Electronics Mart India Limited (EMIL) Q3 FY23 Earnings Concall Transcript

Electronics Mart India Limited (NSE:EMIL) Q3 FY23 Earnings Concall dated Feb. 10, 2023.

Corporate Participants:

Karan Bajaj — Chief Executive Officer

Premchand Devarakonda — Chief Financial Officer

Analysts:

Krisha Kansara — Molecule Ventures PMS — Analyst

Deepak Poddar — Sapphire Capital — Analyst

Sameer Gupta — IIFL Securities — Analyst

Unidentified Participant — — Analyst

Akshat Mehta — Sameeksha Capital — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Q3 and Nine Months FY’23 Earnings Conference Call of Electronics Mart India Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions]

I now hand the conference over to Mr. Karan Bajaj, CEO of Electronics Mart India Limited. Thank you, and over to you, sir.

Karan Bajaj — Chief Executive Officer

Thank you. Good evening, and a warm welcome to everybody present on the call. Along with me I have Mr. Premchand Devarakonda, CFO and Strategic Growth Advisor, and our Investor Relationship Advisor. We have uploaded our Results and Investor Presentation for the quarter and nine months on the Stock Exchange and the Company’s website today. Hope everyone had a chance to go through the same.

On 17 October ’22, Electronics Mart India Limited got listed on BSE and NSE. It was a momentous day for all of us. And thank you to all the stakeholders who have believed in us. In the nine months of FY’23, we have opened 19 new stores. Currently, we have 122 stores, 109 of which are multi-brand stores and, 13 are exclusive brand outlets. Out of 122 stores, 102 stores are leased, 12 are owned, and eight are partly owned and partly leased. As on date, we are present in 38 cities across four states, and we have recently entered Kerala as well.

We continue to focus on deepening our presence in the regions we operate in before venturing into the new market, which has led us to establish brands present in Telangana and Andhra Pradesh markets. This enables the target customers to identify with our brands as well as with the product portfolio and helps our understanding of the Market segment and the customer demand preferences. We believe that this approach also enables us to achieve significant market share and dominate in the market we operate in.

We plan to continue to deepen our store network in Andhra Pradesh and Telangana, and also gradually plan to expand our network in the new region that we ventured, that is Delhi NCR in pursuing our defined cluster focused expansion strategy. We plan to open 26 MBOs in NCR, 22 MBOs and 10 exclusive brand outlets in Andhra Pradesh and Telangana in the coming future and adopt a methodological approach in evaluating and selecting locations. We believe that our local market knowledge, supply chain efficiencies and effective inventory management have enabled us to attain higher cost competitiveness and consistent profitability.

Our customized product assortment and comprehensive product portfolio enables us to achieve better visibility, brand recognition, deeper market penetration and an increased customer base. We have nine large centrally located warehouse facilities now, which are backed by individual store areas to — individual storage areas at store levels of varying sizes to cater to individual stores or a group of stores.

Coming to Q3, we have delivered strong growth of 17% revenue year-on-year at INR1,482 crores compared to INR1,265 crores of last year, with a 17% growth and 32% year-on-year for the nine months FY’23 at INR4,118 crores. On account of investments made to open new stores in the new geography that is NCR, the company had increased investment in brand building, sales, marketing, and these investments have lowered the EBITDA margin, which are expected to improve as revenue throughput from new geographies increases.

To conclude, I would like to say that after having established a leadership position in the Andhra Pradesh and Telangana region electronic market, we have now entered Delhi NCR where we plan to capture significant market share over the few years. In the southern region, we plan to expand our footprint in places like Vijayawada, Tenali, Guntur, Kurnool, Nellore, and more Tier 2, Tier 3 cities in the existing clusters by the cluster-based distribution network, diversified product portfolio, strategically located logistic warehousing facility, which overall will give us a competitive advantage in the existing market as well.

With this, I request our CFO Mr. Premchand Devarakonda to update you on the financial performance of the company. Thank you.

Premchand Devarakonda — Chief Financial Officer

Thank you, Karan sir. Good evening, and warm welcome to all the participants. Now, I would like to present the financial overview of Q3 of FY’23. The total revenue for Q3 of FY’23 stood at INR1,482 crores as against INR1,265 crores of Q3 FY’22, with a growth of 17% year-on-year. For nine months of FY’23, our revenue stood at INR4,118 crores as against INR3,119 crores of nine months FY’22 with a growth of 32% year-on-year.

EBITDA for Q3 of FY’23 stood at INR72.8 crores as against INR77 crores of Q3 of FY’22. There is a degrowth of 5% year-on-year, whereas for nine months of FY’23, EBITDA stood at INR245.2 crores as against INR203.2 crores of the corresponding period of FY’22. There has been a growth of 21% year-on-year. EBITDA margins for Q3 of FY’23 stood at 4.9%, whereas for nine months, it stood at 6%. As already mentioned by our CEO, our initial operating and branding expenses while expanding our operations in the new territory, that is NCR, has impacted these margins.

PAT for Q3 of FY’23 stood at INR21.9 crores as against INR27.7 crores of Q3 FY’22, a degrowth of 21% year-on-year. And for nine months of FY’23, PAT stood at INR86.7 crores as against INR68.6 crores of base period. It had a growth of 26% year-on-year. Annualized ROCE and ROE for nine months of FY’23 stood at 12.7% and 9.8%, respectively. The working capital days as on 31 December stood at 49 days. The gross debt to equity is 0.4x, and net debt to equity is at 0.1x, which was considerably improved on account of IPO.

Our net debt-to-EBITDA stood at 0.66x. Our cash flow from operations before working capital changes for nine months of FY’23 stood at INR244 crores, which is almost equivalent to our EBITDA. During the reporting period, our same-store sales growth rate stood at 23.5%. During nine-month period, the composition of sales of electronics and consumer durables has been 48% from large appliances, 37% from mobiles and 15% from small appliances, IT products and others. Out of the total sales, around 98% has been from Retail segment and top five brands contributed around 64% to our sales revenue.

With this, I would like to open the floor for questions. Thank you, one and all.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Krisha Kansara Molecule Ventures PMS. Please go ahead.

Krisha Kansara — Molecule Ventures PMS — Analyst

Hi, sir. Thank you for taking my question. Sir, my first question is regarding Delhi NCR. So, if you could just give a brief about the size and the number of stores opened in this new geography? Also, sir, what is the current run rate of sales coming from Delhi NCR? And have we achieved breakeven now? That is my first question. Thank you.

Karan Bajaj — Chief Executive Officer

Hi, Krisha [Phonetic]. So Delhi NCR, as we talk, we are operating 12 stores there, eight stores were launched on the 14th of August, and four other stores were launched on 22nd of October. So, right now we would look at these stores performing after certain gradual growth that we would be expecting. So post Diwali we saw these stores stabilizing a little bit, and then the biggest season there is actually summer, which will start off from April. So, Delhi on a whole, as a scenario right now, to usually when we look at 12 months to 14 months breakeven in the existing market, Delhi, we were assuming that Delhi would breakeven for us in the period of 18 months to 20 months, a little higher because of the new geography and a new brand altogether.

But what we expect for the store to perform on a year one average of, say, INR25-plus crores. So the throughput on those lines are in track. And once we churn the summer season, that is when we would be looking at the initial growth of year one, year two and year three, which would be higher. And then the store stabilizing and maturing after year four onwards. So that is the trajectory that we’ve seen in the past in the existing market, and we are hoping that in the Delhi market also, we would be on the same track.

Krisha Kansara — Molecule Ventures PMS — Analyst

Sir, currently, like what percentage of sales would be coming from these Delhi NCR stores?

Karan Bajaj — Chief Executive Officer

So Q3, the sales percentage that are added up in Q3 was around INR54 crores. And for the first nine months, because there were a few weeks of Q2 also that added up, so the first nine months, the total revenue from Delhi that is generated around INR84 crores.

Krisha Kansara — Molecule Ventures PMS — Analyst

Okay. Got it. And sir, so you recently opened a few kitchen stores, specialized stores. So currently, how much do they contribute to the top line?

Karan Bajaj — Chief Executive Officer

So kitchen stories [Phonetic], is in specialized store format and we have one store in Visakhapatnam and two in Hyderabad, and we’ve recently taken over the operations of the Kerala store as well, but the stores that we are about to launch will be launching in the month of April. So technically, today, the store is not operational in Kerala, but we’ve been booking sales there. But apart from that, the existing stores that we have in Hyderabad and Visakhapatnam, they deliver but a very miniscule sale because it was specialized store only for very high-end categories of kitchen appliances. And it is a tie-up between the German modular kitchen brand Hacker. So for that reason, these are all incubation stores where the margins — gross margins are much higher than our regular stores. But here, we would look at a lesser throughput. So the average stores would be around INR15 crores to INR18 crores for these specialized store formats.

Krisha Kansara — Molecule Ventures PMS — Analyst

INR15 crores to INR18 crores per store?

Karan Bajaj — Chief Executive Officer

Yeah.

Krisha Kansara — Molecule Ventures PMS — Analyst

Okay. Okay. Got it, sir. And sir, how many more such stores do you plan to open in the near future?

Karan Bajaj — Chief Executive Officer

So we’re not looking at opening more of these stores, because this has to do with the tie-up for the kitchens as well. So probably one or two more stores in the coming few years, nothing on the plans to expand the store format.

Krisha Kansara — Molecule Ventures PMS — Analyst

Okay. And sir, one last question. So currently, contribution from mobiles is around close to 40%. So I just want to understand how has this contribution changed over the years? And can we easily expect that this contribution will remain in this range of 30% to 40% going forward also? Or in your opinion will it increase?

Karan Bajaj — Chief Executive Officer

No. So what happened is basically like few months, like if suppose it is the quarter of summer, where the cooling products like refrigerators, air coolers and air conditioners are a category will start delivering more, so automatically mobile as a category, the penetration, the percentage of share on this product mix would reduce, whereas a few months where like December or November or post summer few of the months, you would look at a higher share of this category. So the lowest would be as low as 32%, 33%, and again, the highest would be around 40%. So if we average it out on an annual basis for the nine months, it comes around 35% or 36%. So that is the number that we look at for a mobile category to contribute to the total revenue.

Krisha Kansara — Molecule Ventures PMS — Analyst

Correct, correct. Okay. And sir, are we seeing any demand slowdown in this segment?

Karan Bajaj — Chief Executive Officer

Sorry, can you repeat your question?

Krisha Kansara — Molecule Ventures PMS — Analyst

Are we seeing any slowdown in demand in this Mobile segment?

Karan Bajaj — Chief Executive Officer

Mobile, no, not at all. In fact, we just are about to launch the Samsung S23 as well and we’ve seen quite a good demand coming in for that model. We saw good demand coming in for the 14 series of Apple as well. In fact, suppose the 5G launch completely, we were — we are expecting there will be a lot of churn in the next coming few quarters, which would definitely bring in a little more growth in this category. In terms of ASPs going up, because the 5G devices are going to be on the higher price segment. But one advantage that we have is the last six months, we’ve been already selling a major number of 5G devices. So we are already there, showcasing the 5G technology in our stores. So, we believe that post the rollout of 5G completely in the existing markets that we are operating, we would look at definitely a churn coming in for devices from 4G to converting to 5G devices.

Krisha Kansara — Molecule Ventures PMS — Analyst

Okay. Got it. And sir, so in your presentation, you’ve mentioned that currently just 12 owned stores, right? So how will this number move going ahead? Like will we be opening more such owned stores or will those be on lease only?

Karan Bajaj — Chief Executive Officer

Yeah. So, it is more like a 80-20 split right now, whereas the 80 properties are approximately leased. Around 20 properties, around 12 properties are completely owned by us, and eight properties are partly owned, which means that if suppose we have two stores in that building, one is owned and one is leased, when you are operating the stores, and out of that, seven stores to eight stores are what we have actually decided to buy in Delhi NCR. It was a major investment that we made in the last 12 months, And out of which 3 stores are operational. Five more stores of the property that we have bought are yet to get operational in Delhi, which will get operational in the next few quarters.

So, going forward, it is going to be a mix. You know, the majority is a mix of lease-out properties, and very few selective locations we would be buying out. The Delhi expansion was planned on buying out the bigger ones, and we have already done the buying out in Delhi. So, we don’t see a major requirement for buying out properties in the existing markets.

Krisha Kansara — Molecule Ventures PMS — Analyst

Okay. Correct. Got your point. Yeah. That’s all from my side, sir. Thank you.

Karan Bajaj — Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.

Deepak Poddar — Sapphire Capital — Analyst

Hello?

Karan Bajaj — Chief Executive Officer

Hi.

Deepak Poddar — Sapphire Capital — Analyst

Yeah, thank you very much, sir for the opportunity. Sir, I just wanted to understand, I mean, you mentioned that this margin decline this quarter was because of the increased investment. So, is it possible to kind of quantify the investment that we would have done in brand building or sales and marketing in this particular quarter?

Karan Bajaj — Chief Executive Officer

Yes, Deepak. So, Deepak, one major change that we did compared to the last year was INR4.5 crores of cashback that we had paid out for — on the financing and the cashback that we do in the stores during the festival period. So, that was a major spend that we did of INR4.5 crores. And if you look historically, what is the marketing spend that we did, that was another major spend that would include the Delhi launch and all the lucky draws and all the other offers that we do. So, that was two major spends that we did.

And given all calculated when Delhi was expected to burn a little initially, because it takes a little time for the stores to stabilize. But what I can say is that in terms of what our expectations were in stabilizing the stores, I think we are on track on doing that. And once we open a few more stores in Delhi and stabilize there, the marketing cost again would be in hands with our sale revenue. So we are not expecting anything out of the box to go wrong in Delhi right now. So, everything is under control there. So the spend majorly would be pertaining to the cashback of INR4.5 crores approximately and the marketing spend. So, that is the effect on EBITDA.

Deepak Poddar — Sapphire Capital — Analyst

So, what would that total be? So, INR4.5 crores is the cashback, and the Delhi launch, the incremental investment would be how much?

Karan Bajaj — Chief Executive Officer

Sir, only Delhi, Delhi incremental and plus, there was an incremental in our spend in the Tier 2, Tier 3 cities in Andhra and Telangana as well. So the bifurcation would be given to you. I’ll just ask the team to send you the bifurcation even, but the total amount was around INR10 crores spend between the existing market and Delhi because of an incremental cost during that quarter.

Deepak Poddar — Sapphire Capital — Analyst

So total marketing spend is about INR7 crores, right?

Karan Bajaj — Chief Executive Officer

Sorry?

Deepak Poddar — Sapphire Capital — Analyst

This total sales and marketing spend is about INR7 crores. Out of that, about Delhi launch would be included there?

Karan Bajaj — Chief Executive Officer

No, no. It would be much higher. It is not INR7 crores, it is much higher.

Deepak Poddar — Sapphire Capital — Analyst

Total spend was around 42?

Karan Bajaj — Chief Executive Officer

INR45 crores for the nine months.

Deepak Poddar — Sapphire Capital — Analyst

No, I was just trying to understand the third quarter, not the nine months. Third quarter what the spend would be?

Karan Bajaj — Chief Executive Officer

Third quarter was around INR22 crores.

Deepak Poddar — Sapphire Capital — Analyst

INR22 crores. So that is our marketing spend rate, and that would include our Delhi launch?

Karan Bajaj — Chief Executive Officer

Yes.

Deepak Poddar — Sapphire Capital — Analyst

And then how much was this spend in second quarter?

Karan Bajaj — Chief Executive Officer

Second quarter spend was around INR10 crores.

Deepak Poddar — Sapphire Capital — Analyst

So incremental we can say that 12 crores would have come, right? I mean, on a quarter-on-quarter basis.

Karan Bajaj — Chief Executive Officer

The INR10 crores which I have told you that is the incremental spend that we did.

Deepak Poddar — Sapphire Capital — Analyst

And addition to that would be INR4.5 crores cash back, right? That would be additional.

Karan Bajaj — Chief Executive Officer

It was also cashback.

Deepak Poddar — Sapphire Capital — Analyst

Okay.

Karan Bajaj — Chief Executive Officer

It was actually not — we didn’t carry out any cashback last year for the same period. So, we didn’t come out with cashback. And majorly, this marketing even for Andhra and Telangana stores, because that is where we are not stabilized and the stores are maturing. So, we had started spending in those territories as well. And these Tier 2 markets and all are very heavy on vernacular newspapers majorly. So that is the only major medium for us and theatres. And these are two expensive mediums. We don’t have too many options in terms of marketing because we don’t have outdoor hoardings and radio in these Tier 2, Tier 3 cities. So, the major spend goes through and marketing goes through either theatres or through the newspaper. So these are — both of them are quite heavy in terms of the money required for utilizing in that region.

Deepak Poddar — Sapphire Capital — Analyst

Fair enough. I understood. And sir, this margin front, I mean we have been always been saying that 7% is a kind of a steady-state EBITDA margin for us, right? Now this quarter was around 5%. So I mean this journey towards 7%, would you expect that to kind of achieve in FY’24 as a whole? I mean some understanding on that would help.

Karan Bajaj — Chief Executive Officer

Yeah. So Deepak, if you look at the nine-month number, it is around 6%. So we don’t see a drastic drop there, number one. Number two, FY’23, Q4, also, I would say that because we’ve already passed six weeks under the Q4 quarter, and we know significantly how the product mix is going and how the demand for cooling products are coming in. And then you can check historically how a Q4 would deliver. So we are on track on achieving the numbers that we have given out in the market earlier in terms of our estimations. And FY’24 also, we’re expecting the stores in Andhra, Telangana will mature, we’ll be opening new stores as well, Delhi also would be stabilizing by Q2 after the April, May, June summer period. So we were expecting that things would be in line for FY’24 as well.

Deepak Poddar — Sapphire Capital — Analyst

Okay. So fourth quarter as well as FY’24, we are expecting that 7% EBITDA margin band, would that be fair to kind of understand?

Karan Bajaj — Chief Executive Officer

Sir, I do not say that — sir, I’m not exactly pointing out a certain number, but what I would say was it would be in line of what our expectations are. And it would not be a drastic jump or high or low in that number, but we would definitely try to achieve, because it would depend on the product mix as well, where the cooling products like AC, refrigerator and air coolers would give us a higher gross margin, and that would automatically help us increase the number.

Deepak Poddar — Sapphire Capital — Analyst

Fair enough. I understood. And my last question is on your revenue. I mean we have been talking about maybe, what, 20%, 25% revenue CAGR, right, I mean two years to three years. So we are holding on to that?

Karan Bajaj — Chief Executive Officer

Yes. So if you look at the first nine-month number, we are upwards of 32% growth, though FY — the Q3 of FY’23 was at 17%, but of course, Diwali, if you see the markets were down real bad, but we were still able to achieve a good throughput during December as well. So — and we got confident on how the operation is stabilizing across the new geographies also. So I think we are on track for that as well.

Deepak Poddar — Sapphire Capital — Analyst

On track for that. Okay. That’s it from my side, sir. All the very best. Thank you so much.

Karan Bajaj — Chief Executive Officer

Thank you, Deepak.

Operator

Thank you. The next question is from the line of Sameer Gupta from IIFL Securities. Please go ahead.

Sameer Gupta — IIFL Securities — Analyst

Hi, sir. And thanks for taking my question. First question is the SSS growth of 10.5% this quarter that you have clogged. So we are basically witnessing a slowdown across consumer discretionary categories especially after Diwali. So just trying to understand this 10.5% SSS growth in that context, is it because after October, the sales for you are anyways very low in this quarter, and that is why you’re not seeing any slowdown brunt or is it that you have bucked the trend and performed really well?

Karan Bajaj — Chief Executive Officer

Yes, the 10% approximate same-store growth has come in for Q3 alone, but that has not been there for Q2 and Q1. So I mean in April Q4 also, we would look at different trajectory. But definitely, yes, it was a major slowdown. Usually, we would see a slowdown for a couple of weeks after Diwali. But then this time that got a little more delayed for another 3 or 4 weeks. So it went up till almost December 1 week, but then we were averaging out what number that we would do. So that brought down the SSG as well during that period. But then I don’t see that one-off incidences happening during that period, but we are back on track again on Q4. So we will see a much higher SSG coming in the future as well.

Sameer Gupta — IIFL Securities — Analyst

Just a follow-up on this. So are you seeing any sort of — see SSS growth Y-o-Y can be misleading because there is an Omicron in the base and all those anomalies are there. But on a sales per store, something like a metric, which is better to track, are you seeing any better traction in the fourth quarter? Or things are more or less similar?

Karan Bajaj — Chief Executive Officer

So — there would be a different trajectory coming in for Q4 because we’ve already passed 6 weeks. So we know what is happening. And most of the stores. So there was nothing additionally done apart from the Delhi stores as an expansion, so the SSG eventually would be coming in for the — majority of them will be coming from the mature stores.

So we are quite happy with what we’re delivering. And we see a performance coming in from a mature store as well as for the new stores, so once the new store stabilize and definitely looking at a much higher SSG coming in the near future.

Sameer Gupta — IIFL Securities — Analyst

Got it, sir. Second question is this 5% margin that you have reported. And my sense is that a large part of this is because of the Delhi 12 stores that you have added during the year.

Now out of the 19 stores that you’ve added, 12 are in Delhi, and you just mentioned that a Delhi store typically will take 18 to 20 months for breakeven versus the normal 12-month trajectory for your other stores.

Now with the growth construct being similar going forward, that 2/3 of the additions will be in Delhi, how are you so confident that you’ll get back to the 6.5% EBITDA margin trajectory. I mean just by the math of this bigger breakeven period for Delhi should actually skew the margin to the lower side, right?

Karan Bajaj — Chief Executive Officer

But I would even — see, definitely initially, there might be a drop of a percentage or 2 in the gross margin levels in Delhi operations, but then not necessarily that the Delhi is contributing to a much higher number of revenue coming in from their initially.

So — and one more thing is that this product mix in Delhi initially today, when we compare to our existing market, where we see a 35%-plus mobile phone contribution, which is one of the lowest gross margin categories with 7% coming from IT, whereas we have the largest product selling better in Delhi [ today ] for us.

And we’ve not even completed the summer season, which is one of the largest contributing seasons in Delhi as a region. So only after we complete 1 season of summer or 1 complete year of different seasons of all 4 quarters, that is where we’ll be able to completely in-depth tell you — analyze and tell you the complete detail of that.

It is too early for us to comment. It has hardly been 5.5 months of operations for 8 stores and 3.5 months for 4 stores. So it will be too early for us to comment. But what we can look at right now in Delhi as overall strategy is that we’ve been able to achieve a certain decent throughput for us to be on the path of achieving INR25 crore-plus for every store.

So that is more important for us initially where the extraction is there. And then — and it is not a bond purchase, but it is an extraction that we’re looking at right now. And then it will begin to stabilize and then create a market presence for instance. So that is what important for us initially.

Sameer Gupta — IIFL Securities — Analyst

Sorry, I didn’t get that number. INR25 crores sales per store on an annual basis in Delhi, that’s what you’re targeting?

Karan Bajaj — Chief Executive Officer

Yes. So whenever you open a new store, historically, what we look at is whenever we open a new store, how we look at the calculation of breakeven in that it is an existing market, we look at INR30 crore throughput for year 1 then gradually increasing in year 2 and then year 3 and then stabilizing or maturing after year 4 onwards.

So usually it takes around 4 years for it to mature. But in the existing market, at a INR30 crore number, we would breakeven between 12 to 14 months. That is the number historically what we’ve delivered.

So looking at that Delhi because the new competitive market, we position ourselves at INR25 crores for year 1. So that is the number that we look at. And because of the throughput in INR25 crores, we look at a higher breakeven period, which is around 18 to 20 months.

So that is why these numbers were given out, and these are all conservative numbers, but on track, a few of the stores might achieve that much sooner. Few of the stores might take a month or 2 later. So that is — but in line with what we will be looking at.

Operator

[Operator Instructions] The next question is from the line of Rakesh [Phonetic] from HDFC Mutual Fund.

Unidentified Participant — — Analyst

Just wanted to understand this other expenses line here slightly better. There’s roughly about INR21 crores increase on a quarter-on-quarter basis and roughly about INR22 crores if I look at your third quarter last year, right?

If you can help us understand how much of this is — in terms of breakup marketing, what has contributed to this increase? Maybe that could help us understand your margin profile is slightly better.

Karan Bajaj — Chief Executive Officer

So I’ll give you a detailed breakup on this. So the major numbers that we looked at with the expenses have increased, a few of them are directly proportionate to the sales itself, which are sales promotions that linked to dealer buydown charges, credit card charges and all, which have increased around INR7 crores, and marketing expenses have increased a little bit, maintenance, power and fuel because we added up new stores, so electricity costs, fuel costs for generators and all that, that increased a little bit, that is around INR1.7 crores.

Other expenses, which would include all of these other things, like sales promotions, DBD, credit card charges, cashback offers that put together has brought down major increase, out of which 50% of the major increase is only coming from the marketing and advertising front.

Unidentified Participant — — Analyst

So 50% is the extra spend that you have done, would that be a fair understanding of how the cost is working out?

Karan Bajaj — Chief Executive Officer

So around — sir, if I give you the first 9-month number, so around INR28 crores approximately was the marketing spend for the first 9 months, which is adding to INR45 crores. So this would include the lucky draw, the INR1 crore cash price, the car, the 50 lakh cash price that we started in Delhi also.

So from INR28 crores diluting jump up of INR45 crores to [ INR45 ] crores was in marketing itself. And the sales promotion cost from, say, INR71 crores increase to INR106 crores. So that was another major spend around INR30 crores is what directly supported to the sales because credit card charges there, now customers — cash transaction has reduced a lot, customers are buying everything on credit card, debit card, so every transaction, there is an NDR charge that the bank charges around 1.2% and then all the cashback on the UPI payments and all of that.

All of this includes under the sales promotion. Even the paper financing costs that we bear, which is the interest cost, the dealer buydown cost. So all of these costs have directly gone up in the expense report.

Unidentified Participant — — Analyst

No sir. Can you help us understand slightly better in the sense that what is the cost, which is, let’s say, not proportional to your sales which has gone higher because of the margin sticking lower end and what would be the normal trajectory going forward?

So if I look, let’s say, your cost, right, as a percentage of sales, the other expenses in percentage of sales has been roughly about 5.6% to 5.8% third quarter or the previous quarter. And currently sitting at 6.3%, which is about 50 basis point or 70 basis point increase, if I look at on a like-to-like basis, year-on-year basis, right?

What has contributed to the 70 basis points of incremental spent because that will not be linked the proportion of this year?

Karan Bajaj — Chief Executive Officer

Correct. Not 100% of it, but a different or the smaller portion, but the majority of them is what I told you. I’ll just ask Prem, sir, if he is able to get in detail with you on that right away on the call and explain it to you. Sir, please.

Premchand Devarakonda — Chief Financial Officer

Power and fuel is one of the major expenditures. That is for the 9-month period, this has been 0.69% of the revenue during the current financial year as against 0.6% of the previous financial year.

Then another major expenditure is the maintenance. So that includes the housekeeping as well as [Indecipherable] So this has gone up by — I mean it is — during the current 9 months period of the current financial year, it is 0.66% as against 0.63% of the previous year of the revenue.

Then advertisement has already been mentioned. So it has been 1.19% of the revenue as against 0.95% of the previous financial year. Then we have business promotion expenses, which is nothing but the lucky draws and other launching activity, which we — so that has been 0.22% during the current 9-month period as compared to 0.09% of the previous financial year. So these are — and apart from that sales promotion expenses, which has been 2.81% during the current 9-month period, which has been 2.46% during the previous financial year.

Unidentified Participant — — Analyst

Okay. Now sir, going forward, how should we look these 3 big head items, advertisements and promotions — business promotions and the sales and marketing, right? All of these costs have gone higher in this quarter. So what I’m trying to understand is, going forward, what would be normal trajectory? Is the third quarter what you’ve seen last year or this year is going to be a normal trajectory going forward? Would you expect these numbers to come down as a percentage of sales?

Premchand Devarakonda — Chief Financial Officer

That’s right, sir. Once the store throughput improves in Delhi NCR, so obviously, these costs as a percentage of sales will come down.

Unidentified Participant — — Analyst

Okay. So in that scenario, I mean how do you achieve 7% EBITDA margin in just the ’24? Because…

Karan Bajaj — Chief Executive Officer

So sir, [Foreign Speech] advertising expenses which are directly proportional to the sales throughput per store. Right now, a lot of the rental costs that we proportion, for example, or the advertising cost or a sales promotion, all of these were for a limited number also.

So say, for example, if I’m doing INR50 lakh draw next year in the same quarter, I would have 25 stores in Delhi or 20 stores in Delhi would — the number of spend would — or the number of advertising that we would do in the same quarter would remain the same, but would get divided or the increase of stores would give us a higher throughput or higher revenue overall.

So in that proportion will definitely come down. But initially, because it is Diwali and Dusshera was a period during that quarter, we had to — we have the new market players, we had to be at par with advertising with the larger players. So we could not step back on that.

So that is all — this is all calculated initially when we started our operations in Delhi. So Hyderabad, AP, Telangana and — are the existing market, there was not an incremental increase in advertising. Just to give you a number there, the proportion that we spend on advertising and all other aspects of marketing was definitely much lower than what our sales percentage would be. So that is in line so same thing would happen in Delhi, but not probably this quarter, probably next year in the same quarter, we would definitely look at a similar spend with higher throughput coming out from that market.

Unidentified Participant — — Analyst

Understood. And one last question. What is the seasonality in your business in this — especially in terms of gross margin. So this year, this quarter, gross margin is 13%. Last year, same time was 13.3%, but that was also, I believe, was the lowest quarter during the fourth quarter.

How should we generally think of gross margin seasonality going forward for the 4 quarters, which quarter is would be higher typically at what range so that we get some sense of what is the normalized margin for the year — you would still maintain — I would assume that you are still guiding 14% gross margin for the year as a whole?

Karan Bajaj — Chief Executive Officer

Yes. sir, majorly, the highest grossing category or the product category that we sell is AC and cooler. So this season, AC, cooler [Indecipherable] automatically — we’re looking at higher gross margin during that year. But summer would again — or the weather would again play a very important role for us.

So for example, because this year, we would in say FY ’24 Q1, we would look at a longer summer for us because Delhi also would add up to numbers coming in, not very big number, but some numbers coming in from that region as well because the summer is elongated there and would go as long as June, July.

So if we are lucky enough if the weather supports us, we’ve been able to deliver a higher throughput for AC, cooler as a category. So we would look at the quarter where the cooling products would give us a higher GP to blended GP for those quarters would definitely be higher, if you look at historically data also. Number one.

Number two, Diwali or festival period definitely on paper would give you a higher margin. But then again, that is one of the only period where the discounting becomes the highest as well because it is the most competitive cut throughout market that happens on a customer point of view there everybody’s got an ad, everybody’s running an offer.

So though you get an extra margin or an extra benefit dealing the [Indecipherable] from the brand to negotiate better. But then eventually, it’s the [Indecipherable] to discounting that on the floor. So otherwise, cooling product category, AC, cooler, refrigerator would be the highest growth in product category at any time of the year for us.

Operator

The next question is from the line of Tushar Sarda [Phonetic] from Athena Investments.

Unidentified Participant — — Analyst

You mentioned that Delhi will achieve breakeven at around INR25 crores sales per store. So if you can explain the store level economics of well and also for the Delhi cluster, how the economics would work out because some of the costs like advertisement, marketing would be common. So if you can just broadly explain that would be very helpful.

Karan Bajaj — Chief Executive Officer

Okay. So sir, if I’ve understood your correct — question currently. So Delhi market, though the market size of Delhi is much bigger than our existing market that we’ve been in. So that is the one of the reasons that we entered that market. INR25 crores was a very conservative number that we calculated our breakeven and because obviously, we didn’t want anything to go out of hand because the margins that we control is not in our hand. But the expense is what [Indecipherable] can control, so we didn’t want to take a very high rental or very high man power cost strategy there in Delhi.

So we want to make sure that everything is in line in the times of brand stabilizing there. And then we can look at avenues of increasing our margins in that region. So right now, INR25 crores is what we look at for the delivery happening in year 1.

And our costs have all calculated against that, so that is why we’ve calculated an 18-month breakeven period where even if our margins or gross margins, which are a 13%, 14% are lower to 11%, 12% also in year 1, we still were able to deliver a breakeven in 18 to 20 months, that is the calculation, sir, that would increase the capex as well as the opex, sir.

Unidentified Participant — — Analyst

So what is your store cost in Delhi, individually, roughly should we assume INR2 crores a year, INR3 crores a year, including rentals and salaries and other overheads?

Karan Bajaj — Chief Executive Officer

Yes. Yes, sir. so you’re talking about the gross profit per store there in Delhi?

Unidentified Participant — — Analyst

Yes, yes, store contribution.

Karan Bajaj — Chief Executive Officer

Yes. It will be in that line, sir. But again, as I told you that only after we complete the summer season because AC and cooler are actually a longer period season, only after we understand that period once because we have not gone through that period in Delhi and the cooling products being 1 of the highest grossing product categories for us. So once we go to that churn, we see how the market is reacting to see, how the competitive the market is, whether we’re still able to deliver a higher, much higher gross margin than we would do in Hyderabad or AP and Telangana, how the competitive scenario there is.

Those things would only play out after the end of Q1 or Q2 in FY ’24. So once that is done, once we do a complete churn a year’s chrun, we’ll be able to understand the market better and then comment better on that market, sir.

Unidentified Participant — — Analyst

Sir, You have 12 stores now in Delhi, right?

Karan Bajaj — Chief Executive Officer

Sir, 12 stores, 13th is soft launch is done for that store in Noida Sector 18 where the official launch will be happening in the next couple of weeks, sir.

Unidentified Participant — — Analyst

Okay. And how much do you plan to spend on marketing next year in Delhi?

Karan Bajaj — Chief Executive Officer

Sir, Delhi marketing plan would be in line with the revenue that we would generate. So it would be around in the line of INR10 crores to INR12 crores.

Operator

The next question is from the line of Akshat Mehta from Sameeksha Capital.

Akshat Mehta — Sameeksha Capital — Analyst

Sir, my question was on the — was on your expenses — on your operating expenses as you said that your advertising expenses is around INR10 crores to INR12 crores on average. And this quarter also, your ad expenses has been around INR22 crores. So that forms around 1.5% to 2% of your overall revenues.

But if you look in the past data in ’20, ’21, ’22, ad expenses formed more than 3%. So how — I mean, why is there declining trend in advertising expenses or is there because of Delhi that we are spending less amount there or what is the scenario there?

Karan Bajaj — Chief Executive Officer

Mr. Mehta, I didn’t understand your question. Can you repeat it once again, please?

Akshat Mehta — Sameeksha Capital — Analyst

My question was that if you — the numbers that you’ve given right now for quarter 2, quarter 3, your ad expenses in those quarters, it forms around 1.5% to 2% of your overall revenues for the quarter.

But in the past few years, ’20, ’21 and ’22, your ad expenses in your annual report has been holding 3% of your revenues. So why is there a fall in advertising expense as a percentage of your revenues going forward? I mean is this something because of the Delhi side that we’re spending less in terms of — as a percentage of revenues marketing in Delhi? Or what is the trend here.

Karan Bajaj — Chief Executive Officer

No, Mr. Mehta, in fact, the advertising expenses in the previous historical years have been around 0.8%, 0.9%. In fact, the COVID years, we were spending one of the lowest amounts in advertising.

So if you look at our advertising cost for FY ’22 versus the revenue, it should be around 0.8%, 0.9%. I don’t know it could be some added under the FY ’22 number where you’re seeing a 3% advertising spend. Whereas, as you correctly said now, because of Delhi being added, the marketing spend from 0.8%, 0.9% would be looking at for the 1.3% to 1.4% for this financial year.

Premchand Devarakonda — Chief Financial Officer

You must have added sales promotion to our advertisement because sales promotion is not our advertisement. The sales promotion expenses include dealer buydown charges and other incidental expenses.

Akshat Mehta — Sameeksha Capital — Analyst

Okay. So what will be the quantum of that in these 2 quarters, if you can share that?

Karan Bajaj — Chief Executive Officer

So other — Mr. Mehta, if I tell you, like FY ’22 for the first 9 months, we spent around INR27.8 crores in advertising versus for the first 9 months of this year, which went INR45.1 crores. So you would see a drastic change in advertising and promotion compared to 9 months of that FY ’22 and 9 months of FY ’23.

If I give you a quarter-on-quarter number, Q3 of FY ’22, we spend INR16 crore versus Q3 FY ’23, we spent INR22.3 crores only on marketing and advertising.

Akshat Mehta — Sameeksha Capital — Analyst

No, no, I was asking for sales promotion.

Karan Bajaj — Chief Executive Officer

So sales promotion — sales promotion from INR71 crores in FY ’22 for the first 9 months, it went up to INR106 crores for the first 9 months of FY ’23. And this is directly proportional to the credit card, debit card financing, paper financing charges that we bear at the store level for customers.

Akshat Mehta — Sameeksha Capital — Analyst

Okay. And my second question was on your gross margins. I mean your gross margin in the past like 4 years, it was 15.1 in around FY ’19, from there, it has come down to 13.7 in FY ’22, and now it is in the first 3 quarters also, it is coming down to 13%. So what is driving that reduction in gross margins currently?

Karan Bajaj — Chief Executive Officer

So sir, definitely, yes, we were also a little surprised by 0.5% on a Q3 number because right after Diwali, we saw a major drop in the revenues for the first couple of weeks, which we had to take an impact on.

So how 0.5% margin in our books would directly hit the bottom line is because your other fixed expenditure remains the same, your rental, the manpower cost, your cost of inventory, borrowing costs and all remain the same, but that 0.5% also would impact us in terms of the number looking much higher or lower.

Whereas historically, in ’19, ’18, ’17 or that kind of period, the contribution coming from IT mobiles were quite low, whereas IT was never higher than in FY ’19 also IT contribution was not more than 3%.

The IT contribution today stands at 7%, which is one of the lowest gross margin categories and even mobile phone for that matter. So mobile phone also stand at 35%, 36% today. So if we look at the first 9 months number, the blended gross margin level look at much higher compared to the Q3 gross margin level so once we cash in the Q4 period, which is Jan, Feb, March, when summer setting early, we would look at the cooling products to start delivering the higher margins.

So that is why are a little confident on how the Q4 would turn up and that would even help us deliver the number for the annual number for ’23.

Akshat Mehta — Sameeksha Capital — Analyst

So this is — as I understand, this is the view on account of the change in mix, your product mix that has changed more towards — a bit towards mobile as well as towards the IT and other small appliances, correct?

Karan Bajaj — Chief Executive Officer

I mean, Mr. Mehta, it was getting in right, yes.

Operator

He next question is from the line of Preet Jain [Phonetic] from Blue Jersey Capital [Phonetic].

Unidentified Participant — — Analyst

My first question is how is the response from Delhi NCR category? Are we facing any major competition there?

Karan Bajaj — Chief Executive Officer

Sorry, sir, we could not hear you. Can you repeat your question, sir?

Unidentified Participant — — Analyst

How is the response from Delhi NCR category? Are we facing any major competition there?

Karan Bajaj — Chief Executive Officer

Sir, Delhi NCR definitely is one of the most competitive markets in the country and there is no fun in not competing in the market because — so we are getting, but it is not like a backlash that we can’t maintain or we have to undercut a lot but it is quite a reasonable market there because you have to look at expenses also because the retail scenario was a little different there compared to other Southern or Western organized markets.

So you’re competing a lot with brand stores with a lot of mom-and-pop stores. So you have to make sure that you can deliver better throughput. And the margins definitely initially, yes, we were expecting it to be 10 basis points lower than what we would expect in our existing markets. But then once we cover up all the season once we understand the market — once we understand the preferences of the customer, then that is [ variable to reckon ] our strategy — for the future we should be ready for it.

Unidentified Participant — — Analyst

Okay, sir. And sir, my second question is, can you provide us the segmental margin profile of large appliances, smaller appliances and mobile segment?

Karan Bajaj — Chief Executive Officer

Yes, sure. So mobile phones give us a margin of around 9%. Large appliances would give us — so if I bifurcate television, television would give us around 17%, washing machine refrigerator would give us around 18%, AC and coolers would give us around 20%. That is the historical margins that we generate out of — the gross margins that we generate out of each category.

Operator

Ladies and gentlemen, this will be the last question for today. I would now like to hand the conference over to the management for closing comments.

Karan Bajaj — Chief Executive Officer

I would like to thank everybody for joining the call today, and but I just want to give a little flavor of how things are working out. So the revenue that we generated for Q3, though we had a little downfall, the market was a little slower in November and December, but we still able to achieve our projected numbers for Q3.

And the first 9 months, we are on track in January and February — we’ve already crossed January and 2 weeks of February. So Q4 is also in hand and control with us in terms of what is happening. And we’re quite confidant that once the summer sets in a little early, March month should be a good month for us. And eventually, we would be able to deliver our suggested number that we had given out during our IPO road show going forward as well.

So thank you, everybody, and I would like to thank our IR as well on the call. Thank you, everybody.

Operator

[Operator Closing Remarks]