Shoes to cost more: Liberty

Adesh Gupta, CEO, Liberty Shoes, spoke to CNBC-TV18 about the earnings of the company this season. He attributed the marginal fall in profitability of the company to abnormal increase in input cost. Rising interest rate is also likely to create an upswing in the interest burden for the company, he said. Going forward, he expects to pass on the cost to customers by increasing prices by 5-15%. Gupta believes that his association with Pantaloon Retail is in goodwill of the company and hopes to expand capacity further in the coming quarters. 

Below is the verbatim transcript. Also watch the accompanying video.

Q: If you can first tell us, there has been slight decline in your margins, about 2% points, why is that been and do you anticipate any further pressure on margins?

A: There are two things, one is, on year-on-year basis, the company has shown better performance in terms of the profitability and it has grown over 15%, but surely in quarter 4,  we saw some dip in the profitability, it is because of the abnormal increase in the price of raw materials. Globally, we know oil prices have gone up tremendously as well as all the food prices and the inflation. All this combined together is putting pressure on margins of all the companies, not only Liberty per se, and we could see some of the effect of such pressure on prices or pressure on margins.

Also see: Liberty Shoes Mar '11 results

Q2: If the raw materials stay where they are currently, how much lower can your margins go and I believe the other factor, which has hurt your profitability, has been the increase in interest cost, is there a scope for your interest cost to rise further?

A: As I said earlier, the interest cost over the year has come down, but surely in that quarter and that all of us know the bank interest rates have gone up tremendously, up in the last quarter. So naturally, we will see the upswing in the interest burden. But surely, this kind of situation would continue even in future, and to amortize all those costs, including raw material cost or the interest cost, what we are looking at is revision in prices for the consumers or the customers. When all kind of food, inflation and all the commodities are showing an upward trend, why should shoe be left behind? We expect an increase of between 5-15% in the price of the shoes, going forward.

Q: So when would this price increase take place in the next month when would that be? And also again what would it do to your margins? Will it be stable at that 6.8% that you did in Q4?

A: See, what we have done is that in certain varieties of shoes, we have already increased our prices to offset the pressure. But now, we have to do that on a global basis or on a pan India basis that we have to increase for all the product ranges because the prices in the raw material actually has grown exponentially. So it is not only for us, it is for the entire sector or the whole industry. We see, of course, some pressure on the margins. That does not mean that we are looking at a performance only for a quarter, we are a long-term player, we are a 60 year old company and naturally, such pressures on prices or of any kind they are always seasonal. I do not see any major issue going forward, but surely we have to address them as they come.

Q: What about your expansion plans, you were expanding in the tier-II cities, was that through the franchise model and since interest cost and all would start hurting, are you putting them on hold? And the other question was that you also have a JV with Pantaloon Retail where you had launched about 25 stores, any update on that JV?

A: There are two part of your questions, one from the retail, we are quite bullish on our retail expansion. The company is having now 100 COCO model stores, which are company owned, company operated and the experience of those stores is very positive. We see almost about a 50% growth in our sales from these expansions. We have done predominantly well in the south, where we see a better footfall as well as the revenues. We would continue to expansion through franchise model or COCO model and this is not just a one-year exercise. We are on a continuous path of growth, and but more importantly, what we see in future is that if we had 50 more stores and whereas if we had 10,000 stores or dealers, the number would be much bigger and the presence or the reach will be far bigger and better for the company in the long-term.