to liquidate, so we had to give some cheap discounting on those so that we don't end up having those inventory with us. That's the whole purpose.
Okay. My next question is on Unlimited. I know it's too early to ask for financials, but strictly from the modeling perspective, what we note from the financial result that you said that you have now taken over 64 stores agreement. Does that mean that you will close 10 stores in Unlimited? Maybe if you can, if not EBITDA, at least tell us what is the gross margin. This is purely from the modeling purpose, because almost 17% contribution has come in this quarter from Unlimited stores. For full year it is about 10%. It is an important piece.
Shirish , I mean, I would request everyone. See the fundamental, I'll just give you a small brief. The fundamental gross margin that we have in Unlimited is right now, it is higher. We are operating at almost 8% to 8% higher gross margin in Unlimited versus V-Mart. Similarly, the cost is almost 11% to 12% higher. 12% or more higher than the V-Mart cost that we have. Overall, if you understand. The EBITDA would be almost 4% to 5%, 4% less than our V-Mart EBITDA. 4% to 5% less than our V-Mart EBITDA. That's the model that you could make it for yourself.
That's really helpful, Lalitji. My last question is on you earlier were holding a position of Chairman and Managing Director. But what we see the latest announcement, Mr. Munjal is now appointed as a Chairman and now you have become MD. What is the thought process? Is that you are not comfortable and you want to have a quick hands-on for turnaround of Unlimited stores? And give me some understanding what is it that you feel that you need to be in charge of the company. Mr. Pankaj, at least let me relax for some moment, man. Come on, if I've got a good opportunity and if I'm able to hand over someone, please let me relax.
No, I understand. See, the point of view is very clear that we want to create our organization as the best governance organization, and that should be the best governance board. To look at those perspectives, we have always relied on bringing in the best governance practices. The best governance practices suggest that one person should not hold two chairs. Because I am at the helm of our business, I am the CEO and Managing Director, so I have to look at the operations and the business as such. We definitely wanted to have separate seats available.
I thought, having it with the independent director, making our board a little more dynamic and more better is always a good thing. That makes me more focused on my areas of managing as a managing director on the business operations. It also gives us a very good, you know, transparency at the board level and much more better board environment. That is how we've taken a right call, and we believe this is a very good thing that we have done.
Thanks a lot, Lalit. I really admire giving away the power. I think that's one of the thing I really like, and I really appreciate this gesture.
Yeah.
All the best to you.
Thank you. Next question is from the line of Ankit Kedia from PhillipCapital. Please go ahead.
Sir, three questions. My first question is, you know, Anand Agarwal, in your opening remarks you mentioned, you know, 50 to 55 new store addition for next year. Isn't that, you know, below our guidance of 20% to 25% space addition, which we normally talk of?
Hi, Ankit. That number is right now pegged at 50 to 55, and there might be some more additions that we will look at, looking at the, you know, South India territories, and there may be five or 10 stores which might also come up there. Yes, you are right. Our original estimates usually, you know, work around 20%, and we have not given up that. These are numbers that we can say with more certainty and with more conviction that these are definitely that, you know, the size on which work is happening or will happen.
This 50 to 55 is purely for North and the 5% to 10% which you have guided for Unlimited in next two years will be addition to that or this 50 to 55 includes that?
As of now it should be, you know, a total of around 60. That is what we are looking at, and, if there is more, we will definitely keep everybody updated.
Sure. My second question is regarding rebranding of Unlimited. You know, with the new stores now, you know, on cards in Unlimited, would the new stores be on V-Mart branding and slowly next six months the old stores will also be, you know, rebranded to V-Mart given that the inventory of V-Mart is now also in the system or that is still some time away?
Ankit, let me take this question. We are still in the process of understanding the customer and understanding the brand strength of Unlimited right now in that market. We are not taking a hasty decision because anyway there is a lot of disturbance because of COVID which has happened through the market, and we don't want to give another jerk to that brand. We have appointed a marketing agency to understand and take some customer survey, do some you know, one-on-one with a lot of customers and taking to give us those feedback, and then only we'll go ahead. Till that time, whatever stores open in those states, we'll go ahead with the similar name which is Unlimited.
Thanks. My last question is regarding competition. You know, with raw material price inflation nearly 13% to 20%, do you think, you know, organized players like us are in a stronger footing compared to unorganized players, who you know, would face challenges in vendor payments or buying, procuring raw material in bulk or, you know, getting it stitched? We are better off compared to competition organized and market share gains could be much higher for us in the medium term?
Yeah, Ankit, that is always the case. That will always happen whenever there are you know swings in the market, whenever there is not a consistent approach in the market. When whenever these things occur, where the manufacturer tend to take more benefit or the manufacturer is not capable enough to deliver in the right products. In that case, all those unorganized mom-and-pop shop whose potentiality to buy or impact the vendor is very low will turn and get difficult in a difficult position. Today is the you know seller's market. Today is the manufacturer's market is what I would call out for because there is too many things happening in this industry. There are too many players which have jumped into this industry.
I also want everyone to get aware of this, that both from B2B as well as B2C, online as well as offline, there is lot of activity which is happening in the market which is whether they are making profits or whether they are able to create a business for themselves or not, but they are definitely disrupting the market on the supply and the manufacturing side. There is some amount of pressure which is getting bent on the market on the sellers, and that is definitely going to all those little less capable retailers or sellers who may not be able to negotiate well with the suppliers. That, this is a very, very dynamic situation and we will give them the best of hope. We could support wherever we could.
Still I think there is definitely going to be a difficult time for the unorganized players.
That's very helpful, sir. Thank you so much and all the best.
Thank you. The next question is from the line of Percy Panthaki from IIFL. Please go ahead.
Hi, sir. You mentioned that the cost for Unlimited is higher by about 7% to 12%. Just wanted to understand the reason for that. Why is the cost higher? And, is it in this particular line item, is it higher?
Hi, Percy. The costs are typically higher, more you know, on the rental side. I think the average rentals that V-Mart is used to is roughly around INR 35 to INR 37 per sq ft. While on an average, thirty per square foot rental on an average in Unlimited business is roughly around INR 60 to INR 65. That is a straight 100% jump. Apart from that, I think the other in terms of the running and administrative costs, whether it is in terms of manpower or you know, per unit manpower cost or even the establishment cost is also on the higher side.
Given the fact that some of these stores are also in malls, there is a higher overhead in terms of CAM and other, you know, stuff, which takes the overall cost structure a bit high. Having said that, I think the bigger point that we are working on is not really to, you know, bring down the cost, but to increase the throughput, which is the sales per square foot, which currently is at, even pre-COVID times, it was, you know, roughly around 50% of what V-Mart used to achieve. And that is where is the big opportunity area. Our thought and plan is to increase that throughput by at least 20% to 30%, and thereby mitigate the cost pressure.
Understood. Secondly, just a question on the price increases. Out of the 47%, sales growth that you have done this quarter, how much of it can be attributed to price increases?
Price increase, Percy, would have been in the range of around, you know, 7% to 10%. While it is not, you know, across every line item, every product, but yes, it would be safe to assume, you know, roughly around 8% to 10% impact coming in because of the MRP increases.
Okay. Given that the pricing might have happened during the quarter and would not have fully affected all three months, do you think there is basically a spillover impact into Q4? I mean, you have taken the pricing, let's say, in November, December, and it will come fully in Q4. This 8% to 10% price increase would work out to how much in Q4 on account of that?
As of now, it should remain pretty much same. We had roughly around 10%. We can look at a slightly increased number of 10%, you know, 10% or 12% or 13% or maybe more in quarter four. But also we must understand that the price increase should have some negative impact on the quantity or the volume.
Understood. You mentioned earlier that you are budgeting a slight decline in the margins for FY 2023. Was that with reference to gross margin or EBITDA margin?
We're not. I did not mention anything on the margin side that we are planning a decline, but definitely there will be pressure as far as the cost structures are concerned, because we are seeing a very high inflationary trend. So far we have already taken, you know, 7% to 8%, 10% price increase. There is a limit up to which customer can also sustain that level of price increase if it continues to keep rising. There should be pressure, but as of now, we are not building in any, you know, decrease in the margin because our thought has been that whatever is the, you know, the raw material pricing, we will pass it back to the customer.
Understood. Basically, your high single digit margin, which was a normal in the pre-COVID times, we should be targeting that kind of margin for FY 2023, assuming that there is no COVID disruption.
Yes, absolutely. I mean, we should still gun for that.
Okay, understood. That's all from me. Thanks and all the best.
Thank you. The next question is from the line of Sabyasachi Mukherjee from Centrum PMS. Please go ahead.
Yeah, hi, thanks for the opportunity. You know, if you look at these numbers and compare them with the pre-COVID quarter of December 2019, that is FY 2020. You clocked around, you know, INR 566.2 crores kind of revenue number in December 2019. Now if I remove the Unlimited piece of the business, so I look at the only standalone V-Mart stores, that translates to a revenue of INR 574 crores. That is hardly a 2% kind of a jump over two years, despite almost, you know, 16% to 17% kind of a increase in retail area or store count. How do you, I mean, explain this kind of weakness in store throughput?
Sabyasachi, there is a negative SSG of -9%, which I mentioned in my opening remarks. Definitely we are still, or the business is not definitely out of the woods. There have been challenging times. The entire quarter or the entire period has not been absolutely on full capacity. I think the way things are looking up now and what we are seeing currently, I think we should see much more normalcy coming in in the future.
Just a follow-up to that. Lalit also mentioned about, you know, slight pressure in, I mean, semi-urban and rural markets because of record inflation and also affordability issues. If I just compare with the urban peers of ours, they have actually done much better than, you know, what we have done. When do you actually see this rural or semi-urban kind demand coming back to, you know, what we used to witness a couple of years back? Second thing is, you also mentioned about the volume decline that you are planning for the FY 2023. What is the kind of confidence you can share with us?
See, Sabyasachi, the situation on the ground right now looks positive. As I said, the inflationary pressure will be there. Similarly, I also said that, you know, the job market is doing well. The crops, agriculture and crops can look to be better than the crop in the further outcome which is going to come in. If all those continue to be on the better side, the consumption will be more volume. I hope customers should get back their money. They should come back to their normal consumption. We hope that to come in from the Q1 of next year. That's what we suppose it should be.
Not that we are targeting any volume between this, but we wanted just to understand even from people like you and we are having calls from various economists. What happens in a scenario where the price rise is so high? Because in our history we have not seen such a high price rise in the commodity cost, and which is increasing almost 10% to 15% of the cost of the apparel. If that 15% rise in the apparel cost may give rise to a little quantity behavior in the customer at a like-to-like store level. We are not saying at a company level will be so. At a like-to-like store level, we are little cautious on that approach. Still we are very watchful. We would want to increase our volume.
If there is a situation where consumption or gets affected because of the price rise, we should not end up with a high inventory. That's the whole, analogy that, I'm just trying to give you.
Okay. That's good to hear. Thank you. That's all from my side. Thank you.
Thank you. The next question is from the line of Tejas Shah from Spark Capital. Please go ahead.
Yeah. Thanks for the opportunity. My question is an extension of the previous participants' questions that recovery and overall growth seems slightly sluggish or underwhelming. Considering that three drivers that we always called out, winter, wedding, and festive season, all three were packed in this quarter, and then considering the pent-up demand was also there. This recovery looks slightly sluggish, but you called out that the recovery in rural was weak. So we have now a very decent base of 155 stores coming from tier one, tier two cities. So is it that within our bucket of urban store recovery was way better than what we have posted on overall numbers?
Tejas, first of all, the wedding, winter, everything is in the second half of this quarter. Q3, if you divide Q3, the first half and the second half. The first half was largely festivals. Within the first half, the festival which is especially in the eastern side of India, which is Durga Puja, that didn't have a great time because still there were restrictions and there were no puja pandals. That part of the business suffered a lot during this quarter. Otherwise, I think, the second half of the festival or the second half of the quarter was very good, except the last one or two weeks of December, where once again Omicron started hitting us.
Yeah, what I believe that the way. You are right. The urban cities we have seen a better response. Our definition of tier one still is not those pure metro and pure bigger cities. Our definition of tier one is all state capitals. That is how we define our tier one. Yeah, but still, I think out of the lot, tier one did have a better result, comparatively. This is true.
Mr. Lalit Agarwal, you also made a remark in your opening statement that FY 2023 should be one of the best year in last three, four years. Is it you are seeing that kind of recovery already on ground or is it just we are hoping that on a base that we have created in last three year things should be better?
Tejas, I mean, recovery happens not immediately. Yeah, as I said, the sun is shining and we could see a clear sky. I mean that. When I say that there are symptoms and there are signs that we could see and there are calculations that we could make. We will keep doing it. But we will definitely understand we wait for the situation to come in, but we are confident that it has to come in. The whole calculation definitely leads us towards that.
Sure. Lastly on urban competition, tier one and we are okay. Let's say a brand like Zudio is now penetrating in areas like population of 3 lakh, 5 lakh of Ujjain or Bankura. Are you seeing heightened competition from a very new set of national champions rather than regional competition that we used to fight earlier?
No, you're right, Tejas. But definitely all these new national so-called conglomerate-led competition is heightening, and there's a lot of penetration both from the Reliance as well as the Zudio or the Tata and also Technopak. They will continue to come in, and they are now available in most of the towns, especially Reliance Trends. We will see more of them. We will see more of Zudio, more of them. We still believe that there is so much room and there is so much consumption there, which is bound to grow. We will all have a good time.
Sure. Last one, Anand, in your opening remarks, you spoke about expanding Unlimited, if I heard correctly, expanding Unlimited this year in South and West. West, is it a new addition to our plan or was it just broader remarks you made?
Tejas, Unlimited already exists in West. We have a reasonable presence in Maharashtra and also in Goa. We will continue to expand Unlimited stores in the existing territories, which includes AP/TS as well as you know Tamil Nadu, Kerala you know Maharashtra, Goa, all of those territories.
Sure. Under the previous owner, they were also not confident of Unlimited having very strong value proposition in Western India. That's why they were focusing inside. Are we seeing any revival there or?
We've not identified that exactly this is the location that we are going to open into. You are absolutely right. We will definitely do our full feasibility and understanding as well for a normal V-Mart store and then only get into that location.
Great. That helps, sir. Thanks, and all the best.
Thank you. The next question is from the line of Abhijeet Kundu from Antique Stock Broking. Please go ahead.
Yeah, hi. Thanks for the opportunity and congratulations on the very strong results. My first question was on the increase in depreciation as well as interest during the quarter. Would that be because of the rentals coming back? I mean, the increasing rentals. Would that be the reason then? My first question is that.
Abhijeet, the increase in depreciation is because of, you know, the inclusion of the Unlimited stores and the impact of Ind AS 116, which basically, you know, optically inflates the
Right.
for the nomenclature of rental into depreciation and interest cost.
Essentially, the rental that's what I was referring to, that because of the rental increase which two components increase, and that was because of the inclusion of Unlimited.
Yeah, correct.
Is that right?
Yes.
Secondly, you know, now that your product will be also available on Amazon as well as Myntra, what has been the thought process behind it? Secondly, typically, you know, what we are seeing is that on Myntra, those, I mean, those control brands sell their products where the gross margins are relatively far higher, and hence they can afford to sell it at a, you know, like give you the higher trade margin to Myntra. Also a lot of it is actually the older inventory. So in your case, I mean, how would you? Would you be selling the older inventory or you will be having the whole gamut of, you know, products available on both these websites?
Abhijeet, your voice was not clear. Sometimes I could understand as well as you reply. For us right now we are a very novice player in the digital channel, and in fact we consider ourselves an incumbent in that. We are just trying to, first of all, place ourselves there. As you all know that we have always believed in honest pricing. Honesty is very important. Launching ourselves with not old inventory and liquidating inventory, launching ourselves with fresh inventory, trying to cater to the similar segment, understanding business from those digital masters, how to treat those customers, how to deal with them, what kind of product works, what kind of product doesn't work, what kind of marketing works, how to place those products.
These are all right now for us learning sessions, and we will continue that journey. This is a journey that we have to go a little longer. This is not what I would have got me to. We are a good brick-and-mortar retailer. We definitely want to be better in the omni space, and we will learn from all of them, and that is how we are getting into. We have no target right now to increase the margins, sell higher priced products only or sell old products. We are continuing with the normal operation. There are some unique assortments that we would want to place, but not with those intentions.
Okay. Got it. Thank you. On the Unlimited side, one, you are saying that you have hired an agency which would, you know, work on the strength of the brand in the existing geographies. That is one part. Any work that you require to do on the merchandising part, I mean on the product assortment, anything did you find there? Is some work going on there? Because, you know, Unlimited was there. I mean, it used to be one brand, then they changed it to or almost the third phase where Unlimited as a brand had come. They had started off with Mega Mart and all that. Now, you know, it was not really working.
In terms of essentially what any corrective measures that you are taking in terms of merchandising.
Yeah, yeah. I'll stop you there. Abhijeet, we are definitely, as you know, we have integrated the buying teams. The buying and the merchandising areas have become common. We are definitely bringing in or retaining, first of all the good things that the brand had done, all the good products that they had created. We are also adding up the new merchandise, new lines that V-Mart was running, sorry. We have started doing that, those lines have now started reaching to the store. We will definitely have a little mixed view as far as the forward coming seasons are concerned.
We definitely, as you rightly said, that brand and that store, which have gone through multiple transitions, we don't want to give them another shock, so we are very mindful of all of that.
Okay. Okay, thanks. That's it from my side.
Thank you. The next question is from the line of V.P. Rajesh from Banyan Capital. Please go ahead.
Hi. Thanks for the opportunity. My first question is regarding the competitive intensity. You mentioned Reliance and other entering into your market. Are you seeing that smaller regional players exiting the market or increasingly becoming weaker?
See, we would not call for smaller players are exiting the market. As I said earlier, in these difficult times, in these challenging times, these upstream and downstream, the smaller players always suffers the most, and that is what can happen. But they are also, as you have to also understand that there's an entrepreneur sitting on the smaller player, and the entrepreneur's ability to create a faster decision, the agility that they could demonstrate, the understanding that they could demonstrate in the business could also be a good asset that could come in. We still believe and we still feel that they should not go down. There are some players who are in trouble. There may be some players who could get into further trouble, and a lot of others can also come out very well.
We don't see a mixed reaction. Yes, these are difficult times for smaller players.
Got it. My second question is regarding the rural markets. It seems that you saw less sales from your sort of rural skewed markets. Can you comment on that and maybe your view why the rural is not doing well in spite of the continuous good monsoons?
As I said in my opening remarks as well, the K-shaped graph that we all talk about, there has been an impact for the smaller player. The smaller shopkeeper has not paid them their salaries. The smaller contractor has not got jobs. Where there has been a relative slowness in that particular market where they have created some amount of loss. If you compare it with the professional world, the corporate world, the bigger cities, where we have all got good salaries in our pocket, we have all received salaries on time, whether we have gone to our offices or not. For smaller areas, they have to all go out to work regularly to get their money. There was a difficult time that they all went through.
I think this is going to get repaired very fast.
Okay. Thank you so much.
Thank you. Ladies and gentlemen, due to time constraint, we take that as the last question. I now hand the conference over to the management for their closing comments. Over to you, sir.
Yeah, thank you so much everyone for being there on the call. We continue once again doing our best. We are on the similar track. We have focused very heavily on bettering our processes, bettering our technology, bettering our teams, building better strategic objectives. We are also looking into lot of areas of development as our scale has become bigger, as our size of stores, number of stores have become bigger, as the competitors are becoming bigger. We are trying, but definitely working very, very well towards all of that. We are very conscious that life is not going to be so simple and not so easy. We will definitely find all those challenging times, and we will all overcome jointly along with all of you.
There is a lot of work that we have to do. We will come back very fast because there is a lot of hunger that all our team members have. We would definitely want to become the best value fashion player in the middle India. We will definitely want to become one of the best retailers offering our customer segment those kind of product lines in the territories where we operate. Thank you so much for being there patiently with us, and we will continue to make you proud. Thank you.
Thank you. Ladies and gentlemen, on behalf of Motilal Oswal Financial Services, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.