Aditya Birla Fashion and Retail Ltd (ABFRL) Q3 FY23 Earnings Concall Transcript

Aditya Birla Fashion and Retail Ltd (NSE: ABFRL) Q3 FY23 Earnings Concall dated Feb. 07, 2023

Corporate Participants:

Jagdish Bajaj — Chief Financial Officer

Ashish Dikshit — Managing Director

Vishak Kumar — Director and Chief Executive Officer

Analysts:

Richard Liu — JM Financial — Analyst

Garima Mishra — Kotak Institutional Equities — Analyst

Varun Singh — ICICI Securities — Analyst

Tejas Shah — Spark Capital — Analyst

Kaustubh Pawaskar — Sharekhan by BNP Paribas — Analyst

Devanshu Bansal — Emkay Global — Analyst

Vaibhav Agarwal — Basant Maheshwari Wealth Advisors — Analyst

Ankit Babel — Subhkam Ventures — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to third quarter and first nine months of FY ’23 Earnings Conference Call of Aditya Birla Fashion and Retail Limited. The call will begin with a brief discussion of the company’s management on the Q3 FY ’23 performance, followed by a question-and-answer session. We have with us today, Mr. Ashish Dikshit, Managing Director; Mr Jagdish Bajaj, CFO and Mr Vishak Kumar, Director and CEO, Lifestyle Business. I want to thank the management team on behalf of all the participants for taking their valuable time to be with us.

I must remind you that the discussion on today’s earnings call may include certain forward-looking statements and must be viewed therefore in conjunction with the risk that the company faces. Please restrict your questions to the quarterly and half yearly performance and to strategic questions only. Housekeeping questions can be dealt with separately with the IR team. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

With this. I hand over the conference call to Mr. Jagdish Bajaj. Thank you and over to you, sir.

Jagdish Bajaj — Chief Financial Officer

Thank you. Good evening, and welcome to the Quarter 3 earnings call for our Company. The quarter saw the highest-ever quarterly revenues for the company at both standalone and consolidated level. This was driven by continued strong growth trajectory of our premium and luxury segment and strong resilience of the value segment. Aggressive network expansion, robust e-commerce performance, new category extensions and successful brand-building initiatives have consistently been our growth drivers that have helped us to deliver impressive double-digit revenue growth for pre-COVID levels for the fifth consecutive quarter. I would want to highlight one aspect of our business where we had to take a hit in view of the adverse impact of COVID. As we moved out of it, we have amplified our marketing investments since the start of the year.

This quarter our marketing investments have been approximately 2.3 times of same quarter last year. And a part of this spend were utilized to build first-ever national TV and digital launches along with the spending on local activation, celebrity endorsement, influencer marketing, etc. Additionally, we furthered our deep investment into our new and investment [Phonetic] businesses for the purpose of aggressively growing the distribution network and building top brand equity.

I will talk about financial performance for our company for this quarter. Company delivered sales of roughly INR3,589 crores, which is growth of 20% over the same quarter last year and 39% over pre-COVID. The company achieved a consolidated EBITDA of INR467 crores. EBITDA margin was broadly in line if adjusted for higher investment in brand building and advertising, which was INR125 crores, higher than Q3 last year and also rental savings of INR55 crores in Q3 last year FY ’22. The company continued with rapid network expansion during the quarter. Our branded business has had an extension of 245 stores, led by additions of 122 Reebok stores to our network and expansion of retail network in Lifestyle Brands, innerwear segment and ethnic businesses Pantaloon also continued their expansion journey with the addition of 10 stores during the quarter. The Company persistent in efforts to strengthen its digital platform placing in particular emphasis on enhancing its omnichannel capability. eCommerce sales grew 33% Y-o-Y, across the portfolio. We have continually expanded our omnichannel reach with now over 2,350 stores equipped with omni capabilities throughout India. This represents consistent advancement of our digital initiatives as we continually adapt to the changing demands of our customers.

Reebok completed its transition into ABFRL operations with effect from 1st October 2022. This will build a strong meaningful play in exports market. We are glad to announce that tomorrow it has completed the acquisition and integration of 6 of the 8 digital-first brands previously announced in a press release in November 2022. Now in terms of our YTD performance, sales grew by 63% over last year to INR9538 crores. Company posted EBITDA of INR1,385 crore. It is important to note that marketing investment for YTD are INR300 crore more than last year. I am pleased to tell you that in-line with our strategic objectives our other businesses, including innerwear youth fashion and international brands have grown approximately 50% over last year while ethnic business has grown to 13 times of pre-COVID levels to reach INR400 crores.

I will now take you through the performance of individual businesses, starting with our Lifestyle with brand business. Lifestyle Brand maintained their remarkable business performance. It achieved highest quarterly sales on the makeup, a robust retail performance is reflected in 5% LTL growth and strong e-commerce performance. This result is a testament to the strength of our brands and business model. Revenue for the quarter stand at INR1,873 crore, 18% higher than last year. EBITDA stood at INR317. The growth in this business segment continued to be driven by premiumization across brands along with the strong rebound in occasion and work wear. Our Womens wear is continuously growing and achieved 26% Y-o-Y growth. Also other categories like Suits and Blazers, Denim and T-shirts continue to receive strong consumer traction as they posted impressive growth over last year. Retail business grew by 21% over last year on back of solid net addition of more than 110 sores during last one year and consistent same-store sales growth.

Further, e-commerce continued to be a strong sales channel and e-commerce sales grew by 19% Y-o-Y despite overall moderation in e-commerce growth across the industry. I want to reiterate that Lifestyle Brand is one of the largest branded e-commerce business in the country. Brands marketing efforts reached back pre-COVID levels resulting in a noticeable announcement in overall brand recognition and awareness. Our expansion in small town India continuously continued aggressively as we take our brands to these markets through an asset-light formats. We have presence across more than 505 stores in small towns contributing profitably to the top line.

Moving on to the Pantaloon business. The Pantaloons division recorded highest quarterly sales of INR1,159 crores with a growth of 9% over last year. EBITDA stood at INR168 crores. This was achieved despite post-Diwali demand slowed down in value segment. Additionally, this growth needs to be seen in view of the shift of Pujo to Q2 this year versus Q3 last year. A substantial portion of the customer base is located in Tier 2 and Tier 3 cities and hence on account of inflationary pressures and weak consumer sentiment led to sluggish performance in these cities and towns. Pantaloon opened 10 new stores during the quarter to exit with 460 stores.

Other businesses. Other business segment continued with its outstanding performance and the portfolio comprises of four business lines; active athleisure and innerwear, youth fashion brands, super-premium brands and Reebok. During this quarter, the portfolio posted revenue of INR363 crores, a 26% growth over last year. Let me begin by talking about innerwear business performance. The revenues of this segment grew 10% over the same quarter last year despite overall slowdown in athleisure segment. The segment continued to scale up rapidly and has 31,000 trade outlets. Brand also added 48 EBOs in the quarter to exit with 159 EBOs.

The business launched its largest nationwide television and digital advertising campaign. Youth fashion segment consisting of American Eagle and Forever 21 delivered strong performance. American Eagle continued to solidify its reputation as one of the leading aspirational denim brand as it delivered 24% LTL growth. Brand opened five new exclusive brand stores in the quarter and is now available at 31 EBOs and 42 doors of department stores. Forever 21 has also added stores on a net basis during the quarter. The brand is back on expansion journey with 50% Y-o-Y revenue growth on the back of a strong LTL growth and robust e-commerce performance.

The collective and other super premium brand witnessed a sharp growth of 43% over last year with a very strong 24% LTL. The segment has consistently maintained strong profitability over the past few quarters. Online revenues continue to surge as own eCommerce site, thecollective.in recorded more than 60% growth over last year.

Ethnic businesses. We have built a comprehensive ethnic portfolio across multiple locations and price points. These include partnership with designer Sabyasachi, Tarun Tahiliani, Shantanu & Nikhil and House of Masaba. Premium men’s ethnic wear brands TASVA and Jaypore. The segment achieved revenue of INR189 crores and it’s grown 66% year-on year. Business has continued to invest in brand building initiatives and new store openings. Sabyasachi revenues grew by 23% over last year with the strong growth across all the categories. Brand crossed INR100 crore-plus quarterly revenue. We are really pleased to inform you Sabyasachi’s newly opened iconic New York store has received an overwhelming response and is well poised to establish the brand as a truly global brand. That’s why our premium men’s ethnic brands added 11 new stores in the quarter and is now available across 32 stores. The brand also launched its first comprehensive marketing campaign which is currently live across prominent digital platforms and television. Brand and its products continue to be well-recognized by the consumers and the industry.

Jaypore brand is present across 15 stores and witnessing a very strong traction across multiple channels. The brand continued to grow on the back of network expansion and growth in new categories that it has added such as home and accessory. Revenue front, the brand grew by almost 80% over last year. Shantanu & Nikhil delivered the highest ever quarterly revenue with 43% growth over last year. Brand is now available across 15 stores. Brand introduced sports inspired lifestyle category by launching Shantanu & Nikhil Cricket Club. House of Masaba delivered highest ever quarterly revenue with 66% growth year-on year on the back of LV LTL growth of 61%. The newly introduced brand, Lovechild, continued its expansion into new categories such as fragrances. Our products continue to receive favorable response from the customers. I just to reemphasize that the ethnic wear is a huge market opportunity where we wish to build a large meaningful play through our comprehensive portfolio. With the way the portfolio is stepping up in terms of performance, we are confident of building a large and profitable business over the next few years.

To conclude, our performance is backed by strength of our brands, our distribution capability, our deep consumer understanding and our sharp focus on operational rigor. With the most comprehensive portfolio play in Indian personal industry, all our new initiatives have demonstrated expected early indications of success and along with our mainline businesses we are confident that we are on the right path to execute our stated strategy. Thank you. And we are open to questions now.

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 Richard Liu from JM Financial. Please go ahead.

Richard Liu — JM Financial — Analyst

Hi, thank you for. Just want to check if you can hear me?

Operator

Richard, sorry to interrupt you. Can’t hear you properly.

Richard Liu — JM Financial — Analyst

Okay, is this better.

Operator

Slightly better.

Richard Liu — JM Financial — Analyst

Okay, let me try again. Sorry about this. So, Ashish. Hi, thank you for this. I have two questions. One is on the long-range Madura margin, right. I mean, if I look at pre-COVID which is the 3Q FY20 quarter you did about INR1,300 crore of topline in that quarter and round it is more like INR1870 crores. I mean, so that’s quite a bit of increase versus that level, but that time you reported a margin of about 70.3. With a much, much higher revenue base at this time, your margin is lower at 60.9. And I remember you all had very practically speaking about some structural cost savings that would affect during COVID which was supposed tokeep margin higher on a permanent basis. In light of all that, can you please help reconcile this kind of margin that you clocked this quarter.

Ashish Dikshit — Managing Director

I’ll give my first response, and I think Vishak can add to it. Richard, clearly a large part of the margin shift this quarter is coming because of significantly higher quarterly advertisements with a phasing issue and sort of one-time large investments. We had not made investments in the last 2.5 years. That’s a significant shift. If you look at the shape of the business, it continues to remain as strong as it was before. In fact, stronger over a period of time. The CAGR is if you look at it from ’20 to ’23 ignoring or even counting factoring in the COVID figures, continues to stay very-very strong. This is despite the fact that some of the trade and wholesale customers has fallen off. As far as structural margins is concerned, I think we are marginally better than where we were in FY ’20, if you take care of the additional onetime advertising because we are always good, in a few quarter, this quarter was significantly higher than prior to that. Your point about structural change in the cost structure. COVID went through a lot of phases which were one side. And there were few which were structured over a longer period of time. At this point of time, as business is coming back, the difference is. I would say not as noticable as it was during this COVID period when you could take lot of discretionary cost down, overheads, which went down. Retail starts, so the costs have come back although the nature of our retail business was not variable than it was in FY ’20 and a testament of that is that during the times when things were not very good, Madura business managed to hold on to its margin a lot better than pure fixed cost businesses. So I don’t know, Richard, if I’ve answered all your questions. And Vishak if you have anything to add.

Vishak Kumar — Director & Chief Executive Officer

Richard, does that answer your question?

Richard Liu — JM Financial — Analyst

No. I got the flavor of A&P, but. I mean if I add back the A&P to both the quarter, would you be at a much higher level now considering that your top line is much better.

Vishak Kumar — Director & Chief Executive Officer

As a percentage margin level, I won’t say much better, but better than what we used to be. So this is a dramatically higher top line with marginally better margin percentage, is the way I would read it. So we have continued to grow very strongly, Richard, while holding on to the strong double-digit margins that we consistently enjoy.

Richard Liu — JM Financial — Analyst

Okay, and what about gross margin, because there was also a thought at that time that the discounting as a concept, it’s not going to be so prevalent anymore. Do all those assumptions continue to hold or we have gone back to pre-COVID behavior.

Vishak Kumar — Director & Chief Executive Officer

Okay. Richard, here is the deal. I think our discount haven’t changed too much vis-a-vis pre-COVID, but very much recognize is that they have gone much higher during the COVID years. So to that extent, we have brought it back to pre-COVID levels. So in that sense progress. Is there room for further improvement in that, incrementally yes.

Richard Liu — JM Financial — Analyst

Okay. Thanks, Vishak. I’ll just move to Pantaloons then. I mean, if I look at and I’m looking at Q2 and Q3 combined, so that we don’t get into this Pujo shifting thing. If I look at Q2 and Q3 combined again pre-COVID FY20, the revenue was about INR2000 crores. This quarter it’s about INR2,250 crores, so that’s about 10% higher. But your store count is up from about 340 then to about 400 plus now. What explains this. I mean, why would you keep investing in this business if this is the situation of the growth that you are able to garner after all these years.

Vishak Kumar — Director & Chief Executive Officer

So I think that should for one quarter perhaps performance during this phase may not tell the whole one story. Indeed, this quarter has been weak and post Diwali, which is month of November has what was pulled down the business performance. If you look at FY ’20 performance and compare that to FY ’23 I think that same store growth is down by about negative 9% or something and which is what is reflecting in the kind of numbers that you are talking about. I would say, Richard, if you were to look at the value segment performance, there is the larger headwind that Jagdish talked about what we are experiencing in that. Very different from what we’re experiencing on the other side of the market, which is where most of our premium brands are which are enjoying the sturdy comeback that consumers have seen in the higher end of the market and this is borne out both in terms of consumer segments as well as geographical positioning. Tier two, Tier three towns has seen much lower recovery and much lower productivity even at this point of time as we speak and that’s something that Pantaloons is suffering from and experiencing that. I think it’s the phenomena, which we will have to grind through as we speak.

Richard Liu — JM Financial — Analyst

And what will actually revive the sentiments at the value end, because. I mean, we are seeing a lot of these sort of comments also at let’s say the lower priced consumer goods players and everybody is thinking that the government is going to do A, B, C, but I mean, isn’t that more of a hope than anything else. I mean what will happen to revise the sentiment that at the value end.

Ashish Dikshit — Managing Director

So. I think overall there has been demand destruction during pandemic and for smaller end of the, lower end of the customers, smaller markets. I don’t know whether job loss is still relevant in those markets but definitely there has been a slowdown and curtailment of discretionary income and expenditure at that end. I think the longer-term picture and we’ve seen it before, it’s not the first time we are experiencing that. There is equally strong recovery that happens when consumer sentiments improve. I think when you look at the premium end and the value end we are also seeing the resilience at the top and the challenge at the bottom. At least for our business, I don’t think government alone and those factors are perhaps too macro for us to comment upon in terms of how they deliver into our performance. Some of it could also be recovery post strong festive because that period indeed saw, both Pujo and Diwali saw good recovery and its months after that which has actually pulled us down. Hard to put one factor which could change it. I think overall consumption and economy will have to improve for this to start to seeing a meaningful shift as far as that part of the market is concerned.

Richard Liu — JM Financial — Analyst

Okay. And if I can just slip in one more question. On Reebok, if you can help us understand how much did it bleed, why did bleed, what does the P&L look like and what will it look like when you get to a decent shape.

Ashish Dikshit — Managing Director

So I think there is a one-time effect in transition. We transferred a whole lot of inventory and business and there is a one-time impact in accounting that into it which you saw in this quarter. From business, we expect it to get close to double digit EBITDA margin sooner than later and I think that was the sort of the business before we acquired but any business which has not been looked after for sometime does require a little bit of investment and revitalization. I don’t think it’s a long journey. It’s a very short 9 to 12 months journey that we will have to do but we’ll have to see that we do towards in this point in time.

Richard Liu — JM Financial — Analyst

And you are talking about double-digit margin. Despite the royalty that you will have to pay. I mean because. I guess the earlier operation did not — did it also have royalty construct into it.

Ashish Dikshit — Managing Director

Yeah, we’ll have to deliver that post royalty. I mean that’s our margin.

Richard Liu — JM Financial — Analyst

Okay. And you think you can get to that in about 9 to 12 months’ time.

Ashish Dikshit — Managing Director

No, I think 9 to 12 months is what it would take us for turning around. Perhaps maybe another 12 months after that,. It’s really hard for us to right now because it’s just three months into our operation. We are testing parts of the businesses, making sure the inventory system gets in control with the expenses, 6, 9 months away from that. Lot of stores need refurbishment at this point of time but it’s a fundamentally strong business which is 350, 400 square business so we have a good base to work on in that sense.

Richard Liu — JM Financial — Analyst

Got it. Thank you very much, Ashish. Wish you all the best.

Operator

Thank you. Next question is from the line of Garima Mishra from Kotak. Please go ahead.

Garima Mishra — Kotak Institutional Equities — Analyst

Yeah, hi, am I audible?

Operator

Yes, you are.

Garima Mishra — Kotak Institutional Equities — Analyst

Alright, thanks so much for the opportunity, Jagdish, could you please help us with the period ending net debt number. And any major investments or outflows towards promised investments that we should expect over the next two or three quarters.

Jagdish Bajaj — Chief Financial Officer

So the net debt on 31st December is INR340 crores. The Board has approved investment in TMRW between INR400 crores to INR500 crores. Out of that I already made around INR120 crores, so that is the only outflow which we think.

Garima Mishra — Kotak Institutional Equities — Analyst

Okay, so the remainder, let’s say, 350 to 400 crores for TMRW, what is the time horizon that you have in mind in terms of investing it.

Jagdish Bajaj — Chief Financial Officer

It will be this quarter or at best spillover into next quarter. It’s not a very long-term–

Garima Mishra — Kotak Institutional Equities — Analyst

Okay, understood. And specifically for TMRW, the investments that you have, I know there are some details of those that have been disclosed but is there any sense that you can give us in terms of the cash investment or let’s say the cash loss you may have to incur towards ramping up this portfolio in let’s say FY ’24.

Jagdish Bajaj — Chief Financial Officer

It’s hard to give a number but you will have visibility of that quarter in-quarter. If you look at this quarter, we have about INR19 crores of loss for TMRW consolidated level. We expect it to marginally go up in the immediate short-term and then subsequently depending on the performance of the portfolio companies.

Garima Mishra — Kotak Institutional Equities — Analyst

Okay, but as and when you deploy the remainder 350, 400 crores of the Corpus, this loss number may actually increase, if let’s say the acquired companies are loss making or they are just startups and not really profitable.

Jagdish Bajaj — Chief Financial Officer

Yeah, it is a combination of — most of our companies that we acquired, these accounts that you see currently in the books are marginally profitable at consolidated level. However, there is an overhead cost, which is the TMRW company costs, which is incurring this overhead, which is what you’re seeing in terms of losses. As we increase investments, it will depend on the quality of portfolio businesses that we will build. Also some of these businesses are very scalable. And the reason, that’s the reason for investment, which would require a deeper loss in those businesses. So, the trajectory would indeed depend on the quality of business at the entry and these investment will require to take it to the next level. It could go up and possibly will go up is my guess looking at theway digital business eventually turn out. But the range will be between 20 to 30, 35 kind of number.

Ashish Dikshit — Managing Director

Of course, what Jagdish is saying that all this is covered as a part of overall summing that he has given but I think your question was specifically around the losses, that will come in the books of ABFRL.

Garima Mishra — Kotak Institutional Equities — Analyst

Yes, that is right. One more question on Reebok. Could you help us understand the revenue and EBITDA made in this business, specifically in the third quarter.

Jagdish Bajaj — Chief Financial Officer

INR34 crores revenue as Ashish was saying around INR13 crore EBITDA loss.

Garima Mishra — Kotak Institutional Equities — Analyst

Got it.

Ashish Dikshit — Managing Director

Let Vishak give you a more detailed answer.

Vishak Kumar — Director & Chief Executive Officer

Okay, Garima it’s like this. In the Reebok business we’ve transferred the business from first October, okay. There is, if you look at pre royalty component of EBITDA, in fact in Q3 itself, we would be close to breakeven on that. So it’s as the business scales up in quarters to come, so we will keep getting some of the benefits of that leverage. There is a fixed-cost organization that we’ve put up. There is a network of retail stores which is being fast ramped up. There is also a lot of investments into replenishment systems, warehousing etc, all of which kick in the next few quarters, okay. So with that, that is what Ashish was trying to say earlier. In the next 12 months itself, it’s going to be a fairly, we will be able to get this into some kind of steady state and then get into double-digit margins from the year after.

Garima Mishra — Kotak Institutional Equities — Analyst

Alright, understood. The last question from my side, if I may. Ashish, you mentioned that the advertising expense was indeed very hefty this quarter. How one-off or non-recurring should we expect this number to be because given you are seeding new businesses, ramping up new brands, it may continue at this pace for the next few quarters. I just thought, I just wanted your thoughts on this.

Ashish Dikshit — Managing Director

No, you are right, Garima. There is advertising spend this quarter coming as a very large sum because that has come back, both in existing business which we felt for a fair bit of period had not seen visibility as well as new businesses that we’re seeding. So your point is valid about the new businesses, although even for them, this was the right time to advertise and create visibility because it’s the season, we were launching TESVA. We had a network of about 30, 35 stores. Similarly innerwear, where we had not had the opportunity to build because of COVID since launch really impactful national campaign. So those businesses also saw, I would say, exceptional level of one-time investments. It doesn’t mean that these businesses will not get advertising support but this should not be in the proportion that we ended up spending this time. And the same is true about the Lifestyle Brands business, which is the other place where advertising spend was nearly three times the normal spend that we have done in past because there is a sense that we needed to get back and make our brands more visible, having lost about two 2, 2.5 years of that period. This is definitely an exceptional spend for the quarter as it appears. It reflects our investments in brand philosophy, which we’ve always done between 3.5% to 4% is that we have been investing over a long period of time. I don’t expect that trajectory to shift. This quarter, that was up almost 200, 250 basis points depending on which business you’re talking about. In the core business, it was 200 basis points, 250 basis points. In the new businesses, this was obviously a onetime initial launch expenditure. Our overall advertising spend will remain in the range that we have always done in past, and the new businesses will continue to get support ahead of the revenue at this point of time, but perhaps all that impact cumulatively is somewhat coming together and therefore looking so much bigger in this quarter.

Garima Mishra — Kotak Institutional Equities — Analyst

Understood, Ashish. Thank you so much and wish you all the best.

Operator

Thank you. The next question is from the line of Varun Singh from ICICI Securities. Please go ahead.

Varun Singh — ICICI Securities — Analyst

Am I audible now?

Ashish Dikshit — Managing Director

Yes, you are.

Varun Singh — ICICI Securities — Analyst

Okay, thank you, sir for the opportunity, sir. My question is on the marketing investment. Sir, so if I may ask that, how have we decided to allocate this resource, like how much in which, for which brand.

Ashish Dikshit — Managing Director

So look, we have a large portfolio of brands. And each one is in a different stage of existence. Many of them have been around for a long period of time but still have something new to say about themselves. Some are very new and therefore just need to build awareness. So expenditure is of course in line with this category that we’ve played out for each brand. So, it’s not a top-down allocation although there is a judgment at the top. It’s primarily done as a part of the annual planning for each of the brand and it plays out differently in different quarters.

Varun Singh — ICICI Securities — Analyst

Okay. I was just thinking that if you could talk about Lifestyle Brands and Pantaloons broadly, something in that direction.

Ashish Dikshit — Managing Director

Okay, so Pantaloons business the retail brand typically operates with 2% as its marketing costs, sometimes 1.5%, at the peak, it could go to 2, 2.5. Lifestyle Brands and other side operate between 3 to 4 but in peak periods like this quarter would have gone up to maybe 5.5% but on an annual basis, our branded business operate between 3.5% to 4% and our retail business operates between 1.5% to 2%.

Varun Singh — ICICI Securities — Analyst

Understood, understood. Yeah, so that’s it from my side. Thank you very much.

Operator

Thank you. Next question is from the line of Tejas Shah from Spark Capital, please go ahead.

Tejas Shah — Spark Capital — Analyst

Hi, thanks for the opportunity. Sir, just one question, kind of an extension of the previous participant’s question. Sir, how do we measure ROI on brand investment. And is there any kind of method on which quarter or which considering that the broader economic environment was muted after October, is it like that there is agility in the process that if we see that the response from customer is not coming, we can actually postpone the plan and we can kind of repurpose it for some other time period.

Ashish Dikshit — Managing Director

It is, Tejas. Sometimes it’s hard to take a very short-term measure and advertising, as you know and you watch so many businesses across categories is longer-term. And there is a lot of residual effect of advertising and it presides over a longer period of time. Having said that, remember a part of our business is experiencing exceptional growth momentum. Lifestyle Brand business, if you look at quarter 1, quarter 3 including this quarter and continues as we speak, it is experiencing very, very strong business momentum. So this is very much in line with that strategy. Advertising is aiding the brands to stand out, convey the new categories in which they want to play, whether it’s Louis Philippe jeans or Van Heusen flex or Allen Solly category. Each of the brand has a growth driver which is being supported by advertising and much unlike the general mood that your question seems to be indicating that part of the business is actually enjoying a very good run and the advertising supporting the kind of momentum that the business has picked up. On Pantaloons, that’s why you don’t hear that comment about it because we are careful about spend after October and we have taken steps to curtail that. On the new businesses where some of them are yet to be proven but I think they require the initial awareness building and the message to go to the broader consumers and that’s why whether TASVA or innerwear which are advertising in a significant manner after a long period of time, we continued and those businesses. I don’t think are experiencing. Most of the challenges in the market post Diwali are really at the value end of the market. And we have been more watchful about spending money in that part of the year.

Tejas Shah — Spark Capital — Analyst

Sure. And so second question on this Tasva. So you spoke about awareness that requires to be there for the new brand, but then, if I see and if I’m not wrong, actually engagement with we had, Bollywood celebrity or national celebrity for TASVA launch. And when I see that the on-ground presence is just 35 stores, so how come that awareness actually converts into demand, even if somebody wants to engage with the experience with the brand based on the spend that we have done. So, is it like I understand it’s always economic [Phonetic] between distribution and advertisement, but I was as a consumer or as an analyst, I was actually intrigued that we spent so heavily at a time when our on-ground presence was not that high. So I just wanted to know your insight on how we approached TESVA’s launch.

Ashish Dikshit — Managing Director

I think Tejas you have answered the question in your question. In many ways, there is a bit of a chicken and egg. You build retail distribution, which is high fixed cost investment in inventory and then wait for demand creation to happen or you do one before the other. I think there is a very strong wedding linkage to this category. That is why the brand which was launched about six, nine months, this is the first wedding season that the brand has seen. I also wish we had 100 stores instead of 30 stores at this point of time. But that would have meant, you would have had that much cost which you’d have seen no advertising and low awareness. I think some of these things have to be done in this manner. We have created a reasonably strong initial visibility for the brand. It will help, not just existing stores, but also finding new stores and getting consumers, because it’s a slow process. And we needed to build that awareness, even for the stores, which will come in next three to six months.

Tejas Shah — Spark Capital — Analyst

Sure and sir, lastly, what will be our EPO [Phonetic] strategy for Tasva as we go along. Will it be FOFO, COCO or mix of both.

Ashish Dikshit — Managing Director

So initially, as we had said earlier and at the launch stage, you wanted first 40, 50 stores to be COCO stores because we make sure that we establish the brand, strongly both in terms of where we want the stores to be, the quality of stores, the experience and also to establish proof-of-concept even for potential franchises. And we didn’t want it to be held back till that model is proven and franchisees come in. As you go forward like all our brands, this will increasingly move from a pure COCO model to a FOCO and eventually to a full FOCO model. But in the near-term future that you see over next one or two years, the the movement will be more gradual.

Tejas Shah — Spark Capital — Analyst

Got it, thanks and all the best.

Operator

Thank you. Next question is from the line of Kaustubh Pawaskar from Sharekhan by BNP Paribas. Please go ahead.

Kaustubh Pawaskar — Sharekhan by BNP Paribas — Analyst

Yeah, good evening, sir. Thanks for giving me this opportunity. Sir, my question is on the EBITDA margin. So going ahead, as you said that the marketing expense what you have done for this quarter would phase-out going ahead. So considering that in the core business, should we expect margins to stabilize considering the fact that we will continue to grow in double-digits. However, on the consolidated front, it will take another year or so, because you are investing in some of your newer business. So that will continue to have impact on the profitability. So is it fair to assume that at consolidated level there will be a gradual recovery in margins from FY ’25. However, at the core level, we should expect margins to come back on track from FY ’24.

Ashish Dikshit — Managing Director

So, I think if you look at our business and some of that and you will get a better and clearer picture effect. As far as Lifestyle Brands is concerned, I think the good indicator of that would be a 9-month picture instead of this quarter or the previous quarter, etc. Because the horizontal view of the business is perhaps the most stable view of the businesses. That’s been a very consistent business and a margin will perhaps be moving in the zone that 9-month margins will indicate, it’s around 17 odd percent. It will probably move between 17, 18, 19 percent kind of zone as the business grows over the next couple of years and that’s the Lifestyle Brands. As far as Pantaloons is concerned, the business is undergoing as we speak, a more challenging situation, but again I would suggest you look at the 9-month picture which reflects reasonably strong performance not just compared to category and industry but even with respect to FY ’20 performance which is 9-month of same period last year where the margins have been hovering around 17% to 18%. So, these businesses are in that sense while we may see fluctuations quarter-on-quarter, the longer term picture is more stable than the quarterly fluctuations. As far as the new business is concerned, I think we have two, three kinds of businesses. There are parts of the ethnic businesses and if you look at therefore ethnic profitability they’re marginally breakeven to positive because part of ethnic businesses are already profitable but new businesses like TESVA are going to take perhaps two years to really come back to breakeven and improve. Some of the other new businesses which are businesses like TMRW are little bit more unclear at this point of time to predict. Then it would be perhaps a much longer gestation considering the nature of these businesses and going to take more than two three years to get to that level, but most of our ethnic business hopefully particularly TESVA which is the one which is consuming most of the investment at this point of time will take about two to three years to become profitable.

Kaustubh Pawaskar — Sharekhan by BNP Paribas — Analyst

Got your point, sir. And for this quarter, the interest cost has gone up potentially. So any particular reason for this.

Jagdish Bajaj — Chief Financial Officer

This is [Indecipherable] interest cost has not gone up.

Kaustubh Pawaskar — Sharekhan by BNP Paribas — Analyst

Okay.

Operator

Thank you. The next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.

Devanshu Bansal — Emkay Global — Analyst

Thanks for the opportunity. First question was on Pantaloons with low traction in Q3. Do you foresee higher discounting in Q4 as only also earlier this time around versus last year.

Ashish Dikshit — Managing Director

Well I think low traction in Q3 itself resulted in higher markdown and competitive forces working as far as this segment is concerned in Q3 itself. I don’t think situation has changed post Q3. Most of the current situation, which went down was primarily in November post Diwali and a little bit in December. I don’t think it will change in terms of higher markdowns in Q4. Q4 would be like previous Q4.

Devanshu Bansal — Emkay Global — Analyst

Got it. And January specifically has been relatively much better because of delayed winter sort of getting into. So any early trends that you would like to share for this month.

Ashish Dikshit — Managing Director

Again, I would say, one month, sometimes could give a wrong picture, just as I am urging you to look at 9 month picture for all the businesses to understand the intrinsic nature. January would be an extension of the 9-month story. Businesses are performing along the lines, the premium packs of the businesses are facing and experiencing a stronger uptake with the value end of the segment. A month here and there, picture keeps moving but I won’t change our view or any form of outlook on that accord.

Devanshu Bansal — Emkay Global — Analyst

Got it, and innerwear seems to have seen a higher loss in this quarter. You sort of elucidated to higher marketing. So. I just wanted to check, are we making investments at the gross level as well through higher incentives as in to gain more shelf space here.

Ashish Dikshit — Managing Director

No, that part is very stable. Most of the higher losses, which are showing in the other parts of the investment segment, indeed as you as you correctly suggested is coming from innerwear and a significant part of innerwear are losses. In fact, almost all the losses are due to incremental and increased advertising that we did. This is the first ever national campaign, both television, digital and outdoor that we launched for innerwear. And that’s really what has impacted both the profitability of innerwear as well as the overall other business losses.

Devanshu Bansal — Emkay Global — Analyst

And last question from my end sir. You indicated in previous answer, the previous participant answer also, we made some profits in the ethnic segment in Q3. I guess that is due to stronger traction in other ethnic segment except TESVA. Just wanted to check what is the view for coming quarters as we made about INR50 crores loss in last quarter and this quarter, it is slightly profit. So what’s your view on this segment in coming quarters. So will we return back that 40, 50 crores out of the loss or–

Ashish Dikshit — Managing Director

I do not remember making INR50 crores loss last quarter.

Jagdish Bajaj — Chief Financial Officer

40 to 45.

Ashish Dikshit — Managing Director

40 to 45, okay. So this quarter obviously, both Q3 and Q4 are very good quarters for ethnic wear businesses because it’s the wedding period and most of our business in ethnic are related to wedding. I think Q3 will be a better reflection of Q4. Although Q1 and Q2 similarly go through periods of less wedding and therefore those are more affected for these brands.

Devanshu Bansal — Emkay Global — Analyst

Understood, sir. Thanks. That’s it from my end.

Operator

Thank you. The next question is from the line of Vaibhav Agarwal from Basant Maheshwari Wealth Advisors. Please go ahead.

Vaibhav Agarwal — Basant Maheshwari Wealth Advisors — Analyst

Yeah, am I audible?

Ashish Dikshit — Managing Director

Yeah.

Vaibhav Agarwal — Basant Maheshwari Wealth Advisors — Analyst

Yeah, thanks for giving me the opportunity. So, sir, as I looked in the investor presentation, like the EBITDA margin would have been about 18.5%, 19% if we adjust the rent and the higher marketing expenses. So you said that the Q3 EBITDA margins would be in similar lines to the last year one if you adjust these two expenses. So do we see 18%, 19% kind of a stable EBITDA margins once everything is sorted like by in the next three four years kind of a scenario like when the newer businesses also start performing.

Ashish Dikshit — Managing Director

I think, I would reiterate the point I made earlier. Understanding our margin on a longer-term basis, whether you look at the annual basis this year, last year, look at our 9-month picture, it gives us a fair reflection of where the peak of the business is. As I indicated, Madura business operate between 17, 18, 19 percent kind of margin at different points in time. Pantaloons, while this quarter may have fallen a little bit, but has operated between 17.5% to 18% margin. Our new businesses will go through a little bit us fluctuations while ethnic will probably come back as soon as Tasva investments are over. B2C will take longer time to come back. So those will be less predictable on quarter-to-quarter basis. Ethnic in second half of the year will have stronger performance versus the first half of the year. As an overall ethnic business, because there are lot of profitable business there, which already reside in that portfolio. They will continue to do well and particularly in wedding period do exceptionally well. But Tesva investments will perhaps withhold overall ethnic performance in that.

Vaibhav Agarwal — Basant Maheshwari Wealth Advisors — Analyst

On a stable state basis like we are spending a lot on Tesva and Sabyasachi. All these would be a very high kind of high EBITDA margin business when they mature in the next two-three years, right?

Ashish Dikshit — Managing Director

Sabyasachi is already a high margin business. It is stable, it is fast growing, but it’s a high margin business because the brand is very-very profitable. The question is really about Tesva which is where we are making the investments. We need to build awareness. We need to build a network of stores and it will take time before it becomes a profitable business.

Vaibhav Agarwal — Basant Maheshwari Wealth Advisors — Analyst

And when do we expect our operating leverage to kick in from these investments. By when like in the next one, one and a half years or in the second-half of FY ’24 is it possible. Or it will take much beyond that.

Ashish Dikshit — Managing Director

I think it will take a little beyond that particularly for the businesses which are starting off in investing. We have given a reasonable sense of where we see the shapes of various businesses of our in our external Investor presentation that we have made. We are largely going around that line, so parts of our businesses are running ahead of that and some parts are slightly behind, but overall at a portfolio level we are closer to that overall mix that we had indicated at that point in time.

Vaibhav Agarwal — Basant Maheshwari Wealth Advisors — Analyst

So in the Investor Day, probably you will revise the data and come up with the newer figures then?

Ashish Dikshit — Managing Director

We will come back at it in appropriate time with the revised figures.

Vaibhav Agarwal — Basant Maheshwari Wealth Advisors — Analyst

Okay, sir, thanks a lot.

Operator

Thank you. Next question is from the line of Ankit Babel from Subhkam Ventures. Please go ahead.

Ankit Babel — Subhkam Ventures — Analyst

Yeah, good evening. Sir, sorry for the repetition. But my question again is on the profitability. Now I understand you people are in investment phase wherein you are investing in various businesses for the long-term growth. But as investors, we would like to know you know about the profitability part also. Now, how long this accelerated investments will continue? And I understand the core businesses of Madura and Pantaloons, you had given that range of 17% to 19% margins, which will come up but new businesses will continue to drag. But we need to understand the extent of the drag which can come from these new businesses in next 12 months so that we can take an informed call.

Ashish Dikshit — Managing Director

So, I understand your concern and just as you have repeated previous question, I would restate the response that I’ve said. Look at the portfolio that we have. If you look at 9-month picture on revenue side and look at the weighted-average of the business. Madura business is about INR5,000 crores run-rate for 9 months. So you could extend that. If you look at the annual run-rate Pantaloons today is INR2,300 crores, you could extend that to look at what so, about close to INR12000 crores, INR11,500 crores, INR12,000 crores worth of business, there is a reasonably predictable all quarterly fluctuating profitability shape that one could predict. Then there is a part of the business, which is new businesses that we’re growing. Currently it’s about all the new businesses put together in terms of revenue would be operating at a run-rate of maybe about INR1300 crores, INR1400 crores for 9-month period. So about INR2000 crores annually. That business is the one which is fluctuating. Most of the ones investments that are likely to come are in Tasva, little bit in Jaypore and finally in TMRW. We have given any indication of TMRW where it will probably be in the range of INR20 crores to INR30 crores that we are currently experiencing this quarter. It may move a little bit here and there as we acquire new companies and depending on the shape of those businesses. As far as the ethnic business is concerned on an annual level. I think we will come closer to breakeven very soon. And I don’t expect that to be a very long-term loss-making business, because large part of that portfolio is already productive. And Tesva again I think it will also come closer to consumer less investment than what it is doing right now. I will not give an exact number for next year, if that’s what you’re looking for. Unfortunately that’s not—

Ankit Babel — Subhkam Ventures — Analyst

No issues. The direction is very good. And that’s helpful. So just for simplicity and just for our and everyone else understanding. The figure which you had given say two years back in your Investor Day was around INR2350 crores of EBITDA by FY ’26. I understand a lot of things have changed in the last two years, but still for our simplicity and for our understanding, are you in a position to achieve at least that number in terms of EBITDA in absolute terms or you believe that you will miss that or you believe you will surpass it. I mean, any idea on that number, sir, because that is already there in the public domain, which you people have declared.

Ashish Dikshit — Managing Director

Yeah. I know. We have given in public domain and therefore I am never going to contradict. Except re-affirming the fact that we have given it. Time has passed since then. We will come back to you as I had mentioned with the revised set of numbers. What would that number be. I don’t want to right now give response, which we may have to later correct either upward or downward, but let me tell you, we are broadly moving in the direction that we have indicated in that. Difference only on revenue side or EBITDA side would only be marginal and would be a function of how each of the new businesses have played out. Our core businesses are fundamentally operating in line with what we had projected.

Ankit Babel — Subhkam Ventures — Analyst

Excellent, sir. Thank you so much sir.

Operator

Thank you very much. Ladies and gentlemen, on behalf of the management, we thank all the participants for joining us. In case of any further queries, you may please get in touch with Mr. Rahul Desai or Mr. Amit Dwivedi. [Operator Instructions]