LEADING THE NEXT PHASE OF TMRVL'S TRANSFORMATION
DEAR FRIENDS,
LET ME CONFESS THAT THE YEAR UNDER REVIEW WAS A VERY DIFFICULT ONE FOR THE COMPANY. THE
COMPETITION WAS TURBO CHARGED AND LIQUIDITY WAS IN SHORT SUPPLY. THERE WERE OTHER INTERNAL
ISSUES, SOME OF WHICH I SHALL DILATE ON LATER, WHICH HURT THE OPERATIONS.
The results thus were rather disappointing. Total income dropped by about 15% on the
back of volume drop of 8.6% and competitive pressures took toll on unit realisations that
slipped by about 5%. As a result, the Company suffered a loss of 58 Lakh as against a
profit of 913 Lakh a year earlier.
The Company's online sales too suffered a drop of about 8.62% though its share in total
revenue was marginally higher at 8.82%. In foreign markets, sales of the Company's
products to the GCC market dropped precipitously by 26% on the back of slowing Middle East
economies reportedly due to oil market uncertainties. A redeeming feature was the 42%
growth in the European market, albeit from a low base of the earlier year.
Apparel market was hyper competitive but not bad
According to a report by Care Ratings Ltd., domestic demand for apparel, both branded
and unbranded, grew at a healthy rate of 14%; about 1.4x the nominal GDP growth. Other
leading companies in the sector showed healthy revenue growth of 14-22% as per their
published results. These companies also delivered fairly good growth on net margins.
Globally, elsewhere though, there was a sharp increase in competition, which showed in
some markdown of profits. This, however, didn't have a significant effect on domestic
branded apparel retail in general as much as it seems to have affected your Company.
The reasons are largely internal
The Company's business engine seriously sputtered due to internal factors. Last year,
we had flagged the issue of constraints in working capital. Your management faced serious
difficulties in raising bank limits as the lenders waited for certainty on the issue of
brand license renewal. The fact that the renewal was under serious negotiation and that
the current agreement was valid till March 2020 did not weigh in with them. This shortage
seriously affected the Company's ability to get sufficient supplies on to shelves in time.
Vendors' payments were delayed, further affecting both supplies and the management's
ability to manage input costs. The margins suffered. Though aggressive foreign brands
offered steep discounts over an extended period, your management succeeded in containing
the decline in price realisations to about 5% on an overall basis.
The second reason for the shortfall in revenue was the sudden discontinuation of sales
through Multi Brand Outlets (MBOs). MBOs provide market coverage at a comparatively
moderate cost and are a source of sizable revenues and margins. This channel had to be
discontinued at the insistence of licensors and they were well within their rights to
mandate so. The management was not quick to take their concerns on board since working
capital shortage was pervasive and that limited remedial steps required. This was purely
an internal inadequacy that needs serious redressal.
Thirdly, the Company lost some very talented employees to competition in particular and
consumer companies in general. Due to stressed cash flow, the management had serious
difficulty in meeting financial aspirations of these employees. The Company also had to
let go some senior employees for reasons beyond its control. This created serious
discontinuity at crucial times in the market.
But opportunity is large and growing
The Indian opportunity in branded apparel is as promising as ever. Indians in the age
bracket of 18-35 years constitute over 40 Crore of the population and they are potentially
the prime consuming class for branded goods; the demand, therefore, is assured.
Here is some more reassuring research. Gavekal, a reputed international research
agency, in a recent report (India's Acceleration Phenomenon), analysed India's demographic
move through income classes and its impact on the consumption of various consumer
products. Its hypothesis was that as population lifts itself from one income class to the
next, the consumption of certain products suddenly lifts in discrete leaps. The report
found that given India's GDP growth of nearly 8%, significant shifts of Households (HH)
are underway from the ‘emerging class' (HH income between 2-5 Lakh) to the
‘aspiring class' (HH income of 5-12 Lakh) and the latter into the ‘affluent
class' (HH income of 12 Lakh and above).
The ‘aspiring class' is expected to grow three-fold from 33 Million HH to 101
Million over the next 10 years. Gavekal, a reputed international agency, forecasts that
every year about 1 Crore households will move into the ‘aspiring class' from the
‘emerging class', leading to an acceleration of demand for cars, branded apparel,
toiletries, etc. The movement of a large number of people into the ‘emerging class'
post 2008 led to the acceleration of demand for two-wheelers from 70 Lakh a year to 2.2
Crore! Therefore, your Company is well placed with its play in branded apparel; it has to
prepare itself to take advantage of the unfolding opportunity.
Your management is responding to the situation
Augmenting working capital is the first priority. Since license renewal continues to be
a condition precedent to banks agreeing to increase limits, the management is working
tirelessly to impress upon licensors (The Salman Khan Foundation) the need for a mutually
satisfactory renewal. I assure you it is an urgent work in progress. Over the last three
years, the Company's revenue has remained range bound with a declining bias. This means
the Company needs to rethink its ‘brand positioning' in order to breakout. And this
requires a knowledge-based and research-driven approach to market and brand positioning;
intuition can take you only so far. With the augmentation of funds, the management will be
able to dedicate some serious money towards this.
With the renewal of license, hopefully soon, the management is continuing to work to
iron out issues with the Foundation. While there is unanimity on ‘strategic intent'
between the Foundation and the Company, there is sometimes an asymmetric view of
operational matters. The management is working on priority to address the operational
flaws so that dislocations such as the discontinuation of MBOs that took place in the year
under review are avoided.
For long-term health of the business, technology is another priority to chase. Western
competition shall be bringing in (if not already done) their technology toolkit to the
entire product flow, from trend detection to pricing and personalisation, complete with
the use of Artificial Intelligence (AI), Data Analytics and so on. The Company has to keep
in step. We cannot afford to be surprised.
Foundation
I would like to sincerely acknowledge the encouragement given by Mrs. Alvira Agnihotri
and the support given by her team. Sincere thanks to her and the team at the Foundation. I
am sure with Mrs. Agnihotri's help as the Chief Trustee, the renewal issue will be soon
sorted out to mutual benefit.
Board matters
I am very sorry to inform you of the recent loss of a dear colleague, Mr. Sachin Jaju,
Non-executive Director, on June 2, 2019. Mr. Jaju was an expert in the textile industry
and its supply chains. He was active in Board discussions and he chose his point of
participation very judiciously. I always looked to him for an independent, non-partisan
and informed view. A sprightly marathon runner, Mr. Jaju was just 42. We will miss him. I
must thank my colleagues Mr. Ramnath Pradeep and Mr. Kiran Vaidya for their wise counsel
and guidance on many tricky situations that the Board was presented with. Both stepped
beyond their usual remit as Independent Directors to help the Board and the management
team. I can't thank them enough. I must record my appreciation for the grit shown by Mr.
Manish Mandhana, CEO, in handling this ship in very turbulent waters. All those employees
who stood loyally by the Company deserve heartfelt special thanks. We are very fortunate
to have them.
Lastly, I thank you, shareholders, who have shown tremendous patience during very
difficult times.
Warm regards, PRADIP DUBHASHI