It was a good operational performance by Arvind and the big positive came in from revenues. The consolidated year-on-year (Y-o-Y) revenue growth was up 17.2% at Rs 2,89 crore against Rs 2,466 crore, while EBITDA was up 29.3% at Rs 291.7 crore versus Rs 225.6 crore.

Throwing more light on the quarterly performance and the outlook going forward Kulin Lalbhai, Executive Director, Arvind said the brand business is doing well. The mature brand business should have EBITDA margin of around 15% while retail business should have double-digit margins, he said. “Brands business has a strong operational leverage,” he added.

Edited Excerpts:

Sonia: Big things happening in this space, Walmart coming in, the market is growing, but I want to talk a little bit about your own business because the branded apparel segment margins have improved significantly this time, almost 5% and you did mention in your guidance or in your presentation that you expect it to improve further. What is really driving this margin improvement and what is your long term focus here?

As we have been maintaining, the brands business is a business where there is very strong operating leverage. So, as the brands mature and as they scale, there is a lot of margin that flows to the bottomline. So what you are seeing is that the portfolio is maturing, the power brands are becoming larger, are value format ‘Unlimited’ is growing rapidly with double digit same store sales growth (SSSG).

Even the new formats, which we have launched, are hitting some sort of scale. We had guided 150-175 basis points improvement in the previous year. In fact, we have beat that guidance; so we have ended the year close to 200 basis points improvement. As the brands business keeps growing, you will see that this operating leverage will keep continuing.

Anuj: At what level would the margins settle, you started on a very low base on this, they will keep growing, but what would be a reasonable level?

A mature brand business tends to have double digit EBITDA margins of around 15% and on the retail side, it depends on the type of business. However, once again, a double digit EBITDA with strong turns is possible in a retail business. So, as the overall business matures, we should see convergence upwards.

Latha: What could you guide in terms of margin improvement in this year itself for the brands in retail?

We have been maintaining that consistently a 150 basis points improvement in the bottomline is possible. For the next year we are very bullish about the market and the strength of our brands, we are getting into slightly accelerated marketing spend. So we might plough back a part of that operating leverage gain into further accelerating the business. However, at least a 100 basis points of improvement should be doable.

Latha: This improvement in margins of 300 basis points in brands, is it because you advertise less or is this because you could push up prices and there were other operating leverages?

No, in the previous year, this is purely an operating leverage phenomena. In fact, even though the market has been quite weak in terms of demand, our growth has been very strong which has led to a very strong margin growth. I was referring to the next year where we will continue this momentum, but we will invest heavily behind our brands as well.

Sonia: There is no faulting in terms of growth, but I think some problems came up when you talk about how the balance sheet is shaping up, more importantly on deter days. You did speak about higher marketing spend, so, that could put pressure as well. I was just looking at your deterred days, they have actually gone up to about 44 days in FY18. You did consolidate two of your brands, so I guess that is where it came from, but tells us a little bit about how you plan to sort of bring in a stricter credit policy, more channelled financing, and what is the plan there?

We have been moving to a strong channel finance strategy on the brands business. In fact on the balance sheet what you are seeing is Rs 300 crore additional debt and that is because the Tommy, Calvin Klein (CK) business was brought in which was not there last year.

Secondly, we have got around Rs 200 crore which are still in the process on Goods and Services Tax (GST) refund which should be ironed out over the next few months. In fact we are quite strong as far as the balance sheet position is concerned as well.

Latha: In the textile business what do you expect, you will do double digit over there, 9.3% in the quarter gone by, how will this year shape up in terms of margins and growth?

We are very excited about the textile business. In fact we are getting back into a strong capex cycle. So we will be spending upwards of Rs 500 crore on capex in the textile business. You will see that our growth rates will move into double digits. One of the main emphasis in the business is verticalisation where we are adding very large garment capacities.

So, just to put it in context, we have around 30 million garment capacity today and we will be exiting next year at a run rate of 45 million garments which we will manufacture. So the business is moving into a high growth rate and the overall textile opportunity in advance materials, in performance fabrics, and in garments, these are themes along which we are investing heavily.

Latha: How much comes from exports, overall, brands and textiles?

In our fabric business, it is almost 50-50 export domestic. Our garments business is largely 100% export.

Anuj: This de-merger timeline, it is getting extend right, it has been so long now. Are you convinced that next three months and the company should be listed?

A: It is going exactly as per the timeline. This is what it takes from a regulatory approval perspective. So one should expect the de-merger sometime in Q2 and the listing sometime in October. So it is absolutely on track.

Sonia: It is the season of acquisitions with Walmart acquiring Flipkart. You head the online arm of the group as well, anything that you are looking to acquire anytime soon?

I think the acquisition proves the confidence and the strength of the consumer market which is what we have also been constantly emphasising on. I think the next five years are going to be incredibly exciting as far as consumer is concerned.

For Arvind, all of these relationships with the online majors are very important. 11% of our business is now digital, we see it growing to 20% in the future. So we are very excited that we have strong deep pocketed companies that are going to invest in building out the digital market and we will partner with them as possibly the largest lifestyle partner, to really grow the business and bring exciting brands to the consumer.

Sonia: May be what I should have done is flip the question the other way round then, are you speaking to any big brands for them acquiring your company or buying any stake?

No, we are not looking at anything on the capital table in the near future. We are focused on the de-merger right now. The business is ramping up incredibly well, so, we are excited about the growth momentum and seeing through the next year on a strong foot.

Latha: So many people are hungry to invest in India, surely you must have had some conversation?

In such a quickly evolving market, you are constantly going to evaluate every option in front of you. However, honestly, the focus right now is organically building the business we have. Whilst it is closing into a Rs 5,000 crore business, this can become a Rs 10,000 crore business very soon. So there is a very exciting path in front of us and a lot of execution that we also need to do. So we are putting our heads down and ensuring that that execution happens.