ARVIND FASHIONS LTD (ARVINDFASN) Q1 FY23 Earnings Concall Transcript

ARVIND FASHIONS LTD  (NSE:ARVINDFASN) Q1 2023 Earnings Conference Call dated Aug. 11, 2022

Corporate Participants:

Ankit Arora — Head of Investor Relations and Treasury

Kulin Lalbhai — Non-Executive Director

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Analysts:

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Pritesh Chheda — Lucky Investment Managers — Analyst

Riddhesh Gandhi — Discovery Capital — Analyst

Yash Mandawewala — Mandawewala Family Office — Analyst

Sagar Parekh — One Up Financial — Analyst

Pulavarthi Saikiran — Pulavarthi Advisors — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q1 FY ’23 Earnings Conference Call of Arvind Fashions Limited. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Ankit Arora. Thank you, and over to you, sir.

Ankit Arora — Head of Investor Relations and Treasury

Thanks, Rutuja. Hello. Welcome, everyone, and thank you for joining us on Arvind Fashions Limited earnings conference call for the first quarter ended June 30, 2022. I’m joined here today by Kulin Lalbhai, Non-Executive Director; Shailesh Chaturvedi, Managing Director and CEO; and Piyush Gupta, Chief Financial Officer of Arvind Fashions Limited.

Please note that results, press release and earnings presentation had been mailed across to you yesterday, and these are also now available on our website, www.arvindfashions.com. I hope you had the opportunity to browse through the highlights of the performance.

We will commence the call with Kulin providing his key thoughts on our financial performance for the first quarter. He shall be followed by Shailesh, who will share brand level insights into business and financial performance. At the end of management discussion, we will have a Q&A session.

Before we start, I would like to remind you that some of the statements made or discussed on this call today may be forward-looking in nature and must be viewed in conjunction with risks and uncertainties we face. A detailed statement of these risks is available in this quarter’s earnings presentation. The Company does not undertake to update these forward-looking statements publicly.

With that said, I would now turn the call over to Kulin to share his views. Thank you, and over to you, Kulin.

Kulin Lalbhai — Non-Executive Director

Thanks, Ankit. A very good afternoon to you all. Thanks for joining us for the Q1 results. We witnessed a very strong momentum across channels in Q1, building on the strong demand which we had witnessed in H2 FY ’22. This robust demand reflects the strong affinity amongst customers for our portfolio of market-leading brands. Quarter one FY ’23 is our best quarter one results in terms of sales and profitability, with revenues growing by 40% over pre-COVID to INR920 crores and an EBITDA growth of 52% compared to pre-COVID levels at INR94 crores.

Sharp execution on the retail channel continued in this quarter as well, registering around 25% like-to-like growth despite our conscious decision to push out the EOSS window for our brand. We registered our highest ever full price sell-through in our business across brands in Q1, and lower discounting has delivered a sharp jump in gross margins of 49.4% for the quarter, which is an improvement of 640 basis points compared to the same quarter last year.

The MBO channel witnessed robust demand as well with channel sales growing by 2.5 times pre-COVID. Our investments in omnichannel and marketplace aided strong performance in online channel with sales almost doubling compared to pre-COVID levels and a 20% growth on a significant base in quarter one of last year.

Our working capital continues to remain under control with an improvement in debtors led by higher retail channel mix and better collections during the quarter. We continue to target having inventory turns of more than 4 times in FY ’23, leading to free cash flow generation.

We remain optimistic about the rest of the year with revenue momentum likely to stay strong with a great Autumn-Winter ’22 launch, coupled with continued growth in online and other channels, and a further boost expected in the festive season.

Our focus on expanding adjacencies like footwear, innerwear and kidswear across our existing portfolio will remain one of our growth drivers and we are already seeing rapid growth there. Profitable growth will remain our mantra going forward, and the focus will be on improving operating margin and a significant improvement in our return on capital employed.

I would like to now hand it over to Shailesh Chaturvedi to take us through more details.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Thanks, Kulin. Hi, and good afternoon, everyone. With 40% growth in revenue over pre-COVID quarter one FY ’20 and a 52% growth in EBITDA, quarter one saw a very strong execution of brand promises of our market-leading brands with their consumers.

It was very heartening for the industry that finally, after two full years, we saw a full season starting with season launch in February ’22 to start off end of season sale in July and now launch of the new season in August ’22. Till now in the last two years, we have seen COVID impacting one part or the other or the bulk of the season, but we are finally happy to see finally a full season. This full canvas of seasons also gave us opportunity to execute our work in online and offline worlds, resulting in very strong business KPIs.

The scale of INR920 crores in Q1 is nearly INR600 crores higher than last year’s quarter one. This was possible because all major channels, be it retail, online, trade, they were all firing. We saw INR100 crore revenue gain in retail channel alone in this quarter over pre-COVID quarter one. We saw extra INR100 crore revenue gains in online in quarter one versus the pre-COVID quarter one FY ’20, and the trade channel also grew close to INR80 crores. So we saw multichannel growth in this quarter, resulting in an INR600 crore higher revenue than last year, leading to INR920 crores NSV in this quarter.

Retail has become a very large channel for almost half of our company’s revenue. And this has been pushing our GP percentage higher, because [Technical Issues] have a higher GP percentage. With very high-quality focus and systematic execution, we saw retail KPIs improve like to like store growth of 25%.

I must say our stores have never looked better. April ’22 saw 50% growth over pre-COVID April ’19. May also saw another 50% growth, while June growth reduced because we decided to postpone end of season calendar to July, to limit the number of weeks in a year under sale and improve our margins through lower discounting.

Online continued its growth momentum. It has nearly doubled in quarter one over pre-COVID times. The online business has accounted for 25% of revenue for the company in Q1 and has grown by more than 20% on a large base and it continues to help us serve demand in a more robust omni-way. Majority of our stores are now omni-enabled, and omni contribute nearly 10% of store sales at the connected stores.

Well, let’s talk about the marketplace. With strong investment in fulfillment capabilities across India, with higher degree of online-specific products in marketplace and with bigger assortments for our brands, marketplace business has grown by 50% in quarter one. Our GP percentage of 49.4% is the highest in recent times. Over the last couple of quarters, we have seen a jump of around 4% in GP due to sharper execution focus on like-to-like growth, better pull price sell-throughs and after accounting for commensurate increase in the variable costs in channels like retail, a good part of this gain flows into EBITDA margin.

You see our EBITDA margins have gone up by 1.5% in this quarter versus the pre-COVID quarter one FY ’20. This has resulted in PBT positive performance for the company. This is the third straight quarter of PBT positive performance at AFL. Our focus continues to — remains to grow the business at 12% to 15% annual rate net of COVID and we remain focused on strong, sustainable, consistent and profitable growth of business.

On the brand front, our uniquely powerful portfolio of market-leading brands has gained momentum further post-COVID. USPA, U.S. Polo Association, has become an even higher ranked casual brand in India and is galloping towards the top rank tier. Tommy Hilfiger and Calvin Klein have also performed exceedingly well in terms of reduction in discounting, increase in full price sell-throughs and have delivered double-digit pre-IndAS EBITDA. So this portfolio of U.S. Polo, Tommy Hilfiger and Calvin Klein is a very powerful set of brands in the market and is delivering very healthy profitability and growth for AFL.

Another good news is that Arrow is EBITDA positive. With market revival post-COVID and improvement in supplies to different channels, Arrow has gained scale and is delivering fantastic business KPIs. We’ve also seen in the market revival of weddings, festivals, business travel and celebration of special occasions, which augurs very well for further strengthening of Arrow business, especially its profitability.

As the business continues to generate cash even with impressive growth ahead, we expect our net debt levels to remain close to the level we ended last year at. At June end, our net debt was INR427 crores. With continued tight control on inventory business remains in the zone of four stock terms. With improvements in margin, we have seen return on capital employed move up in this quarter to a high single-digit percentage, and we will continue to step up efforts to take ROCE to higher level in future.

Thank you, friends. Over to Ankit.

Ankit Arora — Head of Investor Relations and Treasury

Rutuja, we can open it now for Q&A.

Questions and Answers:

Operator

Thank you very much. We will now being the question-and-answer session. [Operator Instructions] The first question is from the line of Nishid Shah from Ambika Fincap Consultants. Please go ahead.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Yeah, thank you for taking my questions. Congratulations to the team on a good set of numbers. Hello? Am I audible?

Kulin Lalbhai — Non-Executive Director

Yes, Nishid, you are audible. Thank you. Please go ahead.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Yeah, so this question is addressed to the top management. Now you have got an incremental, as I think Shailesh mentioned it in his remarks, incremental INR600 crores of sales have come. Now, if you look at your gross margins, I mean, in your industry the gross margins anyway should be substantially higher, then it is not translating into the — properly into the operating margins as well as at the net level.

And my second question is, when you benchmark and look at the competitors, some of the competitors who are slightly bigger than — in size to you, I’m referring to Page Industries, they have an ROCE of 67% and an operating margin of 20% and all. So where you do benchmarking and where are we needing to improve to get back to that kind of an industry-leading numbers in terms of profitability and efficiency?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Nishid, very interesting questions. Coming to the scale and the margins piece, in the COVID impacted last quarter, last year’s quarter, we’ve grown INR600 crore. But then also there were delta of close to INR120 crores in the EBITDA. And in a weaker quarter, call it, like quarter one, which in our industry is essentially low, we have done INR94 crores of EBITDA, 10.5%. So there is definitely an improvement in the margin scenario.

Compared to pre-COVID also, our EBITDA margin has gone up by 150 basis points. It’s a journey. We are not at the tail end of these benchmark companies that you mentioned. But if you look at last three quarters, we have consistently improved our margins, our KPIs. And we are on that journey from a loss-making company in the last three quarters, we have become PBT-positive. And I’m sure this journey will continue and take us to the highs that you are mentioning, Nishid.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Yeah. Shailesh, just taking over from there, and I’m glad you mentioned that. Actually, if I look at your annual run rate and Page Industries’ annual run rate, the difference is only about INR1,000-odd crores. But I mean, I’m sure you and Kulin both are cognizant of the fact that there is a huge, huge gap in terms of where Page Industries is, in terms of market cap of INR54,000 crores and where we stand today in terms of our market cap of almost INR4,000-odd crores.

So I’m saying top line is coming. You guys have done a wonderful job. Now is it that we are now focusing — going to focus on the efficiency parameters and also on the profitability aspect? Another thing is, if you look at the working capital days, they have a working capital days of 36 days. We still have to improve on the working capital and improve our inventory churn. So would you like to expand on that?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yeah. So I won’t talk about a specific industry player because their realities and our realities will be different and the level of discounting in underwear business versus our fashion business will be different. But I would definitely agree to what you said that would your focus remain on profitability. I think, if we have to say a single mantra for us to take our margin model to — for power brand to a double-digit EBITDA in next 12 to 18 months is a single-minded agenda that we have. The ROCE improvement, we’ve turned ROCE positive and now reaching single high digits.

What we have promised, we are delivering. And it’s a journey, step by step, we will continue to improve our profitability, and that’s our single objective. Also on stock turns, we have improved our stock turn from 3 to close to 4 now and that’s a journey again that we will keep an eye that improving stock turns from beyond 4 will be a target for us, and we will work hard towards that.

So, I couldn’t agree more with Nishid, what you are talking about in terms of stock turn, in terms of the margin model. That will remain our focus. We have made good progress. We are very pleased with our performance in quarter one and we’ll continue to work hard towards that.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Yeah. I mean, I can see there is a substantial improvement. All I was saying is that we need to improve on the profitability aspect. Now the last question is on the Sephora. Can you — I mean, we have discussed this in the past, is there any progress on the Sephora on the online side or are we going to focus only on the in-store side?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Kulin?

Kulin Lalbhai — Non-Executive Director

Yes, I mean think — I mean, see, in Sephora, the business is doing very well now. I mean, the offline business is currently performing exceedingly well post-COVID. The segment also is doing well. On your question on online strategy, we are still working with our partners on how we should plan that out. For the time being, we are in the process of expanding the retail network and the like -for -like productivities are going from strength to strength. And as we work and get clarity on the other side, we will roll things out.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Yeah. Thanks for that. That was my last question. Thank you.

Operator

Thank you. The next question is from the line of Pritesh Chheda from Lucky Investment Managers. Please go ahead.

Pritesh Chheda — Lucky Investment Managers — Analyst

Sir, our growth versus quarter one FY ’20 seems to be different from what you guys have reported, we are on a slightly lower side, whichever period we can compare with the apparel space. So is it to do with the end of season sale timing issues for which the growth looks different. That’s one question.

And my second question is, sir, the pre-IndAS margin, if you could give some comments there. And at this revenue scale of INR900 crores, which means an annualized number of, let’s say, INR3,500 crores, if I recall in our past presentations, at about INR800 crore of sale or INR700 crore, INR800 crore of sale in our power brands, we were already at about 8% pre-IndAS EBITDA margin. So why is it that the margin number looks lower even if we have achieved INR900 crores? And if you could guide us on the pre-IndAS margin direction for the company.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes. So — yes, as far as the growth is concerned, our growth is close to 40% over the quarter one FY ’20. That’s across the channel. The revenue has fired very well. Now if I look at the retail numbers for this quarter of April, compared to the pre-COVID, we grew 50%. In May, again, we grew at 50% and very good, almost 25% like-to-like. In June, that 50% growth came down close to 15%, because we pushed the EOSS out to July.

And because of that the July — the June numbers growth came down, but our margins and discounting also came down significantly because of that record full price sell-throughs, which are very, very important for the margin model in our business. So July, we pushed out. So the growth is sort of robust and EOSS had an impact on the June number, but that was planned by us, and we saw similar things done by many other players in the industry. As far as the pre-IndAS EBITDA margin is concerned…

Pritesh Chheda — Lucky Investment Managers — Analyst

No, sir. Sir, my question was we grew 40%. Peers have grown 50%. Is there any reason for this 10% differential where the tailwind for everyone was a similar tailwind? So is there any reason for this differential 10%, we being lower?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

I think we’ve been sort of doing well across the channel. Online has grown on a higher base. I don’t know which player and I would not want to comment, because…

Pritesh Chheda — Lucky Investment Managers — Analyst

For Madura, it’s plus 50%; Calvin Klein is plus 50%.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yeah. I mean I’ve seen the related part of these companies because some of these companies have took names or have many businesses, not directly. So they have some businesses which are directly comparable and our numbers are quite sort of in tune, maybe better than some of them. I don’t want to say it specifically, yes, the EOSS is probably be the only reason, otherwise we have done quite well.

Pritesh Chheda — Lucky Investment Managers — Analyst

Okay. And on the margin side, sir, if you could help us understand.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes. So, what happens in the margin between the post-IndAS and IndAS, there is a difference of close to 4% and we have discussed this in the previous calls also. So the difference is around 4%. Now ours is a seasonal quarter, the EBITDA margin differs based on the level of wholesaling, level of discounting. It’s a very seasonal industry, and quarter one tends to be the weakest quarter in any company in terms of the margin. In the historically also quarter one — we are very happy with our margins in quarter one because this is historically the best margin in quarter one.

And if I look at the remaining part of the year, as we get into the festival season, our margins would be higher because it’s a seasonal business. And by — if we are at a 10.5% post-IndAS then there will be many quarters likely to have a higher EBITDA margin. And we are improving our EBITDA every quarter. And whatever the number you took, you will see hopefully a higher percentage than that in this year. We are very confident of delivering.

Also I think if I would say midterm 12 to 18 month period of our power brands portfolio, we have a clear objective of reaching double-digit EBITDA in our brands. We had a slightly weaker EBITDA margin in Arrow. That brand has also broken even, it’s EBITDA positive. But it’s the journey ahead on that brand to improve to double-digit that our overall portfolio will be. But U.S. Polo, Tommy Hilfiger, Calvin Klein, these are all in that zone of pre-IndAS double-digit EBITDA margin. And the whole portfolio will move forward and also seasonally you’ll see higher EBITDA margin as we go along in this year.

Pritesh Chheda — Lucky Investment Managers — Analyst

Sir, just clarifying, when you had an INR900 crore sale and it was a pure full price sale, yet you could not achieve your earlier pre-IndAS 8% EBITDA margin, any comment there? I hope you got my question.

Kulin Lalbhai — Non-Executive Director

No, I think I mean, here…

Pritesh Chheda — Lucky Investment Managers — Analyst

Why seasonality is an answer here when the absolute number is INR900 crores sir.

Kulin Lalbhai — Non-Executive Director

No, I think Shailesh was answering it. INR900 crores, you cannot look at in an absolute sense. Every quarter will have a different channel mix and channel profitability also changes in our business. Historically, quarter one is a quarter where there is no wholesale billing. It is a pure retail-only quarter. So you cannot take a quarterly revenue as a benchmark. When you look at it from an annual sense, what you are saying that logic would hold. So as the other quarters come in, when the channel mix changes, you will see the bottom line profile changing.

Pritesh Chheda — Lucky Investment Managers — Analyst

So in your business, if you could give the hierarchy of margin profile in an EBO. So what EBO is the lowest vis-a-vis the wholesale?

Kulin Lalbhai — Non-Executive Director

So we will — we don’t get into channel level discussions. But historically, retail in quarter one is not the highest productivity retail quarter. Retail in quarter three, for example, will be very, very profitable during their Diwali season. So you have to look at it quarter-specific. If you look at our historical performance over many, many years, you will always see quarter one is cyclically the lowest bottom line quarter in the year because of the channel mix and the kind of sales pattern you usually have in quarter one.

Pritesh Chheda — Lucky Investment Managers — Analyst

So quarter one is more retail and less wholesale. That’s how it is.

Kulin Lalbhai — Non-Executive Director

Yes. So the retail is also a summer season versus the festive season.

Pritesh Chheda — Lucky Investment Managers — Analyst

I’ll take it offline sir. I was unable to understand, but I’ll take it offline. Thank you, guys.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yeah. So, you can connect with Ankit offline for color on the channel-wise numbers, yeah?

Pritesh Chheda — Lucky Investment Managers — Analyst

Yeah.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Riddhesh Gandhi from Discovery Capital. Please go ahead.

Riddhesh Gandhi — Discovery Capital — Analyst

Yeah, hi, sir. You know we have a reasonable — actually, I mean with premium brands that we have. So I’m assuming on those, the gross margin should be reasonably high. Again, just following up on the question of the previous participant is, just wanted to understand like structurally what is it that isn’t allowing us to earn EBITDA that’s actually margins in line with actually other retailers despite having done so high on the revenue font despite like not doing discounting? Like is this something structural? Is it the royalty which we had to pay to the brand? Is it the kind of location where our stores are? Is it that our overheads are for a reasonably higher organization? Is it that we’re overspending on advertising? Just want to understand because something is structurally off with regards to this kind of profitability even at this level of revenue.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes. You know like we said that the quarter one, we do largely retail business and there’s no wholesaling. The primary billing that we do for the season beginning in, let’s say, February March or Jan Feb or in July August, where there is a full margin etc. and retail expenses in the first quarter tends to be on a higher side. So quarter one has a kind of products we sell, the average selling price of that product versus what we sell in the festive season or in winter season for these billings.

So the productivity of retail also is little lower towards this part of the summer season than in the remaining part of the year. So eventually, the sales density tends to be little lower in the summer season compared to the winter season or the Diwali season, and that kicks in a little higher margin as we go along. And you’ll see in the quarter two and quarter three, because of the seasonality, you’ll see a higher margin for us.

If I look at our entire performance, if I look at the GP, — increase in GP, on an average, around 4% in the last three, four quarters we have seen. Part of that, in retail channel, there is a commensurate variable cost because we have to pay the franchisees, commission. So the entire gain of retail in GP doesn’t necessarily flow into the EBITDA, but it still delivers a good EBITDA.

The second thing in this quarter, I can only see that we had a one-off employee expenses of around INR7 crores because last year performance — we used to have a March ending annual appraisal cycle, which has now [Technical Issues] so the new salaries come in July, earlier it used to happen in April. So there is around 7 times [Phonetic] performance bonus, retention that we have paid out, which will not happen in future. And if I remove that INR7 crores, then EBITDA would have been slightly higher. So other than that, structurally, we are in a phase where our GP and our EBITDA margins are going up.

Riddhesh Gandhi — Discovery Capital — Analyst

So, look, sir, I completely appreciate that. I mean, the first quarter seasonally is the weakest quarter. And I understand that the EBITDA will go up in Q2, Q3 which are obviously stronger. But even though it’s the weakest quarter, and I’m saying that compared to almost all retailers who we are seeing, we are still materially lower, despite being on a reasonably high revenue growth outlook.

Kulin Lalbhai — Non-Executive Director

Shailesh, if I could just come in here.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes, yeah. Please. Please comment.

Kulin Lalbhai — Non-Executive Director

Just explain one thing structurally in this business, it’s a very high operating leverage business. Now we have a portfolio of six brands. Each of them are at different levels in their journey. If a brand is typically nearing an INR800 crore, INR1,000 crore turnover, typically it is a brand with a high operating leverage and correspondingly, the profitability is high. So three of our brands are already in a high double-digit pre-IndAS profitability, which puts them broadly in line with market profitability of large established brands.

We have got a couple of brands which are still scaling up. So Arrow has been in a turnaround. It had gone into negative EBITDA actually. It’s come back into positive EBITDA. But the journey for it to get into double-digit EBITDA is still a journey which will take a little bit of time. It is about rescaling the brand and Shailesh mentioned, a lot of positives in the KPIs, but it’s still a little bit of a journey. We have seen the beginning of that journey, and that journey is not complete. Similarly, Flying Machine and Sephora are still in terms of real scale, subscale, they are also getting into their journey of moving towards double-digit profitability.

So large established brands have achieved the double-digit profitability and the maturing part of the portfolio is scaling up. And overall, the company is also scaling up, which will bring operating leverage. So it’s a point in time in our journey where we will continue to see the benefits that will come from some of our brands scaling up and the company overall scaling up.

Riddhesh Gandhi — Discovery Capital — Analyst

Got it. Understood. So I think that’s extremely helpful. The only thing I think, which incrementally would actually help us and I know you don’t disclose the plan that would be in detail, but the reason it would be helpful is it will help us to actually understand the journey a lot better, right, where we can see what has happened with other brands which you guys own, how those numbers have shaped up and how your other brands are tracking as well in this similar direction. It gives us also comfort that we are heading at least ultimately into the right place, and it isn’t being hidden in all of these other aspects.

Kulin Lalbhai — Non-Executive Director

Sure. And I think Ankit can also explain some of this, you know. But generally, the way operating leverage behaves in our business is something that definitely should be understood. And I think Ankit can also shed some light on this offline with you.

Riddhesh Gandhi — Discovery Capital — Analyst

Yes. Okay. So I will reach out off-line and all the best. Thanks.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yeah, thank you.

Operator

Thank you. The next question is from the line of Yash Mandawewala from Mandawewala Family Office. Please go ahead.

Yash Mandawewala — Mandawewala Family Office — Analyst

Hi, am I audible?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes, Yash.

Yash Mandawewala — Mandawewala Family Office — Analyst

So can you talk through the gross margins for this quarter, how much of it is just a one-off due to maybe EOSS being pushed to the subsequent quarter? And if we take a medium-term view, where do we see really the gross margins on the portfolio as a whole ending up?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes. The way our channel mix is behaving and the retail is becoming stronger where our execution is sharper, there is a genuine regular around 4%-odd jump in gross margin in the recent quarter. This quarter, yes, I mean, EOSS would have also helped the pushing of that. But that’s a one-time next year onward till that’s been the norm. But we are definitely in a situation with better focus on our sell-through with lower discounting. Our GP has gone up by 4%.

Now in some of the channels, there is a variable cost below GP like in retail because the [Indecipherable] commissioned the employee cost. So entire — that 4% doesn’t flow into EBITDA that — even with a higher scale. But in some channel, it comes in. So basically, there is a sustained genuine increasing GP of around 4%-odd and. And I think that should continue in terms of the progress into this year and next few quarters.

Yash Mandawewala — Mandawewala Family Office — Analyst

Got it. So basically, whichever quarter the retail sales are high, the GPs will sort of look higher, but the other expenses will sort of make up for that. The commission piece, how much — what does this commission piece look like that we give to the franchisees as a percentage of sales? So how does that line item booked?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes. I mean, so that’s a channel-to-channel. In our books, if you see, there is a term called other expenses. So if you see our P&L, you’ll see other expenses were a large part of this operating expenses, and that’s an INR297.1 crore item in the June P&L. And that, you can track and see how the other expenses and a lot of it is channel expenses below the gross margin that flows there.

Yash Mandawewala — Mandawewala Family Office — Analyst

Right. But that’s a fixed, so — I mean, that’s a variable…

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

It’s a variable. The franchisee commission is linked to sales, so a part of it is variable and some part where suppose we have our own staff etc. and like department, so that becomes a fixed part. But a large part of it is variable franchisee commission.

Yash Mandawewala — Mandawewala Family Office — Analyst

Got it. Got it. And then just next on Arrow…

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Also, there is a royalty component that comes, which is also a variable linked to the sales.

Yash Mandawewala — Mandawewala Family Office — Analyst

Right, right, right. Just next on Arrow, you mentioned we’re breakeven for this quarter, EBITDA breakeven. So this is pre- IndAS EBITDA or this is sort of post-IndAS?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Pre-IndAS EBITDA.

Yash Mandawewala — Mandawewala Family Office — Analyst

Okay, okay. And we are just — during COVID pivoted Arrow towards having slightly more casual or bit more sporty collection. Now that the offices are open and formalwear seems to be making a comeback, how are you thinking about the positioning with regard to Arrow?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

A very good question, because Yash, what we have seen is that in the last — since March this year, the festivals, special occasion, weddings, all those business travel has really increased as you can see the flight tickets and the hotel occupancy has really jumped up. So we also — and Arrow in COVID times when people were only working from home, we modified and we have a strong sportswear collection in Arrow. But what we have seen in the quarter one, the sell-throughs of its core promise of the formals, which is the formal short, formal trousers, they have seen fantastic [Technical Issues].

That business has come back and that is giving the scale because that scale was not coming during COVID. And Arrow is a very, very strong player in many department stores, it’s in the top two brands in a competitive space. And that business has now bounced back. And that is giving scale, which is giving the leverage for the Arrow to sort of come back to EBITDA level pre-IndAS profitability. So we will continue to work on its formal shirt, formal trousers, full blazer. We still have a casual line which is also growing well because demand has been very strong in the Indian market off-late. So Arrow will benefit from this revival of the festive, wedding, special occasion demand.

Yash Mandawewala — Mandawewala Family Office — Analyst

Sir, there was also– I mean, pre-COVID there was this institutional channel that it seems Arrow was pretty strong in. There is, I think, a structural hit to the profitability with regards to Arrow. So how much time really — how are you guys thinking about how much time will you give this brand to turn around? And maybe, is there a decision that needs to be made on the future of this brand over the next 12 to 18 months?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

It’s a very leading brand, if you do any consumer research. It’s a very, very prized possession. It’s a very, very top consumer brand. Arrow in its segment is a leading brand. So I don’t — I think the environment became very, very hostile during COVID because people were not traveling, the weddings were not allowed, special occasions were not happening.

So today, as the world has come back and started to learn to live with COVID, we’re seeing very good traction and build-up of scale. And we just finished our booking for Spring/Summer ’23 season. Arrow is really a very highly desirable brand. When it gets a sell-through of Arrow not just in our stores but with the trade consumers, the sell-throughs are very, very encouraging and very sort of market-leading sell-throughs in the industry.

So COVID was particularly bad for this one brand, but that’s behind us and we are building scale in this. And SS ’22, if I see versus pre-COVID times there is a big improvement in sell-through, big improvement in reduction and discounting. So I think it’s a brand that we are very, very — we feel very proud of having in our portfolio. And this is the only wedding brand in our portfolio. Other brands are casual. So when we go to customers in the market, it’s a very important part of our bouquet that we offer to our customers or two or three customers.

Yash Mandawewala — Mandawewala Family Office — Analyst

Got it, got it. That’s very helpful. Thanks to a lot. That’s it from me.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

We are very strongly committed to Arrow and we’ve seen the worst, and I think this brand should sort of accelerate.

Yash Mandawewala — Mandawewala Family Office — Analyst

Great, great. Thanks a lot. Thanks a lot. That’s it from me.

Operator

Thank you. The next question is from the line of Gautam Rathi from CWC. Please go ahead.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Hi. This is Nishit. Am I audible?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes, Nishit

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

So I have a couple of questions. One, I just wanted to understand, so if I’m just doing the math right — so if I understand it right, Tommy, CK and USPA have all turned profitable on double-digit — seem to be double-digit profitability on pre- IndAS. And all the other brands also seem to be making money, right, which is Sephora, Flying Machine and Arrow. So none of them seem to be losing money. But somehow that doesn’t add up in your numbers, right? So are you losing money somewhere?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

No, no. I mean, we did lose money in Arrow in the past, but that’s behind us, and it’s now broken even in the quarter one. And Flying Machine is also profitable, just that the scale, like Kulin said earlier, the brands are sub-scale, Arrow had a specific COVID impacted performance. So I think with Tommy, CK and USPA continue to do well both in terms of scale and profitability, now Arrow, Sephora and Flying Machine will need to add their scale and profitability. So that’s the journey for us ahead.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Yeah. Shailesh, my thought was that you know if I take those top three brands, they will be — my rough assessment is roughly maybe 50% of your business. And if I give double-digit margins, it’s kind of there. So it’s somewhere — only thing that does not make — something has to lose money somewhere for you to be at that kind of profitability levels. Anyway, I can take it offline if that is…

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

No, no, but I assure you. I mean, like I said earlier, we have seen losses in Arrow business but that business has turned around. It’s broken even now. But the absolute profitability in these brands that you mentioned, Arrow, Flying Machine and Sephora, is still very small. And when we look at double-digit and then summer is low single- digit and you look at the overall portfolio, it does impact the numbers.

So, in a way, you’re right that our task is to take the profitability of Arrow and Sephora and Flying Machine higher, and that’s what we are all working on. And if you look at last three quarters, we have consistently step-by-step improved our execution. And we will also continue to improve the — where Arrow was a year back versus now, it’s in a much healthier space. Sephora [Technical Issues] industry, that business has started gaining scale. So I think in some sense, I agree with you that what you are indicating to us leaves the math part of it is what is the job ahead for us.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Okay. And Shailesh, how should I think about it? Because historically, on the con calls, it was — I had the belief that any brand that reached the scale of INR300 crores to INR400 crores started giving extremely high ROCEs. But that number seems to have gone up. What is the new level for you to kind of — for us to just understand, at what scale does the — do these three brands start giving you double-digit kind of margins or what needs to change for you to kind of start getting those kind of margins there?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

I think, I would say, the answer for a double-digit EBITDA would be two parts, not just scale, yes, scale is very important and it gives you the scale, leverage your fixed costs get apportioned. But I think it’s also the efficiency. It is also about the sell-through. It’s also about the discounting level. You can be a very big brand but with high discounting and still be loss-making. So I think the whole rigor of executing right from right merchandise assortment to the right retailing standard to right growth in the stores or online discounting.

So we have to work on both the sides. It’s scale, yes, I agree with what you’re saying. But there’s no answer to that at this scale, you will 100% become profitable because you’ll have to marry the scale with the efficiency. So it could be a INR400 crore brand and profitable. It could be a INR600 crore brand and loss-making. So somewhere, we have to find both scale, which is important from a leverage point of view, but also efficiency and that’s why, if you see our entire discussion is on sell-throughs, launching season properly, reducing discounting.

And a lot of our effort is actually going in last three, four quarters that you have seen is to improve our KPIs on the execution and that’s what we are doing a fairly decent job of and that’s what we’ll have to continue doing so that every brand in the portfolio of power brand becomes a double-digit pre-IndAS portfolio in next 12 to 18 months.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Okay, fair. That was my third part, which I just wanted to understand. So you’re saying that in the next 12 to 18 months, you see your entire portfolio moving towards that close to double-digit margins, right?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yeah, that’s our greatest objective and we’re working hard towards that.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Perfect. Great. Okay. So, that is fine. And my last question, because I was unable to understand. So you have INR300 crores worth of other expenses, right? And in that, you said a lot of it is also variable like, which is the commissions that you must be paying and royalties? So what is — can you just give us a sense of what percentage of it is fixed so that we get a sense of when you actually get operating leverage, how can you get operating leverage?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Nishit, we can slice it for you and connect with you later, because we can definitely provide we do the math and share it with you.

Nishid Shah — Ambika Fincap Consultants Pvt Ltd — Analyst

Sure. Thank you very much.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Sure. Take care.

Operator

Thank you. The next question is from the line of Sagar Parekh from One up Financial. Please go ahead.

Sagar Parekh — One Up Financial — Analyst

Yeah, hi. Thanks for taking my question. My question is again on the pre-IndAS EBITDA margin only. So I mean, you will have like sliced-and-diced everything. But just on a INR3,600 crores to INR4,000 crore top line base for this current year, we would still not be reaching double-digit kind of pre-IndAS. So given the mix of brands that we have for annually, at INR4,000 crores, what would be like the pre-IndAS EBITDA that we can achieve and at what level of sales can we achieve like double-digit kind of pre-IndAS EBITDA number?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

See, Sagar, what we have stated and we keep giving our guidance is that this year, we will be in the high single-digit EBITDA at our overall portfolio level. Lot of our brands are already [Technical Issues] double- digit. We mentioned some of those brands. Some brands are not, like we just have the names clearly.

So that’s what this year’s journey is. And what we also committed is that we continue to improve our GPs, continue to improve our contribution and EBITDA so that we reach in 12 to 18 months the whole power brand portfolio, which will be double- digit. So that’s our plan, and we are sticking to it. That’s our guidelines and we are working hard towards that target.

Sagar Parekh — One Up Financial — Analyst

Okay. Got it. And just one suggestion. Actually, I know you generally — you mentioned in the call that the pre-IndAS EBITDA is about 400 bps lower than the reported EBITDA. But if you can — in the presentation, you gave the break-up of EBITDA between power brands and emerging brands. This practice you used to do it earlier.

In case if you can possibly do it again in terms of giving us pre-IndAS EBITDA number for power brands and emerging brands separately, it would be really helpful and it would be taken positively by the investor community in general, because otherwise, in the call, a lot of time gets wasted on asking the same questions about what is the pre-IndAS EBITDA margin breakup etc. So that’s just a suggestion from my side. Thank you.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Sure. We noted your suggestion, Sagar, and our team will connect with you and we will definitely work on that, Sagar.

Sagar Parekh — One Up Financial — Analyst

No, I’ve already spoken to Ankit about this. So in case if you all can apply this from next quarter onwards, if you can give us pre-IndAS EBITDA margin breakup for different like power brands and emerging brands separately, that would be really helpful. Thanks.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

We’ll definitely consider your suggestion. Definitely we’ll come back, yeah?

Sagar Parekh — One Up Financial — Analyst

Yeah, thanks.

Operator

Thank you. The next question is from the line of Pulavarthi Saikiran from Pulavarthi Advisors. Please go ahead.

Pulavarthi Saikiran — Pulavarthi Advisors — Analyst

Hi, thanks a lot for taking my question. First of all, congratulations on a very good trajectory in terms of the numbers. So just, I think there is enough of discussion happened at the EBITDA level profitability. If I just change this profitability discussion at the net profit level, just wondering, like how does different brands look like?

Because when we look at the numbers, there is a minority interest which is there, which is essentially the Calvin Klein and Tommy are reasonably profitable when we look at even the long-term trends this year or last year. And as we are suggesting the other brands are mostly broke even at the EBITDA level, but unfortunately, that is not getting translated at the PAT level. If you can just explain us what is this holding it back? And also, if you can just let us know how this profitability at the PAT level can improve for the next few years. Thank you.

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

I think it’s a valid question. So there is a joint venture which is profitable and we have in the AFL a very strong fast-growing profitable brand in U.S. Polo. It’s a market-leading brand. We have a couple of brands, which are sub-scale, where the profitability is low. We discussed in this call one of them we’ve turned around, it’s broken even now. And some other brands like Flying Machine, Sephora, are still subscale.

So the whole effort will be to build efficient scale, a profitable scale so that the EBITDA margins go — as we said, that high single-digit pre-IndAS this year, and power brand double-digit EBITDA pre-IndAS in 12 to 18 months. Once that happens, then the profitability will come. Because if you really see at an interest level or at a depreciation level, there has been a good sort of a reduction. Our debt levels are under control.

Depreciation is going down this quarter versus previous quarter. Also last year, you see a sharp reduction in the — the below EBITDA items are under control. So there is no interest cost or depreciation cost to worry and because its balance sheet has already been tightly managed. So I think PBT level or at a PAT level, the gain will continue to happen when the EBITDA goes up. And we’ll continue to manage our interest cost rightly the way we have done in our depreciation. So I think eventually, we come back to our discussions on margin improvement and our guidance, and our effort, our single-point agenda is to improve the scale in an efficient manner so that the EBITDA margin goes up.

Pulavarthi Saikiran — Pulavarthi Advisors — Analyst

Sir, I understand. But if you look at it, just looking at the same commentary, right, the Tommy, Calvin and then U.S. Polo are highly profitable and probably in the double-digit margins at the EBITDA level. And none of the brands are losing money at the EBITDA level, which is also reflected at the EBITDA side. But unfortunately, that is not getting translated to the PAT level. So, are you suggesting that the depreciation and amortization and finance costs are primarily the fixed, hence, whatever the gross margin expansion happens will flow to the EBITDA, hence the profitability should improve at the PBT level? Is it that what you are hinting at?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes. I mean, like I said, below EBITDA, the items are already shown. If you look at historical last five, six quarter trend interest cost depreciation sharp reduction. And now it’s the — and we were not even PBT positive. In the last three quarters, we — because of all the improvements there in balance sheet and cleaning up of the brand portfolio we turned PBT positive. This is the third quarter where we become PBT positive.

It’s a journey. I understand that. And we are committed to, because this all will eventually come back to cash generation, right? So we started generating cash this year also, the business will throw cash. So this whole PBT improvement [Technical Issues] cash generation at FCF level, this is a guiding principle for us. So we are working hard on that. And as we — some of our brands become more efficiently — and scaled up in an efficient manner and we continue to keep a tight control on the balance sheet item and stock turns etc. then the cash flow will happen. So that’s the agenda that we are focusing on.

Pulavarthi Saikiran — Pulavarthi Advisors — Analyst

Got it, sir. One last question from my side. When you see the Arrow is profitable, are you hinting that Arrow is profitable at pre-IndAS EBITDA level or at the PAT level? Do you manage the [Indecipherable]?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Pre-IndAS EBITDA level.

Pulavarthi Saikiran — Pulavarthi Advisors — Analyst

Got it, got it. So, essentially — okay, got it. So essentially, the Flying Machine and Sephora also, at EBITDA level, they are profitable. But below EBITDA, probably they might be losing some money. Is it a fair assumption to make?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

Yes. I mean — and they need efficient scale. Then only the overall game will change for us. And that’s what we’re focusing on.

Pulavarthi Saikiran — Pulavarthi Advisors — Analyst

Got it, sir. And last question, sir. In terms of the tax rates, how much accumulated losses we would be having on our balance sheet?

Shailesh Chaturvedi — Managing Director and Chief Executive Officer

I think, I don’t have a ready answer, but I’ll request Ankit to connect with you and then we can — Ankit, do you want to…

Ankit Arora — Head of Investor Relations and Treasury

Saikiran I’ll connect this with you offline, and we will give you some color on the tax rate.

Pulavarthi Saikiran — Pulavarthi Advisors — Analyst

Perfect. Thanks a lot. Thank you very much. Thank you.

Operator

Thank you. Ladies and gentlemen, as this was the last question for today, I would now like to hand the conference over to Mr. Ankit Arora for closing comments.

Ankit Arora — Head of Investor Relations and Treasury

Thank you, everybody, for joining us on the call today. I trust all of your questions would have been answered. If any of you have any further questions, please feel free to reach out to me offline, and I’ll be more than happy to answer them. Thank you so much for your time and look forward to interacting again next quarter.

Operator

[Operator Closing Remarks]