NYKAA — earnings call
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Prepared remarks
NYKAA INTERNATIONAL · MR. VISHAL GUPTA – EXECUTIVE VICE PRESIDENT, BEAUTY OWNED BRANDS
MR. VISHAL GUPTA – EXECUTIVE VICE PRESIDENT, BEAUTY OWNED BRANDS MR. ARVIND AGARWAL – CHIEF FINANCIAL OFFICER MS. SUNITA SACHDEV – IR & STRATEGY
Moderator · Conference Operator
MS. SHEELA RATHI - MORGAN STANLEY FSN E-Commerce Ventures Limited November 01, 2022
Ladies and gentlemen, good day and welcome to FSN E-Commerce Ventures Limited 2Q FY23
Questions and answers
Moderator · Conference Operator
Thank you very much.
Ladies and gentlemen, we will now begin the question and answer session.
Participants to ask a question via web please click on the raise hand button on the toolbar at the Q&A tab and click raise hand.
The operator will announce your name when it is your turn to ask a question.
Participants connected via audio call may enter * and 1 on the telephone keypad.
Ladies and Gentleman, we will wait for a moment for the question queue assemble.
Our first question is from the line of Nihal Jham from Nuvama.
Please go ahead.
Nihal Jham
Congratulations on the strong performance, three questions from my side, I will start up with the BPC segment where as you have highlighted the contribution margin is something that has seen a significant improvement whether you look at it on a Y-o-Y basis or over the last 3 quarters as the other data available, I just wanted to understand that would this be the right unit economics to understand that the business can track going forward and also Arvind if you could ballpark, convert this contribution margin to what will be the EBITDA margin for reference perspective?
Arvind Agarwal
So, I think in terms of improvement in gross margin driving that contribution margin that is quite good and I think at least 200 bps out of 259 bps is structural and should sustain as an advantage to us because now both online, offline channel and revised our own brand is also contributing well.
Very importantly, advertisement revenue is doing really well, in fact if you look at commentaries from various FMCG they talk about digital marketing taking a bigger share of their advertisement budgets, so that is good news, so we should be able to continue to monetize it better.
So, I think healthy gross margin is something that we are definitely looking forward.
In terms of fulfillment cost, we might invest part of the savings or efficiency that we afford into better customer experience, but it should operate at some 10% kind of level and marketing is a choice, in some quarters, we have the marketing spends based on brand building like quarter 3 is expected to be a big season, so you might operate there, but it should also operate with, let us say, to almost 150 bps improvement year-over-year in that range, so I think out of the 660 bps, 400 to 500 bps is something that we see a structure and we should also logically flow down to EBITDA as well, but yes, EBITDA we have added quarter in terms of employee cost lines as some of them are also investment to future especially technology function, so the operating leverage might come overtime.
I won't be able to give more guidance on EBITDA number here because it may be, people cost is something like we dynamically allocate across verticals depending on the lease quarter-on-quarter, quite fungible resource and may be when we come to the annual results, we will try and separate out EBITDA also for you.
Nihal Jham
Moving onto the second question on the fashion business, this was the quarter where there was some part of the festive period that come in, so we have seen a quarter-on-quarter fall in the orders that we service.
If you can just give some highlight on any specific reason for that?
Adwaita Nayar
I will come in there.
I think we are quite feeling pretty good about the fashion business from a year-on-year perspective, the fashion business, the core platform which I mentioned earlier is being robust 85% year-on-year on a base which is now significantly higher.
Within that, the orders have gone up on a quarter-on-quarter basis.
Yes, the sequential growth is more flattish than there is a serious rise, but every quarter on quarter we are taking the right decisions in terms of how much to invest versus how much to add to our contribution margin is then seen as to be FSN E-Commerce Ventures Limited November 01, 2022 it around the fashion side of the business where quarter 3 tend to be seasonally get a bit better, so for me it is always also a question of phasing out the growth and when is the right time to double down versus not.
Couple of other metrics I will share, because I think others might also have questions is on fashion we are also starting to see very interesting and strong repeat behavior, so this quarter, we have released it to the exchanges well earlier today that in quarter 2, fashion saw 66% of its revenue coming from repeat behavior, so it is also a quarter where we have seen repeat really starting to kick in and new customer acquisition is always something we can choose to exaggerate.
It is simply a question of how much we want to accelerate and what the pressure might be in terms of profitability with that acceleration, so it is the choice that has continuously been made.
Nihal Jham
And just one last question from my side was on the international business if you could just give some sense on timelines of the launches and the potential investments?
Falguni Nayar
On the international business, we have just recently entered into strategic alliance with Apparel Group.
It is now being ruled out in terms of setting up the subsidiaries and the operating entities we did to rule out that business in the region.
I would think that the first stores can be operational within definitely next 12 months and e-commerce website may take little longer or may be similar time.
So, yes, we are in the execution mode.
We will continue to build that business in our same prudent style that Nykaa has always done and our partners also aligned with that plan, so everything will be more organically almost being treated like a startup in the GCC country that it is trying to execute an omnichannel beauty multi-brand retailer strategy in the region.
Moderator · Conference Operator
Thank you.
We will take our next question from the line of Percy Panthaki from IIFL.
Please go ahead.
Percy Panthaki
My first question is on the fashion business, so the fashion market size is like 5 times that of BPC, we are relatively new entrant, very low base, very low market shares, at this stage of our lifecycle, the NSV growth being only 20% Y-o-Y seems a little surprising, I understand that few other parameters that you mentioned are trending positively, but finally they are means to an end and the end is the NSV growth, so can you comment on what really is pulling down this number and what can we do to really push it up more aggressively, that is my first question?
Adwaita Nayar
So, I think I’m going to take this question in two ways, so the first is, in terms of just talking about what pie of the fashion part we want, so we all know that fashion is a massive market for any estimate at least about 5x the size of the beauty market, however, we want to be extremely positive about what part of the pie we get.
Absolutely, it can be rolled out faster from the GMV NSV perspective, but we focus on the quality of the customer we are getting, the average order value that we are getting and sort of premium that we are being able to deliver on.
I think this is a very tricky industry and if you sort of loosen your reins on what type of customer you want, I think your profitability can get impacted faster than one realizes.
So, what I would say is that overarching comment is that it is actually easy to grow a lot faster, but by sort of more measured thoughtful approach being that even as the fashion market is so large, we want the particular FSN E-Commerce Ventures Limited November 01, 2022 play that make sense to us, that make sense to the Nykaa GMV and the Nykaa Strategy which is to build sustainable businesses with a clear path to profitability.
I think the second point I was going to make is, so keeping in mind that there is a thoughtfulness in terms of the type of audience, the type of customers we want, what I am going to also say is that comparing year-on-year also brings in the basket last years COVID dynamics which make it a base, but it is little bit hard to compare too.
There are two particular things I want to highlight, about a year ago, even before last, the peak of COVID, Nykaa Fashion in particular, so much lower returns than what we are seeing now, those lower returns which we saw a year and some quarters ago were actually deflated returns that were not sustainable.
So, as the world normalizes, return rates are just going up back to normal and actual level.
So, I think the NSV and GMV ratio were now seeing, sure there is some improvement still possible and we are working on that, but this is a more realistic ratio that we see and our understanding from the competitive dynamics is that the ratio that we have and the return percentages we have is still far lower than what the competition has.
So, that is one thing that is the base effect is a little bit noncomparable.
The second thing is, again in terms of base effect, last year we saw very rapid customer acquisition on the fashion side and I think Nykaa Fashion in particular more than beauty gained from the COVID phenomenon because there was a lot easier for us to acquire customers last year where a lot of people won't be going out and were online, so I think one thing we are struggling with our fashion side, it is not struggling, but it is an effect is that we are comparing constantly on a base which saw a lot of uniqueness given the COVID scenario that existed.
Falguni Nayar
I just want to comment and also say that our growth should not be judged as it is all responsible for this strategy, I think there is a clear plan at Nykaa to try and maintain a financial discipline or trying to balance our profitability that we generate and that is now back to acquire new customers, both for beauty, fashion or any other new business that we are building and again, yes, in that light you could say that the new customer acquisition for fashion could have been stronger or faster.
We definitely do see pretty strong returning consumer behavior and pretty much both for fashion and beauty business.
We do feel that if we can acquire more customers, it would be good for the long-term business, but we are trying to be just clear about the pace of growth if I may suggest that.
Percy Panthaki
My second question is on the International venture, so firstly, as you mentioned GCC market size is quite high per cap consumptions are significantly higher than India, so it is a much more mature market there, so unlike India where basically you are the primary driver of developing the BPC market in India, Nykaa is one of the primary agents of market development I would put it that way, in GCC your role is going to be different, so how do you see your role in GCC?
And secondly, when the market size is so huge and it is such a lucrative market, how is it that the e- com penetration is so low and people are mainly shopping online, so is this because it is a mature market, is this an established behavior and that is how the market has sort of evolved and therefore to shift people online is going to be something of a difficulty for you in your view, I mean any thoughts, I know I am asking too many questions within this question, there are many sub questions, but you get my general drift as to what I am sort of looking for?
FSN E-Commerce Ventures Limited November 01, 2022
Falguni Nayar
So, what I can tell you is that e-commerce penetration for beauty business is also going up, so I would now say that it is the market that geographically was not very widespread, but we would exclude Saudi Arabia.
Then, I think it was not geographically very widespread and as a result there is lot of retail happening through physical stores, but still there is already lot of influencer led commerce there as well and penetration of e-commerce is increasing, so we do see that it is again very interesting market from nd there is a huge socioeconomic changes happening in these countries, especially kingdom of Saudi Arabia, so it doesn’t feel that you are too late in the game, it does feel like early days, yes, there could be couple of players already established, but there seems to be room for more players including someone coming out of India taking a whole bunch of brands that would be interesting in the region from what the brand has to offer perspective.
That doesn’t mean we won’t do global brands, as we are multi-brand retailers that will retail both global as well as our brands of Indian origin.
Percy Panthaki
And any guidance you can give on the total investment over a 5-year horizon and the impact on the company level EBITDA margin due to startup losses of this venture?
Falguni Nayar
It is difficult to give that because we don’t have a very clear path spelled out, a lot of early work is going on, but if we can build this business in a way where our near-term profitability of physical retail business can help us invest for the online business that is how we would like to do it and finally, the population size is also limited.
I think it is larger population countries that tend to be quite difficult in terms of building out an e-commerce platform.
It is easier in smaller countries, but it all depends on whether there is an inherent consumption and are you able to appeal to that consumer and connect with that consumer and we do believe that with the strength of us as well as the Apparel Group which is a very large retailer with very extremely successful brand as a retail, both predominantly offline, but also online, we do believe that together coming up this partnership gives us the chance to succeed in that market.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Vijit Jain from Citi.
Please go ahead.
Vijit Jain
Congratulations on a great set of numbers, I have one question specifically on the fulfillment expenses, Arvind, you noted that there was a bit of that Q-o-Q increases owing to inflation, if I look at on a per order basis for BPC this looks like 10% Q-o-Q increase in fulfillment expenses, but on the other hand, for fashion there is a decent decline on a Q-o-Q basis, so I am just wondering does the diversion have to do with your regionalization of warehouse strategy within BPC and associated investments within that or is that something else?
Arvind Agarwal
No, I think first of all, beauty and fashion are at completely different phase of maturity, so they are not comparable in that sense and also because the operating model is quite different in beauty versus fashion, so if I explain you the beauty number itself, yes, there is some increase Q-o-Q because there is some inflation in the air shipment side of it.
It is also quarter just before the season, so we also make a step-up investment, so that we are ready for the season, so part of it, we will again convene into next quarter.
FSN E-Commerce Ventures Limited November 01, 2022
Vijit Jain
And my second question is, in the new initiative what you classify and that EBITDA waterfall that you showed obviously shows about 460 basis points of EBITDA impact, margin impact from investments in selling distribution, employee expenses, other expenses, etc., and obviously there is a contribution margin for the other businesses as well, so I am just wondering, is it fair to assume that there is about 400-450 basis points of cumulative EBITDA level impact with these new investments, that is the basic level of investment you are doing in these new businesses or is some of that also reflecting increases in beauty and fashion as well?
Arvind Agarwal
No, I think when I talk about the lines like selling and distribution, it is not necessarily on the new business.
Even our own beauty brands and fashion brands are also going into offline through modern trade and general trade, so even there the cost go up.
Even the beauty advisors in the retail store, so that cost also comes in there, so it is basically funding a reach and penetration for various businesses to get stronger offline play and omnichannel play, so we should not try and see it only as new business line.
I think the overall impact of new businesses we have given the contribution of this quarter is about Rs.
16 crores, so even if you annualize it, 4 quarters could be Rs.
64 crores, that is the level we are operating at, but these are also in a high growth phase, so as we scale them up, initially the losses will increase and overtime they will come down.
So, I can't give you any specific number of our new business investments, but we are funding it from our internal accrual.
That is very clear.
Adwaita Nayar
For selling and distribution expense, just to say what Arvind said that is coming from every business because we do believe in GT, MT distribution and a wider distribution and that is what we are putting in place for whether it is beauty private label brand, fashion private label brand as well as in eB2B business that we are building, both for our own brand as well as for third party brand because we believe that if you look at any data, there was a large part of the market which stand outside of both online and modern trade and we want to be players in those areas.
Vijit Jain
And one last question, just on the working capital side, the net change in working capital that you have in the first half of the fiscal year, should we think of that as kind of inventory buildup before the festive season and all the sales that you have in the post Diwali sales that you typically launch, is that how I should look at it, it is partly inventory buildup and partly some of the other investments?
Arvind Agarwal
I think you are partly right, so net change in working capital and we have made investments into inventories for sure, so that is definitely part of the reason it should unveil in quarter 3, but also because we opened three new warehouses in beauty, in even eB2B Nykaa distribution, we opened many new warehouses, so as we open more fulfillment center, we have to stop them up to make the regional availability up, so initially there is a catch-up investment to be done and then that gets stabilized over times, right, so before the season we have expanded the capacity reach and also within the existing warehouses, we are stocking up strongly before we get October sale or November sale.
Both are contributing.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Sachin Dixit from JM Financial.
Please go ahead.
FSN E-Commerce Ventures Limited November 01, 2022
Sachin Dixit
Congratulation on brilliant set of results, I had a couple of questions, the first one was with regards to the marketing spends, so is it possible for us to maintain, I know there were some brand market expense in the last quarter, this quarter that seems to be minimal, is it possible to breakdown the market expense like say influencer marketing and what the customer acquisition cost or performance market expense would be?
Arvind Agarwal
We have not given those kind of micro cuts and details into how we spend the marketing, but we can definitely say that 80-85% is digital marketing and content marketing, 10-15% sales above the line and brand building kind of spend, but that varies quarter-on-quarter.
Sachin Dixit
On the next question like, earlier we used to share like how many orders we are getting delivered within two days, next day, stuff like that, so is there any movement on those metrics as well or anything on regional warehouses?
Arvind Agarwal
In fact with the regional expansion of fulfillment center getting closer to customer, that metrics is only improving and we are at industry standard in terms of being able to deliver almost 98% shipment in less than 5 days and of course, we deliver much faster in metro and urban areas, and rural we are able to deliver 98% shipments in less than 5 days.
Falguni Nayar
The distributed warehouse will only improve, so maybe next quarter we will share some amount.
Sachin Dixit
And just one final question, there is a sharp drop in trade payables during the half yearly balance sheet data, what is the reason for that would be?
Arvind Agarwal
While we have big suppliers which are like big companies and they are self sufficient on working capital, but we also have large D2C suppliers and we want them to stock up sufficiently or invest through manufacturing line and then they supply to us, we have been paying them faster, so that they can also ramp up ahead of the business.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Sheela Rathi from Morgan Stanley.
Please go ahead.
SheelaRathi
My first question was with respect to the initiative you had taken last quarter with respect to the everyday value offerings, so just wanted to get your perspective in terms of how they are doing on this point, what is the kind of customer traction you are getting?
Anchit Nayar
Sheela, what I will say is that as we discussed in the past, given that we are already very well established and the dominant leader of the beauty side of BPC, we also want to create a sizeable business on the personal care side.
Reason is that we believe our existing customers can transact with us at a much higher frequency if they begin to buy personal care products on our platform and so that was really the genesis behind the Nykaa Every Day.
What I would say is that it is bearing fruit, obviously we don’t disclose, we are not breaking it out, but what I can tell you is qualitatively it is bearing fruit and we are seeing consumers who previously only looked at Nykaa as a beauty or as a cosmetics retailer, now looking at us more holistically for their more FSN E-Commerce Ventures Limited November 01, 2022 personal care needs including hair care and skin care and other categories and I think that reflects in our category mix.
Now hair care, makeup and skin care are equal parts of our overall business and other categories like hair care, fragrance, deodorants, wellness, oral care is also growing for us and I would say that is playing on nicely and we are putting a lot of effort into driving that initially and I do believe that with the regional roll out warehouse that Arvind spoke about that would only help further improve our commitment to faster delivery for our consumers which is slightly more important when buying personal care items than when buying more expensive beauty items.
I think the regional warehouse strategy continues to play out and will have additional benefits for everyday strategy.
Sheela Rathi
Just a follow up here did you have a number in mind with respect to the roll out of fulfillment center or warehouses in the next few quarters?
Falguni Nayar
No, it is early days, so at the moment we are going into 5-6 large states, states like Uttar Pradesh and some of the other bigger states and then based on that experiment, we may take decision to go into further.
Arvind Agarwal
I think we have added significant CAPEX in fulfillment center and generally the cycles follows in a manner is we try to put a few centers in H1, so that we can really use them in H2 when the season picks up.
I think most of the investment for this year is kind of done, we might have a couple of more and I am talking about beauty side of it, but yes, of course in distribution we will have to keep adding, it has been in the buildup phase.
I think if we look at our IPO objective and how we raise our money and what we declare there, we have given the schedule of utilization of IPO proceeds into fulfillment center and one-third of that is utilized by now, two-third will be utilized in next 2 years.
So, that kind of gives you idea how we are building out the capacities.
Sheela Rathi
Just one more question here on the beauty side, with the complete reopening happening especially in the last few months, what is the kind of customer traction we are seeing in the physical stores and is there any shift with respect to demand moving away from online to offline?
And just a part of it in terms of delivery, are we still following the hyper-local delivery model now where we are using inventory from the stores to deliver to the customers in that locality?
Just two questions and that is it.
Anchit Nayar
May be I can get off and others will add, so Sheela what I would say is that we did see a strong rebound in physical retail in the beginning of the quarter, but to our pleasant surprise, it doesn’t seem to be a cannibalizing e-commerce business, so both are growing at a healthy rate and I think that is reflecting in the beauty vertical GMV and net revenue growth numbers that we have seen year over year.
So, we have to keep in mind that online penetration for beauty consumption in India today is still so low at less than 10% and 90% of BPC consumption has been offline, so even if there is a rebound in offline, there is this macro trend in India which shifts from offline to online which is inevitable and that trend continues to remain.
So, I think in some other metro markets where there is cannibalization and demand does shift from online back to offline, in a very nascent market like India where penetration is still so low, not only for beauty consumption, but especially for beauty consumption online, this macro trend we believe will continue to play FSN E-Commerce Ventures Limited November 01, 2022 out and it is reflecting in our numbers.
Both online and offline grew at a very healthy rate, but yes, I think retail has rebounded nicely post pandemic clearly.
Arvind Agarwal
I will just supplement it, if you look at the beauty growth chart H1 of last year, we are growing at about 32% and actually this year we have grown about 39%, so there is a step up which means that people are going out and shopping in offline, but at the same time they continue to shop online, so being omnichannel has really helped and I think the normalcy coming and then COVID free shopping, our growth rates have actually improved in beauty business.
Sheela Rathi
Anything in the hyper-local delivery models?
Falguni Nayar
Yes, hyper-local was only used during lockdown periods because in our industry air- conditioning is needed for many of the luxury products, so during that time when the malls were shut, we used hyper-local and that was the capability that was developed with the perspective to fulfill from there.
On an average we have 4.5-5 items in a cart, it doesn’t make a sense for us to fulfill on hyper-local plus our stores are very expensive in the state and not conducive to packing and shipping products from there, so just hyper-local is being used only to manage certain slow moving inventory and we usually fulfill from our warehouses.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Garima from Kotak.
Please go ahead.
Garima
My first question really is on the BPC segment, now when you show the contribution margin calculation, which in Q2 FY23 was at 24% contribution profit margin to revenue, does this also fully account for the rent that is payable for the physical stores that you operate?
Arvind Agarwal
Rent for the store come below EBITDA like I showed you EBITDA to PBT that range, so because these are long-term leases, we account them as a lease amortization cost and there is also interest element to this.
So, it doesn’t come in contribution.
Garima
I I have to really see profitability, I understand that rent is a fixed cost, but to some extent it is variable because the more store you open, the more rent you will need to pay, so ultimately some kind of an adjustment should be done to understand the contribution profitability better, so anyway that point is clear.
Second question really was could you help us understand the period ending debt and cash because sometimes these items sit under multiple heads and it does look like you have consumed a fair amount of capital during the first half of the year, so how should we look at this going forward?
Arvind Agarwal
Cash balance at the end of September is about Rs.
365 crores and you are right that we have made significant investment in first half of the year, but you see most of it is working capital which should unwind in H2.
Of course there is CAPEX also, but CAPEX is not very big element.
Two-third of the investments is going to working capital.
Garima
So, you are saying there are some seasonal factors here?
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Arvind Agarwal
Absolutely.Also there are some payouts for the acquisitions we have made, so in the cash flow you have seen almost Rs.
70 crores that we have paid out for Earth Rhythm and LBB acquisitions.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Jay Gandhi from HDFC Securities.
Please go ahead.
Jay Gandhi
I am saying in a market place model, I am talking about fashion, is fulfillment cost a passthrough?
If so, then why do we have a fulfillment expense line item in the first place?
Adwaita Nayar
So, it is a mix, you know there are many brands with whom we work on a more holistic margin structure and which will would not be split out and then there is small number of brands to which we split it out.
The way to read the fashion P&L if we can go to the contribution margin slide I can walk you through it.
Right here in the second column you can see if I can draw your attention to the bottom side rows, so this is kind of apple-to-apple we are looking at things and not fairly on revenue because revenue will have the impact of the commission/ market place mix structure that affects our number, but in these bottom side where you can see that 44.6% is the margin that we are getting typically from brands, these includes your product margin, it includes ad income, it includes services income.
What I would say it is not all brands follow a very consistent structure, some we get an over-arching margin which includes all inclusive, but others we do itemize.
This is the all-inclusive amount that we get from brands and then we make our expenses better than fulfillment, better than marketing and so far.
Jay Gandhi
Second is on eB2B store, I wanted to understand in steady state, what does the working capital of that business look like, is it a negative working capital business or is it a positive one or deeply negative one or a neutral one?
Arvind Agarwal
Of course currently, it is in the buildup phase, so our inventory is around 45 days and we enjoy 30 days of credit from the suppliers, so there is some investment there, but in the long run, in this business actually it is possible for a negative working capital because you will still enjoy 30 days trade credit, but you will build out a network which will supply to these retailersalmost every week or alternate week which means that you will be able to monetize it faster than what you stock up and pay to creditors.
So, it is possible to have negative working capital, but that is few years away in my view.
Jay Gandhi
Got it and then no receivable?
Arvind Agarwal
No, even if we give credit to the trade, it would be financed by NBFC partner, so we do it right now prepaid or cash on delivery, but should the retailer choose to enjoy some credit or let us say 15 days and we pass it on to NBFC partner to fund them, so it is not our receivable at all, we do cash business.
Moderator · Conference Operator
Thank you.
Our next question is from the line of Tejash Shah from Spark Capital.
Please go ahead.
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Tejash Shah
My first question pertains to BPC store expansion strategy, so we have now 121 stores in 53 cities, it looks that we are going forward over debt in the store expansion strategy, so just wanted to know the insights we are working with honestly?
Rajesh Uppalapati
Our current status today, we have about 120-130 stores across 53 cities.
So, we do believe that it is already quite a wide footprint as you were saying.
Now with regards to debts, certain cities like whether it is Delhi NCR or Mumbai or Bangalore, can have up to anywhere from 6 to 10 store whereas smaller cities might have just 1 or 2, so I think we are taking a very measured approach.
We understand the market well.
We know where the demand lies, thanks to our e- commerce platform and we know where the customer lives.
So, our purpose is to build the stores where we know there is demand for the brand which we are selling.
So, with the 2 formats we have thought the luxury store format as well as the on-trend store format, we know which catchment requires which format of stores.
So, given the current formats we have as well as our current understanding of the market, we believe that as we said before publicly that about 300 plus stores are doable within the next couple of years.
So, we are well on track to achieve that kind of roll out and it should be across the top 100 cities.
We have 53, so we will probably open the remainder of the stores across until we get to top 100 cities where we do see strong demand from our online business as well.
Falguni Nayar
But conceptually we have a format where we are a destination store rather than neighborhood stores for now and we would retain that strategy as currently we are very focused on beauty rather than personal care and we are very focused on being destination store.
Tejash Shah
Second question pertains to our inventory, in fact I have slightly different read on our inventory considering that Diwali and festive season is in 3Q and also the fulfillment center numbers have also increased considerably.
I thought inventory has actually not gone up much, so just wanted to understand how seasonality plays between Navratri, Diwali and festivity if you can represent how we should build for an inventory buildup in coming quarters?
Falguni Nayar
Actually, on the beauty side, we work on about a 45 day forward looking inventory and for imported brands and some other brands, we may have over 60 days inventory.
Within that we keep trying to optimize and buy the right inventory and for us in fact starting with Navratri the busy season starts, but at the same time our peak event is in November.
Arvind Agarwal
I think it is a 2 step up.
One step happens in September end or beginning October.
The second step happens in end of October or rather beginning of November as our biggest sale is in November and then that will unwind towards the December.
So, part of the step up you will see in these numbers, part of the step up you won’t see in quarter numbers because that you will unwind within the quarter itself in Q3.
Tejash Shah
And lastly one book keeping question if I may, other current assets have increased Rs.
130 crores odd from March balance sheet, so what does this pertain to?
FSN E-Commerce Ventures Limited November 01, 2022
Arvind Agarwal
Other current assets have increased because we have paid more advances to suppliers and that is because again and especially on our own brands, we need to reverse into supply chain from importing the raw material stage and since the own brand is now picking up as a business, so we have paid some advances there.
I guess more of our working capital investment should unwind in quarter 3 and there is also increase in the GST balance which also sits under the same grouping, balance with the statutory authorities, so in line with inventory going up, GST input also goes up.
Again, that is also timing difference, once we sell the inventory, then we will be able to offset this input against the output with it.
Moderator · Conference Operator
Thank you.
Ladies and gentlemen that was the last question I now hand the floor back to the management for closing comments.
Over to you.
Falguni Nayar
Thank you everyone for being on the call and patiently listening to our presentation and our sharing of our business updates.
I very much appreciate it.
Thank you very much.
Sunita Sachdev
We would like to thank Morgan Stanley for hosting the call for us.
This marks end of the call.
Thank you.
Moderator · Conference Operator
Thank you members of the management.
Ladies and gentlemen, on behalf of Morgan Stanley that concludes today’s session.
Thank you for your participation.
You may now disconnect.