V.I.P. INDUSTRIES LTD (VIPIND) Q3 FY23 Earnings Concall Transcript

V.I.P. INDUSTRIES LTD (NSE:VIPIND) Q3 FY23 Earnings Concall dated Jan. 25, 2023.

Corporate Participants:

Anindya Dutta — Managing Director

Neetu Kashiramka — Chief Financial Officer

Analysts:

Karan Khanna — Ambit Capital — Analyst

Tejash Shah — Lavender Spark — Analyst

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Manish Poddar — Motilal Oswal AMC — Analyst

Tushar Sarda — Athena Investments — Analyst

Nihal Mahesh Jham — Nuvama Wealth Management — Analyst

Akhil Parekh — Centrum Broking — Analyst

Harsh Shah — Incred Capital — Analyst

Ankit Babel — Subhkam Ventures — Analyst

Pulkit Singhal — Dalmus Capital Management — Analyst

Presentation:

Operator

Good evening, ladies and gentlemen, a very warm welcome to the VIP Industries Limited Q3 and 9M FY ’23 Earnings Conference Call. From the senior management, we have with us today, Mr. Anindya Dutta, Managing Director; and Ms. Neetu Kashiramka, Chief Financial Officer. [Operator Instructions]

I now hand the conference over to Mr. Anindya Dutta, Managing Director, VIP Industries Limited. Thank you and over to you, sir.

Anindya Dutta — Managing Director

Good evening, everyone. Thank you for taking out time and joining the call. I would — I’m assuming all of you have received a copy of the presentation and would have time to — would have had the time to glance through it. I’m just going to take you through some of the highlights as mentioned in the presentation.

At the outset, I’m quite happy to announce a good set of results. Our growth continued to be at a high. We had a 32% revenue growth over last year. And even when we compare it with base, it is quite impressive at 22%. Quarter one saw just a 5% growth, thereafter in quarter two, we scaled it up to 25%, and we now continue to be at 20% plus.

In fact, the volume growth on the business has been also quite good, 25% year-on-year and almost 18% over base. And just a call out here, this kind of volume growth is happening on a completely altered supply chain at VIP.

The revenue performance that I spoke about, if you would have noticed, it’s quite well-rounded. It’s good across brands and channels.

Talking about brand first. You would have seen some exciting launches that happened in our portfolio during this quarter. Skybags did a FIFA collections which did very well. In VIP, we had a Highlander which is the rugged hard luggage. In Carlton, we launched a couple of soft luggage — premium soft luggage range. And I think on the cake was our launch in Caprese with a range of products by Manish Malhotra.

Not only the launches, their activations has been very strong. FIFA was activated with advertisements using endorser as Kartik Aaryan and many other celebrities. You would have seen some of these activations in Mumbai. We tried to go quite high disciple on it. In fact, we — Manish Malhotra launch was far bigger than just the volume, but it was more to the drive imagery on the brand. And I would believe that’s just the beginning. We would have much more coming up on Caprese as we go ahead.

Overall at VIP, our premium portfolio has started to kick in as we had gone into a very high on driving the value portfolio. That was one key point on Q3.

When I talk about channels, once again, all channel has played its role in the growth. In fact, not only the revenue growth but also adding the strategic element and the tasks that each of the channel has to do.

General trade is leading us into driving penetration and accessibility. It increased its town penetration by 80 more towns in this quarter. Now, we stand at about 942 towns. We are aiming to be in every town which is 50,000 plus population.

Equally in EBOs, we have come back to a number of 443 EBOs. This does not include the 42 we have under fit out right now. Hopefully, we will cross the mark 500 which we have taken the target for the year before March 31st. Pre-COVID, this was — the highest store count was 485.

Modern Trade, another call out. We had some challenge and pressure due to — in this — in quarter one because of the Future Group issue that had kicked in. It’s still there, but the good news is, Modern Trade is moving beyond its expected numbers in the year and also above its base without Future Group. And in addition to that, by the end of December, a large part of the Future Group stores that got shut has started coming up.

Just to give you some broad numbers. 279 Big Bazaar that used to be there, today has come up as Smart Bazaar in terms of 235 in numbers, right? So almost three fourth of what stores used to be there has come in, and therefore that’s going to hopefully help us in the coming quarter. We were strong in these stores and we should continue our dominance and our relationship with the stores and channel.

Along with e-commerce — along with Modern Trade e-commerce has also fired well. Although this is here where we don’t think that we have reached our full potential or we are ahead of what our expectation is, so there is a lot that’s going on and would continue to happen on e-commerce.

On a side note, we also have launched our direct-to-consumer Caprese website. And this has kicked in about four weeks back, so we are live and we have started to get good. We would say green shoots at least on the whole D2C business on Caprese.

International business is also doing quite well in its own way. Our strategy of going deeper in our high-potential market seems to be working. And the growth that we’re seeing is largely coming from lesser number of countries but far more deeper. For example, as of now, in UAE, we are starting to get double-digit market share in ranges — in chains like [Indecipherable].

So that’s why on channels, if you talk about our category performance, well, hard luggage continues to dominate in the recent past, but we have started seeing some early change of that in terms of soft luggage coming up. And with our supplies picking up in soft luggage, I think that’s quite promising.

Backpack in particular is doing — is looking quite well for us in quarter three as well.

Net-net, overall good revenue growth and a highlight here would be as I started by saying this is completely on a remodeled supply chain, and I would like to give you some numbers there. Currently, 73% of our volumes in quarter three was supplied by our own manufacturing facility in India and Bangladesh. In a way, this has been the highest-ever ratio reported in any quarter.

Our capacities as of right now has increased 65% — our own manufacturing capacities have increased 65% since pandemic. And this year, we seem to be — we would be investing almost INR100 crore in this financial year only to increase our capacities. And not everything of this has been spent, but in terms of actioning the spend and increasing the capacity is underway. This is almost equally split between India and Bangladesh in terms of INR50 crore each.

We would have added almost 200,000 square feet of manufacturing space in this year alone.

All this is leading to good gross margin, sequential improvement of almost 1.3% and Y-o-Y improvement of 0.5%. This is largely happening on account of raw material prices and thankfully ocean freight.

Overall in terms of our pricing and realization, we’ve been positive.

In terms of overall expenditure — fixed cost expenditure, I think it has been in line with our increased revenue, increased business. Advertisement expenditure increase is a conscious decision, and I think that’s an investment that’s going very well into our brands and for our future.

Overall EBITDA margin flow through from above has been lower. One large reason other than increasing in advertisement is the provision we did on the Future Group full-debt. That’s almost taking out 1% out of the EBITDA. The provision we took was of INR6 crores.

Lastly, I think we expect positive demand environment to continue in the coming quarter or the going quarter. We hopefully would continue on our growth trajectory to end the financial year on a good note.

And a high note, in terms of concerns, there is the COVID situation in China which erupted suddenly. We have a high dependence on China. However, it seems like it is passing off quickly. Our teams are working on mitigating the risk. And quarter four is more about — not just quarter four, but also preparing for a very big quarter one. So that’s underway.

With this, thank you. I conclude my opening remarks and I open the floor for questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Karan Khanna from Ambit Capital. Please go ahead.

Karan Khanna — Ambit Capital — Analyst

Yeah. Hi. Thanks for the opportunity. So, Anindya, my first question is on your gross margins. So I think they continue to lag as against your expectation of 50% to 55% range which you’ve highlighted in the past. So is it fair to assume that the majority benefit because of cooling off in raw material prices is yet to play out in your margins?

Anindya Dutta — Managing Director

Yes, Karan. The answer is yes.

Karan Khanna — Ambit Capital — Analyst

So — and second as a follow-up, what I wanted to understand is that, so you have 443 EBOs today. Can you help us understand the split between VIP and Carlton EBOs?

Anindya Dutta — Managing Director

VIP and Carlton EBOs is not part of our strategy. We are not doing Carlton EBOs separately. We have done a few more as an experiment. I can tell you the strategic bit which is company-owned and franchisee, which is what we are driving. So 443 is — the split is 160 and 283.

Karan Khanna — Ambit Capital — Analyst

160 and 283. So you think that there is room for perhaps improvement or cost efficiency is there? And both VIP and Carlton EBOs perhaps can be clubbed in one in certain geographies where you have both the EBOs in the same location?

Anindya Dutta — Managing Director

Karan, there are extremely few. So therefore that’s not something that we are looking at in terms of separately. There are few that we had done Carlton. And maybe, yes, there could be opportunities, but we are talking in the order of magnitude of single-digit numbers.

Karan Khanna — Ambit Capital — Analyst

Sure. So what I’m trying to understand is that despite a roughly perhaps 10 percentage differential in gross margin versus your nearest domestic competitor, I think your EBITDA margins are largely in line with your competitor. So in light of this, perhaps, what are the initiatives which you could take to further drive cost efficiently?

Anindya Dutta — Managing Director

Yes. So I think we are more benchmarking our business and our P&L from that point of view. Revenue growth is absolutely important. Investing behind that growth in a more sure-footed manner, which is building our supply chain and strengthening, that is absolutely important.

We have a mix of brands, and other than the value brands, the other brands needs to be advertised, both in the form of brand-building advertising as well as transaction-building advertising, which is more e-commerce.

So I think, one is in relation to competition, one is in relation to what is the right thing for the business. And I think this is poised in the right direction. I think as the scale goes up, some of these ratios will start playing up better, and that’s what in the long run one is looking for.

Karan Khanna — Ambit Capital — Analyst

Sure. Sir, my second question is, you know, the e-commerce vertical. So we’ve seen that last quarter, e-commerce was 22% in terms of revenue contribution. This quarter, it’s 13%. So I understand there is some seasonality also in this, but can you help us understand is that — there has been market share — any change in the market share in the e-commerce segment?

Anindya Dutta — Managing Director

So to answer the first question, you’re right, there is a strong seasonality. Seasonality in the sense that may be more property and retail property driven. So the big days and all that are really big for e-commerce. So this is not only for one company, I think for overall fashion, for a larger same quarter of larger sector or industry, the quarter two is far bigger in the year as per as e-commerce is concerned. So e-commerce overall gain salience in overall market during quarter two for luggage industry.

So to that extent, if you have a lower share in a gaining — in a sector which is gaining salience, you may tend to lose overall share. But if it is for that quarter, it would even out over a period of time.

Karan Khanna — Ambit Capital — Analyst

Sure. And then last question is for Neetu. If you can help us understand what’s the balance receivable from the Future Group? And what was the deferred tax income that was credited to the P&L? If you could explain that and the lower current tax rate during the third quarter?

Neetu Kashiramka — Chief Financial Officer

Yeah. So the lowest tax rate is on account of receipt of dividends from Bangladesh, which we are in turn giving it back to our investor — shareholders, and therefore we get the tax benefit. And that’s why the effective tax rate is going to be around 18% to 19% for the year.

Karan Khanna — Ambit Capital — Analyst

Sure. And on your Future Group, I mean, balance?

Neetu Kashiramka — Chief Financial Officer

We have around INR12 crore of exposure for them.

Karan Khanna — Ambit Capital — Analyst

INR12 crore. All right. That would be my last question. Thank you and all the best.

Neetu Kashiramka — Chief Financial Officer

Thank you.

Operator

Thank you. The next question is from the line of Tejash Shah from Lavender Spark [Phonetic]. Please go ahead.

Tejash Shah — Lavender Spark — Analyst

My first question is a generic one. So if you can touch upon the overall demand environment, specific observations if you have any on substance type premium versus mass and then metro versus non-metro.

And last one, how is the seasonality bring out as in — in most of the categories, we are hearing that December — by the time December came, third quarter had a very tough time. So if you can touch upon the sub-trends as well?

Anindya Dutta — Managing Director

So, Tejash, on the demand part, I think till — as they say fingers crossed, we are looking good. The demand seems to be good throughout the quarter three. And it’s getting driven by the same cohorts that has driven the industry in the past. There is increased amount of travel, outing. There is good expenditure on non-weddings.

We are also seeing things like a backpack and all that is slowly possibly getting more ears around kind of purchase, and there is a repeat happening. So overall, the demand seems good for the industry, and hopefully, it seems like, at least in the near future, while there are talks about various — where one is reading in the news and seeing there are questions getting raised in the other sectors. I don’t see it right now for our industry in the immediate short-term.

In terms of geographies, yes, there is a tight higher demand in Tier 2, Tier 3 and downward cities. It’s more — it’s not — it’s very measurable online business but qualitatively, we are getting a sense of that. Maybe that’s also coming from the unorganized shift to organized, having a better play there or a bigger play there with more dominance of unorganized in the Tier 2 and down pop strata cities.

Did that answer your question? That was the last question on that.

Neetu Kashiramka — Chief Financial Officer

Yeah.

Tejash Shah — Lavender Spark — Analyst

Yeah. And just expanding on that [Technical Issues] has been a key driver [Technical Issues]

Operator

Sir, your voice is breaking.

Neetu Kashiramka — Chief Financial Officer

Tejash, your voice is breaking actually.

Tejash Shah — Lavender Spark — Analyst

Is this better? Hello?

Operator

Yes.

Neetu Kashiramka — Chief Financial Officer

Yeah.

Tejash Shah — Lavender Spark — Analyst

Yeah. Yeah. So just expanding the another [Technical Issues] wanted to know with China opening up, are you seeing or are you picking up any early trends of unorganized also bouncing back with China sourcing also getting sorted as we go on?

Anindya Dutta — Managing Director

Honestly, not seeing that trend. But yes, keeping a watch out for that because, yes, that could be a possibility. It’s not a major jump, but it will start fueling what was not fueled so well. So keeping a watch out, but no early signs right now.

Tejash Shah — Lavender Spark — Analyst

Sure. And last one, with the volatility that we’ve seen in margins in the recent past, how should we go for, I think pencilling margins for this year? And if you can give some color for the next year as well, what would be the guidance around margins?

Anindya Dutta — Managing Director

So as I said, I can’t give you a definitive number, but it seems in the right track. I think the fundamentals that I’ve been talking and what is there on the presentation is, continues to be pointing towards a better margin environment going forward in the coming year. Probably, the overall commodity and raw material prices are softening. The ocean freight is down. It’s much lower than before. So it may not have kicked in into the business as of now, but it will as we go ahead.

So on one side, the tailwind is, prices coming down. On the other side, the headwind is also the mix and the value category growing and the unorganized sector pushing the growth further. So there will be some kind of set-off happening.

And it’s difficult to predict that part because the volatility is more there and margin is a result of that. What’s happening is, we are pretty sure — clear that we will — want to have a good balance between margin and share, right, and not trading one for the other. And therefore, we will love to pick and choose our battles depending on how the environment is.

So anywhere between 50% to 52%, 53% is what we would try and keep the ship on is how I stand committed.

Tejash Shah — Lavender Spark — Analyst

Sure. And the last one on mainly clarification. Ma’am, you said that tax rate for this year will be 18%. Did I hear it correct?

Neetu Kashiramka — Chief Financial Officer

Yeah. Yeah, you’re right.

Tejash Shah — Lavender Spark — Analyst

And it will normalize by next year?

Neetu Kashiramka — Chief Financial Officer

No, it will be in the range of 18% to 20% because we’ll continue to move this.

Tejash Shah — Lavender Spark — Analyst

Okay. Okay. Okay. Got it. Got it. Thanks, and all the best. That’s all.

Anindya Dutta — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Bhargav Buddhadev from Kotak Mutual Fund. Please go ahead.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Yeah. Good evening, team, and congratulations on a good performance.

Neetu Kashiramka — Chief Financial Officer

Thank you.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

My first question is on the Caprese brand. So just wanted to know what price points are we sort of targeting when we are looking at significantly scaling up this brand. And also which channel we’ll be targeting to sort of scale up this brand?

Anindya Dutta — Managing Director

Thanks, Bhargav. Yes, I think it’s a very pertinent question because it is something that we are starting off now. So somewhere the Caprese brand may have been going towards, let’s say, a price point of INR1,000 and below. We’re definitely looking at the mid-premium and slightly above range. So anywhere between INR2,000 to INR4,000 range is what will be the mid part of what the brand should have once we get enough scale, and we’ll also do enough which is above INR5,000 as well.

So I won’t say we are shifting from a big A to B. We’re just repositioning ourself to what the brand started off with which is where there is a larger void, where there is a play of great design and great brands, and therefore, this is value creation happening. So that will be, let’s say, a sweet spot would be about INR2,500 to INR3,000, if I was to narrow it down somewhat. That’s on the brand and the pricing.

In terms of channel, we want to — we are looking at more direct-to-consumer in all form to begin with as we create penetration. So it’s not only the e-commerce portals, but — that’s why we started experimenting with — not experimenting, we have launched our D2C website and we are — we’ve done all the preparation in terms of back-end to enable and scale up. So that will be another key go-to-market tool.

We could also be looking at — and then there are some pilots going on where we are looking at exclusive experience stores which is — will be in malls where we would bring in the Caprese premium experience to the consumers. But as I said, that’s a pilot stage, if it works, commercially that’s something that we could scale up in a big way in the coming future.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Okay. Secondly, just wanted to know in terms of what has been the progress in terms of backward integration. So we were looking at manufacturing trolleys and wheels subsequently to further make ourselves more competitive. So where are we in terms of our game plan?

Anindya Dutta — Managing Director

I can’t tell you concrete stuff right now, but that’s something, that’s on. There are a couple of pilots that has happened on that in terms of understanding of what model will work. But you will see me talking about it or rather doing it in the coming financial year, right? I think we are more focused on making sure that. as [Technical Issues] and the whole supply chain was usually stressed in terms of scaling up to the demand.

And with every going quarter, I think the demand is higher than what we expected, and — so therefore that has been the big focus. But as we scale, as we cross that peak in the coming quarter which is quarter one, these are some of the priorities that will be taken on in a big way.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

And lastly on the e-commerce bit, I believe we are number three in terms of market share on the e-commerce side, which is lower as compared to offline. So any key learnings from some of our competitors, where we can sort of take clue and sort of implement them to increase our market share? Or we want to continue to dominate offline and be a third or the second largest player on the online platform?

Anindya Dutta — Managing Director

So, Bhargav, one, I think number three is not something that I see it as. But you’re right that there is no definitive data to corroborate that. But one thing is sure that we do not have our fair share. Whatever I have share within the other four channels, I have — I don’t have that, and I definitely don’t have leadership in e-commerce.

So whether it is number two or number three, is not so important. I think what you’re asking and the answer is that, everything we are doing is to make sure that we strive and get first to our — to a majority share — to a leadership market share, and then to aspire for the fair share within that channel.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Got it, sure. So what are we doing to sort of boost up because essentially, we believe some of our competitors are spending a lot to acquire traffic? So are we going to — go into that direction, or we sort of focus more on product launches to create a differentiation?

Anindya Dutta — Managing Director

No, I think we’re doing all that is required, as I said. So therefore, if there is spend, and it’s all about the intensity of spend and not about whether one is doing that or not. So whether within the portals like Amazon and Flipkart, are you spending more on performance marketing, so you would have noticed us feeding our brands through thematic advertising and other digital mediums, right? But you’ve not seen let’s say competition doing too much of advertising in other mediums, let’s say, till about quarter three.

And possibly most of that was getting into e-commerce. We are looking at that, or rather we have kind of made our plans to balance it out slightly more in favor of e-commerce going forward. So we will increase our intensity of spends in e-commerce with it.

The other part is portfolio and pricing as well. So there is many — so this is continuously happening. The pivot are the same. I think the continuity and the intensity is important. And as we are going, we’re continuously increasing that. So it’s not about starting something. It’s more about increasing the intensity of what we’re doing.

Bhargav Buddhadev — Kotak Mutual Fund — Analyst

Got it. Thank you for the clarification and all the very best.

Anindya Dutta — Managing Director

Thank you, Bhargav.

Operator

Thank you. The next question is from the line of Manish Poddar from Motilal Oswal AMC. Please go ahead.

Manish Poddar — Motilal Oswal AMC — Analyst

Yeah. Hi, sir. Actually, just wanted to understand three set of questions. One is, if I look at the manufacturing, sir, now 73% is by own manufacturing. What is the target, let’s say for FY ’24, FY ’25?

Anindya Dutta — Managing Director

So this 73% is what — is the what revenue — what sales has happened. Our 73% of that has been manufactured in-house, right? So in terms of pure sourcing, we are looking at in-house split of about 60% in the coming year, right, and roughly about 20%, 25% will be, let’s say, outsource within India, and maybe have about 10% to 15% at the outer limit, this is including Caprese from China. That’s the rough breakup, but it’s not a limiting thing. So I think depending on what’s making more commercial sense, the splits can get altered.

Manish Poddar — Motilal Oswal AMC — Analyst

And — so would it be right understanding, let’s say, if I look at the delta change in manufacturing from pre-COVID till now, that large part of this, let’s say, and even if you are saving at least what duty arbitrage is there, a large part of that has got deteriorated by the mix of a higher share of Aristocrat. Is that how it is?

Anindya Dutta — Managing Director

Yes, and also the fact that this is a time there is the ocean freight and the inflation was very high.

Manish Poddar — Motilal Oswal AMC — Analyst

But would a larger part be the mix part rather than the inflation part? That is what I’m trying to decipher because if I do the rough maths for the margins…

Neetu Kashiramka — Chief Financial Officer

Maybe 70% mix and 30% other factors.

Anindya Dutta — Managing Director

But we can examine this closely and come back. But this is our immediate or intuitive judgment to you.

Manish Poddar — Motilal Oswal AMC — Analyst

Okay. Just two more questions. One is, on this future retail stores or let’s say now under the new entity, so how many stores are we reaching now because you said two-third of — you’re reaching out three fourth of the stores, and I think earlier we were doing I think 400 odd stores. So how many stores do we reach now?

Anindya Dutta — Managing Director

No, we reached to everything that is opened. What I was telling you is that, under the banner of Reliance, out of the 279 Big Bazaar — Smart Bazaar which is the Reliance banner is 235 stores, and I reached to all the 235 stores. As and when they are opening the stores, they intend to open all the 279 back.

Manish Poddar — Motilal Oswal AMC — Analyst

Okay. So say effectively from beginning of year, which was about 45 stores, now are reaching to 235 stores.

Anindya Dutta — Managing Director

You’re right.

Manish Poddar — Motilal Oswal AMC — Analyst

Okay. And just one bookkeeping. Neetu ma’am, just this insurance, the balance payment, when is that expected to come across?

Neetu Kashiramka — Chief Financial Officer

Hopefully in this quarter.

Manish Poddar — Motilal Oswal AMC — Analyst

Okay. So there is no, let’s say, continued theory and anything like that. It’s just the timing of thing is the difference.

Neetu Kashiramka — Chief Financial Officer

Yeah. So it’s in the [Indecipherable]

Manish Poddar — Motilal Oswal AMC — Analyst

Okay. Okay, fair enough. Thanks. All the best. Thanks.

Neetu Kashiramka — Chief Financial Officer

Yeah. Thanks.

Operator

Thank you. Next question is from the line of Tushar Sarda from Athena Investments. Please go ahead.

Tushar Sarda — Athena Investments — Analyst

Yeah. Thank you for the opportunity, and congratulations on a good set of numbers. I wanted to know when you increase your manufacturing, how much can gross margin expand because you will have other manufacturing costs which would come and sit in the P&L, right? So just on the material side, the expansion should be a lot more?

Anindya Dutta — Managing Director

Yeah. So, therefore, the comparison is versus not manufacturing and buying from China. So the labor cost advantage and the duty arbitrage, the duty arbitrage was largest. So it is more compared to our earlier supply chain where we were buying from China. Today, we bring in the raw material, make it in Bangladesh and bring it in India. The duty is not there. So there is a 15% advantage in the raw material part of it which is like you see about 50% of our business, right?

So that’s a definitive advantage. Now there is a labor cost advantage, which could be offsetting with increase in freight or other areas, right? So straight away, there is this advantage, that is there in manufacturing, at least.

Tushar Sarda — Athena Investments — Analyst

So — I mean, what kind of gross margin will you target? I’m assuming that since you set up the facility, you will prefer to manufacture yourself, right, given all other things are equal unless the costs in China really come down.

Neetu Kashiramka — Chief Financial Officer

So like-to-like basis, if the raw material prices are same for both China and Bangladesh, we will have a 3% to 4% benefit, if all the other factors remain the same.

Tushar Sarda — Athena Investments — Analyst

Okay. So what kind of gross margin one would look at, say in three years down the road when things are normal? Right now, inflation is distorting all the numbers.

Anindya Dutta — Managing Director

Did you say three years?

Tushar Sarda — Athena Investments — Analyst

Yeah. Two, three years down the road when things are normalized.

Anindya Dutta — Managing Director

I think then going back to about 55% is what we have put as an ambition. We are goal seeking that and I think we’ll — It’s all about putting the right strategy at the right time in place to inch up there along with share and growth.

Tushar Sarda — Athena Investments — Analyst

Okay, okay. Thank you very much, and all the best.

Operator

Thank you. [Operator Instructions] Thank you. The next question is from the line of Nihal Mahesh Jham from Nuvama. Please go ahead.

Nihal Mahesh Jham — Nuvama Wealth Management — Analyst

Yes, sir. Thank you so much and good evening to the management. Sir, a couple of questions from my side. First on the e-com channel, as you’re aggressively target to scale that up, what is your experience till now be it in terms of the kind of margin this channel gives? Because ideally, if you look at a lot of the other categories, there is a lot of discounting and a lot of old season product which ends up getting say sold, which ends up impacting the kind of margins you make on this channel. So has your experience till now, the 20% sales that we’ve seen being similar, or we have seen a different experience? And going forward also, we expect this channel to be non-margin dilutive.

Anindya Dutta — Managing Director

So you’re right. There is a pressure on margins in some of channels which is trying to gain, let’s say, volume through attractiveness on price. However, when you see for my business, the net margin, when I take out the direct selling cost in other channels using promoters and all that, I don’t see the difference to be so big. In fact, this — in some quarters, the gross — the e-commerce margin is a tad better only.

So I think in the long run, this is something that is going to not only stay but will grow significantly. It will be a game of getting more scale here. And also to start the premiumization journey here through marketplace operation, right, where the pricing is ruled by the brands and you are listed everywhere. So it’s a long journey. It’s not long, it’s a journey. And I think we — this is not a channel that we had a head start at all, right?

So compared to not only within the industry, but others, I think we are catching up. And what I see in the long run is to — that this channel become — will become a large and a major channel for my consumers to buy VIP products. And therefore, we have to get the margin and share both right in this channel.

Nihal Mahesh Jham — Nuvama Wealth Management — Analyst

Got that point. Just a follow-up on this was that, currently what is the channel parity practices that we are following? Do we have a different range of SKU itself or we are trying to keep the pricing similar across our franchise EBOs and the distribution channel?

Anindya Dutta — Managing Director

No. So increasingly, the e-commerce is a separate set of products because that’s where the channel conflict is highest because the price discovery is the easiest for anybody on e-commerce. But yes, within our other, let’s call it, the physical channels also, there are ranges which are different, right? That does add to some complexities. So we are trying to find the right balance between where we would like to see exclusives and where we want to see a common range there.

So it’s a mix of both. There are some — in non-e-commerce, there are some ranges which are exclusive for that channel and the rest is common. This mix is only slowly changing in favor of more common products.

Nihal Mahesh Jham — Nuvama Wealth Management — Analyst

Understood. My last question was on Caprese. Do we still have the target of maybe wanting to reach INR500 crores of top line in this segment in the next couple of years?

Anindya Dutta — Managing Director

Well, I can’t put a number to that, but what you’re saying sounds too aggressive. We are trying to — see, it’s a very, very fragmented market, right? So if at all anything in three years’ time, I would like to take an ambition of being in a fragmented market, the brand of choice, the market leader in this. Now that translates into what crores is something that we’ll have to work out and either come back or maybe take as a management target here.

Nihal Mahesh Jham — Nuvama Wealth Management — Analyst

Fair. Just a follow-up if I may that, if I look at this category, which is, say the lady handbag segment has not seen any brands really scale up beyond the INR100 crore – INR150 crore kind of market. So what, as per you, has been the limitations, and what are the aspects that we are targeting to improve and scale has to be a much bigger brand, not specifically maybe the number I mentioned.

Anindya Dutta — Managing Director

I think go-to-market has been a limitation in this, because this product needs a close experience as people buy it. So, therefore, — and you also haven’t seen very large companies coming into this category. So I think e-commerce — direct-to-consumer commerce is changing that.

And also to that extent, we may not have been fully able to leverage our national network in the bags business into this which possibly all other players may not have. So go-to-market is possibly one key pivot on which scale up or a brand share in the category can go up on.

Yeah. But you’re right that this is — globally, this is a very fragmented market. So I don’t expect consolidation at all to happen. It is a very large space, right, so therefore, even getting within such a fragmented market high share or market leadership will be a very, very strong ambition to take.

Operator

Thank you, Mr. Jham. We request you to join the question queue for any follow-up.

The next question is from the line of Akhil Parekh from Centrum Broking. Please go ahead.

Akhil Parekh — Centrum Broking — Analyst

Hi, thanks for the opportunity. My first question is on — would you be able to highlight what would be the price differential for a luggage — for a unbranded luggage which is arising from China vis-a-vis say a mass branded luggage basically?

And has the price differential between the two declined meaningfully over the last two years since the onset of pandemic?

Anindya Dutta — Managing Director

No, I am afraid. I don’t think I’ll be able to give you a specific answer on that, because we haven’t tracked a particular product and compared it with this. Because the product — two products are not alike. I mean basis the features, it could be quite differently costed and differently priced, therefore, right? But once again, I would think that it is — there are odd reasons to believe that the gap is narrowed.

Clearly, let’s say, a large part of a bag making is high labor cost, and therefore, our labor cost in China and in Bangladesh and in India is significantly in favor of first India and then Bangladesh. Bangladesh would be more favorable. So to that extent, that’s definitely the difference that should change the cause.

The other thing is productivity. Even if you keep the raw material from China as same raw material, right, if — at the source if the raw material prices is same to all the three, then there is an advantage to India and Bangladesh over both labor cost. And today, we are seeing productivity is coming at par with — there is no major difference in technology, I think productivity is volatile but at least in my Bangladesh unit, I’m getting closer to China productivity already.

Akhil Parekh — Centrum Broking — Analyst

Okay. Okay, sure. This is helpful. And just a supplementary question to that is, like we have diversified our supply base and we have also found [Indecipherable] India and Bangladesh. What are the challenges which unorganized players might be facing from diversifying their supplies? Because I believe that they were largely dependent on China prior to the pandemic, and because of the disruption in China, they have not been able to get enough supplies base. So any specific challenges which they might be having and they might not be able to get their supplies from India and Bangladesh?

Anindya Dutta — Managing Director

Well, they need to then have manufacturers in India and Bangladesh who are scaling up to supply to the unorganized sectors. So — I mean that’s the challenge in terms of — if there is no ready capacity someone that could take — it would take over. So this could be fueling many — setting up a manufacturing happening.

I mean, that’s something that I’m saying more as a theoretical answer to your question that, that is the only way the supplies can happen. And the challenge for them would be to not finding vendors in India or who has the capacity to get them the products that China was giving them.

Akhil Parekh — Centrum Broking — Analyst

Sir, if I understood correctly, I think because they do not have manufacturing base and that’s why they were not able to get it from India and Bangladesh.

Anindya Dutta — Managing Director

Yeah, that’s right. We didn’t [Technical Issues] this in the past, that’s why the whole industry was going to China.

Akhil Parekh — Centrum Broking — Analyst

Got it. Got it. And the second and last question is on the gross margin front, right? The value segment continues to do well. Say, hypothetically, if Aristocrat and Alpha reaches at 40% mark of the total sales, will we still be able to achieve that 52%, 53% of gross margin?

Anindya Dutta — Managing Director

Yes, I think it should be given that the prices — raw material prices and our manufacturing efficiency is going up. The benefit of that will start kicking in, right, as we go along.

So I think it will go even if Aristocrat reaches to the mark that we have said. But as I said that these are things that have not with one change that will happen, I think it’s a gradual change that needs to happen, and one is pushing things in that direction.

Operator

Thank you. Mr. Parekh, request you to join the queue for any follow-ups. And the next question is from the line of Harsh Shah from Incred Capital. Please go ahead.

Harsh Shah — Incred Capital — Analyst

Yeah. Thank you for taking my question, sir. Sir, my question is about a longer-term point of view. When I look at your presentation, we see that in slide there which shows that the organized sector share has increased from 45% in CY ’19 to 56% in CY ’22. But when we see, let’s say, three, five years from now, you are only expecting that to go to 60%.

And secondly, even if you look at that penetration, we’ve covered a lot of ground over the last three years. Our penetration being 90%. So when we look at our — the growth in the luggage space over the next three to five years, if you were to exclude, let’s say, exports, how do you see, I mean, luggage — domestic luggage space grow over next three to five years?

Anindya Dutta — Managing Director

I think the industry in terms of value term should easily grow anywhere between 15%, thereabout CAGR over the next three to five years. Underlying volume growth could be less. But — I mean, this could be the aggressive side of the growth that I would put. But yeah, expecting a 15% CAGR over the next five years given the India’s context, should not be something that we could be shy of.

Harsh Shah — Incred Capital — Analyst

So 15% is something which you are targeting for the industry and not for the Company, right?

Anindya Dutta — Managing Director

Yeah. And….

Harsh Shah — Incred Capital — Analyst

We can grow at higher — yeah. We can grow at a higher pace given the kind of building blocks we have in play.

Anindya Dutta — Managing Director

Yeah. And depending on the category what share we have and yes, of course. But the industry is growing at that pace, and given our share ambition, that we would have and continue to have, it will define our growth objective.

Harsh Shah — Incred Capital — Analyst

Okay. And sir, secondly, how do you look at the — within the backpack space, how do you look at the mass segment and our participation and presence there? Because much of the — I mean unbranded player plays there and that’s a big opportunity for us. But on the flip side, the margins there are quite low. So how do you think of the backpack — the market value in backpack space?

Anindya Dutta — Managing Director

No, you’re right. Actually in every category, the low priced — there is a low price segment, and it is always the largest part of it, so that’s why every category looks like a pyramid. But this is not where we would want to dive into the low price, wants to begin with lower budget. I think for us, there is a huge opportunity to grow in the mid-segment itself, right, and that’s what we’re targeting to begin with.

But yes, there will be something that we will do to trigger people to upgrade from the low-priced to the mid-priced.

Harsh Shah — Incred Capital — Analyst

Okay. So we’re not looking to replicate what we’ve done in Alfa, Aristocrat in the luggage space in the backpack space?

Anindya Dutta — Managing Director

Well, — yeah. In simple terms, if I have just to answer no.

Harsh Shah — Incred Capital — Analyst

Okay, fine. Thank you so much, sir. All the best.

Neetu Kashiramka — Chief Financial Officer

Thank you.

Operator

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

Ankit Babel — Subhkam Ventures — Analyst

Yeah. Good evening, sir. Couple of questions. So you people are targeting a gross margins of around 52% to 53% in FY ’24. So what would be the EBITDA margins if you achieve those gross margins?

Neetu Kashiramka — Chief Financial Officer

20%.

Ankit Babel — Subhkam Ventures — Analyst

20%?

Neetu Kashiramka — Chief Financial Officer

Yeah.

Ankit Babel — Subhkam Ventures — Analyst

Okay. And if I remember correctly, you people were also planning a turnover of around INR4,000 crores by FY ’26, which is around of 25% CAGR. So can we see the traction of 25% revenue growth from FY ’24 onwards?

Anindya Dutta — Managing Director

I don’t know which remark you are talking about. I don’t remember having spoken about on FY ’26 on this. I think it’s been more a directional one in terms of the growth. And I maintain what I’ve said in the past, today, the market is too volatile for us to have a good and a safe prediction for that long.

Yes, we are predicting where it could grow more to build our supply chain and all that point of view. And there we are being aggressive, so that we build supplies given the good growth rate. But I don’t think it’s fair to right now discuss in detail about whether it is INR4,000 crores, whether it is INR3,500 crores or INR4,500 crores for that matter.

Ankit Babel — Subhkam Ventures — Analyst

Okay. But what are the export opportunities you people are foreseeing in the coming years?

Anindya Dutta — Managing Director

As of right now, we are more focused in going deeper into the market we have, right? But we had roughly about INR100 crore business in exports in pre-COVID. I think we are much more than that coming back in this year itself and closing all. So I think we will take very aggressive growth on this. But compared to what is the size of the opportunity, it is not going to be like we’re wanting to become — take a share of the global market and supply that has.

The focus is very large India and the India growth opportunity. But all the markets that — where we have high either right to success are already a good foot in the door kind of a thing, is where we’re going to go deeper.

So it will be an aggressive growth in IB that we’ll take in the coming years. Maybe we’ll look at about INR250 crore, INR300 crore business in two years’ time.

Ankit Babel — Subhkam Ventures — Analyst

Okay. And sir, lastly, what was the advertisement cost in Q3 versus last year Q3?

Anindya Dutta — Managing Director

[Indecipherable]

Neetu Kashiramka — Chief Financial Officer

INR30 crore versus INR9 crore.

Anindya Dutta — Managing Director

Yeah. INR29 crore versus INR9 crore.

Neetu Kashiramka — Chief Financial Officer

Yeah.

Anindya Dutta — Managing Director

Yeah. INR29 crores now versus INR9 crores last year.

Ankit Babel — Subhkam Ventures — Analyst

Okay. Okay. And as a percentage of sales, what kind of advertisement will you target going forward?

Anindya Dutta — Managing Director

5% to 6%.

Ankit Babel — Subhkam Ventures — Analyst

5% to 6%. Okay. Thank you so much, sir.

Neetu Kashiramka — Chief Financial Officer

Okay.

Operator

Thank you. Next question is from the line of Pulkit Singhal from Dalmus Capital Management. Please go ahead.

Pulkit Singhal — Dalmus Capital Management — Analyst

Thank you for the opportunity. Sir, the first question is on Modern Trade contribution. Pre-COVID, it was 30% and now it’s 29%. Can you help us understand how much was the Future Group contribution back then? How much is it now in 3Q?

And given that the stores are opening up, should we expect a sudden bump up going ahead, 4Q onwards?

Anindya Dutta — Managing Director

Yeah. I’m just getting the numbers for you. But before that, yes, as the stores start, we are seeing the stores which are becoming operational full — even I say fully means that in its full glory, our sales are coming back. So there will — there should be a big bump up that we should get.

But also what we saw when Future Group stores were down, in the catchment area, the other stores were able to take the drop in this, and that was a conscious strategy. So I won’t expect to have this as a complete consumption growth, but it will kind of get into a new equilibrium within the catchment area.

As far as your first question is concerned on what was the contribution of..

Neetu Kashiramka — Chief Financial Officer

Future Group.

Anindya Dutta — Managing Director

Future Group to Modern Trade..

Neetu Kashiramka — Chief Financial Officer

That is 44%.

Anindya Dutta — Managing Director

Future Group to Modern Trade was 44% pre-COVID.

Neetu Kashiramka — Chief Financial Officer

Yeah.

Anindya Dutta — Managing Director

What is now?

Neetu Kashiramka — Chief Financial Officer

It’s around 22% [Phonetic].

Anindya Dutta — Managing Director

It’s about 20%, 22%. But we can come back to you with more definitive numbers once we kind of look into this.

Pulkit Singhal — Dalmus Capital Management — Analyst

Understood.

Anindya Dutta — Managing Director

Right now to answer, I think Neetu is confirming, it’s 44% versus 22% as we speak now in Q3.

Neetu Kashiramka — Chief Financial Officer

Yes.

Pulkit Singhal — Dalmus Capital Management — Analyst

And your market share — I mean, you have a dominant market share within this group, right? I mean that continues even now?

Anindya Dutta — Managing Director

Yes, it continues in these stores. In fact, in Modern Trade because of this Future Group issue, the Modern Trade team working was — pushing, gaining market share in weaker accounts like Vishal Mega Mart. We went as strong in Vishal Mega Mart before. And some more entry into some more regional chains. So that’s also looking good, a much better than what we were before in those weaker chains. But in the larger chains, we continue to have a good share.

Pulkit Singhal — Dalmus Capital Management — Analyst

Okay. And the [Indecipherable] I think [Technical Issues] I’m forgetting the amount that is still pending. Is that supposed to be written off in the future quarters?

Neetu Kashiramka — Chief Financial Officer

Sorry. We are not able to hear you.

Anindya Dutta — Managing Director

INR12 crores.

Pulkit Singhal — Dalmus Capital Management — Analyst

Yeah. The amount that is receivable, the doubtful, I mean, that’s supposed to be written off in the future quarters.

Neetu Kashiramka — Chief Financial Officer

So as of now, we don’t have clarity because there are some stock flying and which is coming back. So we will get clarity only maybe by the end of next quarter.

Pulkit Singhal — Dalmus Capital Management — Analyst

Okay. And secondly, based on the raw material cost, I thought that the benefit was supposed to play out three — third quarter onwards because prices peaked up in second quarter. So if you can just help us understand where are the raw material costs right now versus what you have booked in third quarter? So we get a sense of how much of benefit can flow through. Obviously, I understand you’ll pass some bit of it based on the market, et cetera, but just to get a sense of where we are.

Neetu Kashiramka — Chief Financial Officer

We got only one-third of the benefits. So the benefits started actually coming only in the last month of the quarter starting.

Anindya Dutta — Managing Director

Also the fact that as of right now versus what we have with us in terms of stocks and the prices, and how luggage industry works is, also we got to cover whatever is from China, we got to cover a little ahead in time because of the Chinese New Year and all that.

Neetu Kashiramka — Chief Financial Officer

Four to five months of lag.

Anindya Dutta — Managing Director

Yeah. So there is — we could work on the exact percentage there, but it is lower, maybe about 4% to 5% price — overall weighted average price could be lower in the market today versus what we are operating on or what we are using. But don’t hold me to this. I think it’s something that we can check on this and come back to you.

Operator

Thank you. Ladies and gentlemen, that was the last question for today. I now hand the conference over to Ms. Neetu Kashiramka from VIP Industries for closing comments. Thank you, and over to you, ma’am.

Neetu Kashiramka — Chief Financial Officer

Thank you, everyone, for joining the call, and Happy Independence Day. Any other clarification, you can call me.

Anindya Dutta — Managing Director

Republic Day.

Neetu Kashiramka — Chief Financial Officer

Sorry. Republic Day.

Anindya Dutta — Managing Director

Thank you, everyone.

Neetu Kashiramka — Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]