Conference Call Transcript

Transcription

1 Conference Call Transcript VIP Industries Limited Q3FY12 Results February 9, p.m. IST Corporate Participants Mr. Dilip Piramal Chairman Ms Radhika Piramal Managing Director

2 Questions and Answers Moderator: Ladies and gentlemen, good day and welcome to the Q3 FY 12 Earnings Conference Call for VIP Industries hosted by Edelweiss Securities Limited. As a reminder, all participants lines will be in the listen-only mode and there will be an opportunity for you to ask questions at the end of today s presentation. If you should need any assistance during this conference call please signal an operator by pressing * and then 0 on your touchtone phone. I would now like to hand the conference over to Mr. Niket Shah. Thank you and over to you Sir. Niket Shah: Good afternoon everyone. We at Edelweiss Securities are extremely pleased to hold this call and welcome you all on the briefing of Q3 FY'12 results of VIP Industries. We have Mr. Dilip Piramal, Chairman, VIP Industries on the call. I would like to hand over to Mr. Dilip Piramal for his initial comments and then we can move on to Q&A. Over to you, Dilip Ji. Dilip Piramal: Thank you. Good afternoon everyone. My main comment for this quarter is that this has been a most difficult quarter in the last 12 quarters and we had a great run right up to June We had nine very good quarters and then somewhere around September the rupee depreciated very sharply against the US dollar. Now two thirds of our business is that of soft luggage and more than 85% of our profits come from soft luggage and this rupee depreciation was very abrupt and quite sharp. It depreciated by nearly 25% in the four months September to December and this last quarter had the full impact and got the entire front of the depreciated rupee and that is the main reason for our profitability going down. Fortunately in January the trend has reversed quite a bit and the dollar has abated by about 60% of the increase and now it is against the peak of Rs.54 the rupees now hovering around Rs.49. So that is the big relief. Of course it is not at the 46 levels but at 48 rupees to a dollar we are very comfortable and the last quarter also from the economic front also was a bit slow. The sentiment was not very good and that is why rate the growth had come down but that also seems to be better now. January was a very good month. So all in all things are not as bad they are quite all right actually and demand is good. So we look forward to good year next year also. I do not think the profitability will be as high the rate of profitability. Profit will be as high what you had last year or at least from the Q1 of last year but it should be all right. Market strength is quite good and that is the more important thing. I will take your questions if any. Moderator: Thank you very much. We will now begin the question and answer session.we have the first question from the line of Mr. Mitul Mehta from Lucky Securities. Please go ahead. Mitul Mehta: Good evening Sir. In this particular quarter within the hard luggage and soft luggage what was the growth in the soft luggage on a like-to-

3 like basis? Dilip Piramal: Growth was about in soft luggage the growth was 20%. Mitul Mehta: On the CSD sales how do you see that demand shaping up and also under working capital is the collections are happening smoothly or are we seeing some kind of stress there? Dilip Piramal: CSD demand is steady and their payments tend to be bit slow in this January to March quarter and last year there were very slow. In fact they have not made any payments in the January quarter but this year I think January was quite good and I think in March they would not pay us anything so the debtors will go up a little bit but it would not be as high as last year but when that position gets rectified in the Q1 of the next year and just for everybody the information our MD Radhika is also on the conference call now. Mitul Mehta: If you can also elaborate on your handbag opportunity? Dilip Piramal: We are entering the handbags segment that is a totally new product line and we will launch we will may do a very small pilot launch that is the few shops and main launch will happen in October where we plan to launch in 8 to 10 cities. Moderator: Thank you. We have the next question from the line of Mr. Sayon Ray from 1st Global Securities. Please go ahead. Sayon Ray: My question is while the prices of key raw materials for hard luggage such as aluminium and polypropylene have come down sequentially reflecting in the raw material by net sales, but why it is not reflecting on the EBITDA level. It is only because of the rupee depreciation or what else? Dilip Piramal: As I mentioned earlier about two thirds of our business is soft luggage and price of that had gone up so much that these prices what you are saying form a very small portion of the cost and I am not even sure whether there in the last quarter there was great coming down of those prices. So even if it is it could be a very, very small percentage but in the overall picture that does not have a strong impact. Moderator: Thank you. We have the next question from the line of Mr. Nikhil Ranka from Lloyd George Management. Please go ahead. Nikhil Ranka: What is our store addition target for the next year and how much would be exclusive VIP stores in that? Radhika Piramal: We are looking to add about 80 exclusive stores in the next financial year primarily on the VIP lounge and also about 10 Carlton stores and about 20 exclusive Skybag stores. In addition to that we will be adding around 152 to 200 retailer points that will be serviced through a distributor. Those are the small, small shops, which are multi-brand outlets. Nikhil Ranka: In terms of competitive intensity how much sort of market share would we have gained from the like for Samsonite and how has that trend been for the last two to three quarters? Radhika Piramal: Two to three quarters it has accelerated in Q3 of last year

4 where we saw that Samsonite and American Tourister have significantly increased the advertising spend in the Indian market. You can see it on TV and also on Airports. In one sense that is good because finally there is a second player also added to the branded luggage category ad spend but on the flip side there is more competition for us. So we have to also spend more to retain our share of voice that is why you also would have seen in this quarter that we had a significantly increased spend. Moderator: Thank you. We have the next question from the line of Mr. Arun Baid from IDBI Cap. Please go ahead. Arun Baid: Just wanted to understand what kind of action we did in this particular quarter and what is your plan for FY'13 with regard to ad spends? Dilip Piramal: We are advertising roughly about 50% of our domestic sales and that is what we did in this quarter also and we will continue with this policy. Arun Baid: What kind of growth are you looking for next year? Radhika Piramal: 20% revenue growth. Arun Baid: Margins front? Radhika Piramal: The margins to be honest it really depends on the rupee rate. So I think it is best to do some scenario analysis planning and so at Rs.48 to Rs.49 we can expect to maintain our current margins but if the rupee goes back to Rs.53 to Rs.54 or worse then our margins would go down by 2% to 3%, conversely if the rupee were to go back to 45 rupee levels and they would improve. Dilip Piramal: Radhika when you say current margins you are referring to the last quarter. Radhika Piramal: I was referring to YTT actually. Arun Baid: That is about 15.5%, am I correct when I say that? Radhika Piramal: Yes. Arun Baid: Thank you. Moderator: Thank you. We have the next question from the line of Chanchal Khandelwal from Birla Mutual Fund. Please go ahead. Chanchal Khandelwal: I just wanted to know, we have been hearing that lot of slowdown in discretionary spend, so are we seeing some slowdown in terms of the sales growth. You have said January was good but in terms of trend are you seeing consumers back in the market or is it because of the discount January was a good month. Dilip Piramal: I do not think your information on the lot of slowdown in discretionary spend is correct. If you see all the automotive which are the most expensive ticket item sales in January have been very good. Chanchal Khandelwal: Shoppers Stop has reported a volume decline last quarter? Dilip Piramal: I am talking of January. I think your basic premise is not

5 correct. There was a little bit of slowdown. There is a lot of difference between lot of slowdown and little slowdown. So I am talking of that exaggerated slowdown, so little slowdown in the last quarter. As I mentioned earlier the sentiment was weak but it has improved now and I think basically the Indian economy is quite good. So they should not be too much of rate of growth might comedown a little bit from 20% to 25% many other industries are experiencing from any other industry were experienced in the rate of growths might comedown by about 10% to 20%. That I mean if the rate was 20% it might comedown by 20% that is 4% to 5%. Chanchal Khandelwal: I fail to understand that the December quarter was bad so I compared Shoppers Stop even Titan so that is from that angle I was asking why suddenly January seems lot of consumer comeback to the market whatever insights you have from your study of consumption why this is happening? Dilip Piramal: In one month you cannot get too much of study of consumption and all it takes a longer period. Chanchal Khandelwal: Secondly, I just wanted to understand in terms of the sales how much percent of your consumers are repeat? Dilip Piramal: We do not have those statistics. Chanchal Khandelwal: Lastly you mentioned that while you are talking about profitability should not be as high as last year. So you mean gross margin. Dilip Piramal: I met net margin and last year meaning the earlier period, last year was Chanchal Khandelwal: So you mean the gross margin right? Dilip Piramal: When it goes on it goes on at all levels. Moderator: Thank you. We have the next question from the line of Umesh Gupta from Reliance Wealth Management. Please go ahead. Umesh Gupta: I was asking on the rupee depreciation do we have any levers to counter that in terms of any bargaining power we have with our suppliers wherein rupee depreciating about 20% we could renegotiate our contract or get some price reduction? Dilip Piramal: If rupee depreciate that itself is not any reason for them to reduce the prices but there are other bargaining counters, we are a strong buyer. We are the second largest buyer in the world for soft luggage. So we do have lot of bargaining power and I think we are getting advantage of it. Umesh Gupta: Are you saying that since you are increasing size so we are able to renegotiate contracts even this. Dilip Piramal: We do not like to renegotiate contracts but we like to bargain hard for new contracts. Umesh Gupta: What kind of contract are these, are annual contracts or these are recurring kind of contracts and a month-on-month or quarter-on-quarter basis?

6 Dilip Piramal: Semiannual. Umesh Gupta: The second was on since the rupee depreciated sharply in the last quarter so are we using and the rupee has now kind of appreciated so are we left with any high cost inventory in our systems we might have booked because Chinese February is the kind of off. We might have purchased lot of stuff anticipating demand for January or for this quarter and we might end up with the high cost inventory given the rupee thing? Dilip Piramal: We do not speculate on this and as per the requirement we buy. Radhika Piramal: We do not change our pricing so frequently we took a price increase in November based on what we expect buying prices to be for the next six months including the exchange rate we will plan price increases at some point in the first six months of this year. Dilip Piramal: Let me also add our first quarter that is April to June is our largest quarter. We will be now stocking up for that quarter in February and March and if the rupee rate is 49, 48 then we will be buying for that very large quarter at these rates. What we have incurred for the last two quarters what we are saying now these are the relatively smaller quarters especially the second quarter is very small. So to that extent the rupee sort of lower rate of the rupee has not impacted the biggest quarter and if the rupee sort of continues to strengthen or even remain at these levels we should get the next quarter supplies at relatively lesser price. Umesh Gupta: In terms of this price increase you have taken last price increase in November and next one will probably be somewhere around March- April and that is April quarter? Dilip Piramal: It will be April-May. Umesh Gupta: What was the price hike taken in the last quarter in November? Dilip Piramal: 5% to 6%. Umesh Gupta: So the whole impact would not have been seen in this December quarter for some of the positive impact and the rupee being appreciated the margin should improve in this current quarter. Is that assumption correct? Dilip Piramal: Absolutely. Moderator: Thank you. We have the next question from the line of Manoj Baheti from Edelweiss. Please go ahead. Manoj Baheti: Good afternoon Dilip Ji, good afternoon Radhika. Thanks for taking my question. My question is on competition like we have recently seen competition giving aggressive discounts and also based on my information I think they have not taken any price hike in the month of November when we have taken. So it means either the competition is ready to get lower margins because the cost might have gone up for them also. So like what will be our strategy like if the competition goes very aggressive in pricing whether we will also try to play the same game, which the competition is playing especially

7 American Tourister. Radhika Piramal: Up to an extent so I think our response is to try and maintain our contributions wherever possible and then occasionally have some ranges, which can cause some disruption by being a little bit more affordable or by offering a little bit more discount but not on the majority of our sales. So that way you can counter the competitive pressure but also maintain your profitability. Manoj Baheti: If the competition keeps on doing the same thing and if you also respond to the competition by cutting the prices is this industry going to operate at a lower margins than historic because the capital employed is not much mainly in this business? Dilip Piramal: I think what is happening is that right now our competitors are very keen to get higher market share and to some extent we do not mind ceding some market share because we started off at a very high rate, at one time our market share was more than 70% or even higher and that is maintainable if there is a strong competition because even the customers, the consumers want bigger price, bigger choice, so up to a certain level we do not mind ceding market share but we are not willing to let it happen totally unabated, so we are reacting and as Radhika mentioned that we are now doing it tactically and overall our brand strength is quite strong, there will be cut throat competition but definitely I think the margins will be little bit under pressure. Radhika Piramal: I would say one way to think about it is we can look at maybe a half percent drop in gross margins and then maybe another half percent increase in ad spend as a percentage of sales due to competitive pressure. Manoj Baheti: My next question is on ladies handbag segment like next year we are going to launch the ladies handbag and obviously before launch there will be a massive campaign, so just wanted to understand if you can share the details like what type of advertisement spend we are going to target for that? Dilip Piramal: Right now I do not want to talk anything about this and it is not very prudent on our part to reveal our strategy. Moderator: We will take the next question from the line of Mr. Niket Shah from Edelweiss Securities. Niket Shah: Sir just one question from my end, given that the coming of marriage season in Q1 is not that strong any particular measures that you are taking to combat that? Dilip Piramal: First of all this marriage season is impact is becoming less and less every year because our soft luggage sales and our overall sales are going up, marriage season impact is very strong in the East particularly in the state of Bihar and this year the dates are fewer but it does not mean there is a blanket ban, so we have to see whether that is going to affect us to what extent it affects ourselves it might affect us slightly, you cannot do too much about that

8 but this queue is becoming less but it is at the same time Bihar is a very strong market particularly in the first quarter which is mainly driven by marriages, so we are keeping our fingers crossed. Radhika Piramal: I would say we are launching some new ranges that are more premium, polycarbonate ranges, soft luggage ranges, because we do anticipate some of that what we call popular frame luggage sales but they may not grow the volumes that we have seen in previous years due to this fewer number of marriages, so we will try and take increased demand in some other areas and other metro cities etc. Niket Shah: Sir, given that rupee has appreciated pretty sharply in recent times and in case if it appreciates more will we go another price increase maybe around May or April. Radhika Piramal: We are always trying to maximize both our values, volumes and margins, so I think it is likely that we will go for another price increase in April and May but we can touch closer to the time depending on our margins. Moderator: We have the next question from the line of Mr. Nayan Mehta. Please go ahead. Nayan Mehta: I just wanted to know what is our total CapEx lined up for next year? Dilip Piramal: We have an annual CapEx of about 12 to 15 Crores and it is all in very, very small items, it is primarily in three areas, there is hard luggage development cost, there are soft luggage development cost and then there are retail costs in our stores, so these are broadly the three heads and then there is some minor IT spent but it is not significant. Nayan Mehta: I think this setting up of 80 stores for FY 2013 how much of that would go in to those setting of stores because I believe most of them are exclusive stores? Dilip Piramal: We have a very frugal policy, we spend hardly 7 or 8 lakhs per store and 80 is not all exclusive. Radhika Piramal: 80 stores are all exclusive but some of them would be franchisee and some of them would be company run and in the franchisee model we share the cost of putting up those stores with our franchisee partner, about three or four Crores exactly. Dilip Piramal: As Radhika mentioned we have one third of our expenditure goes on the retail stores, about one quarter of our annual expenditure so that will come to about 3 to 4 Crores. Nayan Mehta: What would be the break-even level of each store? Dilip Piramal: It depends on the size of the store, you cannot say. Radhika Piramal: Most of our stores they would be breaking even or profitable within one or two months of operations because by now we have a pretty good understanding of the formula which works, so which size store, which kind of location, what is the maximum rent one should pay for the store, otherwise it

9 will not work etc., etc. Nayan Mehta: Basically usually whenever a branded company sets up a store whether it is own store or franchisee store there is some kind of back end calculation on the revenue side, if you look at whatever square feet of area that you have, whatever investment goes into that in case if you are owning that store so from that perspective? What kind of sales will actually give you some profit? When profits will start accruing? At what kind of sales? Dilip Piramal: Kind of sales means it depends on the size of the store and the area where it is located. Nayan Mehta: First role sales could be something which might be having? Dilip Piramal: One sale rent might be 2 lakhs a month and other shop might have 50,000 a month, so you cannot say, it is not the same thing but basically we see it within two, three months the shop should break even of operations. The first one or two months goes about in getting knowledge about the store, means that awareness of the store, the consumer should know that there is a VIP Store here, so we see more in terms of time that in two three months it should break even. Nayan Mehta: By end of this fiscal what was the total number of stores you will be having fully operational? In FY 2013? Dilip Piramal: I will give you the present situation. We have totally 10, 741consumer touch points that is a very large number but 80% of these are very small and most of our sales, 80% of our sales comes from 2000 stores. We have 593 exclusive business outlets and we added 115 of this 593, 115 were added in the first nine months that is as on December ending and we are present in 1839 towns. Our distribution is very widespread and I think it is very widespread in relation particularly in relation to our sales but we have about 134 distributors who have 7572 retailers. Our total as I mentioned is 10,741. Nayan Mehta: From this entire regions and towns presence you have could you let us know what kind of demand you see from basically which region whether it is tier 2. Dilip Piramal: It is all over. Radhika Piramal: I understand what your people talk a lot about tier 2 and tier 3 and all but finally the rich states of India contribute the most to our sales, which is very logical. Dilip Piramal: Luggage penetration is nowhere near FMCG goods, penetration is very little, so our bulk of our sales do come from the metro towns and tier 1 cities. Nayan Mehta: Could you provide us the total balance sheet, some of the balance sheet items like total loans right now? Dilip Piramal: Loans as on December end was 91 Crores and balance sheet total is 344 Crores, loans are 91 Crores and rest is own funds. Nayan Mehta: How about the debtors? Total debtors?

10 Dilip Piramal: 156 Crores. Nayan Mehta: Would you be incurring any borrowing this year or next year? Dilip Piramal: As I mentioned loans are 91 Crores. Our loans sort of peak in the end of March because our CSD debtors particularly are quite high, as you will notice our total debt is 91 Crores and our debtors are 150 Crores and they sort of peak at the end of March and then by the end of July our loans come down to about 20 to 30 Crores. Nayan Mehta: Our tax rate would be in the 20s? Dilip Piramal: Now it is really 30%. Nayan Mehta: We are paying full tax virtually. Moderator: We have the next question again from the line of Niket Shah from Edelweiss. Niket Shah: Sir wanted to know what has been our domestic growth in Q3 and how has been our export revenues? Radhika Piramal: In Q3 our domestic luggage grew by 17% and international sales declined by 14%. Niket Shah: Broadly for nine months it will be broadly around the similar number, 14 to 15% degrowth for nine months also because I think for the first half it was 15% degrowth. Radhika Piramal: Yes, but the domestic growth was little bit faster if you look at for the nine months the domestic growth was 19% as opposed to the quarter 17%. Niket Shah: When our guidance is around 20% does that mean only domestic growth of 20% or a blended growth of 20%. Radhika Piramal: I am hoping a blended growth of 20% but that does assume that the international business stops declining next year. Niket Shah: How much have we spent on advertisement this year, this particular quarter? Radhika Piramal: We spent significantly more than we did in the previous quarter same quarter last year, so I do not want to share the exactly figure, we advertise all three brands that is Carlton, VIP and Skybag in Q3 of this year which has gone by but whereas in the year before that we had only advertised VIP, so that is a significant increase and if you look at other costs you see that has gone up by quite a bit, other expenditure but most of that is due to advertisement. Moderator: We have the next question from the line of Mr. Ajay Nandanwar from UBS. Please go ahead. Ajay Nandanwar: Sir, Radhika mentioned that in April you might consider taking another price hike and rupee is sort of at 49 or so and you had earlier said that the price hike you have taken in November covers you in to the gross margins for rupee up to 49 to 50 now if you take a further price hike and you

11 said that your gross margins may be half a percentage point lower than what a normalized margins would be. Radhika Piramal: Because we have not finalized on the price hike, so it little bit depends on demand, a little bit depends on competition. Ajay Nandanwar: So would you sort of wait, price hike would be determined by what American Tourister does, would that sort of drive your price hike decision. Radhika Piramal: It is not so much American Tourister it is little bit of consumer demand and volume growth what we see in Q4 because in Q3 the volume growth was much limited to compared to the previous two quarters. Dilip Piramal: I would also add that it is not as simple as just the price hike, sometimes when there is intense competition you introduce new products taking either a very low margin and the margins are not the same on range wise, sometimes tactically, strategically you might want to introduce good product at lower price depending on what the competition is doing, for example American Tourister did introduce one of their fast selling products at very low price, taking very low margins, so sometimes we might have to react to that also not actually taking the same margins as they but may be lower than what we had normally used so it is not only just a question of price increase and since in our business new products are introduced all the time overall margins also have a big impact on the margins. The margins are not only reflected because of price hikes but also new product launches. Radhika Piramal: I will just add one thing, you know this January has been better because of both the rupee appreciation also the increase in sales but it is just one month, so I would like to see a trend line of this before I could confidently say that we can expect to confidently take price increases and improve our margins. Ajay Nandanwar: This January you are saying is it a function of dealer restocking? Radhika Piramal: The secondary sales were better, they were driven by the sales season, which is now established in the apparel, and luggage industry the January consumers look for the end of season sale. Ajay Nandanwar: How much volume loss you anticipate because of American Tourister s aggressive pricing and some specific product line? How much volume you anticipate that you might have lost? Radhika Piramal: We sell about 5 million pieces a year and because of this let us say this one particular American Tourister product line I would put it at anywhere between 10,000 to 20,000 pieces that there products sold, it is very difficult. Ajay Nandanwar: These were primarily in Q3 right? Radhika Piramal: Yes. Moderator: We have the last question from the line of Mr. Utsav Mehta from

12 Derivium. Please go ahead. Utsav Mehta: I joined a bit late, so if you would not mind going through that bit about Carlton being dissolved would you just be able to explain what exactly it was about? Dilip Piramal: We had a subsidiary company in the UK and now we are trading directly from VIP in India that is VIP felts to the UK and we do not need to trade through a subsidiary, so that eliminates a little bit of the exchange risk and we also changed our selling pattern like earlier on we used to do our own selling and the distribution now we are working through distributors in the UK, so we do not need to have a separate company, we cut down on our cost. Utsav Mehta: If you do not take any more price hikes and things remain status quo where exactly do you expect your margins to settle down EBITDA wise? Dilip Piramal: Well it depends on our cost; we do not have control over the cost. Radhika Piramal: What period are you referring to? Utsav Mehta: In Q4? Dilip Piramal: These are very wrong premises. We will change our prices when cost prices also change. Utsav Mehta: Let me rephrase that, what EBITDA margin are you comfortable with or are you aiming at? Would that be better? Dilip Piramal: 14 to 15%. Moderator: Thank you. I would now like to hand the conference back to Mr. Dilip Piramal for closing comments. Dilip Piramal: Well I think I have answered all your questions and ours is a very simple business model so there are not too many complications. At the moment the major driver of our margin is the exchange rate, otherwise we are fairly comfortable and we are looking forward to a good quarter and the next year also seems to be quite good. Moderator: Thank you on behalf of Edelweiss Securities Limited that concludes this conference call. Thank you for joining us and you may now disconnect your lines. Disclaimer This document has been prepared by Edelweiss Securities Ltd. Mumbai, India and is meant for use by the recipient only as information and is not for circulation. Edelweiss, its holding company and associate companies are a full service, integrated investment banking, portfolio management and brokerage group. This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This information in the document should not be construed as representation of our Analyst or Edelweiss s view. The information contained in event transcripts is a textual representation of the applicable company's conference call and while efforts are made to provide an accurate transcription, there may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference calls. Edelweiss or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this document. The user assumes the entire risk of any use made of this information. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks. Important factors that could make a difference to the Company's operations include, among others, economic conditions affecting conditions in the domestic and overseas markets in which the Company operates, changes in Government regulations, tax laws and other statutes and incidental factors. The information contained herein is as of the date referenced and Edelweiss does not undertake any obligation to update these statements. Edelweiss and/or its directors and/or its employees may have interests or positions, financial or otherwise, in the securities mentioned in this presentation. Copyright 2007 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved