present my overview as a part of the 14th Annual Report of the Company.
I must communicate to shareholders the challenges we faced and the strength we gained during the year.
Sect oral weakness
There were a number of challenges that our business encountered in 2015-16.
One, the successive failure of the monsoon began to reflect in not only lower rural and semi-urban incomes, which, in turn, affected their core product purchases, but affected their overall sentiment as well, translating into a deferment of purchases and down trading. The result was a general sluggishness in the country''s retail sentiment that affected our company''s revenues as well.
Two, rural incomes were stretched on account of the government plugging subsidy leaks. Through a combination of enhanced vigilance and online cash transfers, the government indicated that it saved Rs. 16,000 cr in lower subsidy scheme spending. We believe that this affected rural cash flows, which, in turn, led to lower consumption.
Three, the government''s much-awaited rural infrastructure thrust did not materialize in the form and scale that one had expected. The result was local and rural employment was not correspondingly strengthened; it did not enhance incomes at the grassroots and kickstart the much-awaited rural income generation.
Four, at a time when semi-urban sales weakened, competition became increasingly aggressive with the objective to liquidate whatever inventories it possessed to keep their cash flows moving. The result was a general erosion in sect oral margins.
Five, there was a novelty factor about e-commerce in semi-urban Indian, which we believe contributed to the organized retail sentiment weakness.
There were two specific instances that also contributed to the downtrend.
As per the Hindu calendar, the Adhik maas period transpired between mid June and mid July. During the year under review, a number of rural consumers selected to defer purchases. Normally what would have been a busy marriage season marked by attractive retail off take was now marked by weak spending during the first and second quarters of the financial year under review, which surprisingly extended into the third quarter as well.
Besides, a weak winter affected the off take of all those products that are generally consumed during that season.
The combination all these downsides
- some of them unprecedented - translated into weak same store sales growth (result of a store''s volume growth on the one hand and average selling prices on the other).
For the last number of years, the company had been experiencing same store sales growth of around 8 to 10 per cent, riding growing disposable incomes across semi-urban India.
During the last financial year, volume growth was affected by the various reasons that have been enumerated. Average selling prices declined on the back of a decline in the cost of commodities and products purchased by the company for onward sale, which had to be passed on to consumers.
The combination of these two realities was a negative 1% in same store sales growth (fashion) for the full year – the first time the company experienced such a decline in its existence.
In the retail business, the need to run faster is a critical element in overall sustainability. Faster off take and revenue growth translates into a capacity to procure larger volumes and cheaper prices for onward sale, a virtuous cycle that strengthen value in the hands of customers and the brand and vice-versa.
The Company embarked on a number of initiatives to protect its business in 2015-16.
I am pleased to state that despite the sect oral weakness and decline in the company''s profitability, the critical mechanics of the company''s business health were largely protected. Despite the extent and tenure of the sect oral weakness, we are proud to state that there was just a Rs 1.71 cr decline in EBIDTA during the year under review.
Inventory: There is always the danger of an increase in inventory during a sales slowdown. The Company responded to a weak retail sentiment through various initiatives. The Company had moderated the number of warehouses from four to a centralized Bilaspur (Haryana) facility in 2014-15, the impact of which began to kick in during the financial year under review. Not only did the company more than double warehousing space, but was able to generate a number of upsides related to storage efficiency. The result was our overall inventory stayed around the same level as the previous year. During FY 2015-16 our winter end inventory was Rs. 31 crore in comparison to Rs. 21 crore during same period in FY 2014-15.
Vendor management: During a slowdown year when inventory begins to accumulate, there is a premium on clarity of which vendor''s output lies where, of what design and in what quantity. In a business-strengthening initiative, the company launched a vendor-dedicated portal to enhance vendor-centric merchandise visibility across each store.
This information, available at the click of a button, made it possible for vendors to take proactive calls in re-pricing their stock to accelerate sales flows; besides, stock movements generated leads of which vendors should deliver when their next consignment to the centralized warehouse facility (neither overstocking nor stocking out), resulting in a better warehouse space efficiency. Besides, the company moderated the number of vendors from 1200 to 850 in exchange for superior value; it focused on the fastest moving SKUs (as opposed to providing the entire range), helping move stocks faster.
Free cash flow: When sales decline, generally there is less cash within the system to manage the business. When this transpires, the immediate casualty is a cash strain that sets off a number of other triggers: need for higher borrowings, higher interest outflow, lower margins, skew in the gearing and possibly lower credit rating. During the year under review, we rallied the organization around to save every rupee and enhance our liquidity. Our free cash flows have increased by Rs. 13.61 crore. It was Rs. 20.01 crore during FY 2015-16 and Rs. 6.40 crore during FY 2014-15.
Net debt: During a down year, there is a premium on protecting the Balance Sheet that does not compromise the ability of the company to compete in the future. During the year under review, we continued to stay attractively liquid from a net debt perspective - the aggregate value of cash and cash equivalents and investments on our book (Rs. 37 cr) was larger than the value of total debt (Rs 27 cr).
Working capital management: During a challenging year, there is a need to ensure that the velocity of cash inflows is higher than the speed of outflows, ensuring that there is always adequate liquidity within the system to address short-term needs. During 2015-16, the company not just protected its working capital management but strengthened it by 113 BPS.
This performance was the result of a determined focus: to derive higher productivity from each season''s collection leveraging the established supply chain.
This performance was also the result of the dedication of our people, derived from the attraction, retention and motivation of the best industry talent, which makes all the other objectives realizable.
At V-Mart, we believe that outperformance - whether it is against our own retrospective average or that of the sector - comes primarily from discipline.
At our company, one of the biggest discipline-enhancing initiatives has been in wiring the organization, extracting relevant data for informed action and focusing on capital efficiency.
Over the last few years, the Company has strengthened its ERP application for informed decision making. During the year under review, we implemented, an advanced warehouse management system to enhance our visibility of inventory - colour, fabric, style and size across the organization with the objective to replenish shelves faster following sales. The benefits were evident: during the financial year under review, we did not necessarily replenish sales with fresh purchase; we sought to locate whether we had similar merchandise within, as a result of which we saved expenditure on the one hand and time (that would have been spent in initiating a fresh procurement cycle) on the other, strengthening our responsiveness to marketplace realities.
We defined each organizational function around a standard operating procedure - how the function is needed to be consistently operated. This made it possible to ensure compliance and eliminate deviations and, in turn, reduce operational risks. This strengthened the foundation around operational predictability and reduced the management time that would otherwise have been invested in firefighting.
Besides, we graduated the concept of evaluating profitability from corporate return on capital employed to store-level viability. Further, we analyzed store-level profitability: was it being driven by revenue growth or was it being driven by margins; was it being driven by a growing purchase or value-added purchases or the sheer quantum of mass off take that was in turn strengthening amortization and viability? This understanding made it possible for us to develop a sensitized appraisal of the nature of our stores: the revenue drivers on the one hand and profit builders on the other, inspiring customized responses in terms of merchandise, retail space and store ambience.
During the year under review, the Company continued to invest in its business. It raised the number of stores from 108 to 123 by making extensions into West Bengal and Odisha, which we believe represent attractive opportunities based on hinterland incomes and aspirations.
V-Mart offers great value for money which it achieves by: incurring low advertising costs, instead relying on its customers ''doing the talking'' about its products; buying in vast quantities and passing on the cost savings to customers; keeping overheads to a minimum but investing in state-of-the-art supply chain to enable its stores to replenish stocks quickly.
During the year under review, the company transformed its DNA, strengthened back-end efficiencies, generated positive change in organizational pockets and expects to widen this impact in 2016-17.
The prediction of above-average 201617 monsoons holds out hopes of agricultural growth, enhanced incomes and revival in consumer spending.
V-Mart is attractively positioned to benefit through wider store coverage, presence in attractive (population-dense and income-affluent) geographic pockets and lean operational efficiency that is expected to translate consumer preferences into relevant merchandise into enhanced profitability.
I wish to express my gratitude to all our stakeholders - shareholders, customers, vendors, employees and society at large - who have continued to provide their unstinted support to our business.
I am grateful for the guidance extended by governmental bodies, regulatory authorities and the internal and external auditors.
With best regards,
Chairman & Managing Director Lalit Agarwal