ABFRL — earnings call
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Prepared remarks
EXECUTIVE OFFICER, LIFESTYLE BUSINESS · MS. SANGEETA PENDURKAR – DIRECTOR AND CHIEF
MS. SANGEETA PENDURKAR – DIRECTOR AND CHIEF
EXECUTIVE OFFICER, PANTALOONS · MR. RAHUL DESAI- HEAD (IR)
MR. RAHUL DESAI- HEAD (IR) MR. AMIT DWIVEDI- VP (STRATEGY & BUSINESS DEVELOPMENT) Aditya Birla Fashion & Retail Limited May 24, 2022
Questions and answers
Moderator · Conference Operator
Thank you.
The first question is from the line of Tejas Shah from Spark capital.
Please go ahead.
Tejas Shah
I have many questions.
I will just try to club couple of them for efficiency.
First question is regarding the fund raise.
Last March, when we made this presentation for our FY26 vision, we had in fact shared a very detail capital deployment plan also, which was not around raising any further capital and when I look back FY22, it actually went very well for us in terms of recovery, in terms of numbers, so then what triggered this sudden such a big fund raise?
That's the first question.
Ashish Dikshit
Our long-term plan was made in January of last year and was presented to the investors around early March.
What happened in April, May, June, all of you remember, all of us remember has been one of the most devastating period for life in general, but I think consumer retail, specifically fashion retail and all of first half of the year was significantly different from what we had imagined.
We had come out of the first wave in January and February when this plan was made and to that extent, your contention that nothing has happened in FY22 is actually very far from our own assumptions of how FY22 will turn out versus how it did.
Over this period, we Aditya Birla Fashion & Retail Limited May 24, 2022 also realized that a long-term competitive position would require us to invest deeper because many of our growth initiatives, which we had started on, starting from Pantaloons where we had laid out a plan to expand 70 to 80 stores a year, but ended up with close to 40 to 45 stores.
Innerwear where expansion was held back, ethnic wear many of the businesses that we acquired were relatively under invested from expansion in growth point of view.
So, if I were to summarize this, 2 things happened.
One is FY22, unlike what you are saying, was dramatically different from what we had imagined FY22. FY22 in our plan at that point of time was better than H2 that we have delivered this year.
We had a similar view of H1 last year and therefore, the full year would have been much-much better.
Number 2, because of what was happening around and the conditions, our expansion plans were held back quite significantly.
At the same time, we continued to believe both in the long-term growth potential of the market and intrinsic strength of our brands and we feel now the time is to accelerate to catch up on what we have not done over the last 12 to 18 months and I would go back almost till the beginning of the COVID period from 18 to 24 months where some of our growth initiatives have held back.
We have made investments in acquiring platforms, but commensurate investments in actually scaling up those platforms have been lesser than what we would have ideally liked and therefore, there is an accelerated need to grow these platforms.
These are very significant opportunities.
You have seen how Pantaloons business has turned around in the last 3 to 4 years and it's a strong fundamental economic model.
Ethnic wear business that we have acquired now, there is no doubt that the strength of these brands will allow us to grow much-much faster and 2 to 2.5 years back, this business didn't exist.
Now we are clocking, as Jagdish mentioned, about Rs.
400 to Rs 450 crores a year and we have laid out a plan for Rs.
1,500 to Rs.
2,000 crores of that.
To realize all that would require long-term capital and a balance sheet, which is strong and we don't have to keep looking back.
It is the plan that we have been working on from the time the COVID phase 2 happened and how do we strengthen significantly that for the next 2 to 3 years, we don't have to worry about capital to take our organic growth expansion plans and that's really how we see it.
Tejas Shah
How should we think about now FY26 vision, does it mean that we will participate in many more categories because capital is also now available or does it mean that we will go more aggressive in the existing categories that we have identified already?
Ashish Dikshit
Answer to that is latter what you've said, which is we have, as I mentioned, a very-very strong platform.
Pantaloons story is still to play out fully.
Innerwear still long run away, ethnic wear we just acquired, Reebok is a large opportunity that we will play out.
So, our existing strength of platforms, brands and portfolio has a very large capacity and capability to actually grow and that's where most of our investments go.
I don't think that you should look at this investment as a one-time infusion to solve current problems.
This is more a long-term strengthening of balance sheet, which will allow us to fulfil exactly the strategy that we had laid out earlier.
Aditya Birla Fashion & Retail Limited May 24, 2022
Tejas Shah
Whom do we consider our competition now because since pandemic, we are seeing that conglomerate retailers are getting very aggressive across categories and unfortunately/fortunately, most of these retailers are either part of a big house so their dilution if at all happening is not visible or they are unlisted in India, so we are not able to track that infusion that closely.
So, just wanted to understand, are we competing some of those big names or are we actually still mocking our competition, which was the case pre-pandemic?
Ashish Dikshit
So, I think, we have always stated and you saw that in our strategy that the opportunity is what excites us more than the competition.
It's a very large market depending on who you ask, it's $70 to $75 billion, how much of it would have recovered, but when it normalizes, Indian apparel market is perhaps one of the largest if not the largest consumer space in this country.
The extent of branded play is still limited reflecting the fact that even a major player like us is less than $2 billion in revenue, $1.5 billion in revenue.
So, that tells you how large the fashion space is and how little is the penetration right now and what is the large runaway available to us.
So, more than looking at competition because each of our competitor or each of our segment that we're playing has a different set of competition.
Our strategy need to be guided by opportunity, our own intrinsic strength, our capability to execute and the vision that we have for the business.
I am not really looking at competitors and looking at what they are doing and who is your competitor.
In each of them, we obviously will have worthy competitors, both national and international and we will have to deal and compete with them.
Tejas Shah
And the last one, strategic investment already was considered or accrued for the fund raise?
Ashish Dikshit
No. This fund raise, our idea was to get really long-term financial investors, but whose outlook is into future and a partnership that we could build on over next decade or so, as the Company grows and expands its presence in the fashion market.
Therefore, the idea was to get somebody whose investment strategy, proven discipline, ability to have long-term partnership in India proven over a long period of time and that's how GIC filled most of these criteria for us and to that extent, this is really how this partnership was conceived.
Moderator · Conference Operator
Thank you.
The next question is from line of Aliasgar Shakir from Motilal Oswal Financial Services Ltd. Please go ahead.
Aliasgar Shakir
I have a question first on your fund raise and your growth initiatives that you mentioned.
So, and coming from the point of view that we are a Company, which has an ability to generate probably more than Rs 1,000 odd crores of operating cash flow.
I hear your comments that we want to accelerate our growth initiatives, but when I see Lifestyle, largely franchise-led growth, even Pantaloons, we are increasing now moving to that goal and in fact the kind of free cash flow generation we have, I thought we have sufficient capital to drive growth in our existing portfolio, correct me if I am wrong.
So, I just want to understand what are the broad areas of investment of this new capital?
Would it be used for further inorganic growth opportunity that we see in any Aditya Birla Fashion & Retail Limited May 24, 2022 new areas and related question there is what should be your guiding force in terms of your margin profitability metric that we should see during this phase of investment?
Ashish Dikshit
Fair point in terms of some of our businesses having strong cash flow generation capability, but as I was explaining earlier to Tejas' question, I think the way we see our potential and what has happened in the last 2 to 2.5 years, many of our platforms haven't really played out to the extent that we wanted to do and rightly so considering the situation that the industry was, the consumer was and the overall landscape was.
So, we believe, coming to your question where would large part of these investments go, I would say the largest parts would go in singularly expanding Pantaloons franchise to get it to the potential that it has and contrary to what you are suggesting, we have always maintained that Pantaloons will probably stay at 20% and at best 25% of its expansion to franchise.
So, 75% to 80% of Pantaloons expansion would be own capital.
Our entire ethnic wear portfolio, we have acquired some of the most well-known and strong brands in the portfolio.
We now need to do justice to them by expanding those.
Reebok is a large opportunity, our international brands business whether it's America Eagle or international brands, they are going very-very profitably and have a very strong run rate.
Reebok is probably a very long-term large opportunity that we are playing out if you look at that market dynamics.
So, if you really look at what we have in our hands, other than Lifestyle brands, which obviously have consistently been cash flow generator and need very little capital to grow, even there we will perhaps at some stage 18 to 24 months, we will have to build a little bit capacity on the manufacturing and supply chain side.
Most of this would go to strengthen the accelerated growth trajectory that we have created for the portfolio that we have and that's our primary goal.
Needless to say, a part of the capital will also have to go as the consumers are pivoting, as digital is getting more importance, both in infrastructure ability, building own dot com business, which is required to actually have captive platforms where consumers shop from you.
Today, about 80% of our business come through third-party platforms.
That's the other thing that we'll need to invest in.
All these are part of organic plan and pretty much part of the plans that we have laid down.
FY22 dynamics have affected both our growth investments as well as our capacity because it’s have significantly dented the balance sheet versus what we had imagined.
Aliasgar Shakir
Just a quick follow-up here is, so should we build more than Rs.
1,000 crores kind of CAPEX in our existing organic business and are you saying that we don't have any inorganic possibilities in the near term?
Ashish Dikshit
As far as organic CAPEX is concerned, I think Rs.
1,000 crores would be aspirational for us.
We would love to spend.
I don't think we have the capacity to spend that kind of capital, but the number would definitely be what we would like to do with something like Rs.
700+ crores, which we would invest in this year as we go forward.
Aliasgar Shakir
I was just asking this because we already have that kind of operating cash flow to fund our business.
Aditya Birla Fashion & Retail Limited May 24, 2022
Ashish Dikshit
No, I think you are looking at this fund raise, which is a long-term strengthening of balance sheet to take us through the next 3 to 4 years of growth with the CAPEX of one year.
I don't think that is the right way to look at it.
We are suggesting that our CAPEX will be significantly higher this year and perhaps the next couple of years is correct and that number perhaps will be Rs.
700 to Rs.
800 crores at best if you wish and may be on the lower side about Rs.
600 to Rs.
700 crores.
It will be a function of our execution and scale at which we can build this, but that's where it would be.
Aliasgar Shakir
And on inorganic, any near term possibilities?
Ashish Dikshit
So, inorganic, I don't see an immediate thing, but as I have learnt over a period of time in an industry like this where there are so many opportunities available, I think at any point to say there will be never any inorganic would not be a right thing and it would be incorrect for me to suggest that.
As and when these opportunities come, we evaluate them both with strategic alignment with where we want to go as well as the right value that is there.
As of now that's not the purpose of this fund raise.
This is built around a longer-term balance sheet strengthening, which currently requires most attention as far as our organic businesses are concerned.
Aliasgar Shakir
Just last one question on balance sheet if I can just ask Jagdish to address, inventory payables yet look higher than pre-COVID levels, even if I adjust for the new store additions, so is this due to the new ventures in ethnic wear or should this reverse?
Jagdish Bajaj
Primarily, this is a function of building up the inventories in Q4 for the next season.
The payments will flow in FY23 and another reason is the inventory buildup for the expansion plan in all our business segments, including the ethnic business.
Moderator · Conference Operator
Thank you.
The next question is from the line of Gaurav Jogani from Axis Capital.
Please go ahead.
Gaurav Jogani
My first question is with regards to the sharp margin expansion that we have seen in the Madura brands, so just wanted to know how sustainable this is and what has led to this sharp margin expansion during the quarter?
Ashish Dikshit
I will get to Vishak to come in on this question, but I would only suggest that please look at margins over at least 2 quarters because there is some shift in sales quarter-to-quarter, but Vishak would be in best position to explain this to you.
Vishak Kumar
First things first, yes, like Ashish said, we have been on a very good momentum and Q4 also, even in spite of January, which was Omicron affected, we had a very good like-for-like sale.
So, that significantly helped.
The costs are largely fixed and when that gets spread over a larger sale, then it flows straight to EBIDTA.
Also, I think because of a very strong wedding season, discounts were tighter and hence gross margins also expanded a little more.
Some parts of it will Aditya Birla Fashion & Retail Limited May 24, 2022 not sustain.
One is, I think, we will get to a much larger advertising spend as we look at the quarters ahead, so that won't come and there was some part of it, which was still one-off gains of last year with the kind of cost reduction initiatives that we had.
So that's broadly the math of where we are.
So, the momentum is good.
The EBIDTA percentage looks good, but perhaps there are a couple of things where we will invest more in the quarters ahead.
Gaurav Jogani
And one follow up to this.
In terms of the store expansion plan, so if we see, we have opened around 145 stores during the year and we are guiding to add around 350 to 400 stores for the year, so anything on that front?
Vishak Kumar
This year also, we actually added about 400 stores, but we closed roughly 250 stores.
Now closure also, some of it was real closure, some of it was also some term changes, customer code change etc. So, net-net we did expand close to about 400 stores.
Please remember this was also a period of COVID wave 2, etc. where some parts of retail network had to be rationalized where we were not able to get rent concessions from landlord partners, etc. So, we had to do that also.
What it has done is, not only has the expansion moment continued, it has churned out a more robust retail network as well in terms of sales per square foot of the network, which we have now.
That momentum of about 400 stores per year, I think we will be able to continue for a few more years.
Gaurav Jogani
The next question is with regards to the Pantaloons business.
I do understand that the Pantaloons business was impacted due to COVID Omicron impact, but how do you see the overall performance ex of it had we not seen this impact, what kind of a performance internally stacking up about and how is it you were looking, if you can help us with that as well?
Ashish Dikshit
Sangeeta, just give a context a little bit about the large format stores have been particularly most severely affected by COVID, you would have seen it.
Sangeeta Pendurkar
As Ashish mentioned, we have seen given the fact that our businesses are over indexed to malls.
We have through the years the fact that large format stores have had a deeper impact and it's true for us, it's true for other players in the industry as well and largely we have had a start-stop with Omicron coming in, wave 2, wave 3 Omicron coming in, we have seen a start-stop and in January and February the business got impacted.
However, I think we feel good about our overall performance given all the headwinds that we have had.
You have seen the numbers that Jagdish has talked about.
We have ended the year with a 41% growth over the last year.
Had it not been for January and February, I think our performance would have been even better and when we normalize for that, we have lost ballpark about Rs.
150 to Rs.
160 crores just in quarter 4 on account of the shutdowns that we saw in January and February.
I think what is encouraging for us is that everything that we have shifted in terms of strategy over the last 3 odd years, we have seen impact of that.
We have made a lot of changes and investment during the pandemic to make sure that we are a much stronger organization.
We have had headwinds with the shutdowns, some headwinds with our supply chain issues, which had led to some supplier-led issues, but Aditya Birla Fashion & Retail Limited May 24, 2022 overall looking at our performance through the backend of February, March and April, gives us terrific confidence in terms of both our strategy and the return to momentum that we have seen.
I think if it wasn't for the closures and the fact that we are over indexed in terms of malls, our performance would have been even better.
Gaurav Jogani
And one follow-up to this, as Ashish has also mentioned that looking for a robust CAPEX plan going ahead in all formats including Pantaloons, so how should we consider the store momentum here and what kind of CAPEX could we see after the Pantaloons fees?
Sangeeta Pendurkar
This year again we have opened close to about 50 odd stores and just as Vishak explained, we obviously had some challenges there.
We would have opened more number of stores if it wasn't for the closure of a few months in the year.
We have stated this very clearly in terms of our intention to open stores.
We see Pantaloons as the format that works across town classes.
In the past, we have clearly said a number of 70 to 75 stores per year and that's the acceleration that we will see going from this year to next year.
Even this year, we would have open more if it wasn't for the challenges that we faced, but in the coming year and the years to come, we would take that as the number anywhere between 65, 70, 75 stores is what we would like to open.
And commensurate CAPEX that we would need for that is what we will factor in, in our strategy.
Gaurav Jogani
And just one last question from my end is with regards to the other businesses.
So, if we see during the quarter, the other businesses grew marginally by 1% YoY and declined as a QoQ basis, so if you can highlight how has been the performance particularly for the innerwear and athleisure business in Q4 specifically?
Ashish Dikshit
Innerwear business continues to grow rapidly.
There are other parts of the business like Forever 21, which has not grown over last year, which forms a substantial part of our other business.
Innerwear has grown at about high double-digit 15% to 16% for the quarter.
Moderator · Conference Operator
Thank you.
The next question is from the line of Nihal Jham from Edelweiss Capital.
Please go ahead.
Nihal Jham
A couple of questions from my side.
First on the quarter specifically for our Lifestyle brands, the SSG performance has been impressive and definitely industry leading and you have highlighted certain aspects whether it is done with extension of various brands, which have in a way helped us, I just wanted a little more sense, Vishak, if you could bifurcate that, is it mainly the brand extensions or the improvement of the share at E-Com which can bifurcate give more clarity on this growth.
Also, there is talk of obviously a wardrobe refresh kind of a trend currently happening, so are you seeing that trend and that would also reflect in terms of your formal and casual share, how that has played out, that will be the first question?
Vishak Kumar
I think it's a lot of questions.
First things first, the momentum on growth was overall good in the market.
I think we did a little more, but yes there was a lot of wedding season and all of that, Aditya Birla Fashion & Retail Limited May 24, 2022 which we were able to capitalize quite well on.
We in fact built it very well.
We had built a very strong wedding line, etc. As you know, during the periods of pandemic, we had also built a very- very strong casual line and sports line, etc. Now that also came very nicely into the party and with the third impact which is of back-to-work happening and a very strong comeback of a lot of people when they are going back to offices, buying new clothes for that, all of this together, we were able to capitalize on all three segments.
So, that is what created a good strong momentum.
Our many initiatives, which we have been taking over a long period of time, including a 12 season model, which allows for greater flexibility and ability to put what is required in the market at that point of time, some of those things also are very hard to put as a silver bullet, but they contributed significantly.
Many supply chain initiatives including a lot of technology in terms of retail assortments also helped.
So, it was many things, which went together to be able to deliver and it's not just Q4, if you look at Q3 also, that same trend continued.
So, it is in that sense an extension of many of those initiatives bearing fruit.
Nihal Jham
Could we point out any one of these aspects standing out or this all is equal mixes?
Vishak Kumar
One would be hard, but if I were to say the top 3, it's a very-very strong wedding assortment, a strong formal assortment and a strong sportswear and casual assortment.
All 3 together came very strongly, which were enabled by multiple things at the backend to be able to create a force multiplier as well.
Nihal Jham
Second question, Ashish, was on the fund raise, just considering the quantum in terms of how our CAPEX has been in the past and also the average ticket size of our recent investments, is it by any chance possible to give a bifurcation, you mentioned Pantaloons would be the first in order, of where this Rs.
2,000 crores could be incrementally invested in and the second related question to that is, does it change our targets, which we have we laid out for FY26 considering the pace for Pantaloons and all the other brands accelerate versus the earlier that we had?
Ashish Dikshit
It is harder to give exact breakup, but clearly this is meant to strengthen balance sheet to a point that next 3 to 5 years, our expansion is well supported.
A large part of our growth story is built around growth of formats that we have, the two very strong ones, which are Lifestyle and Pantaloons are well positioned, but they still have a large runway.
There are new ones like innerwear, which needs to double and triple over the next couple of years.
There is whole ethnic wear portfolio where we started from zero and we have committed about Rs.
1,500 crores by FY26. In terms of where we stand in that journey, I think our current confidence is that we will do well above that number and that’s the strength of the platforms.
Reebok has additionally got added, some of the confidence around our ethnic wear also comes from the new launches like Tasva, Jaypore coming on its own and therefore at this point in time, we feel that the projection that we had made for FY26 a year and a half back, despite the fact that we've lost almost 6 to 9 months, we feel even more stronger that we will not only achieve it, but exceed those numbers.
A large part of our capital will have to go into growing and therefore Pantaloons and ethnic and Aditya Birla Fashion & Retail Limited May 24, 2022 innerwear, perhaps in that order would take the largest amount of investment as far as capital is concerned.
Nihal Jham
I will look forward to more details in the coming call.
Moderator · Conference Operator
Thank you.
The next question is from the line of Ankit Kedia from Phillip Capital.
Please go ahead.
Ankit Kedia
The first question is regarding the fund raise, why did you select the warrants option and not direct equity?
Ashish Dikshit
We were looking at longer term solution for our capital needs for 3 to 5 years, at least 5-year horizon.
So, we came up to a number.
As you can make out from the previous questions that it's not that we need all that capital today.
We wanted to make sure that our balance sheet is strengthened over a period of time and capital infusion is more in line of what we think would be our requirement as we go forward and that's really how we needed to stagger it and warrants came up as the best solution to do that.
Ankit Kedia
My second question is regarding the D2C strategy, which was laid out last quarter, just wanted to know what will be the capital infusion because few of your press interviews last quarter suggested Rs.
250 to Rs.
300 crores investment.
Does it change after the fund raise or that capital remains at the same level?
Ashish Dikshit
No, I think as far as D2C is concerned, let me first state very clearly that we have said after initial infusion of the capital, we would like to raise capital externally in that entity directly.
That plan doesn't change at all.
This fund raise is not to fund D2C business directly from this side.
We have a clear strategy in D2C, which we laid out.
We will stay consistent with that.
We had mentioned an amount at that point of time between Rs.
300 to Rs.
400 crores, but that might change a little bit because the idea is to first get 8 to 10 investments made in this year and then go out and raise capital on that.
So, that's on a separate track.
I think it will have its own investment profile and will also have its own funding profile.
Our current fund raise is primarily targeted to accelerate the growth of businesses that we currently have and the ones that we have in the portfolio, either part of Pantaloons, ethnic wear or innerwear portfolio.
Ankit Kedia
And my last question is regarding your debt/equity, you have always mentioned that you are comfortable with 1 to 1.5x debt to equity, is it safe to assume we will continue with that or we want to be debt-free going forward?
Ashish Dikshit
I think as a long prudence, long-term guidance, which we can consistently go by, Jagdish had given that number in the long term plan that we have and we will stay with that.
So, there is no change in that.
Of course, there will be periods when cash flows will be such that probably it may just exceed marginally or there will be periods in which they will be debt free.
Our business Aditya Birla Fashion & Retail Limited May 24, 2022 will go through those cycles, but we will stay within the boundaries that Jagdish has laid out earlier in his long-term plan.
Moderator · Conference Operator
Thank you.
The next question is from the line of Devanshu Bansal from Emkay Global Financial Services.
Please go ahead.
Devanshu Bansal
Sir, Pantaloons, we were doing close to about Rs.
8,000 to 8,500 revenue per square feet pre- COVID, can we get back to this run rate in FY23?
Sangeeta Pendurkar
So, as I mentioned before in terms of our strategy, I think all the things we have done to strengthen the proposition of Pantaloons and if you would have seen during the pre-pandemic, we were on a good trajectory to strengthen our productivity through the stores.
What obviously we have seen over the last two years is a disruption on account of lower foot falls and that story has been told by us and many of the other players in the industry.
In FY23, our endeavor will be to absolutely improve the performance over this year.
I think both with demand coming up and these supply chain issues being settled, we seem pretty confident plus in the interim, I think we have done a lot of things as I was eluding to before in terms of strengthening our proposition.
If you look at it, a lot of our large stores have been renovated.
Our entire effort is to get to a much stronger customer experience, both offline, online and omnichannel.
So, our endeavor would be definitely to get as close as possible with a better product proposition with investments in marketing, with expansion in distribution, which of course does not improve the same store productivity, but all in all, a better proposition for our customer and a better customer experience built on a stronger brand, a better product aesthetic and an improved in-store experience with the new retail identity and the investments in the brand, our endeavor would be to definitely get back to the pre-pandemic levels.
Devanshu Bansal
Secondly, for these 75 to 80 store additions that you plan, what is the estimated CAPEX that you expect to do in Pantaloons, this question is because the store sizes that we have been opening are relatively lower now?
Sangeeta Pendurkar
So these stores, again, it is the function of the size of the stores.
I think with the new (Inaudible) 48.18 that we built, our investments in CAPEX per square foot have been higher, but ballpark, the investments would be in excess of about Rs.
150 crores that we're looking to invest in Pantaloons, purely from a store expansion standpoint and some renovations included too.
Devanshu Bansal
So, Ashish, just wanted to understand what is the rest Rs.
550 crores of CAPEX that would go into other segments like innerwear and ethnic, can you break up or segregate the CAPEX for each of the divisions.
Ashish Dikshit
I don't have the number right now, maybe Jagdish can share with you in greater detail, but a lot of it would be Pantaloons renovation, which would be over and above the expansion plan that we talked about with a lot of investments in digital and backend, which is warehousing and Aditya Birla Fashion & Retail Limited May 24, 2022 supply chain.
There will be subsequently a large investment that we have planned in our ethnic wear business, particularly Tasva where we plan to launch 65 to 70 stores next year, Sabyasachi where we are very expanding globally, Jaypore where we will be opening 15 to 20 stores this year on the base of 10 to 15 stores.
Part of Lifestyle brands would see investment in manufacturing as we scale up the backend of that businesses as the frontend is scaling very-very aggressively and as you might know, this is the only business where we have a manufacturing largely to ensure that the premium quality is kept in-house.
So, it's a whole bunch of initiatives around both growth, refreshment like Sangeeta mentioned for Pantaloons for renovation and for backend, which is both digital IT being one side and supply chain and manufacturing on the other side.
Devanshu Bansal
And lastly, we have delivered about 19% EBIDTA margins in H2.
So, I request you to provide some colour on margin trajectory going ahead given the investment that you are going to make.
This 19% sort of EBDITA margin can be sustained going into FY23?
Ashish Dikshit
I don't want to, at this point in time, give an indication on the margin.
I think you have seen the trajectory over a period of time, FY23, FY22 second half was buoyed by 2 factors, one is significant cost depression that we had done through efforts right across the organization, store network refresh, closing down lot of lower productivity stores, driving hard rental negotiation and other cost measures that we have taken and to that extent, the cost base itself has got slightly deflated, some of it would come back.
Part of our advertising investments, as Jagdish had mentioned in the opening speech will need to go significantly higher than where it had come down to in FY21 and FY22 where we had to take deep cuts on that and that will come back to the pre-pandemic levels.
So, these were 2 effects, which will probably moderate some of the good outcome, which is a more buoyant market, relatively stronger position in the market compared to other brands, at least in the Lifestyle segment.
The benefits of the refresh that we are doing in Pantaloons both on the product and experience, the store investments that we are doing.
So, to that extent, some of that will be offset by cost coming back to the levels that they were pre-pandemic and that would probably indicate a margin, which may be slightly lower than H2 that we have indicated.
Moderator · Conference Operator
Thank you.
The next question is from the line of Ankit Babel from Subhkam Ventures.
Please go ahead.
Ankit Babel
A couple of question.
The first is in this D2C business, should we expect some cash burn in the initial years?
Ashish Dikshit
There would be because while what we would acquire would be largely profitable businesses, though subscale, but to get them scaled would require investments, which may have to go through a period of losses in that business that you'll have to do to grow these D2C brands.
Some of them would be seller brands, which are intrinsically profitable and hopefully will remain that way.
Some of them are direct-to-consumer brands, which require deeper investment in early Aditya Birla Fashion & Retail Limited May 24, 2022 phase to acquire customers, create stickiness around that and they will go through a period of losses in that.
So, it is fair to expect some degree of losses in that business initially.
Ankit Babel
My second question is you did mention that you people are now confident of exceeding your FY26 guidelines with so many new brands coming into and scaling up the CAPEX also.
So, I understand that from the top line point of view, there is a visibility of exceeding the guidance, but from bottom line perspective also you feel that you will exceed the guidance for FY23?
Ashish Dikshit
Very hard to say, but I would say we should at least stay what we had indicated at that point of time.
So, investment into growth is meant to create a very profitable business, that's what drives our thinking on these and therefore there is no reason at this point of time to change that.
Moderator · Conference Operator
Thank you.
The next question is from the line of Abhishree Bang from JHP Securities.
Please go ahead.
Abhishree Bang
My question is that it is mentioned in market update that inflationary pressure is offset by price increase, so how is the response that Company got for this price increment?
Ashish Dikshit
Many of these price increases have been more continuous in nature than a one-time.
If you follow textile value chain, the raw material prices have been going up now for last 9 to 12 months.
Of course, the intensity may have gone up of late, but there has been a continuous price inflation in raw material prices and there has also been there for a consistent matching of that at least from the second half of last year.
Much of that will play out and will depend on how rest of the inflationary environment plays out in the country across other consumption baskets over the next 6 to 12 months.
We will have to keep a watch on it.
Too early to say that it would.
In past, there have been times when most of these price increases have been passed on and consumer has had very little volume impact, but I think this time will be guided by overall macro situation as far as the inflation is concerned and that may have some repercussion, but we will continue to keep an eye on it.
At this point of time, we remain hopeful from the current trajectory that most of this price increase will be absorbed by the consumer.
Moderator · Conference Operator
Thank you.
The next question is from the line of Yash Khemka from Yashwi Securities Private Limited.
Please go ahead.
Yash Khemka
I just had a question that what will be your guidance across surveillance in terms of revenue for FY23, could you throw some light on that?
Ashish Dikshit
We don't give guidance of that nature.
At this point of time, it's hard for us to put a number to it.
We have an internal target that I don't think it will be fair right now to give guidance on that.
Moderator · Conference Operator
Thank you.
The next question is from the line of Rajiv Bharati from DAM Capital.
Please go ahead.
Aditya Birla Fashion & Retail Limited May 24, 2022
Rajiv Bharati
On Pantaloons, you said that you have lost Rs.
150 crores in Q4. Can you provide what was the lost sale in H2, just to get a trajectory?
Ashish Dikshit
I think the number would be probably similar or little bit more around that.
So, effectively we have lost closer to Rs.
300 crores in this period due to various impacts that happened.
Of course, the number is much higher as you can make out in H1, but overall number for H2 also would be in extent to Rs.
250 to Rs.
300 crores.
Rajiv Bharati
And on the innerwear side, if I heard it right, you said we grew 15% YoY in Q4. Can we break this for Q4 and 33% for the full year number in terms of volume growth?
Ashish Dikshit
I won't have that number right now.
We can share with you separately.
Rajiv Bharati
And lastly on the sourcing side, on the innerwear particularly, did you see some disruption due to the issue in Sri Lanka?
Ashish Dikshit
No, we don't have much sourcing from there.
So, while initially it was an important part of our early years, but over a period of time, we have been able to diversify into other countries and to the extent, we have not got impacted or have a large business coming out of Sri Lanka.
That has not affected us.
Moderator · Conference Operator
Thank you.
The next question is from the line of Vaibhav Agarwal from Basant Maheswari Wealth Advisors.
Please go ahead.
Vaibhav Agarwal
My question is, we are raising about Rs.
2,200 crores in capital and assuming that we deploy this capital over the next 3 years by FY26, what is the kind of asset turnover ratio that we can expect from this?
Ashish Dikshit
We have laid down a plan very clearly, which was given at the beginning of last year where we have created both revenue profitability, overall projections on that.
That plan has got appended to certain extent because of losses that we have incurred in H1 particularly and to some extent part of H2 in FY22. A part of the capital would strengthen the balance sheet, which has got impacted by last year.
Rest of it would be ploughed back to actually accelerate some of the plans, which have not got played out last year.
Also, as I indicated, with the strength of platforms we have with the addition of Reebok now and some of the other ethnic wear opportunities that we played out, we are looking at exceeding those numbers.
So, projections will remain hopefully ahead of what we had predicted around FY26 numbers.
To some extent, this capital is making up for lack of acceleration that we have missed out in FY22 and to cover up for losses that we had in the first half of H1.
Vaibhav Agarwal
Would it be right to assume that the kind of momentum that we lost in FY22, we would have to dilute our equity to the extent of 7% or 7.5% for that particular loss in momentum in FY22?
Aditya Birla Fashion & Retail Limited May 24, 2022
Ashish Dikshit
Not at all.
I think it would be totally incorrect to see that way.
Equity is built with a long-term point of you with 4, 5, 6 years' growth trajectory, ambition and opportunity point of view and therefore it cannot be linked with one quarter and one half.
All I was commenting on was our projections for next 4 to 5 years.
They have been pulled back in last 12 months and some of that needed to be re-accelerated.
Equity is the long-term capital and it needs to be seen with that light.
What happens in one half or one quarter would obviously impact some of those, but that's not the most critical element when we think about long-term capital wise.
Moderator · Conference Operator
Thank you.
The next question is from the line of Ankit Kedia from Phillip Capital.
Please go ahead.
Ankit Kedia
Just on Reebok, the consolidation was supposed to happen from Q1. Has there been a delay given that globally the deal has actually completed, when can we see that happening in India?
Ashish Dikshit
The deal we starts seeing from quarter 1 of this year.
The deal, you are rightly saying, has got completed.
We will get the consolidated numbers from quarter 1 this year.
Moderator · Conference Operator
Thank you very much ladies and gentlemen.
On behalf of the Management, we thank all the participants for joining us.
In case of any further queries, you may please get in touch with Mr. Rahul Desai or Mr. Amit Dwivedi.
You may now disconnect your lines.
Thank you for your participation.