Power brands to become profitable in FY17: Arvind

With addition and growth in new power brands, Arvind will outdo competition in the fourth quarter, says Sanjay Lalbhai, CMD of the company. However, he adds that consumer spending environment continues to be challenging. The company has added eight stores for brands like GAP and Sephora and one for Aerospatale in the current year. All the power brands will become profitable in the next financial year, Lalbhai says. The company’s new format - Omni channel portal - will aid the revenue growth, he adds. Profitability of other brands like Calvin Klein will improve once they are added to the power brands status. Arvind’s power brands add close to 15-18 percent to earnings before interest, tax, depreciation and amortization (EBITDA). Below is the verbatim transcript of Sanjay Lalbhai’s interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.Latha: The first question really is on your plans for your brand segment. It gives you about 35 percent of your revenues. What are you looking to in terms of a target for your brand segment? A: We are growing quite well as far as brands are concerned. As everyone is aware that the consumption is a little bit of a challenge as of now, the consumer spending is not ticking at the rate as we had hoped. However, everyone is hopeful that the second quarter of this year the consumption should come back. So, we are very hopeful even in these challenging times you would see when we announce our fourth quarter results that we have been doing much better than the competition. We are very much on budget, so we are very hopeful that with more brands entering the power brand kind of status in our portfolio our profitability should improve going forward. Of course we are growing the topline quite handsomely. Sonia: Just to give us a little more colour on how much you hope to grow your power brands, you have added some brands into your portfolio the likes of Gap, Aeropostale, The Children's Place (TCP) etc. What kind of potential do you see from these brands in the overall fashion industry and also in the kids wear space? How much of growth do you expect from these brands say over the next one to two years?A: These are specialty retail formats and we have been very pleasantly surprised. All the new brands which we have launched specialty retail formats which we have launched be it GAP, be it Aeropostale, be it The Children's Place be it even Sephora, I think the kind of store profitability has surprised us all. It is way beyond our expectations. As we speak we have opened 8 stores as far as GAP is concerned, 8 Sephora stores; Aeropostale is getting opened in a very short time. We only have one store, but it is performing brilliantly. The Children's Place, we didn’t realise as to how big an opportunity it is. As we all know that children space has been opened up because the competition has gone away. We believe that with this very strong format we should be able to grow very handsomely in the coming years.Now to put a number is always very difficult because when you start new initiatives you have to see as to how they are going to be received and because it is on a smaller base we will grow by 200 percent, 300 percent 400 percent. However, then we have to also put it in the right perspective and see as to on what base we are growing at 400 percent. Our growth is going to be dependent on the kind of retail locations we find in the malls. So, it is not constraint by the opportunity it is going to be constraint by getting the right space in the malls. Once we launch the omni-channel portal we will be able to take also these brands in to B and C category towns without having to open the brick and mortar store.We are very excited; we believe that all these will become power brands in just the next year. This year we should turn into profitability for all these brands because at the store level we are very profitability but as you would appreciate that when you don’t have scale you have fixed expenses and unless you reach that scale you can’t become profitable. In very short span usually it takes you three years but in the very second year of launch of all these formats we should turn profitable.Latha: Your brands contribution to the EBIT margin is still pretty weak just 2.6 percent whereas your textiles EBIT margin is going at 12.5 percent. Obviously you are in capex mode and investment mode. How might these margins improve or contributions to EBITDA improve in coming years in FY17 and FY18?A: We need to understand that all our power brands are giving us anywhere between 15-18 percent EBITDA. So, they are extremely profitable they are as profitable as any brands could be. When you launch let say Nautica, Calvin Klein, Giant now these are all going to become power brands. They are just now trending at around 8-10 percent EBITDA. They will all graduate to 15-18 percent. As I have been telling you that unless you reach the topline you don’t absorb the fixed overheads because all these brands you have to start with the minimum kind of fixed expenses to launch these brands. Initially you are advertising and making this connect with the consumers. So, as percentage advertising is much higher when the volumes are lower. However, in three years brand mature and start giving you 15-18 percent EBITDA. So, we have a whole portfolio as you know that because we believe that this is a space which is going to create disproportionate shareholders’ value we have gone for a portfolio approach where we have gone for number of opportunities. When you keep on going for newer opportunities the newer opportunities are not going to deliver you the kind of EBITDA which the industry can. However, almost all our brands are doing extremely well as per our plans and as you will see that the portfolio will mature and we will not be launching newer brands our EBITDA would do very well. I would also say that we shouldn’t be comparing EBITDA, we should be comparing return on capital employed (ROCE). These businesses throw up huge amount of cash. They don’t require cash, so what is really going to create shareholders value is ROCE and not EBITDA per se, because they give you disproportionate amount of topline growth. However, the EBITDA is always going to range in 15-18 percent and for specialty retail at around 10 percent.Sonia: How much will your overall revenues be contributed from your online portfolio because you are spread out across the whole range of e-commerce platforms whether it is Amazon, a Snapdeal, Flipkart etc. I was reading a report which suggested that Rs 200 crore could come as revenues only from your online portfolio this year in FY16. What could the amount be in FY17 and FY18? What kind of growth are you looking at?A: These are all disruptive kind of events which are happening and consumers in India are wanting to buy these things seamlessly online and offline. So, the world is changing very rapidly. We believe that all our stores would be like showrooms where you go and experience the brand. All the stores will get digitised and the consumer will be able to buy or consume the brand online and offline seamlessly. So, this will are calling it omni-channel. We are selling through Flipkart and Amazon’s and all that but we want to provide a very kind of comprehensive and holistic kind of experience to our consumers where you will walk into my store and if you have downloaded my app we will know everything about you as to what are your preferences what have you bought so my sales person will only come and show you what you are looking for. There will be never a situation of a stock out because if you don’t have your size or if you don’t have the kind of design which you are looking for available in that store it will be shipped in two hours because I have live inventory in 1,200 stores I have. So, we are moving towards a very exciting time.In the first quarter, we will be launching our omni channel portal. Arvind would be the first company which will be doing this omni channel kind of launch with so many brands and so many kind of depth across the apparel category, the accessories, the beauty and perfumes. So, we will be offering the whole range of apparel and adjacencies to a consumer seamlessly through online and offline kind of offerings.