Arvind Fashions Ltd

NSE:ARVINDFASN

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, good day, and welcome to the Arvind Fashions Limited Q1 FY '24 Earnings Conference Call. [Operator Instructions]. Please note that this conference is being recorded.

I now hand the conference over to Mr. Ankit Arora, Head of Investor Relations at Arvind Fashions Limited. Thank you, and over to you, sir.

[Ankit Arora, executive]

Thanks, [ Tovin ]. Hello. Welcome, everyone, and thank you for joining us on Arvind Fashions Limited Earnings Conference Call for the first quarter ended June 30, 2023. I'm joined here today by Kulin Lalbhai, Vice Chairman and Non-Executive Director; Shailesh Chaturvedi, Managing Director and CEO; and Girdhar Chitlangia, our Chief Financial Officer.

Please note that results, press release and earnings presentation had been mailed across to you yesterday and these are also available on our website, www.arvindfashions.com. I hope you had the opportunity to browse through the highlights of the performance.

We'll commence the call today with Kulin providing his key thoughts on our business performance for the first quarter. He will be followed by Shailesh, who will share insights into key highlights and financial performance. At the end of the management discussion, we will have a Q&A session.

Before we start, I would like to remind you that some of the statements made or discussed on this call today may be forward-looking in nature and must be viewed in conjunction with risks and uncertainties we face. A detailed statement of these risks is available in this quarter's earnings presentation. The company does not undertake to update these forward-looking statements publicly.

With that said, I would now turn the call over to Kulin to share his views. Thank you, and over to you, Kulin.

[Kulin Lalbhai, executive]

Thanks, Ankit. A very good afternoon to you all. Thank you for joining us for the Q1 results. We are pleased to continue our trajectory of delivering improved financial performance even though the overall demand environment has remained challenging during the quarter. While overall sales grew by 4%, largely driven by the retail and department store channel, we have been able to improve our EBITDA margin by over 190 basis points over the same quarter last year.

Our sharp focus on continuing profitability improvement has been aided by operating leverage and higher gross margin through healthy [indiscernible]. We have seen premiumization across categories and brands like Tommy Hilfiger and Calvin Klein, which have benefited from this trend and have delivered excellent performance. We have invested a lot of efforts over the last 2 years in putting sharper controls over inventory and better, which is yielding strong results in managing overall working capital.

In response to the slowdown, we managed our inventory in an agile manner, which helped lower our inventory days by 4 days and that the stronger retail mix helped us lower our receivables by 11 days leading to an overall lower gross working capital cycle of 15 days.

While we expect the demand environment to gradually improve by the festive season, we have multiple growth drivers, such as a strong store opening pipeline, the scale-up of our direct-to-consumer online business and high growth in adjacent categories. We continue to remain focused on improving profitability this year through efficiency improvement and healthy sell-through and also in controlling our working capital, thereby leading to a higher return on capital employed in the near to medium term.

I would like to now hand it over to Shailesh Chaturvedi to take us through the specifics in more details on our financial performance.

[Shailesh Chaturvedi, executive]

Thank you, Kulin. Good afternoon, everyone. Under the background of high yield of last year and amid soft market conditions, [AFL] has delivered an industry of INR 957 crores in this quarter 1 with a growth of 4%. The like-to-like retail growth in this quarter is 4%, which has come on a high base of last year where the retail like-for-like last year in the same quarter had grown [up to] 25% over pre-COVID level. EBITDA has reached INR 116 crores, an increase of 24% for last year quarter 1. As we launched the new fall holiday season this week, let's discuss AFL performance for the full season of spring summer '23 with calendar dates going from January to June '23, incorporating two financial quarters, quarter 4 of the last year, and quarter 1 now, of this financial year.

Performance in season is key because business is run on seasons, and we have to execute rigorously to win the season. In that sense, we had a very good spring summer '23 seasons, where AFL PBT grew 115% in 6 months of Jan to June '23. We had launched spring/summer season in February '23 on time with good quality rigor and had completed bulk of wholesale trade billing by March.

This timely execution led to good NSV growth, healthy like-for-like retail growth and doubling of PBT for last year's same period. The bulk of wholesale billing was in Jan to to March quarter, where PBT grew by 255% and then in this quarter, this quarter, Q1 of April to June '23, PBT has grown at 9%. This doubling of PBT in just concluded spring/summer '23 season has been very encouraging, and we will launch fall/winter season with a lot of energy.

Coming to this quarter, quarter 1 FY '24, we started the business with good stock levels in the market since we had executed season launch well and this led to good retail growth of more than 13% in this quarter in both retail as well as in department store channels over last year quarter 1. Under the current [indiscernible] condition, this mid-teens growth came with a 2% higher discounting, although we did not go early on sales. While industry of preponement of sales, but we stuck to our calendar and our seasonal rhythm.

The overall sell-through for the season has been industry leading, and that has helped us keep our inventory levels under check and deliver stock terms close to 4 as guided. Good retail throughput also held us with receivables, which are down by a good INR 100 crores over last year despite difficult market conditions.

Overall balance sheet KPIs were met with tight control. While retail and department store grew very well, there was a muted number in this quarter in MBO wholesale channel because we had completed most of the building of our season orders in the previous quarter. This business has grown more than 50% in Jan/March quarter, and this key channel has grown at a healthy pace of more than 20% in the full season spring/summer Jan to June.

With the efficient season launch, we had hoped to get repeat orders in April to Jan quarter from [freight] channel. However, these repeat orders did not certify this year because of soft market conditions and our price rate policies did not allow any further billing. We continue to expand our distribution, and we opened 45 mono-brand stores in this quarter. Adjacent category expansion also continued well especially in a U.S. Polo association, which remains a key, strong and vibrant brand.

In this category expansion, I want to call out the fantastic performance of USPA [footwear], which has grown more than 30% and delivered healthy double-digit operating EBITDA in this quarter. The thrust of online business, which contributed nearly 35%, revenue is on rapidly building still in B2C marketplace model where we create the whole experience for online consumers, including product assortment and pricing.

Builder of marketplace and only network is the priority of B2C part of online, which has grown by more than 70% and has contributed to nearly 35% of overall online business. The wholesale online business has remained muted in the current market condition.

We will get good pressthroughs and tight control of sourcing costs, the GP has moved up to 52.8%, an increase of 340 basis points, with greater than 15% growth in retail, the share of retail and revenue mix has gone up by nearly 5%, and that has also helped increase GP percentage because retail channel has higher GP. There is some variable expenses like commission, royalty and supply chain expenses come below GP. Of this gain in GP, a healthy 190 basis points has flown into EBITDA which has grown in value by 24%, reaching margin level of 12.1% in this quarter.

This [1.9%] gain in EBITDA has come after we had 3.3% increase, 330 basis point increase in EBITDA in the last full year as we continue our journey of improving profitability. In this quarter, besides gaining GP percentage, the EBITDA has also been helped by 50 basis points by scale leverage coming from lower manpower costs.

Our investment in advertising has been slightly above budget. And in this soft market conditions, we continue to invest behind marketing wholeheartedly. While PBT has more than doubled in spring/summer season, this quarter saw 9% growth in PBT partly affected by increase in interest costs, which are in line with increase in repo rate, while debt levels have remained stable.

To summarize, while we have seen soft market conditions, fewer waiting days, higher base of last quarter -- last year and early phasing of wholesale billings, we are entheused by spring/summer performance where AFL has delivered industry-leading sell-through, has doubled PBT and has kept balance sheet under tight control.

With that, we can open up for question and answer.

[Operator]

[Operator Instructions]. The first question is from the line of Varun Singh from ICICI Securities.

[Varun Singh, analyst]

Congratulations on good set of performance, especially your performance in emerging business has been very much heartening looking at both the revenue growth as well as margins, et cetera. So my first question is an emerging brand itself that this strong performance, 14%, 15% growth and strong EBITDA margin. So I mean, if you can help us uncover the reasoning that where has it come from? And also we see [indiscernible] of same-store sales growth, if you can highlight, I mean, any of our strengths out there.

[Shailesh Chaturvedi, executive]

As far as emerging brand portfolio is concerned, most of the impact is because of very good performance of Calvin Klein, CK. But I want to just add one point here is that we've been doing a lot of cleaning up of our brand portfolio and the tail brand portfolio has been sort of cut down and we stopped losing money. So in this quarter, we have benefited from reduction in tail brand losses that we have seen in the previous quarter. So that has also helped and on top of that, the main reason is the Calvin Klein performance, which has grown really well in this quarter.

Despite market conditions, the like-for-like growth is in double digit and the overall growth is higher than that. And also, the profitability of CK is very good. So to summarize, Calvin Klein is the main -- the performance of -- good performance of Calvin Klein is the main reason for improvement in emerging brand portfolio.

[Varun Singh, analyst]

Understood. Got it, sir. And sir, Calvin Klein would be roughly now what -- it will be contributing what percentage of our total emerging brand revenue, a bulk of numbers should help.

[Shailesh Chaturvedi, executive]

See, if you see the number. It's slightly higher than 50% of the Emerging Brand portfolio.

[Varun Singh, analyst]

Okay. Got it. Understood, sir. And sir, second question is on the profitability in the Emerging Brands segment. So how sustainable is the current level of margins, if you can guide something out here?

[Shailesh Chaturvedi, executive]

Yes, I would say that CK is on strong footing. There is a good momentum in Calvin Klein brand growth. The sell-throughs are industry-leading there, the sales density, not on the best in the industry -- there is a good scope to expand that brand further in many more towns, et cetera. So there is a good momentum in that brand and that would really positively impact the Emerging Brand profit. Also, the losses on the tail brand will continue to reduce, right? I mean that portfolio that part is getting cleaned up. So the emerging brand profitability will remain healthy and because of both the reasons of tail brand losses coming down and good performance of Calvin Klein.

[Varun Singh, analyst]

Understood, sir. So this performance would be sustainable going forward.

[Shailesh Chaturvedi, executive]

Absolutely.

[Varun Singh, analyst]

Yes. Understood. And sir, my second question is on the [power] brand front, I mean, which is a significant chunk of our total revenue. So that portfolio, I mean, there was a little bit of underperformance, of course, I understand due to high base and slowdown in discretionary consumption. But still, I mean, how are you looking in this segment, the overall business outlook for next quarter, which is again likely to be relatively subdued. And given our prioritizing of profitability over revenue growth, which is not participating much into [indiscernible] and discounting, et cetera. So how should we look at the revenue growth in the Power Brand segment. I mean, if you can highlight both -- I mean, in terms of SSG and retail expansion from both as well, even the profitability focus at that point.

[Shailesh Chaturvedi, executive]

Let's look at our Power Brand portfolio, I put the -- my comments in 3 parts. I'll have still with profitability then about the the sales part of this and the distribution expansion coming to that.

So if you really look at Power brand, they've been really well if you look at -- compared to the last year, the -- if you look at last quarter last year -- same quarter last year, the swing in EBITDA was almost INR 100 crores and we have grown the profitability of the Power brand. Last year, we increased by almost 300 basis points. So now today, we are at an EBITDA base of close to 12.5% in the Power brand portfolio. This quarter is also close to that base in that and we have grown the profitability of Power brand in this quarter also by 130 basis points.

So with that focus on profitability, the rigor on launching season properly, advertising, retailing, so that we full price sell-through happens, discounts and all that rigor will continue, and we hope to sort of continue to expand from this current base of around 12.5% going forward. Some of the brands are already at high double digit -- already at double-digit [indiscernible] EBITDA and then others will improve.

Now as far as your question on the top line -- on the revenue is concerned, this quarter, we do understand that the base effect has sort of hit the Power brand a lot more because last year, base was very, very strong, and the business has done very well last quarter and we had grown in the last quarter, almost like 40% of the pre-COVID level in quarter 1 last year. On that base now, we are reviewing the data that it has grown further under market conditions we [indiscernible].

Now if you look at our growth drivers, I mean, I can talk about top 3, 4 drivers, and we believe that all those drivers are still intact. The market may be soft for a quarter 2 may come back as the industry faces towards the festival time. But in the medium term, we are very confident that we'll continue to grow our portfolio. We've been guiding between 10% to 15% range and we continue to grow at that pace.

Now as far as the store expansion, you asked that specific point, we opened 45 stores, a lot of them in the Power brand in this quarter. And the last quarter also we had grown almost 35 stores. So we have a guidance of around 200 stores a bulk of those stores come in the Power brand and we see a lot of opportunity to expand in many more markets and the other like towns of big metros. And we see a huge energy for expansion in our Power brand and that part should continue.

Second part is the adjacent category. We continue to add more categories into Power brands and grow with them, for example, in U.S. Polo footwear has been a very, very good example in the industry. Footwear in this quarter has grown more than 30% with pre-IndAS double-digit EBITDA. We're adding more categories like innerwear, we're growing it. We're growing small leather goods. We have kidswear is a big focus, which has also grown double digit in this quarter. And yes, we keep looking for opportunities to expand adjacent category in Power brand.

Tommy Hilfiger has a very wide portfolio of adjacent category and the revenue share from store is more than 20% from the adjacent category. CK has very strong underwear line and a bed line and a footwear line. Likewise, we're adding other categories in Arrow and Flying Machine also. So believe that the adjacent category will also continue to grow this business of Power and lastly digitalization. We -- I just mentioned that we have really -- we grew our B2C part of online by 70%. We are linking our stores with Omni and that will also give [flip] to the growth of that we're building scale in the B2C Omni player in marketplace also.

So we see that whether it's digitalization, whether it's adjacent category or whether it's store expansion and the like-for-like growth, we grew at 4% retail. So all those factors are very, very full of energy, few quarters here and there sometimes the market may be very tough, but -- or the base may be very large or [indiscernible] get impact. So for example, in this quarter, our India billing got impacted because like I mentioned, in the previous quarter, we did huge billing, and we grew at 50%. So overall, in the season, we grew spring/summer, 6 months by 20% in that channel. So I believe that Power brand has a lot of energy ahead for growth.

[Varun Singh, analyst]

Got it. Got it. And in the category extension, which you spoke about of our relative success, which category extension as per -- I mean, looking at the overall revenue, would you say that has been most successful, in terms of revenue side. Will that be innerwear? Will that be footwear in terms of overall whatever category expansion that we have done so far.

[Shailesh Chaturvedi, executive]

Footwear clearly, as a business, has crossed at a scale, which is more than INR 300 crores looking like somewhere in that zone and plus of that. Also, kidswear is another category which has already got scale, and it's a very healthy business running into hundreds of crores. So those two categories have already got the traction. And we are building many more categories. Innerwear is another category, which also has a INR 100-plus crores of revenue, and that's all these are multi-hundred crores sort of kind of categories. And we'll keep looking at other opportunities to grow adjacent categories.

[Varun Singh, analyst]

I'm sorry, so you said innerwear INR 100 crores?

[Shailesh Chaturvedi, executive]

Innerwear also at this rate will be upward of INR 150 crores that scale and the adjacent category will continue to grow.

[Varun Singh, analyst]

Understood. And we will also be profitable in [indiscernible] category?

[Shailesh Chaturvedi, executive]

Yes. So very clearly, we don't have a burn model. And even in innerwear category where we have seen a lot of players investing ahead and burning money. We never followed that model because we -- our job is to increase the percentage profitability of AFL. So we've been very, very cautious on profitability front and we would always -- between scale and profitability, we will always be on the side of the profitability.

[Operator]

The next question is from the line of [indiscernible] Jay from [ SLAN ] Investments.

[Unknown Analyst]

Congratulations on a good set. So my first question is to be able to better understand the quality of growth that you've done in your Power brands. Could you help us understand how do we do in USP, Arrow and Tommy specifically?

[Shailesh Chaturvedi, executive]

See, business has been growing well. And like we said in this brand, retail and the department store channel have grown close to 15% and above. We have seen a little bit of a muted response from the Indian channel, which I mentioned, but that's a quarter-to-quarter phasing issue, but overall, the season that channel has grown really well at more than 20%. So these brands are on a good growth path.

The issue right now has been our scale and a lot of these brands have really grown very large scale last year and the market conditions have been a little muted and the wholesale billing sort of impacted, but all these brands are growing well. In last 2 years, [indiscernible] revenue, we've grown our revenue by more than INR 2,500 crores in the last 2 years.

[Unknown Analyst]

So sir, retail has done well. So would our understanding be that Arrow would have faced some compression in terms of demand?

[Shailesh Chaturvedi, executive]

See, when it comes to specific to Arrow and specific to one quarter, this season, the wedding rates were less. We saw less number of weddings in the market and we have seen in the discussion with the industry players also. So yes, for -- if you look at a 3-month quarterly basis, yes, there has been pressure on brand, which has wedding as a key part of the occasion. But other than that, Arrow has been growing well, last year also grew really well.

[Unknown Analyst]

All right. Sir, my second question is, we've seen improvement in the gross margin. Now what I want to understand is, how much of this led you to raw material? And second is we mentioned in the presentation that there was higher like-to-like and full price sales. So I just wanted to understand the gross margin expansion. And secondly, we've also not done [ USS ] in this quarter. So how should we look at gross margins going ahead for the year?

[Shailesh Chaturvedi, executive]

See the -- we've increased our GP by 340 basis points in this quarter. And I would say very simply put, I mean if I take 60-odd percent increase, 2% increase has come from cost. What you just said the raw material prices. We have got very hard to manage the cost of -- we benefited from the softening of cotton prices, but then there are also further rigor on the cost management and new methods of costing. So that out of the 3.4%, 2-odd percent has come from COGS improvement and 1% has come through a richer channel mix.

Our revenue share from retail this quarter went up by nearly 5% because the retail grew at 15% plus and retail is a higher GP channel. Of course, there are some costs which then come below GP as variable in terms of royalty and commissions. But at the GP level, we got 1-odd percent benefits from channel mix, richer channel make, higher revenue of retail and the balance 2-odd percent came from COGS management.

[Unknown Analyst]

All right. All right. Sir, my last question is, just if I look at your BPH profitability, so we've done about INR 12-odd crores. So if I just go back to the [unit] calculation, we come with about INR 28 crores, INR 30-odd crores of loss in the other businesses. So our understanding is, obviously, USPA is profitable. So Flying Machine and Arrow would be [indiscernible]. So just wanted to understand how should we look at this number? And is INR 30 crores the number that we are looking at?

[Shailesh Chaturvedi, executive]

See, if you're -- I'm assuming your question is on this particular quarter, right? I mean -- and not a little more fundamental. So if you look at our portfolio, it's a fact that Arrow and Flying Machine are at a low close to breakeven profitability. Whereas U.S. Polo and Tommy and [ CK ] and Footwear, they are all at double-digit pre-IndAS EBITDA, that's where we are.

Now if you talk about this particular quarter, we saw three issues in our couple of brand businesses. One is the base of last year. So base was very, very large last year. But I'll leave that for the time being. I'll come to this season because of the soft conditions, our discounting went up by 2%. And that had impact on the EBITDA because discounting went up by 2%, so the EBITDA came down by that amount. And then I also mentioned that [indiscernible] bulk of the billing happened in the previous quarter, where the MBO channel grew by 50%, whereas overall for spring/summer, it grew at 20%. So we had a hit from that channel, which is a temporary thing. I know the order flow for fall holiday and the channel is really vibrant and it's a key channel. So that will come back.

But if you talk very specifically to just this quarter, 3 months, then we had a hit from this channel in the brands that we are talking about. So our journey is we have these couple of brands where double-digit pre-IndAS EBITDA includes like all the brands that you mentioned, and in Arrow and Flying Machine, we have a low profitability. Arrow used to lose a lot of money. Last year, we had a very large swing in Arrow, almost INR 80 crores EBITDA swing in the previous year, and we brought it down to breakeven level.

And this soft market conditions despite increase in discounting despite NBO phasing and bulk of the NBO coming in the previous quarter, Arrow has remained breakeven brand. It's not lost money. So that's encouraging, and we believe that as the market improves and as the wholesale, again, billing picks up, the business will go further for Arrow.

[Unknown Analyst]

All right. And sir, just to squeeze one last question. We've seen 300 bps of gross margin expansion. But if I look at the EBITDA ex of other income, we see a 100 bps expansion. So we've done about 50 bps of compression in the staff cost as well. But since you mentioned that retail has grown by 15%, so when -- like what kind of operating leverage do we actually see in our other expenses? Because the 300 bps does not slow down, it actually just ends up with 100-odd bps of EBITDA improvement. So how should we look at this? Because I think in the past few calls, you have clearly guided that whenever your retail mix will improve, your other expenses, because of commission [indiscernible], will also keep increasing. But our sense was it should be lesser than the growth that we see in retail.

[Shailesh Chaturvedi, executive]

Sorry, go ahead, please. I'm sorry, I interrupted. Apologies.

[Unknown Analyst]

No, no. So that was my question. Fundamentally, I just wanted to understand if retail is good by 15%, so your other expenses should not technically grow by 15%, right?

[Shailesh Chaturvedi, executive]

Yes. So let's talk about profitability and the leverage and then I'll also come second part to GP to EBITDA flow, right? Now if you look at our last year's performance, we grew our EBITDA by almost like 300 basis points. Of course, we had a COVID bump also, but our efficiency also went up. And this year also -- this quarter also you see that we have talking about increase in EBITDA this year also 1.9%. We are very clear that this increase in profitability has to continue. And we internally say, in the worst case, also, we must sort of increase our EBITDA by at least 100 basis points. Good times like last year, we grew 300 basis, maybe 150 going forward. So somewhere in that zone, in normal time, at least 100 basis points, in good time, maybe closer to 150 basis points, our EBITDA will go. That's a fundamental increase in EBITDA that we are chasing and will come from the leverage, will come from brand, improvement in the brand profitability, it will come from the COG value. It comes from the business rigor that we will keep pushing the full price sell-through and keep reducing the discount, not go on early discounting or industry.

So that's a fundamental point that we are very clearly going after an increase in profitability and that 100 basis point to 100 basis point is we are committed and we have done better than that. And even in the top case, even this quarter, which is a very, very tough quarter, we have grown at 190 basis points. So that's -- our base profitability last year, we were at average full year AFL EBITDA was 11.4%. This quarter is at 12.1%. My sense is now our base is around 12% for a couple of quarters, and we will keep improving our EBITDA up, like I said, between 100 basis points normally and 150-odd basis point in good time. That will happen. That's a fundamental. It will come from all the leverage and all the hard work that we have to do.

Coming to this specific quarter, our GP went up by 340%, where the EBITDA has gone up by 190 basis points. Now what happened when I explained this in the past, this is a retail-heavy quarter. The retail contribution is more than 50%, the revenue mix has gone up of retail by more than 5%. Now what happened is that the 3.4%, almost 2.8% is a variable, which is your commission, which is your royalty because if the sale goes up, the royalty goes up. There is a supply chain, warehousing activity, transportation that goes up. So a good part of that has gone into the variable, which comes below the GP. But then we have other leverage also that we have manpower cost, which is giving us leverage. We are looking for cutting down discounting. Unfortunately, this quarter, the discounting has gone up. Otherwise, DFT would have gone up even higher than what it has gone up.

So there is a fundamental base of increase in EBITDA and we are going to increase our EBITDA by 100 basis points, normally to 150 basis points in good time. That has to happen and our fixed costs, we are clearly seeing there is a leverage coming in where in this quarter, almost 70 basis points, we have benefited from fixed cost reduction. So that leverage happened. So employee cost this quarter has come -- given us a benefit of 50 basis points as a fixed cost, which is coming down, it's giving us a 70 basis points. So that's why our EBITDA has gone up by 190 basis points.

[Operator]

The next question is from the line of Lokesh Manik from Vallum Capital.

[Unknown Analyst]

My question -- I had only one question, which is on the FY '22 annual numbers. In the other expenses, there is a [line item] increase for commission and brokerages, which is about INR 200-odd crores. Should you please let me know the nature of those expenses, that would be great.

[Ankit Arora, executive]

Lokesh, Ankit here, so it's basically pertaining to the same which [indiscernible] business, which is what we do on sales of returns. It's all the entire franchisee commission and the department store, this is what we do a business on is related to the entire line item of commission and brokerage.

[Operator]

We have the next question from the line of Aliasgar Shakir from Motilal Oswal.

[Aliasgar Shakir, analyst]

And actually, congratulations, very good discipline in this quarter. So, Shailesh, my question is on the -- this quarter's discipline that we have kept in terms of focusing on margin instead of growth. Now what we gather is in the market right now, given the softening of RM prices, a lot of retailers are in order increasing the discount as you also mentioned. And also for the new season, there has been some price reduction that has taken place. So how do we think we will want to work going forward? Do you think we will prioritize margin over growth as even in this quarter, our growth has been slightly lower because we focused on our gross margin. Or you think that given the softening of RM prices further, we may probably reduce our prices so that we could drive to higher gross margin?

[Shailesh Chaturvedi, executive]

Thank you for your comment on discipline. I really appreciate. As far as the pricing strategy, we are very clear. I said this previously in this call that we will always prioritize profitability over scale or growth. For AFL, EBITDA percentage is the mantra, right? And that is what will guide us and help us to take decisions. That's the stated policy, and we have a 100-odd basis point increase in EBITDA margin as a key task for us, and we will execute that, hopefully.

Now market conditions. In the current market condition, we have two pricing philosophies. One is that [indiscernible] stability. So we have sort of looked at our pricing for the year and as things can today with the current market conditions, we believe that we will continue with the stable pricing. So we are not looking for a major change in dropping the price or upping the price. Minor tweaking in a business that we have to do, that will happen, some [indiscernible], but that's very marginal. It's not a strategy. The strategy is for stable pricing. And second strategy, we are seeing opportunity for differentiated products. And whenever we have done something which is differentiated in [indiscernible] Arrow, we've just recently done line called auto press, which are the imported wrinkle-free shirt. We run a super premium line in Arrow called 1851. They've got fantastic response. Their sell-throughs are very, very good.

So our focus is to premiumize our brands through differentiated products because we see better sell-through for those products and we deliver good sales density per square foot. So that is another guiding principle that, of course, those premium products will be priced right for that product quality and then MRP for that consumer and for that competition in the market. But overall, if I have to say, to summarize, we will definitely prioritize profitability over anything else. Second, our pricing will be stable, minor changes here and there. And third is premiumization is a key force for our brands.

[Aliasgar Shakir, analyst]

Got it. So are you saying that basically, we will not pass on the softening of RM prices even if the industry does? And then I mean to what extent if we think that is hurting our growth.

[Shailesh Chaturvedi, executive]

Yes. I mean, also, we have to remain competitive, right? So somewhere we have to also see how industry responds to these kind of things. So minor tweaking here and there, entry price points, strengthening some consumer segment, we are not capturing all that will happen, and we'll have to eventually follow what competition does. But our strategy is stability and premiumization of our brands.

[Aliasgar Shakir, analyst]

Got it. Okay. Second question is on this EBITDA margin that we have seen pretty decent in this quarter, but pass-through of that in the PAT is not very strong. Of course, our tax has gone up, which I understand could probably be because of the CK brand doing well, I understand. So how do you see the PAT -- margin PAT growth going forward? And I think is my understanding correct that, that will more depend on Arrow and Flying Machine's growth because as the growth is mostly in the JV brands, there is increasing contribution from minority interest, and therefore, our PAT growth is not very strong.

[Shailesh Chaturvedi, executive]

See, I just -- I take this into three parts. One is the fundamental EBITDA that we have to grow, and I mentioned certain margin increase that we have to deliver, some brands have to improve. But that's, to me, a larger task ahead to make overall portfolio more profitable, grow at certain basis points every year, make some brands more profitable, that's a fundamental part.

Then below the EBITDA, if you have to go to that journey of -- to PAT. I would say, in this quarter, our interest costs have gone up in proportion to the increase in the repo rate. So our debt levels have remained stable, but the interest rates have gone up, and that -- by that proportion, our interest costs have gone up. Now that -- our debt levels are remaining very, very stable. So our interest costs will fluctuate based on the repo rates in the market. So that's something I think we will continue to manage that fairly well. So I'm not -- I'm confident that there'll be no reduction on -- towards the PAT from that side, it will be linked to the repo rates in the market.

And then below PBT, this time, the tax has gone up because there's a higher tax in this current quarter because the PVH, Arvind Fashions Private Limited, that has declared a INR 100 crore dividend for quarter 1 and out of which INR 50 crores was received by AFL. And of this INR 50 crore dividend that we received, AFL has made a tax provision of around INR 7.5 crores. The balance tax is also coming from the PVH part of the business that you mentioned, Tommy, CK. So that is -- there is a one-off part in this quarter. And yes, some businesses are more profitable, and we pay tax for that. So that's -- will continue.

But if I were to say the interest rates will be no surprise from our side because we don't see major changes in that gross debt level, the tax will follow whatever the tax policy is there. But I think our fundamental philosophy to improve PAT will be to improve our EBITDA and EBITDA percentage. And that's what I've been saying in this call time again.

[Aliasgar Shakir, analyst]

Got it. So in quick summary, you're saying basically that tax item should be lower in coming quarters. So accordingly, that PAT flow-through will be relatively higher hopefully in the coming quarters?

[Shailesh Chaturvedi, executive]

There is a shortly, there's a one-off tax component in this quarter.

[Aliasgar Shakir, analyst]

Got it. And just if you could help with the pre-IndAS EBITDA margin in this quarter?

[Shailesh Chaturvedi, executive]

See, we don't discuss specific and in the previous calls also, we have indicated that there is around close to 4% difference between the post-IndAS and the pre-IndAS that's where we are. And that's the industry practice and we also follow that.

[Aliasgar Shakir, analyst]

Got it. And this is what we have a guidance of reaching double digit by the end of this year, right?

[Shailesh Chaturvedi, executive]

Yes. So what -- if you really look at our EBITDA, like I said earlier, we are at Power brand EBITDA base of 12.5%. We are not very far from that -- in the quarter 4, we were at even 13%. So we are at not very far in the journey. We have made good progress last year and even this quarter. And some of our brands are already in that journey, have achieved, and they will continue to achieve. We have a specific task with Arrow and FM who are at a very low single-digit breakeven level kind of profitability. And our job is to now continue to work. Arrow has a very large spring last year, the current market conditions that come in a way. But we see both FM and Arrow profitability growing up, and there's a lot of hard work that we are putting behind that, and that should help.

[Operator]

[Operator Instructions] The next question is from the line of Ridesh Chaudhary from Molecule Ventures.

[Unknown Analyst]

Yes. So first of all, congratulations on the margin side, right? It's very nice to see margin in emerging brands setting upwards, so just on that side of portion. So how much would be margin expansion would be from closing our Arrow cost and [indiscernible] what would be the contribution of scaling of CK in that segment?

[Shailesh Chaturvedi, executive]

I would say as we go along, the tail brand losses will keep coming down. So it will be largely the future gains will come from gain in Calvin Klein profitability and Calvin Klein has very good momentum today. So we are very confident about that brand performance in both in terms of sales and margins.

[Unknown Analyst]

Okay. Okay. So my next question is regarding U.S. Polo. So right, last year, U.S. Polo was phenomenal for us right. It added around INR 600-odd crores in our top line, which was very good and added to profitably, so can we see [indiscernible] that this momentum will continue in this year as well?

[Shailesh Chaturvedi, executive]

See, U.S. Polo is a very special brand. It's a leading brand in India, it is in top two main casual brands, and we believe it's #1 brand, but it's in that up to position done really well. The throughput is good. The desire for current brand with consumers is very good across the channel, be it online, offline, department store, every channel, U.S. Polo is a leading brand in department store and online portal, ranked #1 brand. So it's a very, very special brand that is dictated. Scale is very nice and whole plan now is to take it to beyond INR 2,000 crores top line. And it's already a fairly good double-digit pre-IndAS brand.

And we're also seeing opportunity to extend this brand. I mentioned footwear being a very large business, innerwear ia a healthy business, kidswear is in boys, they are a leading share in the country. So there are a lot of opportunities to extend this brand, expand store. And you will see in the next 60 days -- you will see a very large investment in advertising in this brand to prepare the consumers and [indiscernible] the consumers for the coming Diwali season, festival season. So it remains a very, very key brand for us, and we see very good sort of momentum. To quarter here and there, we did India billing in the previous quarter and this quarter as well. But overall, brand is on a very, very strong wicket.

[Unknown Analyst]

Okay. So we can expect the momentum to continue in U.S. Polo, right?

[Devanshu Bansal, analyst]

Absolutely.

[Unknown Analyst]

So can you give a rough ballpark figure like what would be the adjacent categories in the U.S. [ peer ] segment? Like in [indiscernible].

[Shailesh Chaturvedi, executive]

So if you look at adjacent category, the three big ones are footwear, kidswear and innerwear. And we're also developing, like recently, we launched small leather goods, such as belt and wallets, we keep trying out new categories in this brand. And the adjacent categories have already reached 15% of the brand. And we believe that could even hit any kind of level of 20% share. So there is a traction in growing the adjacent category even more in U.S. Polo.

[Unknown Analyst]

Right. So one more thing. So when can we see other brands like Arrow or Tommy can get that momentum like which USPA witnessed last year or certain scale after that, we can able to do better on different brands as well.

[Shailesh Chaturvedi, executive]

I think Tommy is very special, doing extremely well. And this quarter also has done remarkably well, both in terms of top line growth and margin structure. So Tommy is leading. The Tommy [ Hilfiger's ] CK market share is unreal in that segment, dominates that segment. And Tommy is doing very well. CK, I have already mentioned. So it comes back to our ability to take Arrow and Flying Machine to better profitability and will need even bigger scale.

So Arrow, the first stage happened last year where we really took it from a very large losses to breakeven losses, low single digit. And the journey will continue from low single digits to mid-single digits to high single digits to double digits. That's a journey that we are on and that's the same what I'm talking for Arrow is also true for Flying Machine. We need to increase the scale, get scale leverage, improve launch these categories, open more stores. So I think eventually, they will come back to improving the margin profile of Arrow and FM and also scaling them up a little more.

[Unknown Analyst]

Yes. Perfect. So one last question regarding Sephora. Do we get any clarity from parent regarding this? As you can -- I can see we have opened a single additional [indiscernible] store addition is Sephora. We have 26 [reviews] as of now.

[Shailesh Chaturvedi, executive]

We have no further comment to make on Sephora than what we made in the last investor call. And I repeat that, that it's a brand in our portfolio that's in the prestige beauty segment, only off-line stores where consumers are also doing online. And we are in touch with the principle to work on the next steps on this brand, and we have, frankly, nothing further to add.

[Operator]

The next question is from the line of Yash Bajaj from Lucky Investment Managers.

[Unknown Analyst]

I have two questions. Sir, first question is on the expense amount on the licensed brands, which we incurred, how much would that be on a quantum absolute basis and as a percentage of sales?

[Ankit Arora, executive]

Yes. Just to clarify, are you asking about the royalty, which is what we pay to the licensed brand?

[Unknown Analyst]

Yes.

[Ankit Arora, executive]

It's in the range of about 4% to 5%. It will vary brand by brand. I won't be able to share specifically on the brand wise, but it will be in the ballpark range of [indiscernible].

[Unknown Analyst]

Okay. Okay. And sir, my second question was like you alluded that Flying Machine and Arrow are close to breakeven. So is that post-IndAS or pre-IndAS? And if it is pre-IndAS?

[Shailesh Chaturvedi, executive]

It's is pre-IndAS.

[Unknown Analyst]

So we would be around either like around minus 1% to 0% EBITDA margin.

[Shailesh Chaturvedi, executive]

No, it's breakeven or low single-digit breakeven that kind of thing.

[Unknown Analyst]

Low single-digit breakeven. Okay.

[Operator]

Ladies and gentlemen, we will take that as a last question for today. I now hand the conference over to Mr. Ankit Arora for closing comments. Over to you, sir.

[Ankit Arora, executive]

Thank you, everybody, for joining us on the call today. If any of your questions have been unanswered, please feel free to reach out to me separately, and I'll be happy to answer them offline. Thanks so much, and look forward to seeing your participation again next quarter.

[Operator]

On behalf of Arvind Fashions Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.