Campus Activewear Ltd

NSE:CAMPUS

Earnings Call Analysis

Positive Turnaround and Growth in Q3 Expected

After a seasonal impact due to a shifted Diwali in Q2, the company anticipates a stable and positive Q3, with most necessary corrections already made. A strategic focus on avoid deep discounting despite sector-wide liquidations led to lower volumes but healthier margins and average selling prices (ASPs), which rose nearly 6% to INR 658. The company also aggressively grew its market share on Flipkart from 5% to 8.5% during the Big Billion Days event, outpacing competitors and demonstrating a robust online presence.

Navigating a Challenging Quarter with Optimism for Recovery

The quarter has posed significant challenges for the company, mainly driven by consumer sentiment which impacted the volume in the second quarter. Despite these difficulties, leadership remained optimistic about the future, believing the worst to be behind them. They anticipated a return to normalized growth rates as early as the third quarter, thanks to various initiatives ranging from cost savings to supply chain optimization.

Inventory Management and Strategic Focus

In response to low consumer sentiment and subsequent reduced retailer offtake, the company made a strategic decision not to overwhelm the inventory system unnecessarily, instead preparing proactively for upcoming quarters. This careful inventory management was not indicative of any product defects or recalls but rather a general channel hygiene measure. Our executive team comprises high-quality individuals who are handling the current strategic direction capably. Enhancements in the management team are expected to stabilize the company's governance further.

Strengthening Market Share without Margin Compromise

A key goal for the year is to maintain and enhance market share, underscored by online platform successes like Flipkart and cultivation of market share in the existing distribution business. Crucially, this ambition prioritizes the preservation of gross margin and rejects high-discount strategies. The focus is not merely on expanding presence but on cultivating a preferred brand image in the competitive INR 1,000 to INR 3,000 price segment, relying on strong brand ambassadors to reach a diverse target audience.

Expanding Reach and Harnessing EBO Success

The company's retail strategy banks on a hybrid approach that leverages online and offline channels, including expansive Exclusive Brand Outlets (EBOs). This mixed-channel strategy has shown success, particularly in markets like Gujarat, where the company has seen remarkable growth. The executive team also highlighted the importance of geographically focused strategies, specifically in the Western and Southern markets, where the company has managed to remain stable despite broader economic challenges.

Capacity Preparedness and No Guidance on Future Revenue

The company is well-prepared capacity-wise to meet increased demand, with production facilities equipped to produce up to 35 million pairs annually. They have already achieved volume improvements over the previous year. However, the company refrains from providing explicit forward-looking revenue guidance.

Regional Strategies and Product Diversification

The focus for growth is diverse, with strategies tailored to suit the needs of different regional markets like the East and the South, with product development aimed at outdoor categories. Emphasis on a mix of MBO, distribution, and EBO strategies cater to these regions' nuances, and initiatives have been deployed to penetrate these markets more deeply, demonstrating adaptability and responsiveness to regional preferences.

Assurance of Quality and BIS Certification

Campus Activewear places a high value on manufacturing quality, which has eased the transition to new Bureau of Indian Standards (BIS) certification requirements. All products, which are exclusively finished within in-house facilities, are on track for BIS certification, promising no negative surprises with regard to compliance or quality.

Closing Remarks with Continued Proactive Management

The closing of the earnings call included a note of gratitude to the attendees and assurance of positive outcomes in the face of challenging times. Leadership expressed confidence in the management's proactive strategies to counter the effects of the broader macroeconomic climate and assured continued efforts to resolve any arising issues.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Campus Activewear Limited Q2 and H1 FY '24 Earnings Conference Call. [Operator Instructions] I would now like to hand over the floor to Mr. Diwakar Pingle from EY. Thank you, and over to you, sir.

[Diwakar Pingle]

Thank you, Felicia. Good morning, friends. Thanks for logging in so early. I welcome you all to the Campus Activewear Limited Q2 and H1 FY '21 (sic) [ FY '24 ] Earnings Conference Call. Before we proceed with this call, let me remind you that the discussion may contain forward-looking statements that may involve known, unknown risks, uncertainties and other factors. It must be viewed in conjunction with our business that could cause future results, performance or achievement to differ significantly from what is expressed or implied by such forward-looking statements. The Campus Activewear management team is represented by Mr. H.K. Agarwal, Chairman and Managing Director; Mr. Nikhil Aggarwal, Whole-time Director and CEO; Mr. Sanjay Chhabra, CFO; and Mr. Piyush [ Kumar ], AVP, Investor Relations. I will now hand over the call over to Mr. H.K. Agarwal, Chairman and Managing Director, for his opening remarks. Thank you, and over to you, sir.

[H.K. Agarwal, executive]

Thank you, Diwakar. I welcome everyone for joining our Q2 and H1 FY '24 earnings call today. First, I would like to wish...

[Technical Difficulty]

[Nikhil Aggarwal, executive]

I'm sorry, I think sir has gotten disconnected. Could you please try him again?

[Operator]

Yes, I'm connecting in just a moment. I welcome back the chairperson, please go ahead, sir.

[H.K. Agarwal, executive]

Thanks, Diwakar. I welcome everyone for joining our Q2 and H1 FY '24 earnings call today. First, I would like to wish everyone [indiscernible] and happy Diwali. Since last Diwali, the consumer sentiment has been subdued due to inflationary pressure and we experienced delay purchasing or down trading of MRP. I have seen the footwear industry evolve over my 40 years of a experience in this industry, and we have successfully navigated to all up and down time and again.

We have a clear vision and understanding of what we are doing and what we want to do. Campus have become India's largest FOCO brand on the back of very strong fundamentals and core strengths, such as our top of mind brand, world class R&D, our omnichannel sales network and fully integrated largest supply chain. While the market was subdued, we took the opportunity to focus our energy on further innovating and strengthening our system and process to get ready for the next phase of growth.

We have evolved with the time over the year to reach here and will continue to do the same in the future to respond to a dynamic business environment. In an involving business, people changes tend to happen, and let me assure you, all changes are in the right street towards building their world-class team that led the organization for the next decade, and we are fully committed to creating long-term value for all our shareholders.

Hence, I will now hand the call over to Nikhil Aggarwal.

[Nikhil Aggarwal, executive]

Thank you, sir. Campus Activewear quarter 2 FY '24 revenue stood at INR 259 crores, impacted by a decline in volumes owing to subdued demand in key Northern markets. Also quarter 2 FY '24 sales were impacted by exit of Udaan and Ajio, O2O platforms due to change in their business models. However, we continue to maintain healthy gross margins of 54.3% in quarter 2 FY '24, benefiting from the lower raw material prices mainly. We have recalibrated our business strategies and choose to remain nimble footed for H2 FY '24.

We have proactively undertaken inventory correction in some geographies, especially the states of UP and Bihar and some parts of Rajasthan. And our DSOs are under control as we enter the second half of the financial year with the latest assortment of new product developments. During the quarter, we have launched Campus Air Turbo designed for Indian consumers with thermal management technology, thereby elevating the consumer's overall footwear experience. We're committed to engage and connect with our target audience through our innovative 360-degree marketing strategies.

We continue to make judicious investments to strengthen our brand, along with premiumization and expand Campus' presence in its existing and new geographies. Additionally, the implementation of BIS quarter 4 onwards is a big positive for the organized sports and it's leisure footwear players all across the country. I would like to reiterate that we see the current financial year FY '24 as a transitionary one. However, Campus Activewear remains focused on its long-term business goals and thereby to create value for its steam stakeholders over time.

I will now hand it over to our CFO, Mr. Sanjay Chhabra to take you through more details on the quarter 2 and first half FY '24 performance.

[Sanjay Chhabra, executive]

Thank you so much. Good morning, everyone, and welcome to the Q2 and H1 '24 Earnings Call of Campus Activewear Limited. During the quarter under review, our revenues from operations stood at INR 259 crores. In terms of volume, the company sold around 3.9 million pairs in Q2 FY '24. The ASP in quarter 2 FY '24 stands at INR 658 per pair versus INR 608 in Q2 FY '23. Similarly, on a category basis, revenue mix across men, women and kids and child stood at 79-21 in Q2 '24, driven by our continued focus towards growing this category.

Our EBITDA stood at INR 25 crores in Q2 FY '24. On the balance sheet side, our net debt stood at INR 162 crores as of 30th of September, showing a marginal increase of around INR 5 crores versus INR 157 crores in March '23. Our net debt-to-EBITDA ratio stood at 0.7x in H1 FY '24 as against 0.6x in FY '23. Our balance sheet demonstrates the position of strength with robust return ratios such as ROCE and ROE of 20% and 19.2%, respectively, as of 30th September '23.

With this, I'll conclude and hand it over to the operator for questions and answers. Thank you.

[Operator]

[Operator Instructions]

First question is from the line of Aditya Soman from CLSA.

[Aditya Soman, analyst]

So 2 questions. Firstly, you mentioned Udaan and Ajio and sort of a change in business models there. Can you throw some more light on exactly what happened? And second, on the inventory correction that you mentioned in Bihar, UP and Part of Rajasthan. Again, if you can just throw more light on if there inventory correction is done? Or do you still expect some further sort of correction to inventory levels in those states or any states in the back half of the year, that would be super useful.

[Nikhil Aggarwal, executive]

Great. No, thanks, Aditya for your question. So from the O2O platforms, they shut down literally their businesses in the first quarter, they announced that they would be exiting these platforms. And it was almost like an overnight kind of transition because they did not really give time to any of the companies to purchase. So they stopped purchasing overnight. And therefore, we had to improvise basically to recalibrate our online business model to increase the share of our marketplace. And that's exactly what we have done over quarter 2 as well.

We've grown our marketplace business by approximately 60-odd percent, slightly over 60%. So that's a meaningful jump. And we'll continue to invest behind marketplace business and take it forward. So that's the industry-wide phenomena, where O2O was all shut down for everybody.

While the inventory correction where that is concerned, we have consciously taken that step in quarter 2. Given the subdued demand in the market, we wanted to make sure that instead of loading the markets with more inventory and possibly seeing that pain in the next few quarters, we decided to not increase our exposure of credit limit beyond a point.

Therefore, we've very well maintained our DSOs at a very healthy level, which would be also reflecting in our working capital. And a very healthy working capital rather than we have demonstrated in quarter 2. So in maintaining, we took that conscious decision to reduce the inventory in the system and further improve the situation in the market. So therefore, we have seen some correction in parts of UP, Bihar and some parts of Rajasthan where the demand was most impacted in these urban states. Therefore, we have not loaded the businesses, the distributor channels further with more inventory in quarter 2.

[Sanjay Chhabra, executive]

Also, I mean, this correction in inventory gives us an opportunity to now sell more of the new products which we have launched for the season. And this would be sort of a positive from a channel perspective.

[Nikhil Aggarwal, executive]

Yes. Also, just to mention that we held a very, very good distributor meet in quarter 2, where we have taken confirm pre orders from our distribution channel for the first time we've worked on this model of preorders. And it was a very successful meet where we have received very significant orders till the end of December. And currently, the company is in process of supplying all those preorders.

[Aditya Soman, analyst]

I understand. So I mean in terms of just understanding this decline rate in top line, I mean, would you say that most of it is due to these 2 reasons. And then you should see a reversal to a sort of more normalized top line growth on a quarterly basis from 3Q? Or do you think there's still some more effects of this inventive correction or maybe inventory correction needed in some more states?

[Nikhil Aggarwal, executive]

No. So we should see normalized growth and normalized, I think, quarters from quarter 3 onwards because whatever correction had to be done, it's been done in quarter 2. Most of it is already through. And we basically -- we also saw a slight bit of phasing due to Diwali in this month -- in September because Diwali got pushed out by a month this year. Therefore, we saw a slight bit of effect of phasing of Diwali as well in quarter 2. So quarter 3, we expect a much more stable and a positive quarter.

[Aditya Soman, analyst]

I understand. Very clear. And just maybe 1 last question, if I may. I mean in terms of -- if you look at 3Q, obviously, would this also lead to sort of a bump up in revenue? Or you still would say that a more normalized sort of quarterly run rate is what 1 should expect?

[Nikhil Aggarwal, executive]

Unfortunately, we cannot share any numbers or any guidance beyond the point, but I would like to assure you that we are on the right track. Most of the correction, whatever had to be done is already through in quarter 2. So we should see meaningful quarter in quarter 3.

[Operator]

The next question is from the line of Jay Doshi, that's from the line of Kotak Securities.

[Jaykumar Doshi, analyst]

My question is again with respect to the trade distribution channel. Do you think in the last 6, 9 months, at any point of time, there was some discontent in the channel? And was there any -- were there any corrective measures required to ensure clarity between the channels online as well as off-line. And is there a possibility that the weakness in growth recently has so perhaps a function of some discontent amongst distributor in the trade. So what's your thoughts whether there was a certain issue. And if that was the case, have you corrected, have you taken corrected measures?

[Nikhil Aggarwal, executive]

Jay, so no, I appreciate the question, but we have seen majority of the pain due to macro environment only. There was extremely low footfall in quarter 2.

We have not -- honestly, we've not seen this kind of a time in Campus ever. So this almost was a bit of a shock to all of us as well. And this -- so this is primarily due to a very low macro environment. Most of the consumers ended up either downtrading to lower MRPs or they postpone the buying to festive season in quarter 2. That is where we've seen the pain and some bit of it, we have taken that conscious call of inventory correction, like I mentioned, but there was absolutely no discontent amongst the distributors for any reason whatsoever with regards to channels or any other conflicts that I can assure you, while we have also taken many steps to further improvise and improve the channel salience. And just to give you some flavor, we have also seen distribution business getting back on track in quarter 3 so far. So that's a very big positive sign. And so we'll be -- I would like to tell you that there was no channel conflict that we have seen so far in that sense.

[Jaykumar Doshi, analyst]

That's good to know. My second question is during the course of this year, we have seen slightly higher than the usual level of discounting amount some of your competitor brands, including some of the global brands.

So how has your performance been in terms of market share in the recent sales season, Flipkart is a key partner for you. So Big Billion Day sales as well as Amazon sales, do you -- would you be able to give us some directional color or something on market share trends and whether you're growing faster than the platform or category online?

[Nikhil Aggarwal, executive]

Sure, Jay. So we have actually delivered a pretty good BBD this year in Flipkart. It was in the first week of October. It ended somewhere in the -- around the end of October. And we have -- we've been able to increase very aggressively our market share from 5% to almost 8.5% on Flipkart. These numbers have been validated and given to us by Flipkart themselves. And so this is a meaningful jump for any brand. And we have also seen a lot of our peers and competitors doing a lot of liquidation and discounting across channels. That is mainly due to the same reason that the macros have been weak and everybody was sort of liquidating their inventory whatever they were sitting on.

But we have not taken that approach. That's why you see a dip in our volumes because we have been very clear that we will not discount beyond the point. And we have maintained that hygiene very well across channels, across geographies. Therefore, our ASPs have actually gone up by almost 6%. We have been able to demonstrate meaningful material margin jump from 48% to 54% and our ASPs have also gone up from INR 608 to INR 658. So this is in spite of a tough macro, we've been able to demonstrate healthy margins, and that is what we will continue to do so in future. And that has also -- so we have increased the market share in our online channel without really compromising on the margin beyond the point as well.

[Jaykumar Doshi, analyst]

That's helpful. The last and final question is what is the competitive intensity and that you see in some of the northern states, UP, Bihar? And in case of competition from smaller players, local regional players, usually see a trend where aggression for a few quarters and then the channel inventory goes high and then the clearance liquidation and then you'll see a more benign or stable competitive environment. So where do you think we are in this journey of competitive intensity in some of these states?

[Nikhil Aggarwal, executive]

So honestly, we don't think we have any competition in our segment. We almost dominate this category of INR 1,000 to INR 2,000 category. There is -- there are hardly any other especially organized players or even unorganized players in this segment. Most of the private and the smaller companies in this space are limited to less than INR 1,000 MRP products only. And interestingly, UP is a go-to-market for all footwear companies. It's the first go-to market. So anybody entering into footwear first, enters UP. And therefore, it becomes sort of like a war zone in some sense and a little bit of an ugly situation sometimes for every single brand out there.

So we have a separate strategy for UP in order to be very aggressive. UP has always been a very strong market for Campus. We have a very strong following. We are the #1 top of mind brand in UP amongst the domestic players. And we would continue to maintain that lead on the back of various initiatives like marketing campaigns and better broader pool and a better distribution reach. So we're working on multiple of these aspects to increase our saliency in UP and Bihar going forward from here on.

While the rest of the geographies across India have been performing quite well in spite of a bad macro, we have been very stable across every other geography in the West and the South and Central and East.

[Jaykumar Doshi, analyst]

Understood. So essentially, what I gather is you've gained significant market share in marketplaces online channel this quarter. Your channel correction is largely done as far as trade based solutions channel is concerned that by end of last quarter. So there won't be any meaningful adverse impact there. And you are guiding for or indicating a stable quarter, December quarter. Do you also think that BIS-related implementation-related things are also in place and should not affect your December quarter or maybe second half performance? Or you think that some adverse impact of BIS implementation?

[Nikhil Aggarwal, executive]

No, not really. In fact, if anything, BIS, we see it as a very positive move by the government. We are very excited about the impact that BIS is going to create -- now it's just a timing thing. It might create that impact in quarter 4, the positive impact or it may bring that in quarter 1, depending on how the BIS when it is rolled out exactly.

But because so far, the official notification is yet to be received. But we -- as per the government sources, we anticipate that it should be coming and by the first week of January-Feb, which should get implemented. But as far as quarter 3 is concerned, we don't see much of pain due to any BIS -- non-BIS liquidation inventory because the government has given adequate time to all the footwear companies in India to be able to tell [indiscernible] post January as well. We just have to declare at the end of December, the inventory that we're carrying of non-BIS goods. So there is no pressure really from that perspective. And so far, we are on the right track.

[Operator]

Next question is from the line of Akshen Thakkar from Fidelity Investors.

[Akshen Thakkar, analyst]

Just on your point on Ajio and Udaan. So while that some sales that you would have lost holds from a Y-o-Y basis. I thought that impact was there in Q1 as well. So if I look at your sales performance sequentially is still down about INR 100 crores, right? So last quarter, Q1 also, you didn't have Ajio and Udaan and this quarter as well, you don't have Ajio and Udaan. So there is some seasonality, but some believe in Activewear, you don't really see Q2 versus Q1 being a material drop-off. So this INR 100-odd crores sequential decline, how much of it was due to -- like you alluded to some shift in festive? And how much of it was this channel correction in UP and Bihar. That was question one.

And question 2 was, gross margins have moved up fairly decently. You're sitting at record high gross margins, given that there is some competition, like you said, in UP and Bihar, how does management think about top line versus margins. I know steady state, you said that you'd like to be a high teen, 20% margin business. Is there a case for dropping gross margins a little bit, dropping margins maybe to 18% instead of 20% or 16% instead of 20%. I'm trying to get back to the run rate of growth? Or do you think both are separate, growth will be a separate dynamic and margin will be a separate dynamic. Those 2 questions from my side.

[Sanjay Chhabra, executive]

Okay. This is Sanjay. On your first question related to Ajio. I think when we compare year-on-year, so what happened is that last quarter -- last year same quarter, we had a good sales of around INR 36 crores from this business, which in this quarter is just INR 4 crores. So roughly INR 32-odd crores impact is coming straight from this -- in this quarter. But if you see quarter...

[Akshen Thakkar, analyst]

Yes, I was referring to -- yes, sequential numbers. Y-o-Y, I understand, but Q1 this year also didn't have...

[Sanjay Chhabra, executive]

Sequential, I mean, the impact was not this steep. We still did some numbers in Q1 of FY '24. So in Q1, the impact was around INR 17 crores, which has aggravated to around INR 32 crores in Q2, if I talk sequential. So that's a big impact, INR 32 crores on this quarter amidst the other macroeconomic factors and the distribution inventory correction we took. It's 1 of the big building blocks for the degrowth. I pass it on to Nikhil for taking the margin question.

[Nikhil Aggarwal, executive]

So Akshen, basis our strategy. So 1 strategy is to deep discount the products to gain market share. The other is to invest behind the brand and to make the brand bigger and stronger. So for us, it is the latter where we are committed to building the brand and taking it to the next level. So all our initiatives and our resources, we are flowing into marketing, into the right steps that need to be taken to make a consumer brand -- a true consumer brand, right? And for that reason, we shy away from the strategy of passing on big discounts in the channels, and we don't operate in a high low kind of MRP environment. So that's basically the strategy that we are following, and you'll see some significant investments in marketing being made even this year and for next year as well. We'll continue to do so.

[Akshen Thakkar, analyst]

Okay. My second question was, a few calls back, we spoke about doing a value brand to at least not leaving space for competition to get into the key markets as an entry brand. Any updates on that? Have you test marketed some products, some geographies? And what have been the feedback around that?

[Nikhil Aggarwal, executive]

So interesting question. So we did some pilots and we -- the results of the pilot were basically that we don't want to operate under the same brand Campus In a very low-value segment because, obviously, on 1 aspect, we have been premiumizing really well over the last few years, so we don't want to dilute any kind of brand salience especially on the lower side. So therefore, we have put that strategy on hold.

We are not looking to aggressively look into the lower economy side of the segment. Even as of quarter 2, we've been able to basically do about 25%. We've reduced our contribution of our entry segment, which is up to INR 1,000 shoes to 25% versus 30% last year quarter 2. And we have been able to increase our premium product offering up to INR 1,500. And up to rather, sorry, INR 1,500 plus, we've been able to take it from 40% to 36% for INR 1,500-plus and INR 1,000 to INR 1,500, we are at 28% versus 31% last year.

So the endeavor is still to continue to premiumize. What we spoke about in the previous earnings call was about a new challenger brand. That strategy, we don't think is the right Step given the current market dynamics. So we are very clear that we'll continue to focus only on 1 brand strategy, and we don't want to divert our resources on any other sub-brand or a challenger brand at the moment.

[Operator]

[Operator Instructions]

The next question comes from Ankit Kedia from PhillipCapital.

[Ankit Kedia, analyst]

Sir, 3 questions from my side. On the O2O business, which you alluded the INR 36 crore last quarter run rate. I know historically, you've always told that Ajio and Udaan account for sub 20% of the business. Can you, sir, share with us the breakup of online? How much is it direct? How much is it marketplace? And how much was O2O for us?

[Nikhil Aggarwal, executive]

Sure. We can give you a rough split, Ankit. Approximately, we used to do about INR 80 crores -- INR 70 crores to INR 80 crores of revenue from O2O platforms on a base of INR 500 crores. And the balance was being serviced about, I believe, 40% to 45% from marketplaces and the balance from outright sales. So that contribution of about 17% to 18% of O2O platforms is basically being substituted now by the marketplace growth, on which we are focusing because that O2O was basically gone for everyone. And so that INR 70 crores is being now substituted by marketplaces and outright, mostly marketplaces because that's a better margin business than outright as well for us.

[Ankit Kedia, analyst]

But out of the INR 70 crores, you saying INR 36 crores was in Q2 itself. So 50% of the O2O business came from Q2 last year.

[Nikhil Aggarwal, executive]

Yes, approximately because -- yes. Sorry, just to add, that's basically because of -- in these platforms, they load up the inventory in quarter 2 for the season, for the upcoming season in quarter 3.

[Ankit Kedia, analyst]

And typically, O2O businesses would sell to retailers directly, right? Wouldn't that retailer because of need of demand now purchase the product from the distributor on the ground or the consumer of Udaan and Ajio would now actually still go to marketplaces to buy the products?

[Nikhil Aggarwal, executive]

So that consumer, the retailer would end up going to the distributor -- back to the distributor. So this business should add on ideally back to our distribution business. This should be compensated by that. And -- but that is -- it takes maybe a quarter or 2 for that to reflect properly in the distribution business. It's not an overnight change. It takes about a quarter -- a couple of months to fully reflect into the other channels.

[Ankit Kedia, analyst]

My next question is on the EBO. I see EBO business actually growing at 50% in the quarter. Can you just talk about the SSG growth in the EBO business, how many EBO we have scaled up and what's the plan for next 1 year on the EBO side?

[Sanjay Chhabra, executive]

This is Sanjay. On an EBO perspective, we continue to add around 5 stores -- 5 to 7 stores a month. So that's the kind of strategy we have. And in this quarter also, we did add around 22-odd stores, 10 in EBO and 12 in franchisees. So that's roughly a ballpark number, which we'll continue to maintain. And the good part is that we get closer to the consumer, and this channel gives us a better realization as well.

[Ankit Kedia, analyst]

Sure. And sir, you just said the challenger brand, you are keeping it on hold. But if I go to your website, I see 1 of your value fashion brands continue to be present at a 60% -- 50% to 60% discount. So are we liquidating that inventory in the market to get out of that business? Or what are we doing with the smaller brand now?

[Nikhil Aggarwal, executive]

That's correct, Ankit. We are liquidating the stock that we have. It's not a lot. It's very little. So whatever it is, we are just finishing it off, and we won't be manufacturing that going forward.

[Operator]

Next question is from the line of Aliasgar Shakir from Motilal Oswal.

[Aliasgar Shakir, analyst]

I just wanted first a clarification. You mentioned you have clear inventory correction. Is this a channel inventory or our own inventory? And -- if you could just quantify because as you mentioned, Y-o-Y, it's out of what it was INR 70 crores, INR 80 crores, the impact of, let's say, Udaan and Ajio would be about INR 32-odd crores, then how much impact would help this had on your revenue?

[Sanjay Chhabra, executive]

Ali, this is Sanjay. I would say that the inventory correction, just to clarify, is primarily in our distribution channel and in certain competes of UP, Rajasthan and MP and Bihar -- sorry, Bihar. So I would -- I mean as we said, that roughly INR 30-odd crores attributed to the O2O business and remaining INR 40 crore shortfall in our revenue. I would say that INR 20-odd crores would be attributable to phasing of Diwali and remaining INR 20 crores would be a mix of inventory correction and subdued consumer demand. So that's how the split would be in a range.

[Aliasgar Shakir, analyst]

Understood. Very clear. Second question on your competitive landscape, you gave a lot of color. The point I wanted to allude to is so point #1 is in the UP, as you mentioned, the impact is being severe. So there are 2, 3 angles here.

First is we have been clearing out our brand. So have we -- while gained market share overall, but maybe you've lost return of lot of market share in the value segment given that we have also reduced our brand-new brand.

Also our channel can suggest a lot of large distributors in the belt of UP, Bihar have either shifted to other new brands that have come in the market. So has the competition on gaming or retaining your distributor gone up because of which probably channel commissions given by competitors have gone up, in fact, they're [indiscernible] hurting us. So just a little bit more color over there, just help how the situation on the ground is in UP and how would we have taken care of that?

[Nikhil Aggarwal, executive]

So see, for UP, we have a very clear strategy that we will not -- we have a common policy for distribution that we follow across the country. And UP, as it became a slightly more competitive market because of a lot of entrants. And like I said, a lot of competition enters UP first. It is the first go-to market for everyone. So therefore, we have been very judiciously doing business in UP in terms of not losing market and I've been not losing any margins in UP due to the competition.

So therefore, we have a very clear strategy of making the brand salient stronger, the brand pool getting our reach even deeper penetrating to every single look in corner in the state through means of a very extensive GTM, for which we have already rolled out and we have started seeing some green shoots emerging in quarter 3. UP as a state has bounced back for us in October meaningfully. Therefore, it is -- the strategy and the steps taken by the company has been working very well.

[Aliasgar Shakir, analyst]

This is very clear. Just last follow-up over here. So in the INR 1,000-plus categories where we are more strongly focusing, the sub INR 1,000 category is where we are not as aggressive, is that understanding correct and that's how we are trying to build our brand?

[Nikhil Aggarwal, executive]

That's right. See, any product. So we have a limited offering of products below INR 1,000. It is the entry segment, which contributes to roughly 25% of the entire revenue.

Now it is basically there to handle the customer when they move from unbranded to branded company for the first time. So it is basically an entry point for them to buy a Campus shoe. Therefore, that is the only purpose that the entry level solves because as a brand philosophy also and as our Chairman's philosophy, we don't compromise on quality and the look and feel of the shoe even though if it's a cheaper product. The quality of the shoe is very, very high. So therefore, it is not as margin accretive as the other -- as the INR 1,000 to INR 2,000 segment for the company. Therefore, we have limited offerings, it is only to handle the customer to the higher MRP shoes going forward in the journey.

[Operator]

Next question is from the line of Rahul Jain from LionRock Capital.

[Rahul Jain, analyst]

Can you hear me okay?

[Nikhil Aggarwal, executive]

Yes.

[Rahul Jain, analyst]

Sir, I think I just wanted to follow up on the previous question related to the inventory correction and Udaan and Ajio stuff. So I understand the Y-o-Y, but I'm just struggling from that INR 355-odd crore revenue you did in 1Q, where I would assume on Udaan and Ajio would be a lot smaller to INR 258 crores or INR 260 crores of revenue in 2Q. So I understand that INR 20 crores Diwali impact. I understand the INR 20 crores inventory impact but the difference is almost INR 90 crores. So that's -- can you help bridge that gap?

[Nikhil Aggarwal, executive]

Sure. Sure, Rahul. Sanjay will do that.

[Sanjay Chhabra, executive]

Rahul, between 2 quarters, as I mentioned, so like last quarter, we did around INR 17 crores in Ajio. But this quarter, we did around INR 4 crores. So that impact is also there. So that's one. And apart from that, when I was talking about Diwali impact, there will be an impact on distribution. There will also be an impact in the online segment, where in the Big Billion Day also shifted, right? And apart from that...

[Rahul Jain, analyst]

That would be INR 20 crores, right? That's what you mentioned.

[Sanjay Chhabra, executive]

Yes. Apart from that, there is always a phasing between the 2 quarters. I mean, our Q2 is unless we are coming closer to the festival. The Q2 is not very much equal to Q1, right? And then in Q3, again, with the seasonality, the festival and the onset of winter seasons, again, the demand picks up. So that's how it is, I mean...

[Nikhil Aggarwal, executive]

So this year, absolutely, Rahul, this year the Q2 was further exaggerated in terms of volume drop because of the consumer sentiment that was the biggest factor driving the quarter 2 volume of this year.

[Rahul Jain, analyst]

Okay. And the follow-up of the as you mentioned that most of the inventory correction is done. When you mentioned that you have a big market share gain within the marketplace is during the Big Billion Day sales. So when we look at Q3 and Q4, generally, I mean when you think about the Campus business on a longer-term basis, it should be a business that should go in sort of the mid-teens top line on a CAGR basis. Obviously, Q2 was very challenging. But when you look at second half and when you look at October and beginning of festive season, do you think we would get back to those regular trajectory? Or there will there be a big -- so there are -- has been a big step down in Q2 and then there is a big step-up in second half because all the corrective measures were done. And how we should be thinking about going forward from there? Or do you think it will be a multi-quarter recovery period from here?

[Nikhil Aggarwal, executive]

Great question, Rahul. So I would like to persuade you all that I think the worst is behind us. And we have been working on a lot of initiatives, which are panning out really well. While I don't want to be super optimistic about Q3 and Q4, but we are on the right track, and we see that we should be back to normalized growth very, very soon, possibly from quarter 3 itself. And we don't see much pain going forward. This basically all the -- and the inventory correction was also not exactly pan India, we didn't really need to. It was only limited to these couple of geographies that we've stated.

So it's not like we have any more corrections to take or any place else. So primarily, we believe the pain is over in terms of at least quarter 2, the volume drop that we've seen. While there could be possibly some impact, if at all, post Diwali, we don't know. But we, as of now, as of the 40, 42 days that have we left in quarter 3 we have seen a very positive outlook.

Now quarter 4 as well, like we said, we are very bullish on BIS, but that's just -- that's a timing thing. It could give us positive impact in quarter 4 or maybe from quarter 1 next year, that is yet to be seen. But yes, so basically, the company, all the initiatives that the company has been taking, be it with respect to margin, cost saving initiatives, supply chain, all the channel, the integration of the channels, all of that is by far is completed. And some initiatives that are still going on, will continue to see the benefits of those flowing through the next few quarters. So that's where we are called for this year. I hope that answers the question.

[Operator]

[Operator Instructions] Next question is from the line of Aditya Gupta from Tara Capital Partners.

[Aditya Gupta, analyst]

A couple of questions. One, on the inventory correction, again, and I'm sorry to harp on this, was the slow-moving goods that were just moving in those states, and you decided not to do any more primary sales over there? Or was there some collections from designs that did not work and you guys decided to take it back from the market and you had to write off some earlier sales? What exactly happened here?

[Nikhil Aggarwal, executive]

No. So it was not related to any sort of specific design or any returns that the company has taken. This was a general correction that we undertook because of the low consumer sentiment. If there is less footfall in the market, and clearly, the offtake from the retailers is low, then there is no point for the company. If we push more products into the system, it will only create more complications for us going forward. So we took that proactive steps as a general caution through the quarter to be ready for the upcoming quarters and not make them as painful from an inventory perspective. So there was no specific inventory that we have returned or recalled at all. It is related to a general hygiene, I would say, that has happened really through the channel.

[Aditya Gupta, analyst]

Got it. Second question. On the management team, there's been a fairly significant churn over the last few quarters, right? And you've obviously appointed replacements, and some haven't seen replacements in some so far. So where are we on that? Is this team stable now? Who's handling what of the people who have left? And how should we read into that? Is that also a cause of, let's say, business disruption because you've had a fair amount of churn in the top management team?

[Nikhil Aggarwal, executive]

Yes. See, there will always be some churn in any growing organization. We are growing very fastly, evolving as an organization, because footwear primarily is a very unorganized business. This you will see in every other footwear company in India. And the kind of channels and the people we deal with, they're very unorganized. So we've had to -- as a category leader, we've really turned things around. We've had to educate a lot of our channel partners, bring them up to the FMCG standards. And that's what we have successfully been able -- we've been doing that for the past few years.

Therefore, we know it is important to understand that there will be some churn always with regards to people also in an evolving business. But at the moment, I would like to assure you that we are very stable now. All the changes that, inadvertently, have been made have -- are through, and we are sitting with a very, very, very good -- we are very proud of the current team that we have who have been handling the business really well. And therefore, we will be able to see the reflection of those in our performance numbers very, very soon.

[Aditya Gupta, analyst]

Got it. And if you could clarify who's handling the strategy role now and who's handling Internet and who's handling supply chain.

[Nikhil Aggarwal, executive]

Strategy is being handled by both the Chairman and myself and our CFO as well. And the online and the D2C business is being handled by -- we have Mr. Uplaksh Tewary. He's been handling D2C, both online and EBO business, for the last few months. EBO -- he started in retail and he took over online business a couple of months back, and he's doing very well. And at the same time, we have Mr. Aseem Sood, who's handling our distribution business. Again, he's from the FMCG background and doing a great job there. So we have really high-quality people handling both the business.

[Aditya Gupta, analyst]

Got it. And if I can squeeze in one last, please. This Udaan and the Ajio issue again, I know you explained it out, but not a lot of your peers seem to be gossiping it out as this big an issue on their business. So how are terms of trade with these partners different? Did we -- I mean, you've given out the numbers, but I'm still at a little bit of a challenge as to it happened last quarter, you called it out last quarter also, but the other players in the -- I mean, in your [ PSN ], the impact does not -- I mean, nobody seemed to have called it out or the impact does not seem to be this significant. So how exactly are terms of trade different with these guys? And what has changed now?

[Nikhil Aggarwal, executive]

So Campus as a brand has been extremely strong in Tier 2, Tier 3 markets of the country. That is why our online business overall has been able to do so well for the past few years. This is the reason why we've been able to also grow our O2O business so rapidly from like a INR 0 crore base to INR 70 crores, INR 80 crores in a span of 2 years. We've been able to do that on the back of demand, on the back of the brand pool and the O2O platform reaching out to us. So that may not be necessarily true for other competitors. They probably wouldn't have been able to scale as fast as we did with O2O because of the brand pool. Therefore, we've also seen that impact probably the most.

[Aditya Gupta, analyst]

Okay. All right. Now you're seeing all of this is sorted, and Q3 onwards, you should be back to, let's say, normalized or trending back towards normalized businesses.

[Nikhil Aggarwal, executive]

Absolutely. See, for us, the larger objective this year is to maintain and grow our market share. We are very clear with that. And we will not do that at the expense of margin beyond the point. It's not about giving high discounts in the channel, any channel whatsoever, or -- so we have a very clearly laid out product and channel strategy that we are following, which has been reaping us really good benefits, and we'll be seeing that very soon now.

So for us, the imperative thing to do is to maintain and grow the market share that we have successfully done on Flipkart as well this year. Basically, all the online platforms, including Amazon, Mitra, every single one of them, we've been very proactive at that. At the same time, we are seeing similar trends in our distribution business as well. So by FY -- by the end of FY '24, we expect to sit at a meaningful market share even compared to last year. That is the primary objective for this year, not at the expense of gross margin dilution also, I would like to add.

[Operator]

[Operator Instructions] Next question comes from [ Saki Nassau ] from Nassau Investments.

[Unknown Analyst]

Sir, can you hear me?

[Nikhil Aggarwal, executive]

Yes.

[Unknown Analyst]

Sir, first of all, let me congratulate the team on rolling out a really wonderful pair of shoes. I think having Campus as a shoe has really trend up the ladder. My [ questions ] would be, sir, how would, going forward, look at your geographical expansion in terms of urban, semi-urban, rural, in kind of taking market share for Campus? And sir, as inventory correction has happened in this quarter, could we safely assume that at least Campus will maintain last year's level in terms of the overall top line, sir?

Also, sir, a company with the stature of Campus, I mean, don't you think this quarter, as the kind of drop has happened, we should look at more -- the way you look at your channel, that should be more sticky. And a couple of withdrawals should not drop your turnover by more than 20%, which has happened, sir.

[Nikhil Aggarwal, executive]

Thank you for your questions, and thank you for the compliment on the pair of shoe, we really appreciate it. That's the endeavor that we all work towards. So with regards to -- I'll take your last question first. We are -- like I said, there was obviously a very weak sentiment in the market, but there were also a few changes that we have been making internally in terms of a lot of initiatives that we've been driving, very positive. So while you're right that there should not be a drop of volume beyond the point, and we do agree to that, we do -- we are aware of that fact, therefore, we have made some very significant changes that this does not repeat again in the future. And we assure you that it will never happen again.

Secondly -- sorry, can you come back to your second question?

[Unknown Analyst]

Sir, geographical divide, how do you wish to spread your geographical divide between urban, semi-urban and rural? Because I think these are 3 entirely different markets. And where do you fit -- where would you want to fit in? And also while taking this, sir, what about, say, adding to you showroom? In terms of how would you wish to add at least garments to it, if you could, because -- I mean, are there any plans on it?

[Nikhil Aggarwal, executive]

In terms of geographical expansion, as we are increasing the brand saliency and the brand pool and the kind of marketing campaign that we are about to roll out now, and you'll be seeing that very soon across all the mediums, we are very proactive. And we have the image that the brand is building is we want to be the preferred brand in this segment, that is the vision for the company, the preferred brand in this segment of INR 1,000 crore to INR 3,000 segment.

And for that, we have been working very with a lot of these -- we have brand ambassadors like the King is a Rapper. So we are targeting the right audience across various geographies. And such celebrities basically end up attracting target audience from both urban, semi-urban and rural. That's the kind of saliency that we want to create. While urban, we have increased meaningfully the contribution in the last couple of years, we are very cognizant of the fact that Campus has been very, very strong in the Tier 2 and Tier 3 markets of the country. That's how we started out. And we literally have negligible competition in those states in those specific sectors. So we'll continue to focus and grow our market share in the Tier 2 and Tier 3 towns as well. So it's an overall strategy. We are targeting every single urban and semi-urban centers, along with rural, through our [ GTM ] that we have been rolling out.

On the athleisure side, like I've mentioned earlier also, we don't want to enter into a new category at the moment given the kind of white space we have in our category. It would be a big distraction for the entire team and the company. So we would take that up probably maybe a year or 2 or 3 years down the line. Once we've been able to penetrate to some extent -- to a large extent, rather, the markets in terms of footwear, then we can probably take up another category at that point.

[Unknown Analyst]

Sir, just do we hope to see that [ 1,487 ] surpassed in the current year, sir, balance report?

[Nikhil Aggarwal, executive]

Sorry, I cannot comment. I would love to comment on that. but we don't give forward-looking guidance. I've given you a flavor of how we are looking at quarter 3 and 4 going forward.

[Unknown Analyst]

And what would the peak turnover be, sir, in terms of our capacities INR 2,500 crores, you are prepared for that without any CapEx?

[Nikhil Aggarwal, executive]

I cannot give you in terms of value. We can tell you in terms of volume. Our capacities are closer to 3.5 crore pairs, that's 35 million pairs per annum. And we have -- last year, we've done approximately 25 million pairs, close to 25 million, and we are trending at better volumes.

[Operator]

Next question is from the line of Abhishek Getam from Alpha Invesco.

[Abhishek Getam, analyst]

Thank you, sir, for explaining your UP strategy. I wanted to know more on our strategy and the flavor of Eastern and the Southern markets.

[Nikhil Aggarwal, executive]

Sure. So Southern market, like we've always maintained that for the last year, since the last 1 year and going forward as well, West and South are our key markets -- focus markets. And we have seen that effect also in quarter 2 where we've basically stayed flat in these 2 markets, we've not degrown compared to the Northern market, so in spite of a very poor macro across India. So that's where we are -- our focus has been well paid. And so we'll continue to grow our market share in those 2 markets. These are very important and focused markets for Campus, both the West and the South.

[Abhishek Getam, analyst]

Sir, I'm asking about Eastern, East market also.

[Nikhil Aggarwal, executive]

Okay. Yes. So East as well, see, East has been flat for us for the last 2, 3 years. We have a decent market share in East. it is equal to the footwear sports shoe component of the entire footwear market of the East. So we are commensurate with that. And I don't see any challenge in increasing, so it is also a focused market, but there's a different kind of portfolio, which we are working on for East as well, which is like outdoor kind of categories where we are also working on some new product development on that side. And we've already launched a few designs this season as well. So that should also help us in increasing our East contribution and market.

[Abhishek Getam, analyst]

Sir, just an extension to it, on our Eastern/Southern strategy, is it an MBO-led or distribution-led strategy or an EBO-led strategy?

[Nikhil Aggarwal, executive]

So it is a combination of all 3, actually. You see, we have been able to demonstrate and we've been able to penetrate a lot of new markets by using flux and a mix of all 3 channels, so very successfully. So we will continue to do that. There are certain different strategies we may need to apply to Northern markets given the conditions there. But for the rest of India, the mix of -- a hybrid of the 3 strategies where the company has really strong foothold in all 3 channels, both online and distribution and EBO, we'll be using all 3 to head into the South and the East and the West markets.

For example, I'll just share 1 data point, at Gujarat, we have just opened our 50th store, which is the highest ramp-up in any company so far in Gujarat, irrespective of category, like be it apparel or footwear. Nobody has been able to ramp up, up to 50 stores in Gujarat in a span of less than -- right? So that's the kind of aggression we have shown in the best markets of Gujarat and Maharashtra. Similarly, in South, we've opened a few EBOs, which are doing really well. And we are seeing higher penetration across distribution and online, thanks to our EBO penetration as well.

[Operator]

[Operator Instructions] Next question is from the line of Mehul Desai from JM Financial.

[Mehul Desai, analyst]

I just wanted to check, one, how big is UP and Bihar for us in terms of sales? And second, I don't know if you have given this number, how was the growth in West and South region in the quarter?

[Nikhil Aggarwal, executive]

So quarter 2 has been flat with regards to West and South and also East. So the major impact has actually come in from the loss of volume in Northern markets of UP and Bihar, like we mentioned. So there is no real volume drop in any of the other markets compared to quarter 2 last year in spite of a lot of pain in the market in terms of macro.

[Mehul Desai, analyst]

And how big is -- I mean, can you give some indication how big is UP for us in terms of sales?

[Sanjay Chhabra, executive]

We look at UP and [ Bihar ] together. So roughly, from an MBO business perspective, it would be close to 25%.

[Mehul Desai, analyst]

25% of the overall, on the MBO sales?

[Sanjay Chhabra, executive]

Yes. Yes.

[Mehul Desai, analyst]

And just to get some sense, how will the A&P spend in first half? And how will it look in the second half as a percentage to sales?

[Sanjay Chhabra, executive]

Obviously, for the second half, in absolute, the spend would be higher because of our TV and media and also print spend, considering the festival season. But on overall percentage terms, as a percentage to sales, we'll be in the range of 5% to 6%. That's the kind of spend we plan to do.

[Operator]

We have a follow-up question from Ankit Kedia from PhillipCapital.

[Ankit Kedia, analyst]

Sir, just one question on follow-up, just on the manufacturing side. Given that our share of third-party manufacturing for uppers and sole is significantly higher, now BIS certification coming in, what percentage of our contract manufacturers have got certification? And do we plan to do more in-house manufacturing now for sole and upper post-BIS?

[Nikhil Aggarwal, executive]

Ankit, just to clarify, BIS is not applicable on upper or sole or even raw materials. BIS is only applicable on the finished goods. So what -- and all finished goods, 100% of our finished goods, is manufactured in-house, completely in our plants at Dehradun and Baddi. So whatever we roll out -- and as of now, we have already 20 -- almost 20% of our production is BIS certified at the moment, which we will take up to 100% by the end of November or by first week of December, we'll get 100% BIS-certified production being rolled out from both the plants. So it does not apply to any sort of -- BIS does not apply to any sort of upper or sole whatsoever. It is up to the company to use those quality standards of upper and sole, that finally we'll make a BIS-certified final product. I hope that helps.

[Ankit Kedia, analyst]

But in order to get the best quality, you would want more in-house manufacturing. Is that the right assumption? Or do you continue with them and do testing and then have a mix of in-house plus outsourced?

[Nikhil Aggarwal, executive]

We continue to have a mix of -- we've had this model work very successfully. These are all exclusive partners with Campus with job workers that we work with. While a lot of it we do in-house as well, but we have a lot of very good partners. And Campus anyways takes pride in very high-quality manufacturing that we've always endeavored to do, and we've been doing for several decades now. So that is the whole genesis of our brand-building proposition. And therefore, for us, it was extremely easy and very straightforward to get into BIS certification because of, anyways, very high-quality standards that we've been following irrespective whether the shoe is in-house or made through a job worker.

[Ankit Kedia, analyst]

So we should not expect any negative surprises from -- on BIS from your side at least?

[Nikhil Aggarwal, executive]

Not at all.

[Operator]

That was the last question for today's Campus Activewear Q2 FY '24 Conference Call. I would now like to hand over the floor to management for closing comments.

[Nikhil Aggarwal, executive]

Thank you, everyone, for attending the call so early in the morning today. I know it's been a tough quarter, and we really appreciate everyone's support during this time. And we assure you of very positive outcomes in the coming times as the management has taken very proactive steps to counter the macro environment and any other issues that may have come up. So thank you so much for attending the call and wish you all the best. Thank you.

[Sanjay Chhabra, executive]

Thank you.

[Operator]

Thank you. On behalf of Campus Activewear Limited, that concludes this conference. Thank you for joining us. And in case of any further queries, please reach out to Campus Active's Investor Relations team at [e-mail]. You may now disconnect your lines.