Vakrangee Ltd (VAKRANGEE) Q2 FY23 Earnings Concall Transcript

Vakrangee Ltd (NSE:VAKRANGEE) Q2 FY23 Earnings Concall dated Oct. 21, 2022 

Corporate Participants:

Dinesh Nandwana — Managing Director and Group Chief Executive Officer

Aninesh Sanghavi — an Individual Investor — Analyst

Ammeet Sabarwal — Chief Corporate Communication Officer and Strategy

Analysts:

Unidentified Speaker —

Vipul Mittal — an individual investor — Analyst

Jitendra Kumar — an individual investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Vakrangee Limited Q2 FY 2023 Earnings Conference Call. [Operator Instructions] [Operator Instructions]

I now hand the conference over to Mr. Dinesh Nandwana, Managing Director and Group CEO, Vakrangee Limited. Thank you, and over to you, sir.

Dinesh Nandwana — Managing Director and Group Chief Executive Officer

Thank you very much. Good day, dear ladies and gentlemen. It is pleasure to greet you all once again on behalf of our Board of Directors and Senior Management. We begin by thanking all of you for having spare time in joining us here today to discuss our second quarter earnings for the financial year 2023. Today, we are emerged as a go-to market platform for the rural India for various business verticals, including the new age Fintech and Digital platforms.

We are building India’s largest Last Mile Distribution platform and emerging as the physical plus digital ecosystem with the Pan India presence. Today, we have more than 24,887 outlets spread across 33 states and union territories, 595 districts and 5,834 postal codes. Our 82% outlets are present in deep rural Tier four to six locations. This kind of presence makes us the partner of choice for any new business partners who wish to make their product services available in rural India.

We have a clear focus on market expansion and to strengthen our first mover advantage, thereby our plan is to achieve our long-term outlet expansion target of 75,000 NextGen outlets within the next 18 months. This will mark our presence across 100% districts and postal codes of the country and will make up India’s largest last mile rural distribution platform with a physical presence.

Recently, we have launched new attractive pricing for all our Kendra models, including the 100% refundable deposit product for ATM services as well as we introduced our Master Franchisee initiative, whereby we are in the process of appointing district-level Master Franchisees across the country. We have successfully appointed Master Franchisees in 53 districts across 15 states across the country. These Master Franchisees would provide ongoing operational support with the existing franchisees as well as drive new franchisee acquisition.

This would lead to help us scale at a faster pace and expand on a Pan India basis. We believe this Master Franchisee initiative is a game changer, and it’s given our local field agents and operational control at the ground level. We plan to achieve 100% district coverage over the next 12 months. These new initiatives would help us to scale up at much faster pace and thereby achieve our long-term targets well ahead of targeted time lines. Since the last quarter, we have launched additional franchisee commission incentives schemes.

These additional incentives are transitory in nature, but would lead to quick payback for the franchisee, thereby creating positive word of mouth and driving strong new franchisee interest. Strong word of mouth and referral incentives, along with Pan India marketing have resulted into higher yield for franchisee acquisition. We have a strong support and brand presence in rural India, and our customers trust us with their day-to-day banking needs.

During quarter two financial year ’23, we opened 5.5 lakhs bank account, 1.7 lakh insurance and pension policies and did more than INR1.93 crores banking transaction with a gross transaction value of INR9,688 crores. While currently nascent, the Indian neobanking user base, is expected to grow fast at 80% plus yearly over the next five years. There is a huge underpenetrated rural market with huge retail and MSME customer base.

Further, there is lack of trust with the currently rural customer base, therefore, physical presence and assistance is a key differentiator. Going forward, we are well structured to transition into neo banks as we plan to launch neobanking services through our BharatEasy Mobile Super app platform. Through this, we are focused to evolve into unique online to offline platform, whereby there would be assistance available through the physical Kendra network along with digital neobanking services.

Further, we have a strong existing retail customer base in rural India, and we are focused on affordable pricing and unique online to offline consumer experience. With respect to the proposed demerger of the noncore banking of key governance and IT/ITES as a separate entity, we would like to update that we have received the approval for demerger from stock exchange and have now filed the application for NCLT approval.

We believe that proposed demerger would unload the potential of the core Vakrangee Kendra business in the current listed entity, with existing business of Vakrangee Kendra physical outlet as well as digital platform of BharatEasy Mobile Super app. Vakrangee Kendra business is a retail-centric consumer facing business. It is an asset-light, high return on capital business, thereby, we’ll get the proper representation post the demerger. We believe this would lead to significant rerating of the core business and would maximize shareholders well.

Over the last few years, we have undergone a huge transformational journey, where we have made a transition from nonexclusive store in store format outlet to a highly recognizable standardized fully branded net in format outlet’s. We believe — we are now well poised and have a clear visibility for a strong growth journey in the next few years to come. We have aligned our strategy with one of the existing service partner, we expand our presence across the country in every gram panchayat level.

Commenting on the quarterly result performance, we have witnessed stable operating growth on year-on-year as well as quarter-on-quarter basis due to increase in number of outlets as well as our services return to normalcy on the business front. Our revenue from operations increased by 12.98% on a year-on-year basis and 3.56% on quarter-on-quarter basis. Our total number of Vakrangee Kendras outlet cross INR24,887, which are spread across 595 distances, 32 states and UTs.

Our quarterly gross transaction value crossed INR129.41 billion, where our quarterly number of transaction crossed, INR33.04 million. Our near-term profitability has been impacted as we are reinvesting our operational cash flow for enhancing franchisee incentives, our margins have been impacted primarily due to the launch of additional franchisee incentive schemes. These additional incentives are trajectory in nature, but would lead to quick payback for the franchise, thereby driving strong new franchisee interest.

The marginal impact on gross margin due to these traditional incentive has happened and would keep on reducing over the next few quarters, thereby gross margin and profitability will keep on improving, hence forth in the subsequent quarters. The strong word of mouth and referral incentives along with Pan India marketing have resulted into higher lead funnel for franchisee acquisition. Further, we have introduced new expected pricing for all our Kendra models as well as introduced Master Franchisee initiative, which would help us scale up at much a faster pace and thereby achieving our long-term target well ahead of targeted time lines.

We are confident that these strategic initiatives shall lead to significant growth and profitability in long term. Vakrangee Digital Ventures Limited is a 100% subsidiary company of Vakrangee Limited. The company has launched a mobile super app based business platform, primarily targeting rural India. BharatEasy app, India Ka Super App, currently beta trial work has been launched. It is currently a beta trial version, and we intend to go fully operational and commercial live in the next six to eight months.

We have made live and have activated some of the key services like online shopping, total health care services, online demat account opening, CIBIL credit score rating services as well as the online payment card application services. A unique differentiator and sustainable competitive advantage is whereby our digital super app platform would be able to leverage the Vakrangee on-ground ecosystem.

The vast, well diversified Pan India level physical store network of Vakrangee as a point of physical assistance, especially to customers — consumers to semi-urban and rural remote locations. Vakrangee Digital Ventures shall leverage the venture ecosystem, strong brand recall, Vakrangee Kendra enjoy good positive NPS among users. Our NPS score is 60% as per RedSeer research report. Access to existing of Vakrangee customer base of 25 million active customers, access to existing network of 24,800 plus outlet for physical assistance and consumer awareness.

This unique proposition of digital along with physical would help the digital channel to scale up fast and would significantly reduce the cost related to acquiring customer, physical assistance, order fulfilling and return management of the online orders. Further leveraging physical presence would results into better customer interaction, a strong brand recall and better service experience and trust for the customer. Our company has been globally ranked number one in the Sustainalytics ESG Risk Rating ranking assessed in the software and service industry segment.

Overall, Vakrangee has been recognized by Sustainalytics as an ESG Global 50 top rated company. Vakrangee Limited has been identified as a top ESG performer out of more than 4,000 comprehensive companies that Sustainalytics cover in the global universe. Vakrangee Limited has also been honored to be included in the year’sn Sustainability Yearbook 2022, published by S&P Global. Vakrangee has earned S&P Global Bronze Class spot in yearbook in the corporate Sustainability Assessment survey.

The Sustainability Yearbook 2022 published by S&P Global is one of the world’s most comprehensive publication providing in-depth services on corporate responsibility. This annual ranking showcase the sustainability performance of the world largest companies in each industry, determined by their scores in the annual corporate sustainability assessment. In 2022, S&P Global has assessed over 7,500 companies across 61 industries this year.

Vakrangee has been accepted as a signatory of the United Nations Global Compact, and we have met our sustainability measures with a United Nations Sustainability Development Goals. Further, we have appointed Grant Thornton as our assurance auditor for our assurance of our integrated annual report. We have recently released our third integrated annual report for 2021-’22, along with reasonable assurance from independent auditor, Grant Horton, Bharat LLC. Global recognition reflects company’s commitment to further enhance its corporate governance and transparency standards.

Company has achieved global condition across various platforms for superior ESG performance and long-term business sustainability. Lastly, I would like to again reiterate that our profit margins have bottomed out, and we are all set for sustainable improved — improved growth going forward. The maximum impact of the strategic initiatives on PAT margins, PAT margins has already been factored in and thereby, profitability will keep on improving, henceforth in the subsequent quarter. We are confident that these initiatives shall lead to significant growth in profitability in the long run. I would like — I would now like to take this opportunity to thank our shareholders for their support.

We can now open the floor for Q&A session. Thank you very much.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is from the line of Aninesh Sanghavi [Phonetic], an Individual Investor. Kindly proceed.

Aninesh Sanghavi — an Individual Investor — Analyst

Hello. Good evening. Yes. My question is that going forward, does the profitability will get better from current quarters? Please provide your guidance on this side. Also, can you brief on the long-term growth plan and the number of outlets we are expecting in the future?

Ammeet Sabarwal — Chief Corporate Communication Officer and Strategy

Thank you for the question. So, as we have highlighted also that currently, our margins have been impacted because of the additional franchisee incentive schemes which we had provided since last quarter, we started in last quarter. And going forward, these are temporary maker because primarily we need to generate a very strong word of mouth and a positive environment at the field level by doing new franchisee acquisition. Therefore, these are transitory makers.

And over the subsequent quarters, over the next four to six quarters, we will keep on reducing — margins will keep on improving, and this incentive will keep on reducing. So, our profitability will get back on track over the next few quarters. The maximum impact has already happened. So every quarter-on-quarter, you will see the improvement coming in, and our margins going back to our standard level. So, that is what we expect because we are generating a huge amount of interest for new franchisee acquisition, as well as we have set a very high growth target in order to reach 75,000 NextGen outlets over the next 18 months.

So 75,000 outlets was earlier our target for the five year period, whereas what we realized was that we are having the first-mover advantage in place where our brand is known and people know us very well. And since we are also launching a digital super app platform over and above our physical network, so it becomes very important for us to have a faster expansion at the field level. So the physical plus digital ecosystem can be showcased as a Pan India level kind of presence.

So our target is to have a presence across each and every postal code of the country across each and every districts of the country. Currently, we are present in around 595 districts. Overall, targeting to reach across all 740-plus digits. Currently, we are present in 5,800-plus postal codes. The target is to reach across entire 19,000 postal codes. So for that, we had to come out with some kind of incentive schemes where our existing network becomes very profitable and very strong, and there is a good model in place, good word of mouth in place.

Because in the rural level, what we have realized is the new franchisees, whoever — they largely depend on the feedback that they receive from the existing network. Therefore, the profitability of the existing network is very important. And since we are giving a very good handsome incentives, which is over and above the regular commission, it all the most become more attractive.

And therefore, we are receiving a huge funnel in terms of new inquiries, we have received more than 1,50,000 plus EOI, expression of interest. And therefore if you see, even in the last quarter, we have added almost more than 2,000 plus new outlet in terms on boarded and we have crossed 24,800 plus now. And we are having a very strong pipeline in place. So as these incentives get normalized and get back to their normal level, the jump will be there, seen in the — our gross margins, EBITDA margins and PAT margin.

So therefore, what I would say to your query, yes, profitability will definitely improve. Every quarter-on-quarter, we will see the improvement in profitability. And maybe in the next three to four quarters, we’ll get back to our normal profitability margin. In terms of the growth target, long-term growth target, our current focus is to reach 75,000 stores within the next 18 months. That is where we are targeting in order to have 100% presence in accross each and every postal code of the country and each and every district of the country.

So the first target is to reach to 75,000 stores. Overall, we feel the market size or targetable, addressable market, what we say as a TAM is basically around one million stores because there are more than 6,50,000 villages almost more than 3,00,000 grampanchayat more than 75,000 urban wards, or more than one million polling booths. So where we feel that our Vakrangee Kendra, which is within a walkable distance of a local community, the overall market size would be maybe one million outlets, but maybe at least we are still scratching the surface. We are still only at around 25,000-odd outlets, but at least we want to grow three times these networks in the next 18 months to 75,000 stores. I think that is the key milestone which we are focusing on right now. Thank you.

Operator

Thank you. The next question is from the line of Vipul Mittal, an individual investor. Kindly proceed.

Unidentified Speaker —

Thanks. My question is, can you please throw more light on the Master Franchisee initiative? How will it impact on the business growth? And what is the future road map for the sale?

Dinesh Nandwana — Managing Director and Group Chief Executive Officer

Sure, Vipul ji. Thanks for this question. So Master Franchisee is interesting initiative which we rented out. And what we are seeing is that it has tremendous potential because we have already appointed now almost 53 Master Franchisees in 53 districts across 15 states of the country, which almost — the fair amount of pilots or, I would say, mix with what we have done.

And what we have realized is with Master Franchisees, these are localized person of that particular district who is already having a very strong foothold, a very strong network in place. And we had a — who is there at the local level has our representative. And this scheme is there in the game because he is earning basically a commission on the incremental business that the franchisee does. So, therefore, the — all the interest and the intent is completely aligned with our vision and our interest.

So, therefore, what we are seeing is that a Master Franchisees at the local level, not only brings us strong local presence because we’re already setting up the own local office — Master Franchisee office at every district level, plus who is there at the local level to do handholding of the franchisees for day-to-day operations resolving the issues at the local level. At the same time, he is the face, he is already conducting seminar, he is conducting events in order to do new franchisee acquisitions, because he also want to grow the business, because his interest and our interest are completely aligned.

So that is what we are feeling is that this is a really game changer mode for us. And what we see is that maybe in the next eight to 12 months, we will have a Pan India presence with the proper office in place at each and every district level location. And I have this kind of field force in place where the person can entrepreneur, because Master Franchisee enters as an entrepreneur. And he is earning if the franchisees are earning. So his interest are completely aligned with the franchises and with us.

So that makes us more comfortable, more confident. And at the same time, we’re much more mature as compared to our normal franchisee because he is a high net worth individual. He has a strong skill set in place. He is running a strong team in place to — it is not only Master Franchisee. Every Master Franchisee has his complete team in place. So they have a spot for each vertical, plus they have every block level, block officer. So that, in a way, gives me a complete field report all voted for us.

With the local — in the local language, in the local skill set because, for example, if I’m going to the south, language can be a barrier, but here my Master Franchisees is a localize of that particular district. So that gives much more comfort even for any new franchise coming on board because they have a local space, they have a local person to speak to and the local ongoing day-to-day operational support in place. So we feel — with the Master Franchisees in place, our scalability will be much better, would be much strong.

At the same time, our monitoring, control and day-to-day operations would be much more tightly run because the Master Franchisee is there at the local level. And at the same time, the model is built in such a way that his interest and our interests are completely aligned. So as I said, he is getting the submission of the incremental business that the franchisee network is doing under him. So that makes all the more important that his participation is at the max.

So, therefore, we feel that with this Master Franchisee model in place, initiatives in place, we will be able to achieve our target in a much more profitable manner, in a much more scalable manner. And definitely, it feels very promising from the experience what we are getting, from the 53 district where the Master Franchisees have been appointed. The results have been very encouraging. And I think maybe six months down the line, we will actually see the fruit of this initiative, and we will see a huge impact in terms of our owner scalability and profitability. Thank you.

Vipul Mittal — an individual investor — Analyst

Thank you.

Operator

The next question is from the line of Jitendra Kumar, an individual investor. Kindly proceed.

Jitendra Kumar — an individual investor — Analyst

Hi. I have seen that Vakrangee is continuously adding new services. What is the current plan to add more services in the near future, in which services you see that there is huge potential for the future growth? Can you please guide on this?

Ammeet Sabarwal — Chief Corporate Communication Officer and Strategy

Sure. So as we said that we have built — basically, we have built Last Mile distribution platform basically, so where any brand, any partner, any service can be plugged in and we can provide some access to completely unserved — underserved or Tier 3 to Tier 6 kind of customer base. So, if you see basically the services like banking, ATM, money transfer, insurance or online shopping, we had Amazon. And recently, we have just done the tie-up with Decathlon. We are currently doing the pilot project for Decathlon. That is, again, similar to online shopping for sports goods.

On the neo services, healthcare services, total healthcare services has been very promising. We are adding a few more products there basically. We are also trying to add agri products. So we have done a tie-up with a partner called BigHaat. So, where basically, complete agriculture products will be available through online portal, products such as the, say, agri equipment. So, those — that looks very promising. That will be going live over the next two to three months.

Demat accounts, we had done — we have also recently done tie-up with Anand Rathi. So we’ll also be making that service live. We had done Pan Card Services and CIBIL score services also through the portal. And what we are also doing is, we are exploring many more new verticals. So, whether it is in the education side, or whether it is on the employment side, getting the rural jobs, getting unorganized job opportunities. So we are exploring those kinds of opportunities because that is our target customer base and these services are more of a requirement in those locations.

And how we can also work on the farming and agri side is where — what we are exploring. So maybe these are some of the new verticals which might get added over the next couple of quarters. But right now, if you see our complete financial services is there, complete ATM is there, complete e-commerce is there. Within e-commerce, similar to Amazon, we had done tied with Decathlon. We are doing with BigHaat, which is more of an online for agri products. And we are exploring, as I said, two more verticals, which is education and another one is basically, employment generation or skill development.

That is where we are working on. And maybe in the next couple of quarters, we will be announcing some ties in that space. So I think so that is — from our perspective, we want to make our store as the most convenient store for that neighborhood, for that local village level location. So our tagline, what we say [Foreign Speech]. So we are trying to see what are the things, which are not being done at our stores and what we can bring under one umbrella, where our target customer base suits and which have more services. But that is where we stand today in terms of new services which we are exploring. Thank you.

Jitendra Kumar — an individual investor — Analyst

Thank you.

Operator

As there are no further questions, I would now like to hand the conference over to Mr. Ammeet Sabarwal from Vakrangee for closing comments.

Ammeet Sabarwal — Chief Corporate Communication Officer and Strategy

Thank you, everyone, for taking time out and participating in our Q2 FY 2023 con call. Please feel free to get in touch with us in case of any further queries in case of any further details required. My e-mail ID is ammeets@vakrangee.in. It’s also available on the website. Thank you, and good evening. Thank you.

Operator

[Operator Closing Remarks]