Bata India Limited (BATAINDIA) Q4 FY23 Earnings Concall Transcript

Bata India Limited (NSE:BATAINDIA) Q4 FY23 Earnings Concall dated May. 19, 2023.

Corporate Participants:

Nitin Bagaria — Company Secretary and General Manager

Gunjan Shah — Managing Director and Chief Executive Officer

Anil Somani — Director Finance and Chief Financial Officer

Analysts:

Nikita Jain — Batlivala & Karani Securities India Pvt. Ltd. — Analyst

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Nihal Mahesh Jham — Nuvama — Analyst

Tejas Shah — Spark Capital — Analyst

Gaurav Jogani — Axis Capital Ltd. — Analyst

Nitin Shakdher — Green Capital Single-Family Office — Analyst

Girish Pai — Nirmal Bang Financial Services Pvt Ltd — Analyst

Aliasgar Shakir — Motilal Oswal Financial Services Limited — Analyst

Ankit Kedia — PhillipCapital — Analyst

Akhil Parekh — Centrum Broking — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q4 and FY ’23 Earnings Conference Call of Bata India Limited hosted by Batlivala & Karani Securities India Pvt. Ltd. As a reminder, all participant lines will be in listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Ms. Nikita Jain from Batlivala & Karani Securities India Pvt. Ltd. Thank you, and over to you.

Nikita Jain — Batlivala & Karani Securities India Pvt. Ltd. — Analyst

Thank you. Good evening participants. On behalf of B&K Securities, I would like to thank the management for giving us the opportunity to host the Q4 FY ’23 earnings call. Today we have with us from the management, the MD and CEO, Mr. Gunjan Shah; Director Finance and CFO, Mr. Anil Somani; and the company Secretary, Mr. Nitin Bagaria.

I would now request Mr. Nitin Bagaria to start the call with his opening remarks post which the moderator will open the floor for Q&A. Thank you, and over to you, Nitin.

Nitin Bagaria — Company Secretary and General Manager

Thank you B&K team and Nikita and a very warm welcome to everyone. Good afternoon to all of you. We have Gunjan Shah, who is the MD and CEO. We also have Anil Somani, who has joined us in April as CFO and has been elevated to Board and he is Director Finance and CFO. We have shared the presentation with the stock exchanges a little earlier prior to this call. We will be happy to take you through this call. We will navigate through the slides, as well as the page numbers, so that we stay connected.

So on Slide number 2, we have the disclaimer. I’m sure you have gone through the same. So we move to the next, which is Slide number 3. Over to you Gunjan and thank you for joining.

Operator

Should we begin with the –, I’m sorry sir, please go ahead. Yeah, thanks. Thanks Nithin. We will run through the presentation. The template is for people who have joined us in the past should be reasonably correlatable. Okay, let’s go. So we are on Slide number 5. This is basically talking about some key milestones. So I think the key ones that I would like to highlight here is that we crossed 2,000 points of sale for the first time in our history for sure, and obviously 700 plus cities where these points of sale are spread out, both of them are all-time highs. We also had sneaker studios, which I have been talking about for some time, now spread with 500 plus stores. And new product, which we are very excited about, which is doing extremely well. Continues to create records every quarter for us and did achieve ever highest last quarter. Besides that we did obviously continue our investments in technology and we received awards on the CSR front, okay. Slide number 6. Slide number 7. So these are the levers that I’ve talked about. Portfolio expansion as well as retail excellence, marketing investments and making the brand beautiful, exploring digital commerce, making sure that our supply chain becomes agile and efficient dictators of demand. And though we have some variability on the cost structures, the foundations of talent, process, technology and being a responsible citizen as well as sustainable contributor to the ecosystem. So largely you will see updates on various initiatives across this. So many of them continue quarter-on-quarter and — for consistency and leverage and scale. Recall growth continues to outpace our overall growth, largely Floatz as I mentioned is something that continues to create momentum every quarter. And we have made some very promising and reasonably contributing now in growth [Indecipherable] occasion everywhere. That is something that we were largely absent in. I would say focus towards ladies, but also covers men. Retail excellence, store renovations continues. NPS, Net Promoter Score, is at ever highest released last quarter. On an expansion front, we saw franchise core additions against company momentum. And we saw in the multi-brand outlets expansion in terms of number of distributors, quality of those distributors. Marketing investments, we ran campaigns across sneaker, schools and women. The teams helped us basically try footfalls and the same-store growth. And obviously as I mentioned [Indecipherable] retail values. On the digital side, the marketplace business was a little muted, but however our own e-store as well as our omni channel business did extremely well last quarter. NPS in our own store increased and that is something that is a very critical event for repeat business as well as we saw significantly higher sneaker contribution on our [Indecipherable]. We did execute and stabilize the entire third-party outsourcing of our largest warehouse in Monark [Phonetic], this is in Jamalpur. And the project is under way — in this quarter for building the next largest warehouse and outsourcing network retail. That has given us not only efficiency, but also effectiveness in terms of service level [Indecipherable] pre-transfer. Our optimization on costs continue. It is across corporate overheads as well as in terms of store manpower as well as in the [Indecipherable] outsourcing, three projects that I just mentioned. Last, but not the least on technology. Two large projects, one of them completed which is the RIMS project, which is the entire inventory management project that has got upgraded and now because in manner I would say, once it get readiness for a full-blown ERP when it comes along, but it basically allows for that information now crosslink across many other platforms of ours and therefore better decision making, but ERP as well as the high performance merchandising project are on-track. The high performance merchandising will go live in another two or three months, in fact three months. The ERP is expected to go live with the first module going live in the first quarter last year. Okay. Next slide please, Slide number 8 or Slide number 9. [Indecipherable] some of those key parameters that we have been tracking and sharing with you. Points of sale, we crossed 2000 plus, now at 2053. What you do see out here is the ratio below. And as I have been talking about consistently for a long period of time, we will [Technical Issues] expansion on the franchise and advance from a contribution perspective because they will expand much faster. While we will have COCO expansion also happening even in this quarter as well as going forward. Franchise as well as SIS for the full-year, we did ever highest additions in the year ’22/’23. And the momentum is pretty promising. We got ambitious targets even for the coming year with this control. Franchise, yeah the results basically gives you a longer-term trend-line of it. Let’s set a vision about, you know, one and half years back of getting 500 [Phonetic], which now touched almost 420, [Phonetic]. And we look to be much on track for that 500 maybe a year prior to what we had initially targeted sales. What you see in the graph below is what has happened over the last three. 59 stores we added on the franchise in 2021, ’21/’22 we added 75, last year we added 116. And as I said, we are on track to achieve 500 much earlier than expected. We should see — you see continuous momentum on this. And it is backed by not only same-store growth in existing franchisees, but also by a couple of other parameters that we consider very important in terms of sustainable franchise business. One is the NPS, our franchise score is almost at par with now what we consider as almost 15% plus at EP, NPS and COCO. And also basically number of franchise stores as we opened with existing partners as now contributed to almost 60% of our new franchise store additions every quarter. In multi-brand outlets, our expansion journey continues. The business has been a little tight for the last two, three quarters largely because the lower price points have been under pressure. We do hope that turns around, with inflation now getting moderated/flattish, but our expansion in building blocks continue both in terms of distribution, as well as in terms of category. We did bid [Indecipherable] plus times as well as retail distribution now as touched almost 44%. Within categories, the categories that we consider as competitive edge category which not only price growth, but price profitability in this. We continue to try our groups. We have now entered price to launch in two new categories, one is sports [Indecipherable] and the other one is basically value added category for ladies and kids. Both have in fact shown good signs and these are the two that we like to over a period of time. build into competitive edge category, which are currently [Indecipherable] which are school as well as fine customary plastics [Phonetic]. Digital as I said overall had a slightly muted quarter, largely to do with marketplaces. And I think it was a temporary blip. Early signs are that we are more than making up for the gap that was there from a marketplace perspective last quarter. But rest of the channel which is both omni as well as our own new store did extremely well. And in fact we did have our highest number on e-store and is on-track to becoming almost 2 times of our largest store in our network. Backed by extremely good metrics. Now that we have started tracking in terms of consumer experience as well as satisfaction. We did drive campaigns driven largely anchored around sneakers, school. School was towards the fag end of the quarter and which will extend into this quarter. And obviously our style without campaign. All of this obviously helped us deliver strong existing growth this quarter. We are also amongst the key categories that we focused on. Sneaker continues to grow well. We will see a lot more action on power going forward and I’ll speak about that in a few slides down the line. Hush Puppies again continues to outpace, which continues the entire premiumization journey, back to back [Indecipherable] brand also did extremely well and a very profitable brand as well as clothes. While the base might have been negligible, but on a sequential basis also we see continuous strong demand. These are some key initiatives. Some of them I have talked about, some of them we have shaped up now we feel more confident about how we want to take them forward. Red Label, we have started off with an experiment or single-store in the North in quarter four — quarter three in October, November, December. We see encouraging response across the metrics, whether it’s AFC, whether its profitability and whether it is probably footfalls and consumer feedback as well as most importantly the age of consumer that we’re attracting. And we will now want to expand this into multiple others locations. And the next score on this line is likely to come up in the mix, about 45 days. The next big initiative I had indicated towards this last time was apparel. We will be launching athleisure under power brands. We’ve seen that with 1.5 million consumers walking into our stores every week across the network. They do have a latent as well as obviously an actual need of apparel and they do purchase it also except that we don’t offer it. I think we got a right to partake into that entire consumption area and this is something that we will see light of day in the coming quarters in another couple of months. We will be launching across three technologies as well as reasonably competitive price points with decent margins to boot. We will wait and watch this space in terms of further updates on this, but we feel very bullish on it. Last, but not least it is Floatz. While we see continuous momentum and significant growth in this category and new brand, we have also expanded our collection in this. We are also wanting to take the brand outside the Bata banner and we believe started-off with even in this quarter with at least a couple of kiosks. The drill basically herald the Floatz brand moving outside the Bata banner. We have also experimented this into the multi-brand challenging both e-commerce, as well as the distribution business with encouraging response. We already have almost 60% penetration, even within our franchise base. Other highlights for the quarter gone by, NPS, so we will now beat every [Indecipherable] so it is best-in-class. So I think this is something that we can see continuously plugging at. And depending on the right benchmark on this, but I think on a [Indecipherable] basis itself is extremely strong. We did significantly invest towards training of our people and capability on that front. We have obviously the two large projects from a technology piece. While there are many others that are enabling much better or do you say, the entire visibility is much more informative decision making and quick corrective feedback wherever required. There have been obviously various events organized from the engagement of employees as well as making sure that all of us are working towards single objective of the organization. We did do a significant VRS in our Southern factory in Bangalore in the last quarter as well as we do see now some amount of benefits in terms of reduction on material pricing. Last but not the least, efficiencies in our supply chain continue. I have talked about this in detail and in similarly in our [Indecipherable]. With that, the financial summary. What we did see was 17% topline growth that you see in the bar chart. We also for the full-year saw significant growth and we clawed back to pre COVID levels of volumes, almost 48 million pairs and with average realization that was significantly higher, which I talked about back because of the inflation we did and [Indecipherable] prices. This is a blended realization across all our business lines. As I mentioned before the COCO business of price, [Indecipherable] is very different from one which is [Indecipherable] and this is very different from what we see from the multi-brand outlets. But this is a blended price realization. And these are the financial metrics, I will not read the chart, because it is self evident as you can see on the perks. So I will not go through each of these lines. With that, it should be, okay — yeah, there is one more last chart. Slide number 20, cash generated for the year has now moved to about INR726 crores as you exit this year. And the ROCE and stores has obviously pulled multiple weeks end. We expect this to keep going up, as we improve our capital efficient expansion and durability [Indecipherable] and obviously growth. So thank you so much. And more than happy to take questions. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] We have our first question from the line of Bhargav Buddhadev from Kotak Mutual Fund. Please go ahead.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Yeah, good evening, team and thank you for the opportunity. Sir Bata has been sort of working a lot on premiumizing its portfolio. So just wanted to know your numbers in terms of what percentage of portfolio would now be below INR500 MRP and what was it pre-COVID? And what is your sense on this category going forward in terms of outlook?

Gunjan Shah — Managing Director and Chief Executive Officer

Okay. I don’t have it handy. I did mention some numbers last time. Just let me see if the team is able to rustle up something quickly. But broadly I would say that below 1,000, we were at about 50/50 pre-COVID and now we would be in the range of about 35 to 40 below 1000. That number we handily — I do track it because we also did a tracking because of entire GST and opening up price point back again wherever we are going to get volume growth going back in. Below 500, my sense is out of that 35, 40, we should be about half of it, so about 30% [Phonetic]. So both of them obviously would have declined with the premiumization because both mix as well as price that could have taken up the mix on the higher side.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Sure, sure. Thank you. In terms of coco [Phonetic] our contribution to overall store count is now close to 20%, is it possible to highlight what could be the revenue contribution from this segment and what would be the EBITDA margin in this category?

Gunjan Shah — Managing Director and Chief Executive Officer

You are talking about the franchise stores?

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Yes, sir.

Gunjan Shah — Managing Director and Chief Executive Officer

Yeah, so while we don’t give splits on the business lines, but ballpark I would say that it is — it is almost it is — It is about 600 to 700 points accretive from a profitability perspective at EBITDA or channel operating margin level, which is — takes care of all the nuances and only allocation costs which are neutral across business lines. So due to that almost significant [Indecipherable] to our overall business profitability.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Because sir, we haven’t seen that contribution coming in as of date. So possibly as this — sort of sector such contributing meaningfully, will we see that also getting reflected on your EBITDA numbers?

Gunjan Shah — Managing Director and Chief Executive Officer

So it should — see the whole objective of driving franchise expansion is on three fronts. One is that it allows me to open up stores in places where the brand is obviously the demanded for, but however the scale does not justify me opening up company-owned store. The second one is basically it is — as I said, it is accretive from a profitable perspective. So the pure contribution that I get at an EBIT level per pair is higher than what I get from a COCO store. And the third one is basically in terms of capital efficiency. It allows me to flex expansion much faster without fixing up or deploying to much of cash. So on all these fronts, we will see and the whole objective of doing this is to make sure that it’s — step-by-step it keeps on contributing meaningfully to our overall the growth as well as profitability. So it gives me access to consumers as well as run it in a far more capital efficient and profitable way.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

And sir my last question is Bata has appointed Badri Beriwal as a Chief Strategy Officer who has come from Britannia. Is it possible to share in which particular vertical will he be spending more time like COCO, distribution, [Indecipherable], SIS.

Gunjan Shah — Managing Director and Chief Executive Officer

So the designation is Chief Strategy as well as Business Development Officer and therefore driving the strategy from a consumer point-of-view across the organization as well as making sure that new initiatives as well as alternative growth engines etc. are given the right kind of leadership as well as direction, both from a strategy as well as the execution perspective.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

So this is our new position, right in the history of the company or was this position already there?

Gunjan Shah — Managing Director and Chief Executive Officer

Yeah — there in the recent past.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Okay, okay sir, thank you for your thoughts and all the very best.

Gunjan Shah — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have a next question from the line of Nihal Mahesh Jham from Nuvama. Please go ahead.

Nihal Mahesh Jham — Nuvama — Analyst

Yes sir, thank you so much and good evening to the management. So three questions from my side. The first was that could you discuss the category wise, and here by category I would say bifurcated into formal, casual, school wear and also new to sneakers category where you’ve given some data, but how has the recovery versus pre-COVID and not versus last year?

Gunjan Shah — Managing Director and Chief Executive Officer

Okay. Basically, I would say that see overall we would have recorded about — for the quarter gone by about 15% growth over pre-COVID. Now it’s in fact, I would say sneakers, casual as well as would have outstripped the rest of the category. So comforts/casual, sneakers and the premium segments would have outstripped, while I think most of the categories even school would have exceeded pre-COVID level, but I didn’t hear the category that would have grown faster than the [Indecipherable] growth.

Nihal Mahesh Jham — Nuvama — Analyst

Understood. Because if I say volumes for this year are similar to what we did in FY ’20, which are these categories. Is it mainly formal which seen of all versus pre-COVID or the all the schools, which are categories we have lost share in terms of marked revenues?

Gunjan Shah — Managing Director and Chief Executive Officer

I am — I didn’t get your question clearly. You asked which categories have grown — have done better [Speech Overlap]

Nihal Mahesh Jham — Nuvama — Analyst

Which you highlighted was basically the casual categories and sneakers. So I was just to ask the other side that which are the categories in which have incrementally seen a reduction in share. Assuming formal, but anything that you want to highlight?

Gunjan Shah — Managing Director and Chief Executive Officer

So I would say the ones that are at the lower price point. So I would say by — as I said all of them so even school would have exceeded pre-COVID, but they would not have grown at 15%. More importantly I think plastic as well as volume category, which is facing some amount of demand pressure are the ones which have been relatively little over versus pre-COVID. I mean relatively versus 15%.

Nihal Mahesh Jham — Nuvama — Analyst

Understood. And just a follow-up here that is this driven by our own aspiration that maybe the inventory that we are keeping now is more premium or this is more related to the way the market will grow?

Gunjan Shah — Managing Director and Chief Executive Officer

It’s a combination of both. See premiumization is a conscious strategy, but that does not exclude ourselves from a significant amount of business that we do from the below 1000 price point which I answered to someone else. And we would like that to grow and through our multi-brand distribution business etc. we will see that growth happening. I think the building blocks are pretty much there and there is no reason why we should not see that demand recover and you know the inflation stabilizes.

Nihal Mahesh Jham — Nuvama — Analyst

So is it possible in the future this share becomes 50/50 again from the 40/60 it currently is?

Gunjan Shah — Managing Director and Chief Executive Officer

Sorry, I didn’t get that question at all.

Nihal Mahesh Jham — Nuvama — Analyst

I’m so sorry. I was asking that currently the share of INR less than 1,000 — plus 1,000 as you highlighted was around 40% and 60%, which was 50% and 50% pre-COVID, so do you see the case as in the future, the share of less than 1000 and plus 1000 becomes 50% and 50% again?

Gunjan Shah — Managing Director and Chief Executive Officer

It’s a little difficult to predict this. As I said there are two egos at play. There will be premiumization across segments. Now with segment relatively doing better at various points in time will determine this mix. But right now we see the premium segment relatively doing much better. So that’s driving the momentum of growth, but you will also have times where in obviously the bottom of the pyramid sector will start firing in. And we will see that also grow, but I think over a longish period of time, I think while last year we would have seen a significant impact of inflation there from an acute impact on less than 1000 that should normalize in the queue. But longer-term trajectory would be that I don’t see that going back to 50% 50%.

Nihal Mahesh Jham — Nuvama — Analyst

Point taken. The second question was is it possible to share the channel mix for the full-year between wholesale online and COCO franchise?

Gunjan Shah — Managing Director and Chief Executive Officer

So basically COCO is about about 70%, franchise which is at about 8% you will have more multi-brand distribution at about 14% and e-commerce at about again 10% or so.

Nihal Mahesh Jham — Nuvama — Analyst

Last question from my side. You did highlight investments in technology and marketing as a positive reference. Any sense or quantification that you expect, how much of the spend could be on a ballpark basis? If you have budgeted?

Gunjan Shah — Managing Director and Chief Executive Officer

Yeah, so the IT technology based capex that we will have outlay for this year will be in the range of about INR30 crores — with — around 30 crores and marketing expenditure we will look at it continuously going up to basically from 2.6%, 2.7% levels to about 3% over a period of time. Yeah.

Nihal Mahesh Jham — Nuvama — Analyst

Okay. Thank you so much Gunjan. I wish you all the best.

Gunjan Shah — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have our next question from the line of Tejas Shah from Spark Capital. Please go ahead.

Tejas Shah — Spark Capital — Analyst

Hi, thanks for the opportunity. Yes. So we have made a lot of interventions[Phonetic] on distribution, premiumization and they’re not even planing to listing in large direct 24 to 36 months. Now, when I see distribution expansion CAGR quits at 7% of last four years versus our revenue growth of 4%. The output actually looks a bit underwhelming despite putting so much effort on the premiumization and distribution expansion. So does it — Is it why the underlying demand is so underwhelming or have we lost market-share in versus the COVID period?

Gunjan Shah — Managing Director and Chief Executive Officer

So there are couple of factors. I think one, ethically right as we go about expanding. Some of these, like the franchise stores in general are at about 0.5 times of our COCO stores on an average. 0.4 times to 0.5 times. So the turnover per store would be lower because your [Indecipherable] penetrating into cohorts that are relatively smaller and which is why we want to franchise model, to get success there. So it’s not — it’s sort of apples-to-apples.

The second piece that would be there is basically in terms of multi-brand outlets. I think, there is some kind of a demand pressure that has been seen over the last year on those price points which are at the mass gaming and that has obviously created some of the pressures. As I have mentioned, we are looking-forward to the inflation stabilizing consumer adjusting to it. I’m sure the kind of mix that we have in the building blocks that should provide feedback. So I think both of these combined together is what is providing that phenomenon. Each of these elements buys, we have pretty good, I would say same-store growth that we are carrying.

Tejas Shah — Spark Capital — Analyst

Sure. And sir, if you can comment on-market share, any specific segment where we would have gained market-share? We are still under-indexed.

Gunjan Shah — Managing Director and Chief Executive Officer

There[Phonetic] syndicated data available, Tejas on-market share. The last one that we have is — monitor that provides us an annual level, that shows that the market-share is, — we pulled back from whatever fix that we would have taken during overtime. So the last report days that. And there is no syndicated data. My guess is basically on the premium side, I think we could have participated, even better than what we could have. I think on the mass side, we would have done easily then I would say from a market-share perspective.

Tejas Shah — Spark Capital — Analyst

Sure. Just second on the working capital, again if I map it to our 4% CAGR growth. Inventory has actually gone up by 9% CAGR, debtors have also gone up by 16%, it obviously have a low-base, but Inventory growth is also significantly impact two times our revenue growth. So just wanted to understand, is this the new mix in the distribution will actually entail higher inventory investment or are there are transient one-offs and this number right now?

Gunjan Shah — Managing Director and Chief Executive Officer

Anil, if you want to answer that? I don’t know where the inventories, you said how much — you said 1.5 times.

Tejas Shah — Spark Capital — Analyst

No, sir 9% CAGR versus 4% growth in revenue, pre COVID.

Gunjan Shah — Managing Director and Chief Executive Officer

Okay. I don’t see it that way. So I’m a little surprised. I would say, actually we would by this year as inventory efficiency, which we measure in terms of number of days of inventory that we carry-on actually would be better than what we have ever had a lot of past. So even– right now I feel that roughly at par. So I don’t know, where the carrier is changing.

Anil Somani — Director Finance and Chief Financial Officer

Okay. Just to add Gunjan, obviously, [Technical Issues] bringing, not that much with slower pace- -slower sales growth, So I don’t know where this number coming from.

Gunjan Shah — Managing Director and Chief Executive Officer

So we can respond separately.

Tejas Shah — Spark Capital — Analyst

Yes, sure. I’ll take it off later. And sir, lastly if you can comment on.

Operator

I request you to come back-in the queue. Mr. Shah as we have other participants.

Tejas Shah — Spark Capital — Analyst

Sure.

Operator

Thank you. We have our next question from the line of Gaurav Jogani from Axis Capital. Please go-ahead.

Gaurav Jogani — Axis Capital Ltd. — Analyst

Well, thank you for the opportunity, sir. Some of the business with regards to the investment that you’re doing on technology and also on the other ventures like marketing health[Phonetic] check up. So do you think that these are right now surprising the margin gains that you have…

Gunjan Shah — Managing Director and Chief Executive Officer

Gaurav, your voice is not clear. It’s cracking up.

Operator

Can you use..

Gaurav Jogani — Axis Capital Ltd. — Analyst

Is it better now?

Gunjan Shah — Managing Director and Chief Executive Officer

Yeah, no, it is muffled but yeah, okay.

Gaurav Jogani — Axis Capital Ltd. — Analyst

Sir, If you could hear me right now?

Gunjan Shah — Managing Director and Chief Executive Officer

Yes. Much better.

Gaurav Jogani — Axis Capital Ltd. — Analyst

Yeah, sir my question, sorry. With regards to,– you have been making a lot of investments in the French in the technology part as it is on the marketing front. But at the same time, your franchisee is giving you a better margin perspective. So do you think it is because of these investments that you’re cost-savings initiatives, as well as the incremental margins from franchise is getting masked right now? And once these initiatives are what you could see a rebound in the margin profile?

Gunjan Shah — Managing Director and Chief Executive Officer

Yeah. I would say yes and no. Yes, some part of it is that. Some part of it also lag of capex that we had not deployed during the COVID period a couple of years. So a lot of that has brought it slide in the year gone by and some of it in this year. Besides that, obviously, some of the strategic initiatives. They will not only payback in terms of efficiency, but also our ability and muscles to grow better. So our endeavor is to basically try and make sure that they also contribute towards growth and better efficiencies. So, for example, let’s say the high-performance merchandising project that I’m talking about will allow me to manage this 2000 and expanding network in terms of the right kind of merchandise, what sells, where and therefore the ability to do it more scientifically. And therefore the efficiency of that inventory in terms of generating growth pickup. So similarly on the e-commerce side, which is basically to [Indecipherable] and finally, some of them with no true initiatives and the efficiencies.

Gaurav Jogani — Axis Capital Ltd. — Analyst

So sir, would it be prudent to assume that the high-level of investments would continue at least for the next couple of years that you’re doing?

Gunjan Shah — Managing Director and Chief Executive Officer

Yes. I would say so.

Gaurav Jogani — Axis Capital Ltd. — Analyst

Okay. And sir, my next question is with regards to the dividend payout. So if you see during the year, the dividend payout is almost 57% of the annual profits and I think the last year also, we gave a special dividend. So, is there any change in the dividend policy? And can we see the dividend now being higher versus the historical levels of 25%, 30% dividend payout number?

Gunjan Shah — Managing Director and Chief Executive Officer

Okay. So basically the Board, while last year was a one-off kind of a dividend that was announced at that point in time. But this year is more normative. So, I would say that, that’s in-line with the policy, the Board policy on dividend is up 260%, so we will have to see every year what ratio the Board approved on this but that’s where the policies. This year is more normative. So it’s not a one-off.

Gaurav Jogani — Axis Capital Ltd. — Analyst

Okay. And sir, if I can slip in one more question. With regards to the distribution front, you’ve been very aggressive, even this quarter, you have added almost 200 towns out-of-the 300 towns added in FY23. So what is the outlook here? What kind of performance or contribution you’re expecting from this part of the business and with the inflation now normalizing, do you see growth reverting in this segment back?

Gunjan Shah — Managing Director and Chief Executive Officer

Yes. Both of them, we are looking at very — both the question, we are looking at very optimistically, that’s why we are investing in it, not only in terms of the infrastructure that I’ve just shown you in the slides, but also in terms of manpower and capabilities. So — and also collection and merchandise that’s required for the channel, which is very different from the exclusive business retail outlets. So yeah, we are looking at it very ambitiously and optimistic.

Gaurav Jogani — Axis Capital Ltd. — Analyst

Sure, thank you sir, that’s all from me.

Gunjan Shah — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have our next question from the line of Nitin Shakdher from Green Capital Single-Family Office. Please go-ahead.

Nitin Shakdher — Green Capital Single-Family Office — Analyst

Good afternoon.

Gunjan Shah — Managing Director and Chief Executive Officer

Hello, Nitin. We can’t hear you.

Operator

We have a next question from the line of Girish Pai from Nirmal Bang Equities. Please go-ahead.

Girish Pai — Nirmal Bang Financial Services Pvt Ltd — Analyst

Yes. Thanks for the opportunity. Gunjan, if you look at the EBITDA margin in FY23 and compare with FY20, there is almost like a 430 basis-point dip. A lot of it that, that is coming from other expenses being higher by about 100 basis-points. Can you give some guidance of how that number is going to look like other expense? Was there any one-off in FY23, which is not going to be repeated going-forward?

Gunjan Shah — Managing Director and Chief Executive Officer

At the larger level, the quarter four or with the last quarter, it did have a one-off, right. So there is some element of that one-off. But the other piece that is there on other expenses is to do with two or three mains[Phonetic]. One is, there is a mix that is changing and therefore, the contribution of channels like Sanchay, E-commerce as well as multi-brand have gone up. And that has a very different kind of P&L.

The second piece that is there is that some of the investments that we have put in that has its own depreciation effect. Especially the largest mentioned would be on technology side, Girish.

Girish Pai — Nirmal Bang Financial Services Pvt Ltd — Analyst

Okay. And you also mentioned about VRS being implemented in one of your manufacturing units down south. Are the costs connected with that occurring in the P&L where exactly would those be.

Gunjan Shah — Managing Director and Chief Executive Officer

They will flow-through on the — Looking towards my finance rate but I’m sure it will flow-through corporate overheads. So that is where it should flow in. But basically to pan-out over a period of this year etc.

Girish Pai — Nirmal Bang Financial Services Pvt Ltd — Analyst

And would we see further VRS’ going-forward?

Gunjan Shah — Managing Director and Chief Executive Officer

I can’t comment on it right now.

Girish Pai — Nirmal Bang Financial Services Pvt Ltd — Analyst

Okay. Last question margin at leisure apparel. It’s going to be adding to your revenues. Do you think this is going to be margin-accretive or decreases or what’s your view on that?

Gunjan Shah — Managing Director and Chief Executive Officer

So all the three initiatives that I mentioned in the slide and specifically, apparel for sure, but even Floatz, as well as Red Label, all are being aimed for margin-accretive.

Girish Pai — Nirmal Bang Financial Services Pvt Ltd — Analyst

Okay, thank you.

Gunjan Shah — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. We have our next question from the line of Aliasgar Shakir from Motilal Oswal. Please go-ahead.

Gunjan Shah — Managing Director and Chief Executive Officer

Hi, Ali.

Aliasgar Shakir — Motilal Oswal Financial Services Limited — Analyst

Yes. Hi, sir. Thank you so much for the opportunity. I just wanted some color on the revenue profile in revenue growth. So when I see your store addition over the pre-COVID numbers around 20% and you would have very low, taking some price increase that premiumized utilization combined would have helped us somewhere about 10%. So against this 30% revenue growth expectation probably that we were building. No, I mean your growth, if I compare pre-COVID Summit about 13%. Now I take your point, you mentioned that franchisee it’s about 0.5[Phonetic] and we’ve seen about close to 50 odd franchise, it’s about 10% to 12%, maybe 6% impact would have come because of this. And — But I’m just trying to get a sense that this along with — you also mentioned that lower-priced products are seeing some impact. Still the gap seems reasonably high so against the 30[Phonetic], let’s see if I did 6% impact because of franchisee maybe [Indecipherable] 5% 10% impact because of the low-price, not doing well, still the gap seems reasonably high. So what is it — that has seen a relatively far lower revenue growth than what probably we were anticipating.

Gunjan Shah — Managing Director and Chief Executive Officer

No, this is just only other piece that I can add, but I cannot comment on the mathematics, but the only other lever that I can — our insight I can add to you, Ali that you will have, we have shut-down about — I think about 90 odd COCO stores net. It was pre-COVID, which are all positive.

Aliasgar Shakir — Motilal Oswal Financial Services Limited — Analyst

Okay, and they would have been very-high revenue contributors?

Gunjan Shah — Managing Director and Chief Executive Officer

Average I hope so, not necessarily very high.

Aliasgar Shakir — Motilal Oswal Financial Services Limited — Analyst

Okay. Do you think sir, we mentioned that the calculation as sneaker trend is doing very well, but we may have probably in the shift from our existing to casualization trend seen some revenue loss in some part of the business or do you think this is recoverable?

Gunjan Shah — Managing Director and Chief Executive Officer

You would have seen some loss in — sorry, I missed that part.

Aliasgar Shakir — Motilal Oswal Financial Services Limited — Analyst

So I’m saying that the trend that we are now moving towards casualization, sneakerisation maybe some part, I’m not sure whether open footwear, formal wear, some categories, we would have seen lower revenue profile, probably because you’re pushing it lesser in the store. Has that been a factor which has led to this lower-growth, any of those categories? I’m just trying to understand when we build our growth for the future, what part is recoverable?

Gunjan Shah — Managing Director and Chief Executive Officer

Right, right. So the way the system works, Ali is that — range and therefore for article said that back then automatically — in them, right from our short term horizon is at a store-level etc. And then from a ranged investment point-of-view, which is that let’s say horizon of a season with the six months. So if let’s say for example, we see Comfit doing well then Comfit automatically start getting more inventory and Comfit start getting more-and-more range. So similarly we will see that across. So as I mentioned, we do see a certain amount of traction on premium and that’s doing well. Right the one that is on the lower-end with where basically there is some amount of demand pressure and which is what I responded to another query that was there in terms of what’s growing faster and what’s growing slower. That is where the fees would be. I would not exclude completely but overarching we would like to continue premiumization.

So another example being that, let’s say even if it open footwear right, Floatz is a way of premiumizing open footwear and therefore the average ticket size of consumer otherwise buying flip flops at let’s say INR300, INR400 of average selling price in our stores. We now jumping to almost INR1,200 [Phonetic] plus. So you are catching a consumer, you are offering more premium products, that you are not necessarily excluding them from offerings of INR300 INR400, but some of them are [Indecipherable].

Aliasgar Shakir — Motilal Oswal Financial Services Limited — Analyst

Got it, got it. So last fall-off here is volume, as we see the lower-price point products recovering, should we assume that there is at least about 15% odd recovery in revenue that is foreseeable?

Gunjan Shah — Managing Director and Chief Executive Officer

I can’t project growth for you, Ali. We don’t give forward-looking forecast but our net leverage to make sure that, while we see the market turning around at a certain price segment level. We continue our strategy as I outlined in my presentation. So hopefully that shown only add to our record performance.

Aliasgar Shakir — Motilal Oswal Financial Services Limited — Analyst

Excellent. And last question…

Operator

Sir, I request you to come back-in the queue sir.

Aliasgar Shakir — Motilal Oswal Financial Services Limited — Analyst

Sure, sure.

Operator

Thank you. We have our next question from the line of Tejas Shah from Spark Capital. Please go-ahead.

Tejas Shah — Spark Capital — Analyst

Hi, sir. First of all I wanted to apologize on that inventory calculation. It was wrong at my end, so you were right, it was 2% versus 4%. So first of all, wanted to register that. Sir, my question is on franchisee part. Should we have done a very good job on expanding the network? And usually if the franchise economics works out when the same franchisee partner start expanding the network. So just wanted to know, are we seeing consolidation of franchisee owners who are expanding more franchises?

Gunjan Shah — Managing Director and Chief Executive Officer

I did mention that, [Indecipherable] but first and foremost thanks for sharing that correction, so that we are a little more relaxed on inventory now. I think back on the points on — I had mentioned that in my presentation that there are two or three metrics that we look at in terms of buying we are going aggressive in terms of expansion, but we want sustainable franchise model. And one of those things basically the profitability of our franchise partners. And the best outcome indicator of that is how many of them are opening up stores — multiple stores with us. So, I think the last time — last quarter, 60% of our stores that got opened were with existing franchise partners.

So that’s creeping up all-the-time, which is a good indicator. And that responds to your question, I’d say yes.

Tejas Shah — Spark Capital — Analyst

Fantastic. Second, sir, if I see your brand architecture and our premiumization journey, do you think that the current set of brands are, like can fulfill our aspiration to premiumized the portfolio, or you think that there are still some white spaces in our brand architecture, where will have to launch or bring some of the overseas partners brand to part of families brand to actually kind of premiumized the whole or complete whole parameter.

Gunjan Shah — Managing Director and Chief Executive Officer

Yes. No, there is — I mean it’s a never-ending task ideally, if you look at it, right? And which is why you have so many brands in the market, because there are previous kinds of price and the brand value that is being provided by various branch. From our portfolio perspective, there are obviously guests and the initiatives that have missed it out in the chart in my presentation whether it was rigidable, whether it was Power that was the category –, but hopefully it does well, it’s sponge of the power brand itself and Floatz. All of these are basically attains on that — basically trying to nail some of these kind of facilities[Phonetic]. where we feel that we have developed some extra [Indecipherable].

Tejas Shah — Spark Capital — Analyst

Very clear, sir. Thanks and all the best.

Gunjan Shah — Managing Director and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] We have our next question from the line of Ankit Kedia from Phillip Capital. Please go-ahead.

Gunjan Shah — Managing Director and Chief Executive Officer

Hi, Ankit.

Ankit Kedia — PhillipCapital — Analyst

Hi sir. Sir, couple of calls back you had mentioned, we have aspirations to do contract manufacturing for global Bata. In your next leg of growth, you haven’t spoken off that. Has that [Indecipherable] or that is a separate thing which you will call-out down the line?

Gunjan Shah — Managing Director and Chief Executive Officer

We are — we have not called it out because I don’t have a tangible progress update for you. So, but Ankit, the progress — in the work is not being shelled out in fact it is working even more aggressively. And as I had mentioned like even at that point in time or maybe even subsequent conversation of the call that requires a lot of working I think globally Bata is very aggressively looking at China Plus One strategy. India is the largest sourcing base even larger than China, right, for a Bata global organization primarily centered in India, obviously. So there is a huge amount of capability.

I think there is a natural fit-in terms of what’s required and what’s available, both from a requirement perspective of trying to diversify out of China, as well as in terms of the kind of capabilities and the kind of network that we have in India. So wait-and-watch this space, we will obviously make sure that we update you once we have some tangible progress we made on. Then we –work pretty aggressively.

Ankit Kedia — PhillipCapital — Analyst

Understood, sir. Second question is regarding slots, the category has picked-up post COVID, where actually Crocs is the market leader, you know growing aggressively as well and this is the first time…

Operator

I request you to come back-in the queue sir. Thank you. Ladies and gentlemen, you are requested to restrict your questions to only one at a time. We have a next question from the line of Akhil Parekh from Centrum Broking. Please ask your one question.

Akhil Parekh — Centrum Broking — Analyst

Thanks for the opportunity. Production in the employee expenses front, if I look at it as a percentage of sales is broadly in-line with FY20 numbers. And this is despite some of the –. Hello.

Operator

Your voice is breaking. There is a lot of disturbance.

Akhil Parekh — Centrum Broking — Analyst

Well now?

Gunjan Shah — Managing Director and Chief Executive Officer

Yes. Which number is in-line with 2020 number?

Akhil Parekh — Centrum Broking — Analyst

The employee expenses as a percentage of sales, if I look at that, it is broadly in-line at 12% and we have been doing some kind of a flexi staffing to reduce that cost. Basically, if you can highlight or throw some light on what percentage of our staff is on flexi and do we expect any further cost-reduction on the employee front for next two years?

Gunjan Shah — Managing Director and Chief Executive Officer

Okay. So, directionally yes. Obviously, I think COVID did have its impact otherwise these percentage could have looked a little better. But I’m sure some of these initiatives will pay-back over a period of time going-forward. For there are three viewers on this planet, and it is on very macro-level. One is flexi in terms of retained manpower. As of now stands at about it’s varying [Phonetic] per quarter depending on seasonality of the business etc., but stands at about let’s say about 15% to 18%. The game ideally, this should go to at least about 25% for slippers scope. So there is headroom there.

The second one next, the lever is basically in terms of the packing and therefore you know the supply-chain fees, the — wherever we can outsource non-core areas getting more efficient partners to collaborate with etc. I have updated you on one of those warehouses that we moved, the VRS in one of our factories and they’ll be multiple such other initiatives down the line.

The third one that there is basically on technology, so whether it’s HPA, whether its ERP, whether it’s long data warehouse management systems, etc. like we are setting up, that also we should see productivity increases coming through of digitization[Phonetic] soon. So, all of these combined together will eventually help us keep this under check going-forward.

Operator

Thank you. We have our next question from the line of Gaurav Jogani from Axis Capital. Please go ahead.

Gaurav Jogani — Axis Capital Ltd. — Analyst

Thank you for the opportunity again, sir. Sir my question is with regards to the margins, if you see in Q4, so we had done a gross margin of around 58.5% and given the fact that our franchisee contribution has been inbound for a period. So shouldn’t the gross margins should go down, whereas the impact could be felt at the EBITDA level, but shouldn’t the gross margin theoretically be down? And how do you see this sustaining ahead?

Gunjan Shah — Managing Director and Chief Executive Officer

Yes. So technically you are right, and I think it’s a question of mathematical weightage and of various channels at various points in time. So even let’s say for example, in e-commerce, if new-store has got the maximum margin where the marketplace will have — at the gross margin level would be relatively go over or a sales margin level, right. Obviously, the picture is very different than at –level. Depending on the mix for those channels for various quarters, but eventually get your mathematics will tell you that the margin will trend differently, it’s the mix of lower margin channels goes up, but then that will also get compensated by some of the expense lines below the margin line.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Nitin Bagaria for closing comments. Over to you, sir.

Nitin Bagaria — Company Secretary and General Manager

Thank you everyone for taking out time and joining us. So looking-forward to interacting with you again. In case there are any further queries, you can direct them to us, we would be happy to answer them. Thanks a lot. Thanks everyone.

Operator

[Operator Closing Remarks]