Mandhana Retail Q4FY17 Concall Summary

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About The Company

  • 2016 was a landmark year for Mandhana Group as a demerger with Mandhana In dustries was undertaken to create one of India's leading retail entities The Mandhana Retail Ventures Limited.
  • It entered into an agreement with "Being Human" foundation in 2010 for a period of ten years and since then have worked tirelessly to create a superior high fashion brand
  • The Mandhana Retail got listed as a separate entity in December of 2016
  • TMRV is one of the leading and fastest growing retail brands in the country
  • Company has a strong domestic penetration with over 400 point of sales and a large exposure in middle east through the partners of landmark group
  • The company has a strong balance sheet with almost zero debt and high EBITDA margins to the tune of more than about 20%
  • It has a strong and growing loyal customer base of about 4 Lakh customers
  • TMRV has a design team of approximately 25 people and also a merchandizing team of 30 to 35 people where the designers were from top institutes like NIFT and other top institutes of India
  • The brand today enjoys a high recall amongst its target audience, which is primarily in the age group of 18 to 40 years

Financial Highlights

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  • Strong balance sheet with almost zero debt and high EBITDA margins to the tune of about 20% plus
  • One time hit in finance cost of about Rs 2 Crores due to the interest on delayed income tax payments primarily on account of the demerger
  • TMRV increased the purchase terms from 35 days to about 60 days, which resulted in an increase in the trade payables going up and also an increase in inventory of Rs 9 Cr
  • Rs 22 Crores of income tax payment has been completely made last year . This was the provision of 2014-2015 and 2015-2016 in the books of MRVL; Ho wever, the same was not paid at that point in time primarily because independent numbers were not published for filing and income tax returns
  • Rs 13 Cr provision short term provision is for 2016-17
  • There is Rs 18 Cr inventory accounting for return and if added up the 04 sale in line of the last year
  • The entire inventory is on FG. The 18 Cr inventory is accounted on cost
  • The balance sheet had an advance of Rs 17.31 Crores in FY2017
  • There is also an end of season pricing point available which is actually more or less equal to the original pricing
  • The average sale of each EBO per year is around 2.5 Crores
  • Strong EBITDA growth of over 20%
  • Maintained industry leading margin profile of over 20% at EBITDA level and gross Ma rgins remained at high 50% levels
  • The A&P spends continue to remain one of the lowest in the industry at about 3%-3.5%

Change in Accounting Policy

  • From Q4FY17 the company has started accounting for sales returns, which are about anywhere between 12% and 15% on an accrual basis instead of actual basis therefore the topline of FY2017 has been impacted adversely because the company has accounted for the sales returns which was anticipated in April and May in the current year. This practice gives a more realistic picture of the actual performance during the quarter.
  • The chance in accounting policy is also in line with Ind-AS, which is going to get applicable for the company from next year. So rather than doing this change next year
  • TMRV has actually taken this change one step forward so from 2017-2018 anyways this accounting practice will have to be followed
  • Relatively for last year, the EPS after adjusting for the provisions would have been 9,10 Cr lower

Operational Highlights

  • Total number of EBOs and franchise as of FY 2017 end is 29 EBOs, 24 franchises got 3- 4 more stores in Mauritius, France and 3 in Nepal.
  • Bulk of exports business comes from Landmark group almost 95% would come from the Landmark
  • Added about 70 additional points of sales and an increase of about 20% over the previous year number
  • As EBOs are concerned, company works out a breakeven period of about 2.5 years for a payback on the investments
  • All EBOs are EBITDA positive
  • Goods sold at a mark down value, sold between 28% and 33% anywhere depending on the terms of the trade to franchises and expenses are borne by the franchises. This is the reason for EBO sales being booked at a higher per piece realization vis-a-vis franchise.
  • EBITDA margin of EBO stores is 33% and franchisees is 24%
  • Sales mix is 85% mens and 15% womens wear
  •  Renegotiated the agreement at the time of demerger and the royalty payout increased from 3% to 5.75% all inclusive
  • The revenue for Q4 2017 was adjusted around 562 and for Q4 2017 audited are 376 and difference between adjusted and audited revenue for Q4 2017 would be around 186 due to returns
  • Average return every year is around 10-15%
  • Revenue break up- EBO 33%, franchisees 15% and rest 52% accounts for shop and shops and the distributors and the exports, e-commerce.
  • Apart from brand 'Being Human', efforts on to having similar kinds of arrangements whose margins came down from 25% to 18% and the internal benchmark that management hope to sustaining is 18 to 20%
  • Except for the export and EBO sales rest all sales are in SOR basis, the system will move from primary retails to secondary sales and is one of the reason pro-actively taken the returns of the next year in the current financial year
  • In other brands, it may be a celebrity and non-celebritybased brand, but endorsed by a celebrity which can be anything as long as is exciting and will make money in the long run
  • On the breakup of inventory between RM and FG, everything is FG due to only buying finished goods which got Rs 18 Crores of inventory taken into the account
  • Franchise additionally given a markdown between 24% and 33% 
  • The creditor days where more favorable around 60 days and net working cycle is around 120 odd days which will remain at the level where it is
  • End of season, sales become a business reality in the current brand business socumulatively have to end up selling about 45% to 50% of the sales at discounted MRPs
  • In Q4 2017, purchase of stock in trade was 114% of revenues, which is very high when compared to Q3 2017 that is 41% and 73% in Q4 2016
  • A percentage was about 73% of Q4 revenue in 2016
  • GST is the most complicated subject in the industry right now

Future Outlook

  • The company hasn't given any guidance on growth but has assured that the company is a good growth trajectory for the next 2-3 years
  • The company will be actively targeting tier II towns. There will no change in designs and no different pricing strategy as the company believes that tier II towns are a ready market for international fashion brands
  • Expectation of around 20 stores for financial year that would be opened, breakup of around 10 to 11 EBOs and extra franchises for no CAPEX
  • Capex of not more than 5-5.5 Cr in current year
  • The company has recently planned to add another 10 to 11 EBOs in this year with an investment of 50 Lakhs per store excluding inventories. Each EBO store has an inventory of 4000 pieces i.e about additional Rs 20 lakh for inventory
  • The company wants an EBO to franchise ratio of 50:50
  • The long-term loans and advances were the deposits given for the store, taken on rent were expected the short-term loans and advances
  • In the next one-year , expecting to open 20 stores Beyond FY 2019-2020
  • The vision for the next five years is to have 1500 point of sales from current 400
  • Working capital cycle will remain around 120 odd days. No scope of bringing it down dramatically
  • The company ends up selling about 45% to 50% of the sales at discounted MRPs.
  • Exports have gone down as the company hasn't expanded women's range. Bulk of exports are from Landmark and they have stopped buying women's range
  • The company's sales in e-commerce has also gone down as it has made a conscious decision to not have any price difference between its brick and mortar and online sales
  • The company is aggressively expanding in new geographies esp US and as is expecting to add more customers
  • Inventory will remain where it is despite growth further so but trade receivables will go up for the only reason that most of sales are on Sales or return basis and so TMRV gets paid when the secondary sales happen X the stores from where they are being kept right now; till such time they continue to be in debtors.
  • Women's is a bigger market but it is a more complicated market.There is no target but yes there is a very clear intent to come up with a more aggressive women's wearline.
  • The company is talks with being Human brand to extend the association beyond 2020.
  • The company has recently renegotiated the agreement at the time of demerger and the royalty payout has increased from 3% to 5.75% of net sales all inclusive for the next 3 years

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