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Transcript| VIP Industries Q2 FY’19 Earnings Conference Call

This is the verbatim transcript of VIP Industries management call with analysts.

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This is the verbatim transcript of VIP Industries management call with analysts.

Moderator: Ladies and gentlemen, good day and welcome to the VIP Industries Q2 FY2019 Earnings Conference Call, hosted by Edelweiss Securities Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing “*” then “0” on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Shradha Sheth from Edelweiss Securities. Thank you and over to you Madam!

Shradha Sheth: Thank you Karuna. On behalf of Edelweiss, let me welcome

you all to the Q2 FY2019 earnings call of VIP Industries. From the management today, we have Mr. Dilip Piramal, the CMD, Ms. Radhika Piramal, the Vice Chairman and Executive Director, Mr. Sudip Ghose, CEO and Mr. Jogendra Sethi, the CFO of VIP. Without any further ado, I will hand over the call to Mr. Piramal for his initial comments post which we will open the floor for Q&A. Thank you and over to you Sir!

Dilip Piramal: Good afternoon everyone. Thank you for taking out time and
joining our conference call. We had a good quarter. During the Q2FY19, the
company achieved income from operations of Rs. 402 Crores against Rs. 309

Crores in the corresponding quarter of the previous year registering a growth of about 30%. During H1FY19, the company achieved income from operations of Rs. 920 Crores against Rs. 716 Crores in the corresponding six months of the previous year registering a growth of about 28%.

Consequent to the introduction of the GST several indirect taxes including

central excise and VAT have been subsumed into GST. As per new accounting standards and Ind-AS, revenue has to be reported net of GST, VAT and inclusive of excise duty. Hence, results for the current year H1 and last year H1 are not comparable.

During the quarter, e-commerce and institutional business have grown very well. Modern trade and general trade channels have also grown very well inspite of high base. International business has also shown good growth during Q2.

The growth is mainly volume growth.

Now, I would like to talk about brands. Skybags, VIP, Carlton and Aristocrat, all brands are going very well. Skybags is also the leading brand for backpacks. VIP, Skybags and Aristocrat latest collections have been well received by consumer. Carlton Edge with unlimited warranty is also doing very well.

During the quarter, Premium Alia collection of Caprese hand bags have been
launched, which have been very well received by consumers. As you might

recollect Alia Bhatt, the film star, is our brand ambassador for Caprese. Caprese has also grown well with good margin.

Now, I would like to talk about profitability. I will be referring to consolidated numbers.

Our EBITDA was at Rs. 53.1 Crores for the quarter, up from Rs. 39.4 Crores in
Q2 FY2018, a growth of about 25%. Overall our EBITDA was at 13.2% in Q2 as compared to 12.7% in Q2 of last year. Our EBITDA was at Rs. 151 Crores for
the first half FY2019 up from Rs.102.9 Crores in the corresponding half last
year. Overall, our EBITDA was at 16.4% in H1 as compared to 14.4% in H1 of
last year. The rupee has depreciated against the USD by about 9% during the
quarter. EBITDA has improved due to higher gross contribution. Gross

contribution has improved due to product mix and higher sales.

Our profit after tax for the quarter was at Rs. 32.8 Crores, up from Rs. 23.8

Crores during the corresponding quarter last year, which is a growth of around 38%. PAT for the first half was at Rs. 96.2 Crores up from Rs. 64.8 Crores, a growth of 48%.

Fixed overheads are well under control.

Update on Bangladesh operation.

Income from operations from VIP in the quarter was at Rs. 25.9 Crores against only Rs. 5 Crores in the corresponding quarter last year. Income from operations from VIP Bangladesh operation for the half year was at Rs. 51.1 Crores against 18.8 Crores in the corresponding half of last year, a growth of 172%. This was also because in the second quarter of last year, there was some disruption of production and we produced only for Rs. 5 Crores as against 25.9 Crores in this quarter when operations were quite normal.

Profit after tax for VIP Bangladesh operations for the quarter were Rs. 2.7

Crores as compared to only Rs. 0.1 Crores during the corresponding quarter last year and profit after tax for the half year was at Rs. 6.7 Crores as compared to Rs. 3.3 Crores during the half year last year, a growth of 103%. So with that I turnover to your questions please.

Moderator: Thank you very much. Ladies and gentlemen, we will now begin

the question and answer session. The first question is from the line of Chirag Lodaya from Value Quest. Please go ahead.

Chirag Lodaya: Congratulations on great set of numbers. My first question on growth, so what is driving this such a strong growth it has been second quarter we are growing at 30%, so you can throw some light on that?

Radhika Piramal: Thanks Chirag. Everybody this is Radhika here. Great

question and I like to take this opportunity to introduce Sudip Ghose to all of you. Sudip will be handling the Q&A and as you know he was appointed CEO of VIP on April 1, 2018.

Sudip Ghose: Hi, Chirag. Thank you for coming in. Start with, the market has been good. We feel that the market has been very favourable to the

organization and to the category for some time now. The biggest difference that we are seeing is that there are lot of people who are moving from unbranded to branded and therefore branded luggage business, which used to be small portion of the overall luggage business, has started growing. Hence, I think that overall sentiment and big fact that this category is moving from commodity to brand is helping all the organizations in this.

Chirag Lodaya: What is the institution business contribution in Q2?

Sudip Ghose: The institution business has also done well. We do not give range wise or channel wise or brand wise numbers, but I can tell you that institution business has also been very good, which means that as a category lot of institutions are preferring to give luggage because it is very functional and it helps the employees to use the product and we are getting a lot of enquiries.

Chirag Lodaya: But was it meaningful for the quarter, just wanted to check in terms of institution?

Sudip Ghose: Yes, it was.

Chirag Lodaya: And going ahead, this kind of growth momentum one should expect?

Sudip Ghose: Yes, as I said I would like more and more institutions to consider giving luggage instead of whatever they plan to give and yes, as we make this category aspirational.

Chirag Lodaya: My second question is on our sourcing cost, now we have seen around Rs.9% depreciation in a single quarter, so what has been the impact in our sourcing cost and what corrective steps we have taken, the reason I am  asking is it has been third quarter, Q-o-Q I am seeing your gross margins are coming down, so how one should read that?

Sudip Ghose: If you compare with gross margins over last year same time, it is actually better.

Chirag Lodaya: I am comparing Q-o-Q, Q1 versus Q4?

Sudip Ghose: The rupee actually plays an important role and we are looking

into. So coming back to the question, we have already taken two price increases during the year and we are planning to take further price increases, but you should also remember that we operate in a competitive scenario and we need to be very careful on the kind of price increase that we can take and we can pass on and therefore we are evaluating it. But if the trend is like this, we have no options, but to take price increase.

Chirag Lodaya: Sir, in the opening remarks you mentioned volume growth was higher than value growth and you mentioned in last one you have taken two price hikes, so this does not tally, how one should read this, if you have taken price hike say about 7% to 8% in last one year so value should be higher than volume?

Sudip Ghose: We operate in a competitive scenario. When we say price

increase, we have about five brands. We have to look into where to take price increase so that we also do not give up on the volume because end of the day more than percentage we also need to take the absolute value back home, so if you really see in the Aristocrat in entry level segment we have been very cautious on the price increase while on the higher end, which is Carlton and VIP and to some extent Skybags, we have taken price increase. Since people are moving from unbranded to branded, the lower end segment has started really, really moving well fast and therefore the mix also has an impact on this, so that is how it has worked.

Chirag Lodaya: And just one last question on your other expense, the other
expense for the quarter as well as for the first half it is much higher, growth is much higher than your topline growth, what is driving this higher other


Sudip Ghose: Other expense does have the freight, which plays the reason
prices are up. Transportation costs are going up, so as the factory’s power

costs, which has got impacted. Also, there has been quite a bit of travel because business is growing. There is travel increase and flight tickets are expensive, so all put together there has been an increase in the other expense.

Radhika Piramal: There is one more significant part of the other expense,

which is due to foreign exchange, so Jogendra can you explain why it is flowing so in this head, but that is showing other expense and Jogendra will explain you why.

Jogendra Sethi: With the change in the accounting standard, difference in the exchange rate at which company is booking imports vs the exchange rate at which the company is paying to exporter, is being accounted for in other expenses which is actually part of cost of goods sold.

Radhika Piramal: And a specific part in this instance especially in Q2 because of quick depreciation, other expenses are going a bit higher than going in line with volume and value growth because our volume growth is also at 30%, so freight costs have gone up a lot and there has been diesel price increase and there has been foreign exchange, so to just go further on the margin point there has been a decline from in the last six months on our margins and unless we take steeper price increases, it will be hard to maintain even these margins and it is a paid off between price increase versus volume growth and we are evaluating our options on that to get it right.

Chirag Lodaya: Just Madam, if you can quantify what would be the forex loss for first half?

Radhika Piramal: It is about Rs. 5 to 7 Crores.

Chirag Lodaya: That is it. On a first half basis?

Radhika Piramal: On the quarter.

Chirag Lodaya: On a quarter, so 14 Crores on a half yearly basis.

Radhika Piramal: It depreciated more in Q2, so that is not.

Chirag Lodaya: Thank you. All the best.

Moderator: Thank you. The next question is from the line of Shiva Kumar from Unifi Capital. Please go ahead.

Shiva Kumar: Thank you for the opportunity. So, how has been the sourcing

changed during the quarter, how much is being sourced externally and how is being produced in house?

Sudip Ghose: There will not be much of a change in the mix of the sourcing

pattern as we talk of Q2.

Shiva Kumar: Sir, coming to the revenue growth trajectory most of the retail companies have commented that the festive season coming a bit late this year, festive demand has actually switched to Q3, so can we say that the revenue traction, which you got in Q2 will continue in Q3, how has been the festive sales?

Sudip Ghose: First of all, as I said I cannot hear you properly, so I take your
question or whatever I understood I just say, you want to know whether the

revenue growth will be same as Q3 will be the same as Q2 that is what you are asking?

Shiva Kumar: That is right because the festive season getting into Q3, so you would actually have that tail a bit in Q3?

Sudip Ghose: There are two things to it, one in Q3 unfortunately, we do not
have much of marriage dates and last time Q3 was very, very good for us. We

are getting into a trouble in the second half where we are aware of other things to be done and we are going to take reactions for that.

Shiva Kumar: Sir, coming to your contracts with your importers, does USD INR play a larger role or does the moment of Yuan with respect to INR also play a role in how you get the raw material prices contracted?

Sudip Ghose: So, it is both, if both gets weak then it is okay, but if one gets

strong and the other one gets weak then there is a problem especially the Yuan starts getting stronger, so we balance it, it is a balancing thing. Our sourcing team is aware of the fluctuation that happens in both the currencies and we play it accordingly.

Shiva Kumar: Sir, like in the current scenario wherein INR is depreciating

against USD, but with respect to Yuan rates has been constant can you use the pretext and ask your suppliers to keep the rates constant, will that work?

Sudip Ghose: Yes, in fact.

Radhika Piramal: The Yuan has not depreciated as much as the rupee, so
there is a difference and it is not a one to one, so our offset in dollars and to

expect to get the same offset I mean depreciating rupee is going to have affect in the market.

Sudip Ghose: The depreciation has been more, Indian rupees have depreciated more than the Yuan, but if you are asking me are the sourcing team aware of it and pushing the prices of course they are doing it.

Shiva Kumar: Thank you Sir. That is it from my side.

Moderator: Thank you. The next question is from the line of Ravi Naredi from Naredi Investments. Please go ahead.

Ravi Naredi: Sir, any more capacity expansion on cars?

Sudip Ghose: What is happening is the business is a kind of shifting from soft luggage to hard luggage in a big way. We are seeing this globally and therefore it is good for us because all the hard luggage is produced here in India and we are definitely looking into increasing some kind of capacity for hard luggage in India, yes, so the answer to your question is yes.

Ravi Naredi: Any more capacity expansion in our companies on cars, capex


Sudip Ghose: Yes, if we have to increase the capacity there will be capex

involved and there will be investments on that.

Radhika Piramal: So in fact we are investing again in machinery and plants in India, now the capex is not such a high spend that is going to flow through in some meaningful way on the depreciation from an organization perspective it is actually very good for us to the hard luggage polycarbonate in particular is growing and we are buying some more machineries.

Ravi Naredi: What is your commentary H2 will be weak in compare to H1 this year?

Sudip Ghose: So, the topline growth probably would continue, but because of the rupee depreciation that has happened there will be some amount of

pressure on PAT.

Ravi Naredi: Roughly how much percentage can you quantify?

Sudip Ghose: I am not aware of that.

Ravi Naredi: We have good brands, so we can raise the prices that is why I am asking you?

Sudip Ghose: Beyond a point very, very good brands also cannot do it, I love to, we have been having a discussion, but we also have to keep in mind that we operate. We do not operate in a monopolistic situation. There are competitions and so we cannot let the market share slip because it is difficult to get a market and once let competition come in and it is very difficult to dislodge them, so we would protect market share, but we will also ensure that we get the revenue, but as I said economy of the country do play a role and rupee will have its impact so, to answer your question I do not have an answer because I do know how much.

Moderator: Thank you. The next question is from the line of Josias Goh from Saga Tree Capital Advisors. Please go ahead.

Josias Goh: Thanks for taking my question. I have two questions. The first one is on Caprese may I ask if there has been a growth of Caprese into new

distribution channel?

Sudip Ghose: Is Caprese has grown in the newer distribution channel that is

what you are asking?

Josias Goh: I am asking whether there is a huge role of Caprese in the

distribution channels?

Sudip Ghose: Yes, so first instance Caprese has done well in e-com like the last e-commerce that we saw, we did very, very well there. Suddenly we know as I said light luggage even for handbags we are seeing women going into branded products and therefore we have started selling of the high end, which earlier we were not selling, so there has been distribution growth in Caprese because we are seeing people coming up and asking in outlets where they earlier never used to ask and with the kind of campaign that you have done with the kind of brand awareness there is an attraction to the brand pretty good, so answer to your question is yes.

Josias Goh: My second question is on Skybags, so you have done very well on Skybags, which is your number one brand, so can I ask like you see greater traction in terms of opportunity for Skybags luggages or Skybags backpack?

Sudip Ghose: So the way we see in a business is that our Skybags is more of a youth brand and if you see youth today travels more with rucksacks and

backpacks, so ideally when given a choice I would like to make it 100% backpack brand, but it does not work actually, we also have to sell luggage, so yes the contribution of backpacks hardly increasing big time in Skybags and because the overall backpack market we have really, really done well. We started only about four years back and today I think that Skybags is the biggest brand in backpack in the country, so Skybags’s contribution of backpacks will keep increasing and someday I hope it becomes a backpack band.

Josias Goh: Thank you.

Moderator: Thank you. The next question is from the line of Nitin Gosar from Invesco Mutual Fund. Please go ahead.

Nitin Gosar: Question is on Aristocrat brand, is that the growth in the
Aristocrat has been good and keeping in mind the kind of pricing power you
may have by the end of the segment because of the competition the higher it

grows the more pressure it puts on margin is that the right understanding?

Sudip Ghose: Yes, as I said earlier we have to take price increase and we
cannot have a price increase in every segment. If Aristocrat is selling more,

which obviously we do not compromise on the product, we do not compromise on the quality, so if you really see the wheels of one products, one brand is not inferior to the other, it just that we make a little less money in Aristocrat and therefore if you sell more Aristocrat there will be some pressure on the overall margins, but we also need to grow the Skybags in the way that offsets, so the volume and value kind of matches, but if we sell more Aristocrat yes there will be.

Nitin Gosar: Fair point and the second question is with regard to it is more of a continuation of the first question, couple of quarters back there was comment that post GST the entry level price point gap has reduced between organized and unorganized and the comment was more to do with the Aristocrat brand also, now keeping in mind the raw material inflation that we have seen in the last one or may be last six months there would be more pressure on the unorganized guys because the sourcing broadly would be same, but the gap, which we used to have between unorganized and organized somewhere around 15%, if we go for a price hike do they come very close to our entry level price point?

Radhika Piramal: It is a bit of function that the unorganized players will take price increase we have not seen any evidence of that in the market yet despite the rupee depreciation.

Dilip Piramal: How much gap did you say between organized and unorganized?

Nitin Gosar: I think couple of quarter back there were some comment, which was mentioning 15% to 20% is the gap now.

Dilip Piramal: No, it is 100% over the unorganized sector.

Nitin Gosar: No, the gap between unorganized and organized, so entry level

price point?

Dilip Piramal: Organized sector may be double the price of the unorganized


Radhika Piramal: It goes by brand. If you look on an average, our company’s price point then it is a 100% what Chairman is saying, but then obviously it will be split by brands; we have Carlton at the top, VIP Skybags in the middle, Aristocrat the entry, so if you just look at the lowest level of Aristocrat to the highest level of unorganized that is what you are saying is right, the difference is not 15, but let us say 20%, so even in unorganized there is some segmentation.

Nitin Gosar: So, despite they are seeing raw material inflation, which even we are witnessing there has not been any kind of price hike from unorganized sector?

Sudip Ghose: It is very difficult to understand the unorganized price hike so

fast because it is like for organized segment the moment there is a price hike all companies get price list of the other companies, I am sure when I increase the price my price list reaches my competition below and like similarly we get their price, so we can actually see, but I do not know which player it takes a little time for us to understand and it is very difficult. It is very difficult to figure out whether importer in Coimbatore is increasing the price or not I cannot really say that.

Nitin Gosar: A bit more on this, does not it mean that the organized guys
players, number 2 and number 3, which PSH they are waiting for you to take a price hike and then decide on what price hike they should be doing or the

overall industry is waiting for the competition, which they are seeing from the unorganized guys and want to do it for the price hike call?

Sudip Ghose: We do not look into unorganized guys as organization we can
say we have already taken price increase to try to protect the margin to the

extent that we should without really impacting our numbers, I will not be able to comment on competition.

Nitin Gosar: Fair point Sir. Thank you.

Moderator: Thank you. The next question is from the line of Karan Khanna

from Ambit Capital. Please go ahead.

Karan Khanna: Thanks for the opportunity and congratulations on the greater quarter. My first question is for Dilip Sir, firstly in the recent interview we had mentioned that we are confident of achieving around 32% CAGR and profits over the next five years, so just trying to understand more on the drivers for this 32% growth because in the recent interview our marketing head has mentioned that we are looking to grow an excess of 20% Y-o-Y over the next five years in terms of revenue growth and if we look at the comparative results both Safari has reported around 44% growth, but even Samsonite has reported 49% growth in India business this quarter, so just wanted to understand whether the entire 32% growth as we are talking about would this be led by a strong revenue growth or is there some scope for margin improvement as well and secondly your thoughts on how do you see the industry in the next five years in terms of split between organized and unorganized and if could you throw some light on category wise growth?

Dilip Piramal: I may not be able to answer all these questions, but I will tell

you that just 32.5% or 32% growth is for five years, so it is a long period and it will be both on the basis of revenue and margin improvement and what was your second question?

Karan Khanna: My second question was if you look at our competitors even

they have been reporting strong revenue growth, so just wanted to understand how is the competitor scenario panning out because both Samsonite and Safari become very aggressive?

Dilip Piramal: As I said five year forecast 32.5% growth CAGR profit after tax, so it is panning out well, so far we are doing 50% from the two quarters out of 20%, our run rate is 50% nearly, so we are doing well. I do not want to comment on the competitors we are doing quite well and what would be your next question?

Karan Khanna: Now if we talk about hand bags we believe you have crossed

100 Crores revenue in Caprese and that the brand has been growing at around 47% since 2013, while gross margins are higher can we get some sense on by when can we expect Caprese can meaningfully contribute to our EBITDA and secondly we are also having the value segment, I think in the recent interview Mr. Sudip Ghose had mentioned that we are also having value segment, the new launches starting at Rs.1000, which is cheaper than a regular hand bag as around 1800 bucks, so just wanted to understand the reasons for the change in strategy here, when we launch the brand in 2013 we were looking the position as a premium brand?

Dilip Piramal: No, nothing like that.

Sudip Ghose: Just to answer on the question, to start with as there is a

stocking there has been a pretty dominant shift between the unorganized and the organized both in luggage and in handbags we are seeing a lot of attraction of consumers who walk-in to hypermarkets, which we discount, the value chains that we call it and we feel that there is a market that needs to be tapped, so would like to have a designer bag from a brand at a price, which is affordable and therefore we decided to move there, but it does not mean that we have moved away from our core business, which happens in our company stores and departmental stores and therefore we are balancing both so that we get the volume and start contributing as you said very rightly said meaningfully it does already now, but a little more would not hurt that is why we are.

Karan Khanna: And Sir on backpacks is it fair to assume that the average

realization on backpacks are around Rs.700 to Rs.900 for backpacks given that we sold around 3 million backpack in FY2018 and the revenues on backpack is around 15% to 20% of a revenue?

Sudip Ghose: Individual channel price brand wise revenue I am not ready to share, I can tell you we started about four years back where we are actually priced aggressively, over the years we have taken the prices up and our contributions of backpacks are now actually matching to luggage to a large extent so we have moved, we did well by getting the market at a lower price and we have taken the prices up, which the brands have been able to manage.

Radhika Piramal: What is your good name Sir?

Karan Khanna: Karan Khanna.

Radhika Piramal: From?

Karan Khanna: Ambit Capital.

Radhika Piramal: Thanks Sir. Nice questions. Thank you.

Karan Khanna: One just one more question on VIP Bangladesh just wanted to understand what could be your total capacity you have because I think the first plant was 70000 pieces and the other plant is 30000 pieces and there is another third plant that they come out with and what sort of utilization that we are operating at currently?

Radhika Piramal: So, the figures you have is about right, we had a slight

setback in Q2 in terms of some production disruptions including incoming raw material and so forth, so at the moment actually we just want to continue with the current levels for some time, obviously in the future we would like to increase because it helps a little bit as a strategic alternative to China, but at the moment we are continuing at these levels.

Sudip Ghose: Also Bangladesh is going to face elections coming in sometime I think end of the year and therefore while like all countries, which face elections there is a bit of uncertainty and chaos that prevails, which is there in Bangladesh currently and therefore as Radhika said we cannot comment really on how this would pan out.

Karan Khanna: One last question from my end, so again I think in the recent

interview management mentioned that we are looking to grow export to around 25% of a revenue in four years’ time from around 4.5% in FY2018, but that was in the US and European market, so just wanted your thoughts in terms of how confident are we of achieving this target especially given that over the past three or four quarters we are seeing a decline in our exports revenue?

Dilip Piramal: I think this is a very, very broad generalization so at this moment I do think we can get into any details of that, let us wait for another year before we can give you more concrete figures.

Karan Khanna: Sure. That is it from my end. Thanks a lot and best of luck.

Moderator: Thank you. The next question is from the line of Ankit Kanodia

from Smart Sync Services. Please go ahead.

Ankit Kanodia: Thank you for taking my question and congratulations on very good set of numbers. Most of my questions have been answered. I just have one question, in the last concall you have mentioned that currency depreciation would be a big risk for Q2 as this is the time that it will hit the books, so if we assume that the exchange has remained same just a hypothetical thing and if crude price also remains at a comfortable level can we expect margins to stabilize at this level or we still face some pressure on the margins?

Radhika Piramal: We still face some pressure because while we did want
about the potential for the margin reduction in Q2 actually we had some

inventory left over from Q1, so I will say that the September margins will work under July margins, so in Q2 you are getting a bit of blended effect whereas in Q3 definitely we expect October, November, December an average could be more similar to the September than July, so there is definitely margin pressure in Q3 versus Q2 region.

Ankit Kanodia: Thank you so much.

Moderator: Thank you. The next question is from the line of Chintan Gupta

from Way2Wealth. Please go ahead.

Chintan Gupta: Sir, thanks of the opportunity. I wanted to understand the

competitive intensity of the industry post the entry of Xiaomi into the luggage sector?

Sudip Ghose: So, the way I will see it is we do control more than 60% of

market share in Indian context and competition has been trying to get into a lot of channels where we are very strong so currently they have not been able to manage to get that, but what they are trying to do is trying to get into the lower segment, so the whole point of we have been asked whether we can increase prices across I do not see my competition have taken price increase for one year.

Radhika Piramal: In fact if you look at the Q2 Safari results, we see a sales
growth, but we saw that on the margins they were not strong, so I comment
that yes we have taken price increases, but selectively on our brands and

overall our volume growth is a bit higher than our value growth so the product mix is moving, I will characterize the bottom end of the segment facing an extreme price competition right now.

Sudip Ghose: And also what has happened is the other competition has

launched new brand called Kamiliant, which is again at the same price point of Safari and there has been no price increases, so all put together that price point is becoming very, very competitive.

Radhika Piramal: It is slightly surprising that two members of the organized sector have not increased prices despite 10% depreciation, so that is surprising to me of course the depreciation has just happened so they may change that in time.

Chintan Gupta: Thank you. That is it from my side.

Moderator: Thank you. The next question is from the line of Punit Mittal from Global Core Capital. Please go ahead.

Punit Mittal: Just one question with the extension from the previous question, you said there is a strong value migration that is happening from one brand to brand and you also mentioned that there is a strong volume growth on your side plus you will not compromise on the quality in the value for money segment, so can you give any colour on what is the margin differential would be in this segment versus other segment, I do not want the breakdown from your side I am just saying what can be broad margin differential in these different segments?

Radhika Piramal: As we say in every call Carlton is about 5% higher than

average and Aristocrat Alfa about 5% less than average with VIP and Skybags in the middle.

Punit Mittal: So because our value for money brands are growing may be
faster than the other segment and because there is intensive competition in
these segments that is probably one of the reasons why there has been a

margin pressure going forward?

Radhika Piramal: It is one of the reasons for the depreciation of rupees
because our Carlton, Caprese, Skybags and VIP growth is also robust it is not
that Aristocrat is going so much faster than the others, all our brands are

genuinely doing very well in this high volume and values.

Punit Mittal: Understood. Thank you so much.

Moderator: Thank you. The next question is from the line of Madhav B from Spark Capital. Please go ahead.

Madhav B: Thanks for the opportunity and congrats on good set of numbers. This is just an extension of previous questions, which was asked on gross margin ceteris paribus how much price hike would you require to cover the rupee depreciation and crude appreciation that you have witnessed in the recent past?

Sudip Ghose: 10% to 15% and that is what is required.

Madhav B: And considering that the growth momentum is so much in your

favour do you believe that at least a part of this price hike would not be taken easily by or absorbed by the market in current scenario?

Sudip Ghose: It is difficult to say, you know every category, every product has an optimum point. We really do not know what is the optimum point of a branded luggage, as I said just getting into buying these category as a branded product and not a commodity product, so if you ask me whether 10% will be good, 15% will be good or 5%, do not have an answer, but in my understanding 4% to 5% price increase does not hurt to a large extent, but anything excess of 10% is definitely big, but between 5% to 7% is something that is we need to figure out how to do it, but overall the price breakeven at what point the consumer will stop buying that is very difficult to say.

Madhav B: Fair enough. Second I believe that there is no import duty on your Bangladesh import is that correct?

Sudip Ghose: Yes.

Madhav B: So, what happened on import duty in recent past, do not you think that increasing sourcing from Bangladesh will shield us somewhat from the import duty that we witnessed?

Sudip Ghose: Yes, of course in a sourcing we need to increase the production there it is not so easy we all understand that it is very simple maths that one country has got more duty, the other county has less duty it is better to bring it from the contribution of less duty, but we also have a figure whether we can find products to get it from the less duty country, so we are working on it and to answer your question yes, but are we doing it in a period of time depending upon how it works out that is going to happen.

Madhav B: On labour is a limiting factor there to scale a production or anything else?

Sudip Ghose: See Bangladesh is not an easy country. There is quite a bit of

limitation going for a large increase in that country.

Madhav B: And lastly the 10% to 15% gap you mentioned that is after

accounting for the import duty hike or is it excluding that?

Sudip Ghose: It is including.

Madhav B: Great. Thanks and all the best.

Moderator: Thank you. As there are no further questions from the participants, I now hand the conference over to the management for their closing comments. Over to you!

Sudip Ghose: Thank you all for tuning in. It was very nice talking to you and
mine being the first it was great talking to you. We have had a good quarter.
We have had a good first half of the year. As I mentioned that we are getting
into a turbulence we are aware of what are the things that needs to be done
that is the beauty of it because if you get into a place where you do not know
what is coming, it is dangerous, but we know there is turbulence ahead and we have our seatbelts ready. Hopefully, we will be able to take this journey, I
cannot say smoothly, but with a little bit of bump to the end of the year. We

started well, we will try to close it well.

Moderator: Thank you Sir. Before we close there is one question that has come up. Would you like to please address that and that is from the line of Sajan Didwania from Frontline Capital. Please go ahead.

Sajan Didwania: Thank you for giving me opportunity to take my question.

First of all I will congratulate for your topline growth. I just want to know there is a cost of goods sold it is higher 50% of the sales, is it due to any change in product mix like hard luggage had been sold more, soft luggage has been sold less, it is due to only the product mix is the same, but the cost pressure?

Sudip Ghose: It is purely cost pressure, it is the way the rupee dollar

relationship has behaved, the import duty all put together.

Sajan Didwania: Another thing is that employee cost also has increased by

approximately 6 Crores compared to the June quarter?

Sudip Ghose: Employee cost?

Sajan Didwania: Yes.

Radhika Piramal: Reason for that is because we are definitely adding to our
sales and distribution strength to drive this growth in value and volume, so

modern trade add new doors, so there is a the channel expansion there we add our merchandisers, promoters, regular sort of incremental cycle kicks in July.

Sudip Ghose: The incremental cycle actually, which is the kind of increment, but if you see vis-à-vis the same period last year.

Sajan Didwania: But if you see as a percentage of sales actually it is still the

field is likely less than corresponding quarter in the previous year?

Sudip Ghose: Because of the employee cost is I can say that it is more or less

too fixed so that is why Rs 6 Crores compared to the June quarter that is what I was asking?

Sudip Ghose: The increments hit in this quarter.

Sajan Didwania: One more question just I wanted to know the backpack

segment is giving a high growth of somewhere around 30% as you said in the last conference call, can I get to know what is the growth in backpack segment sales in current quarter and the luggage segment?

Sudip Ghose: It is similar the market actually does not really change much

because today backpacks are bought throughout the year so the growth for this quarter has been quite similar to the previous quarter.

Sajan Didwania: Thank you very much Sir.

Moderator: Thank you. One last question from the line of Rajamohan an

Individual Investor. Please go ahead.

Rajamohan: Thanks for taking my call and congratulations on good set of

numbers. Actually there has been a lot of talk on gross margin challenges in the second half, what I wanted to understand is below the gross margin you have personal and other expenses, do you think you have slightly better leverage on personal and other expenses in the second half for you to sort of ameliorate the pressure on gross margins?

Radhika Piramal: No, because we are not a very short-term company and we have had an excellent one of sales growth and until the rupee depreciated excellent margin growth, so it would be I think very short-term to try and do, reduce our fixed cost and reduce our organization capability for few quarters margins, so in the long run we have demonstrated an ability to take price increases because of our brand. It has been a tough quarter, in terms not the results for Q2 but in terms of the 10% depreciation of the rupee and increase in employee cost, there is margin pressure, but let us not take too many shortterm decisions to protect one or two quarters margins, we will find a way back to profitable growth and let us close the call. We ended our calls. We have made a closing remarks and I will back to the Q&A.

Dilip Piramal: Radhika, I just wanted to say something that we are actually

having a most profitable growth where is the pressure on finding our way back. This quarter is the highest profitable growth we have had and what background are these questions being asked I cannot understand.

Radhika Piramal: They are being asked in the context of the upcoming margin pressure that we have.

Dilip Piramal: Yes, we will do that next quarter. That is the fact.

Sudip Ghose: Thank you everyone. Thank you very much and hopefully see

you in next quarter again.

Moderator: Thank you very much. Ladies and gentlemen, on behalf ofEdelweiss Securities Limited that concludes this conference call. Thank you for joining us. You may now disconnect your lines.
First Published on Dec 24, 2018 01:41 pm
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