Vakrangee Ltd (VAKRANGEE) Q3 FY23 Earnings Concall Transcript

Vakrangee Ltd (NSE:VAKRANGEE) Q3 FY23 Earnings Concall dated Feb. 03, 2023.

Corporate Participants:

Dinesh Nandwana — Managing Director & Group Chief Executive Officer

Ammeet Sabarwal — President of Investor Relations

Analysts:

Jignesh Kumar — Individual Investor — Analyst

Ankita Sharma — Individual Investor — Analyst

Vikas Gupta — Individual Investor — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Vakrangee Limited Q3 FY 2023 Earnings Conference Call. [Operator Instructions]

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

Dinesh Nandwana — Managing Director & Group Chief Executive Officer

Thank you, 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 spared time in joining us here today to discuss our third quarter earnings for the financial year 2023.

Today, we have emerged as the go-to market platform for the rural India for various business verticals including the new age, fintech and digital platform. 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 a more than 24,887 outlet spread across 33 states union territories, 595 districts and 5,834 postal codes. Our 82% outlets are present in deeper rural Tier 4 to 6 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 it’s our first mover advantage. We are planning to cover entire 764 districts, which is 100% of district coverage across the country through appointing district level master franchisees. We have successfully appointed master franchisees in 113 districts across 29 states across the country. These master franchisees would provide on ground of personnel support to our existing franchisee, as well as drive new franchisee accusation. This would lead to help us scale up — scale at a faster pace and expand on Pan India basis.

We believe this Master Franchisee initiative is a game changer and strengthen our local field presence and operational control at the ground level. We plan to achieve 100% district coverage by end of this year. These new initiatives would help us scale at a much faster pace, and thereby achieving our long-term target well ahead of targeted time line. Since the last quarter, we have launched additional franchisee commission incentive schemes as well as we have launched special incentive for master franchisees. These additional incentives are transitory in nature, but would lead to quick debit for the franchisees and master franchisees, thereby creating positive word of mouth and driving strong new master franchisees and franchisee interest. Strong word of mouth and referral incentives along with Pan India marketing have resulted into higher lead funnel for franchisee acquisition.

We have a strong footfall and brand presence in rural India and our customers trust us with their day-to-day banking needs. During quarter three financal year 2023, we have opened 4 lakh bank accounts and 3 lakh insurance pension policies and did more than 1.89 crores banking transactions with a gross transaction value of INR9,674 crores. There is a huge underpenetrated rural market with huge retail and MSME customer base. Further there is a lack of trust with the current rural customer there. Therefore, physical presence and assistance is a key differentiator.

Going forward, we are well structured to transition into the Neo Bank as we plan to launch Neo Banking Services through our BharatEasy Mobile Super app platform. Through this, we are focused to evolve into a unique O2O, Online to Offline, platform, whereby there would be assistance available through the Physical Kendra network along with Digital Neo Banking Services. Further, we have strong existing retail customer base in rural India, and we are focused on affordable pricing and unique online to offline customer experience.

With respect to the proposed demerger of the non-core business of E-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 filed the application for NCLT approval. NCLT has now paved the way towards creation of two separate listed entities, that is Vakrangee Limited and VL E-Governance & IT Solutions Limited. The honorable NCLT by way of its order dated January 20, 2023 has inter alia directed the company to convene a meeting of its equity shareholders and unsecured creditors on Friday, that is 3rd March ’23. We believe the proposed demerger would unlock the potential of the core Vakrangee Kendra business in the current listed entity with the existing business of Vakrangee Kendra physical outlet, as well as the digital platform of BharatEasy Mobile Super app. Vakrangee Kendra business is retail centric consumer facing business. It is an asset light high return on capital business, and thereby will get the proper representation post the demerger. We believe this would lead to significant reset — re-rating of the core business and would maximize sell orders well.

Over the last few years, we have undergone a huge transformational journey whereby we have made a transition from non-exclusive store in store format outlet to a highly recognizable standardized exclusive branded national format outlet. We have further announced and launched our NextGen 2.0 format with the key features such as exclusive dedicated outlet for banking-weekly [Phonetic] outlets, exclusive dedicated outlet for ATM and other services, design provisions such that the ATM can be operated for extended hours. Our current focus is to implement and upgrade existing Kendras in accordance with NextGen 2.0 format over the next couple of quarters. This would result into better productivity and alignment with government vision of digital banking unit. Our number of outlets remain stable at 24,887 as we are currently upgrading the existing outlet to a new NextGen 2.0 format, especially the outlets opened during the pandemic period.

Commenting on the quarterly result performance, we have witnessed stable operational growth on year-on-year as well as quarter-on-quarter basis due to increase in number outlets on year-on-year basis as well as our services return to normalcy on business from post-pandemic. Our revenue from operation increased by 20.16% on a year-on-year basis and 7.12% on quarter-on-quarter basis. Our total number of Vakrangee Kendra outlets remains stable at 24,887, which are spread across 595 districts, 33 states and union territories. Our quarterly gross transactional value crossed INR130.68 billion, whereas our quarterly number of transaction crossed 32.91 million.

Our profit after tax has reduced by 92.7% on quarter-on-quarter basis. Profitability has been impacted as we are reinvesting our operational cash flows for enhancing franchisee incentives as well as building a Pan India district level Master Franchisee network. The profitability and margin impacts shall be there for the next quarter, post which profitability shall be improving in the subsequent quarter.

Our current focus has been on expanding our presence through building Master Franchisee network and to strengthen our first mover advantage. We are currently building a Pan India district level Master Franchisee network, which will result in a strong on-ground operational management as well as better scalability in the future.

Our number of outlets remained stable at 24,887 as we are upgrading the existing outlets to new NextGen 2.0 format, especially the outlets opened during the pandemic period.

NCLT has paved the way towards creation for two separate listed entities, that is Vakrangee Limited and VL E-Governance & IT Solutions Limited. The honorable NCLT, by way of its order dated January 20, 2023, has inter alia directed the company to convene a meeting of its equity shareholders. Due to demerger process in the final stages, we have currently abated the E-Governance and IT/ITES trading business for the next quarter, which shall result into lower revenue and profitability in the next quarter, post demerger completion the growth shall get normalized.

Further, we have introduced new attractive pricing, which would help us scale at a much faster pace and thereby achieve our long-term target well ahead of targeted time line.

We are confident that these strategic initiatives shall lead to significant growth in profitability in the long term.

Vakrangee Digital Ventures Limited is 100% subsidiary company of Vakrangee Limited. The company has launched a Mobile Super app best business platform primarily targeting rural India, BharatEasy app India Ka Super app, currently upgraded beta trial version has been launched. It is currently a beta trial version and we intend to go fully operational in commercial now [Phonetic] in the next few quarters. We have made live and activated some of the key services like online shopping, total health care service, online Demat account opening, CIBIL credit score rating services, as well as the online PAN card application services. A unique differentiator and a sustainable competitive advantage is whereby our digital super app platform would be able to leverage the Vakrangee on ground ecosystem, a vast well diversified pan India level physical installed network of Vakrangee as a point of physical assistance, especially to customers to semi-urban and rural remote locations.

Vakrangee digital venture shall leverage the Vakrangee ecosystem: strong brand recall, Vakrangee can enjoy good positive NPS among users, our NPS score is 68% as per Redseer Research; access to existing Vakrangee customer base of 25 million active customers; access to existing network of 24,800 plus outlets for physical assistance and consumer awareness. In this unique proposition of digital along with physical, physical would help the digital channel to scale up fast and would significantly reduce the costs related to acquiring customer, physical assistance, order fulfilling and return management on online orders. Further leveraging physical presence would result into better customer interaction, strong brand recall and better service experience and trust for the customers.

Our company has also 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 the more than 4,000 comprehensive companies that Sustainalytics covers in the global universe.

Vakrangee Limited has also been honored to be included in Sustainability Yearbook 2022, published by S&P Global. Vakrangee has earned S&P Global Bronze Class spot in the yearbook in the Corporate Sustainability Assessment survey. The sustainability yearbook published by S&P Global is one of the world’s most comprehensive publication providing in-depth analysis on corporate responsibility. This annual ranking showcased the sustainability performance of the world’s largest companies in each industry, as it is determined by their score in the Annual Corporate Sustainability Assessment.

Vakrangee has been accepted as a signatory of the United Nations Global Compact, and we have mapped our sustainability initiative with the United Nations Sustainable Development Goals.

Further we have appointed Grant Thornton as our assurance auditor for our assurance of our integrated annual report.

Global recognition reflects company’s commitment to further enhance its corporate governance and transparency standard. Company has achieved global recognition across various platforms for its superior ESG performance and long-term business sustainability.

I would now like to take this opportunity to thank our shareholders for their support. We can now open the floor for a question-and-answer session.

Questions and Answers:

Operator

Thank you Mr. Dinesh Nandwana for your opening remarks. Thank you very much. [Operator Instructions] The first question is from the line of Jignesh Kumar, Individual Investor. Please go ahead.

Jignesh Kumar — Individual Investor — Analyst

Good evening. My question is about profitability. See, the profitability has affected in this quarter. So going forward, does the profitability — it will be getting better for current quarter? Or will it — or we will see the downfall in the same? Can you please guide on this?

Dinesh Nandwana — Managing Director & Group Chief Executive Officer

Sure. Good evening. So as we have said basically where — what we are focusing right now is on building the network of our Master Franchisee as well as building a strong base for our existing franchisees. So what we had done in the last couple of quarter is where we have increased the sharing incentives with our existing franchisees, so that we get a strong brand recall and a strong word of mouth publicity, specifically in rural India, so that we are able to get a better funnel for the new franchisees. At the same time, we are appointing master franchisees across district wise on a Pan India basis. So till now, we have appointed around 113 master franchisees. And we feel that this is very important perspective for us, because these master franchisees are going to help us manage the on-ground operational excellency as well as compliances. At the same time, they will help us target the new franchisee acquisition. So we are also providing good amount of incentives specifically on threshold basis to our master franchisees also.

So the schemes of these incentives in terms of franchisee incentive as well as master franchisee incentives, these are already announced till the month of March. So what we feel is that, the March quarter will also have an impact in terms of profitability because of the higher sharing ratio with the franchisee as well as master franchisees. So if you see currently, normally our gross margins are typically at 20%, 25%. Currently, our gross margins are in a low-single-digit number, because we are doing a higher sharing with our franchisees and the master franchisees.

But what will this have an impact will be a very long-term positive impact, because it will improve the payback for our franchisee network. So our existing franchisee network will have a better payback during this period. And so, we get a good brand recall as well as good visibility in terms of rural India, where this kind of business models is very well accepted. At the same time, our new initiative, which is of setting of master franchisees, they will also see the green shoots very early on where they will be able to see some good earnings. And that will drive our Master Franchisee acquisition activity also, because our target is to have a complete Pan India presence that is complete 764 districts to be having a exclusive master franchisee partner in place by end of this year itself.

So that is what we are focusing on. That is where we are investing our operational cash flows currently. And therefore, to answer your thing, we feel that the profitability or the margins will be subdued in the current quarter, but they will keep on improving over the subsequent quarters as these incentives get normalized and our sharing ratio gets back to our normalized sharing ratio and our gross margins are back to where they are typically. Thank you.

Jignesh Kumar — Individual Investor — Analyst

Okay, sir. Thank you.

Operator

Thank you. Our next question is from the line of Ankita Sharma, Individual Investor. Please go ahead.

Ankita Sharma — Individual Investor — Analyst

Hello. Vakrangee has received approval from NCLT for demerger. My question is by when the demerger process will be completed? And how do we see the change in the business operation of both the companies? Does the demerger will make any change or impact on the services or business verticals of Kendra business?

Dinesh Nandwana — Managing Director & Group Chief Executive Officer

Thank you. So if you see basically the NCLT — the honorable NCLT has now paved the way where we have got the approval for setting up the meeting with our exist — for our shareholders as well as our unsecured creditors basically where the approval will take place basis on that meeting. So we have already previously got the approval from the respective stock exchanges on this demerger. So hopefully, we are in the last leg of this process. And maybe it is not right for me to give a specific time line, but we are in the last leg and very soon we will be able to have this entire demerger completion in place. Now since we are in this last leg of this getting demerger in place, we have currently abated our legacy business, E-Governance business and the IT/ITES businesses.

So there is no specific change in terms of our Kendra business. Our Kendra business is as it is. It is not getting specifically impacted because of this demerger. But post demerger, both the businesses get a proper representation. So that is easier for all stakeholders to understand our business, separate balance sheet, so return on capital, return on investment, the return ratios are segregated. And at the same time, the Kendra business, which is more consumer-centric business, because it’s a retail store kind of model, it’s a B2C business. So it’s a retail consumer-centric business where we are adding more and more services every quarter-on-quarter. So that will get a proper representation as a B2C business, whereas the legacy business or the IT/ITES business is more of a high working capital, high CapEx driven or thin margins in terms of IT procurement and trading services. So that gets segregated.

So I think so — it is now more or less we are there at the final leg of this — completing of this demerger, maybe a quarter or more for say what we feel, but it is hard to tell exactly But that is what is our visibility as of now, because of which one quarter might get impacted as we have abated the legacy and the IT/ITES services. But post that both the businesses will be on their own growth path, will be getting on to their own normalized revenues and profitability growth path accordingly. Thank you.

Ankita Sharma — Individual Investor — Analyst

Okay. Thank you.

Operator

Thank you. Next question is from the line of Vikas Gupta, Individual Investor. Please go ahead.

Vikas Gupta — Individual Investor — Analyst

Hi. Sir, you have said about the Master Franchisee initiatives. So how it is helping in the business operation and growth? Then what is the future road map? Can you please explain the same? Also, can you brief on the number of outlets we’re expecting in the future and long-term growth plan?

Dinesh Nandwana — Managing Director & Group Chief Executive Officer

So Master Franchisee, as we have said, this is the initiative which we have launched over the last six months or so basically. And what we envisage was that, every district level we would be appointing a exclusive authorized representative of Vakrangee. So our Master Franchisee is an exclusive district level master franchisee, who is an authorized representative on behalf of the Vakrangee. So it’s like our business partner there at the local level.

Due to which it will help us in two to three things. First thing is basically that since he is the local person there at the district level, so managing our existing outlets, so day-to-day operational issues, day-to-day operational challenges as well as compliances to be managed at the local level. Second, acquisition of any new franchisees. So he is a localized. So one of the things that we used to face was any new franchisee who want to become a franchisee, he wants a local place. He wants to go and meet the local representative of the company. So that is one of the another issue which gets resolved through this. And third is basically relationship management with our existing bank partners, with our existing business partners at the local state levels, local district level locations. So that is again where Master Franchisee plays a key role.

So what we experienced through this exercise was that master franchisee is a very key part of the overall scalability. If we want to reach a Pan India scale, we want to reach a 3 lakh stores, which is our long-term vision. Then we need to have a local representative in place as a master franchisee. So we started this journey of appointing district level master franchisee things. And we have already appointed 113 master franchisees out of the 764 districts overall.

And our target is, in this calendar year itself, we want to achieve complete 764 districts. That is where we are focusing on. We are spending our resources accordingly in order to have this journey at a faster pace. Because once these master franchisees are appointed, they are in place, then we can get the next leg of growth in terms of our outlets. So our outlet expansion would be at a much faster pace, at a much higher scale once we are able to have these master franchisees in place. So our current focus is to expand the base of the master franchisees. So our target is, from 113 we go to 764 within this calendar year.

And the second focus is basically how to then scale up our base of existing Vakrangee Kendra outlets. There also we have gone gone little bit slower. Right now, we have a very good funnel of inquiries in place. But we had gone little bit slow, because we have updated our NextGen format, which is the 2.0, where we have made some changes in the Kendra design and branding things where we now have a exclusive banking BC point area segregated as well as we have a dedicated segregated area for the ATM services. So that the ATM can be operational for extended hours as well as our banking BC point is much more exclusive with the dedicated manpower, so the productivity and the earning capacity and the efficiency is much better is what we experienced.

So what we are doing is the outlet which opened during the pandemic period, that is between 2020-2021, these outlets we are making sure that these are getting updated with the new NextGen format, so that we are aligned with the government’s vision of the DBU, which is digital banking unit, where we have a segregated area for banking services, we have a segregated area for ATM and all other services. So we are focusing more on that.

I think so the fruits of this exercise will come in the subsequent quarters, post — I think so June quarter onwards is where we should see start seeing the impact of these master franchisees as well as the upgradation which we are doing in terms of the NextGen 2.0 format. And with a good funnel in place, I think.

So higher scalability or a better scalability should not be a challenge. We have planned for around 75,000 outlets, so that with a presence in each and every district. And I think so the precursor to that is having a Master Franchisee presence in each and every district of the country. So that is our road map. That is our plan currently. Thank you.

Vikas Gupta — Individual Investor — Analyst

Thank you.

Operator

Thank you. That was the end of our question-and-answer session. I now hand the conference over to Mr. Ammeet Sabarwal from Vakrangee for closing comments.

Ammeet Sabarwal — President of Investor Relations

Thank you. Thank you everyone for taking time out and attending our Q3 FY ’23 con call. In case of any further queries or any further information, please feel free to write to us. My e-mail ID is there. It is ammeets@vakrangee.in or info@vakrangee.in. You can write a mail to us and we will get back to you with any details. As well as if any further information is required, please feel free to get in touch with us. Thank you. Good evening to everyone. Thank you.

Operator

[Operating Closing Remarks]