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Welcome, everyone, and thank you for joining us on Arvind Fashions Limited Earnings Conference Call for the second quarter and half year ended September 30, 2021. I am joined here today by Kulin Lalbhai, non-Executive Director; Shailesh Chaturvedi, Managing Director and CEO; and Pramod Gupta, Chief Financial Officer of Arvind Fashions Limited. Please note that results, press release and earnings presentation had been mailed across to you earlier, 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 with Kulin providing his key thoughts and brief update about our financial performance for the second quarter and half year ended 30th September 2021. He shall be followed by Shailesh who will share insights into business performance and key priorities for us moving forward. 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.
Thanks, Ankit. A very good evening to you all. Thank you for joining us for the Q2 results. The previous quarter saw the markets opening up post the COVID second wave. What was very heartening to see is that the recovery was more than twice as fast as the recovery after the first week. Most of the retail channel opened up by August, and the market response to the end of season sale was also strong. AFL was able to make the most of this recovery and post a strong set of numbers with a cash breakeven in the continuing business.Sales for the quarter were up 113% year-on-year and 155% quarter-on-quarter. Higher sales and good cost controls led to a INR 100 crores swing in the EBITDA compared to the same quarter last year, and we ended the quarter with an EBITDA of INR 72 crores. The offline channel showed a lot of resilience. While July remained affected by store shutdowns, August and September retail sales were almost back to pre-COVID levels. A highlight was the performance of the power brands, which saw 145% growth over the same quarter last year. The department store channel saw a slightly slower recovery, but we do expect momentum to pick up in the channel in quarter 3. The MBO channel also saw very robust tertiary sales due to fair stocks and healthy footfalls. The offline recovery has seen further momentum building up post quarter 2. This was one of the strongest Diwali seasons we have seen in many, many years. Customers came out in big numbers with Diwali. And with a fresher and higher level of stocking in the channel, we were able to post high double-digit LTL sales across our brands compared to the FY Diwali season which was before the COVID impact. We are also cautiously optimistic that this performance will sustain post Diwali due to a strong performance of the winter wear offering.The online business continues to be a highlight. Even on a very large base, the business saw growth of 55%. We added INR 120 crores of additional sales in the online channel compared to quarter 2 of last year. Marketplace sales has scaled up with an expanded offering in the core business, launch of new categories and by connecting a larger number of stores for omni sales. FM continues to gather momentum with sales almost doubling year-on-year for quarter 2. NNNOW.com has scaled up with a focus on fresh season launches, a scale-up in the beauty category and the launch of more exclusive offerings. We are well on track to achieve a INR 1,000 crore online business run rate as we exit the year.Our focus on improving inventory turns has started showing results. Even though sales have gone up 113% compared to last year, inventory has come down by INR 60 crores from the comparable quarter last year for the continuing businesses. Overall inventory reduction is over INR 180 crores, considering the business exits. We are on track to exiting the year with an inventory turn of 4x.Q2 also saw completion of 2 important strategic actions. The first one was the exit of the Unlimited retail business to V-Mart. The transaction has been completed, and the company has already received INR 166 crores from the transaction. In addition to the upfront amount, AFL will also receive milestone-linked payments in the future. Another critical transaction was raising INR 400 crores through the preferential allotment route. We are happy that marquee investors participated in the round and reported their pace in the company. Debt reduced by INR 70 crores compared to the quarter before. With the preferential funds, which came in, in the month of October and strong collections from the festive season, we expect the debt to further reduce and settle around INR 600 crores by the end of the year. This would be the last quarter of losses from discontinued operations. The one-off charge largely comprises of the operating losses of the Unlimited business before it was handed over and the complete exit of the GAP business. We have accounted for all future losses that would accrue for a complete business exit. And hence, there will be no other losses from discontinued business moving forward.We are excited about the second half of the year. The festive season has gone off very well and the momentum for the autumn/winter season appears to be strong. With healthy inventory levels and a high level of freshness, we expect a boost in productivity through the retail channel. Store openings have also accelerated, and we expect to open 150-plus stores by the end of the year. The digital channel should continue its momentum with new category launches and the omnichannel push. We will remain tight on costs and focus on further improvement in working capital terms.With the scale returning to the business, improvements in productivity, along with reduced cost structures and exit of loss-making businesses will allow us to achieve a positive PBT for the second half of this year. I would like to now hand it over to Shailesh Chaturvedi to talk about the brand level highlights, market recovery and the plans moving forward.
Thanks, Kulin, and good afternoon, everyone. Q2 was a quarter of robust recovery in business, both strategic gains as well as on recovery of revenue and profitability. Strategically, sale of Unlimited around second half of July was a very key outcome. A month from then, we also raised INR 400 crore preferential share in second half of August, which capitalized the balance sheet adequately, leading to sharp reduction in net debt which stands at close to 420 crores at end of October as the capital reached our bank in early October. By September end, we've also completed exit from discontinued brands and made all the adequate provisions for every anticipated hit here and there.Business of continuing brands reached cash breakeven in Q2 and with high-teen like-for-like retail growth in pre-Diwali season. We are achieving higher level of business performance. The like-to-like growth has been even higher for our top run brands like U.S. Polo, Tommy Hilfiger and Calvin Klein. I'm very excited to see double-digit pre-IndAS EBITDA in USPA once again in Q2. Overall, AFL revenues double more than -- more than doubled in Q2, and they continue to gain traction even after Diwali season. Timely onset of winter has helped retail footfalls. Demand has been very strong in Q2, and it has continued that momentum in Q3 also, with very high freshness portion in merchandize in this fall holiday season, and this significant strengthening of back-end processes in terms of buying, stock planning, loyalty program, visual merchandising. We are pleased with high quality of our execution in this season.We have sharp focus on our 6 high conviction brands and our portfolio has unique consumer appeal in post-COVID scenario with inherent, relaxed, casual and comfortable appeal along with multi-category play. Online channel grew 55% in Q2 and accounted for more than 40% share of our revenue with a scale of more than INR 300 crores from online in Q2. With a growth of INR 120 crores in quarter 2 compared to the same quarter last year and more than 90% growth over pre-COVID, we remain undisputed leader in online business in apparel lifestyle accessory space with a monthly run rate of more than INR 100 crores in this quarter.We added omni capabilities another 150 stores, taking into account of omni enable stores to 750-plus and we achieved mid-teen percentage share of store business through omni linkages. We also added further capabilities in B2C warehousing for online with -- for higher volume and faster and cheaper fulfillment. With completion of exit strategy on discontinued brands at end September, INR 400 crores capital raise in Q2. Full recovery of revenue by August, cash breakeven in continuing brands in Q2, sharply lower debt at end October, and fantastic same-store growth of high-teen percentage in key Diwali season, AFL is poised for strong business performance in times to come. Our focus will remain on strong execution on 6 high conviction brands and on improving profitability.We can now keep the floor open for question and answer, Ankit. Over to you.
Ali, please go ahead.
[Operator Instructions] The first question is from the line of Rishikesh Oza from RoboCapital.
Sir, 1 question from my side. Sir, EBITDA numbers are around INR 72 crores for this quarter. But we see majority of our lease or rent expenses they are recognized into depreciation or interest expenses. So in that case, isn't it -- will it be fair to say that our real EBITDA is actually very less.
Whatever the results, the reduction in the rental that is reflected as a practical experience in our P&L. So it is not a not a reduction in the rent and in the depreciation and interest. So frankly, I have not been able to understand your question because this is a real reduction in the operating cost. There is no reduction in the interest and depreciation because as per the IndAS, we can -- Ankit or I can separately explain to you outside of this call, but that rent reductions and all do not impact any reduction in the either deduction -- interest or depreciation.
Okay. No problem. I'll -- we'll take it later.
So just one thing I would like to add is even without IndAS impact, the EBITDA of the company has been enough that we achieved a cash profit as well on the continuing business. And since the offline recovery was not back to 100% even without 100% recovery, we have posted reasonably strong set of numbers on the EBITDA side. And I think as we reach full normalcy and we get back into LTL growth and full scale, you will see the percentage EBITDA improve in the quarters to come.
So if I could just add the numbers, I mean without IndAS impact also, if we were to just look at the numbers prior to IndAS, our EBITDA was INR 27 crores, whereas our interest cost was around INR 26-odd crores. So therefore, there is a small, but nevertheless, it's the positive cash profit quarter. So that enables us to just back out the entire impact of IndAS and just top intrinsic business to business.
[Operator Instructions] The next question is from the line of Nishid Shah from Ambika Fincap.
Congratulations on a good set of numbers. What's the strategy now on beauty and fashion, especially on Sephora, given the fact that Nykaa has a dream run and dream listing. How are we trying to capitalize on that? That's my first question.
Yes, I can come in here. See, I think one important thing to just keep in mind is I think one should not draw 1:1 comparison between different formats, which are quite different in terms of their ASP and addressable market. Coming to the Sephora business specifically. Sephora operates in the prestige part of the beauty business. This is INR 1,500-plus ASP product. And within that product range, it actually has a very strong dominant market share. In fact, between whatever we do on the offline side plus online, Sephora does have a strong position in that market.And we believe that, that market will continue to grow extremely well in India because as the per capita GDP goes up, there will be more and more women upgrading into that particular segment. So Sephora will continue to operate in the prestige segment. I don't think there would ever be a strategy to get into the mass segment because that's not what Sephora is known for or what would be good at.And in order to win in the prestige segment, the key aspects of the strategy that world over have worked very well is, one, a very unique offering because Sephora private label as well as the exclusive brands which are launched through the Sephora franchise globally every year, are the unique differentiation of Sephora. So some of the world's most exciting new beauty brands are born in Sephora because they get the whole huge global Sephora network to scale up. So every year, there will be many of these new exciting brands coming into the country. And with that exclusive catalog it really helps cement Sephora in the place of the prestige customer. The second aspect is the retail experience. One of the things that Sephora is known for globally is not the selling product but selling experiences, selling makeups -- I mean, makeup experiences, the in-store wow that needs to be delivered.And that is possible because of, again, the format and the kind of animations and e-store services that are made available. So there also, the idea is as digitization comes into the store and as more and more the store experience is upgraded globally, we would want to bring more and more aspects of that global rich experience to the retail format.So I think if we stay true to what Sephora is known for globally, which is the unique assortment and very high experiential retail, we believe that Sephora will have a strong place in the Indian market, especially in the prestige part of the market, which is, as such, the real addressable market for a format like Sephora.
I'm glad you explained this in detail, but when do we have Sephora India? Because if you go internationally on Sephora's site, you have a very different and a unique experience which is not available in any of the online sites right now. Like, for example, a women gone to the site and looking at her skin color and all, they will suggest what kind of makeup has to be used and all of that. So right now on NNNow.com, you do not have those kind of options. So when are you going to have sephoraIndia.com coming in into play?
No, we are working with our global partners on that thought process. Since it's a global tech stack which requires to be executed in a fully comprehensive way, you have to figure out how we can execute it perfectly. But it is definitely something which is an ongoing discussion, and we hope to bring that aspect also of the experience to the market as soon as we can.
So my last question is on the -- you mentioned, and that's very good that you are a leader now in the online space, especially in segments in which we are operating. Now how do we capitalize that? Like we are a leader, but how do we capitalize and have more brands and more prominence in the online space? If you can elaborate a little bit on that.
Yes. So what we have discussed maybe even in the last call is that online as a business model is evolving very quickly, where rather than a wholesale mindset, it is a model where brands now will directly control the experience through own dot coms and through the marketplace model on third-party website. And we actually will now be developing merchandise just for the online channel. And the more you use analytics and a quick supply chain to quickly feel the online channel, one can grow very disruptively.So our company is building all of these new edge capabilities along the signs of analytics, along the signs of flexible and quick supply chain, new category insighting. All of this allows us to build a very robust and quick efficient catalog for the online business. And I think capitalizing online opportunity can be done with a very strong portfolio of brands we have.In fact, a lot of the levers are also about getting into new categories like footwear, for example, where U.S. Polo has become a #1 footwear brand. It could not have happened in the offline space, but it can happen in the online space. So part of the reason you are seeing this kind of traction is we have built all of these capabilities, and we hope to keep doubling down on that and protecting the market share and continuing the growth momentum. So I don't think we would lose the opportunity in any way, and we would work to capitalize on it to the full extent.
Yes, this is Dhruv. I have 2 questions. One is you mentioned that you will exist this year with a 4x inventory turn. So if I recollect correctly, last time, you said that you want to end with 5x. Are we on course to deliver that?
Yes. See, what we mentioned last time and what our stated goal is to move towards soar stock turn, and we are on course for that. We've also done a lot of back-end changes on the way we place the orders for inventory. There is a supply chain project going on to reduce the lead time with suppliers and include the turns on the core products with the automatic replacement model. So our entire objective is to reach 5x. We were in 3x we are now this year improving it significantly to move close the year by 4x And as we go along, we will definitely move -- our intent is to move towards 5x, but it will take a step-by-step approach. So we are very committed. This is a key priority for our organization to increase continuously the stock turn and we are using our stock turn. If you look at the last 2 quarters that we have managed our inventory quite well despite COVID and our stock trends are going up and our intent is to reach 5x turns in the medium term.
Right, right. And I just -- can you guys elaborate on the margins front as far as the online and offline now that online is almost 30% of your revenues? So it will be heartening to know what is the margin difference between an offline and online. I'm talking pre-IndAS basis.
Both online margin and off-line margins for AFL are on the increasing turn. We have seen the trends where both the margins are going up and also because as we recover fully post COVID our margins are going up. Now as you say, difference between an offline margin and an online margin, now the way our company and the way our online business is constructed, it's a very profitable business already. So online and offline margins are very similar in the successful power brand. And both are sort of converging and we are looking at moving to double-digit EBITDA in sort of medium term. Both offline and online will drive for that in the medium term. So it's in a very similar percentage of margin we are seeing in offline and online.
Right, right. And my last question is, you mentioned about Tommy, Calvin and U.S. Polo. Can you give us a word on Arrow, how much recovery have we seen in Arrow, now that most offices have started?
Yes. So Arrow has also seen good upswing. July definitely the business was impacted by COVID and Arrow has a higher percentage of its business coming from department store and EBO in the big cities. So July was COVID impacted, but September onwards, Arrow has started breaking even on the EBITDA level. And we are hopeful that in the quarter 3, Arrow should reach mid single-digit EBITDA percentage turn as we go along. So Arrow also profitability is improving on a slightly lower base to start with. But we are seeing good traction in Arrow also in terms of the like-to-like sales growth and also in terms of EBITDA profitability.
The next question is from the line of Harsh Shah from Dimensional Securities Limited.
So my question is on the gross margin front.
Harsh, I'm sorry, you're not audible.
Is this better now?
Yes.
So my question is on the gross margin front. If we look at the current quarter, we have done somewhere around 41.5%, which is still in the range that we used to do when we had Unlimited in our revenue base. I would believe that Unlimited being an economical brand was a lower gross margin business. So if we remove that, then shouldn't our gross margin have been much higher? And added them to this, if I look at your numbers below the gross margin, then we have 4% royalty expense, and then we have another 7% to 8% of commission expenses. So if I deduct these from your gross margins, then we come to roughly around 20% to 30% net gross margin, if you -- if that makes sense. Then my question is from where can we get that operating leverage to reach the mid double-digit kind of EBITDA margins?
If I look at our margin terms over FY '20, the pre-COVID times. Today, we are at 42%. And another way we look at our margin is what is called as contribution, where the variable select is removed. So at contribution level, we are at a place where our contributions are going up by 2% to 3%. We've seen the trend in Q2, and we are seeing the trend continuing. So our margins are going up at 2% to 3% at contribution level. GP level, in the last quarter, this quarter, in the same quarter in '19, we were similar 42% GP. If you look at quarter 2, there are 2 things which stand out as far as the GP part is concerned. One is for an exceptional reason of COVID, the entire U.S. the end of season sale happen in Q2. Typically, this happens -- starts in June and then it comes into July. So part of the lower margin of U.S. has happened in first quarter in our industry. And then the remaining part happens in the early part of the Q2. This year because the malls were not open, the retail was not open, the entire discounting in the U.S. has happened in the Q2.So as an exceptional, even the Q2 margin was slightly impacted because of the full U.S. discounting that happened in this quarter rather than happening in Q1. So that's a one-off thing. Despite that, our margins are holding up at 42% similar to what it was at the pre-COVID level. And at contribution level, we are going up by 2% to 3% because of all the efficiencies that we bought in.Second thing is that we also have to look at our GP in terms of channel mix change. Now here, the online business comes into picture. And online -- as the share of online business has gone up significantly in this quarter compared to the pre-COVID same quarter. Now online is a very profitable business, as I said earlier, very similar to the off-line profitability, but there is a difference between the GP level and at the contribution level.And in online business, the difference between GP and contribution is very low, the retail select, et cetera, that comes in offline, doesn't come in online. So the right way to look at margin in our company and in our industry is to look at contribution level. And online has a very good contribution level, but it has a slightly lower GP level. And as the online business share has gone up significantly, you will see GP staying at 42%, same as what it was in pre-COVID quarter 2 FY '20. Whereas a contribution, we're seeing a 2% to 3% higher contribution because of all the efficiencies that are kicking in and the profitability -- inherent profitability of our power brand that you mentioned, as we are exiting the less profitable businesses. We believe that in our short-term horizon, we should move from 42% up to mid-40s, that's a very likely scenario as the efficiencies are kicking in, and we should reach that goal. We are very confident that in the couple of quarters, we hit the mid-40s gross margin and 2% to 3% increase in contribution level that the trend we are seeing this should stabilize and we should improve further on that.
Can you explain us the difference between gross GP and contribution? How do you calculate this number? Not in anything...
Yes. So GP, when we remove the discounting and the taxation from the retail price, we get to the GP. And from the GP, we removed the variable expenses. So we remove the retail select, which doesn't come to in online business, it comes only in off-line, we remove the commissions, rental, et cetera. So all the variable components get impacted, they get reduced from the from the GP to variable.
Okay. Sir, then in a sense...
Also, royalty gets reduced from there.
One other way to think about it is below contribution, we only have advertising and fixed costs. The rest of the variable costs are between GP and contribution.
Okay, understood. So my another question is on the commission side, which is nearly at 7% of revenues. Sir, I would believe a lot of our sales also comes from the franchisee route, right? Then what exactly is this commission? Whom are we paying at 7%? Because none of the peer has this line item at -- which is -- this is so high.
So this is -- yes, you're right. This is the franchisee margin that we pay. So we have smaller percentage of our own company stores, and we have a larger franchisee network. So that line item comes through as a commission.
What would be roughly -- what would be the split between franchisee and own sales?
We have 900 -- 2 to 9 kind of a percentage. So our own share is less than -- own store is less than 20%.
Okay. So 80% you are saying would be from franchisee route?
Yes, higher than 80%.
All right. And the store expansion, which you're talking about would again mostly be from franchisee route.
So our store expansion is on the asset-like model. That's what we are stated focus policy. So most of our expansion of core will be through the franchisee network. And we have figured out a method where we manage the operations very, very tightly in a franchisee model also. But you're right that most of our expansion close to INR 175 crores that we are planning to open 150 plus that -- they all be largely from the franchisee route.
Okay. And another bookkeeping question, which I wanted to ask is just wanted to understand the accounting aspect of this. So when we sell via franchisee, is the commission expense only the remedy that your franchise earns or do we also give them certain discounts to the selling rate?
The discounts that we give to the selling price goes into the discounting line. But in any case, if you have -- a more detailed understanding if you want, Ankit can connect with you separately and explain to you a little more in detail because that will enable you to have a little more interactive dialogue in a one-on-one setting.
The next question is from the line of Sagar Parekh from Deep Financial Consultants Private Limited.
So my question was on the leverage. So if I heard it correctly, you said that by the end of the year, we are looking at about INR 600 crores of debt. Right now, if I adjust the cash, we are about around net debt of about INR 400 crores -- INR 400 crores, INR 450 crores. So -- And we are talking about improving profitability and cash flows in H2. So what is the missing link here? Because if we are at INR 400 crores right now and as the cash flows improve, then I believe that, that should reduce further from here.
So Sagar, there's no missing link aspects in this. The thing is that like as you know September quarter end, we would have had -- got a fair amount of inventory in order to build up the inventory for the upcoming season areas. And since October month itself also has been a great month for us in terms of sales. So therefore, while the cash has got upfront because our sales have been pretty good, but some of those inventories will have to be paid for. So intrinsically, let's say, from around INR 450-odd crores, if we were to reach at the debt level of just -- it should be a little lower than INR 600 crores or so in that range. So around INR 100 crores will be going into our working capital.And in any case, I mean, we have been -- at the end of September, the money had just come in, so some amount of this will get utilized, and that's what we had mentioned earlier also that we are raising these funds, both to make sure that we have adequate growth funds available as well as to reduce our debt. So debt will be significantly lower than what it was at the end of March. Like if you were to look at March '21 to March '22, there will be a reduction in debt of at least INR 350 crores. And therefore we will -- and then we are completely focused on reducing the leverage even in the times to come.
Right. So -- Just so on H2 FY '22, as we improve our profitability, we would throw some cash, right, in H2 or we would probably, after working capital, we'll just like breakeven. What is the...
No, I mean, see, our continuing business already is at a cash breakeven stage even in Q2 and that had significant impact of COVID in July, right? So H2 looking very, very promising, and it should throw up significantly higher cash than what we have seen in Q2. Our debt levels that we are forecasting will be INR 600 crores or maybe slightly lower than that. Our intent is to keep the debt level as tight as possible. Direct -- our guidance has been conservative always, and no, we hope to beat that guidance.And other than building growth inventory for channels for the season launch that will happen in spring/summer in February and March, we will have no other sort of reason for that. So at that level, we'll very tightly monitor our inventory. You see last 2 quarters, we managed inventory very, very tightly. Our execution has been good. And I don't think we'll disappoint on that front.
And what would be the -- so now basically, since Unlimited is gone, CapEx would largely be very miniscule, right, going forward also in FY '23 in H2. Because the store additions are all coming at franchisee -- through franchisee routes. So CapEx would be minimal. Is that the right understanding, like INR 30 crores, INR 40 crores per year?
So yes, I mean, between INR 30 crores to INR 50 crores is that kind of number you should be looking at. But having said that, all Sephora will not be franchisee, and then we are committed to investing very heavily around IT systems and all. So therefore, there will be investments behind that. And plus, if you look at the net gross and all, we would invest behind some of the experience or and some renovation, et cetera. But I think INR 30 crores to INR 50 crores kind of CapEx is the right number to think through -- think about.
Right. And Sephora, how many stores do we have currently operational?
24.
24 right now, we have operational.
And how many stores do we plan to add next year in H2 also? I mean in the next 18 months, how many stores do we look to add?
We have dialogues on for 6 more stores, and it depends on how the mall got sums up, but between 4 to 6 stores we will definitely open. Our target is 6, but somewhere between 4 to 6 is a realistic scenario, new stores in Sephora.
And that would entail a CapEx of what will be per store CapEx?
Sagar, we don't specifically talk about this level of details regarding our CapEx. But you can rest assured that we will continue to maintain a very significant amount of capital efficiency when in the stores theme. Sephora stores will typically be prestige store. Therefore, it will be a place where we would like to give an excellent experience to the customer but let's just leave it at the fact that we would like to do the stores well, but at the same time, maintain the capital efficiency of investments we have got.
Okay, got it. And my last question would be on the margins pre-IndAS for next year. So given a normalized scenario, what should be like the pre-IndAS margins that we should look at broadly, given that we have done all the cost cutting, some bit of cognizant cost cutting and with improving inventory turns and situation getting normalized. And so obviously, the sales will pick up. So what should be like the pre-IndAS EBITDA margins that we should look at in a range basis, yes.
Yes, we don't give specific guidance like that, but I would definitely like to discuss with you that our intent is to move to -- because all the brands now are high conviction brands that we are double-digit EBITDA is [indiscernible] next goal for us. In the short to medium term, we should reach that number. Now beyond that, I want to specifically answer that question, but we want to continue to make progress on profitability of our brands. That I can confirm.
Got it. So at INR 4,000 crores kind of top line for the 6 plus the smaller brands, I mean, broadly, so at INR 4,000 crores, do you think we can reach about...
Do you want a comment on that specific number, Sagar. Yes. I mean we won't talk about a specific top line number and specific margin right now, but you see there is a significant progress happening at our end.
Okay. So basically, double-digit EBITDA is possible, let's say, in 2 to 3 years from now, at least that...
I think you should think about in the next year, if your -- since your question was regarding specifically FY '23, you could think of high double-digit -- high single-digit kind of EBITDA margins being there for the next year.
The next question is from the line of Miyush Gandhi from Canara Robeco Mutual Fund.
Sir, is it possible to share the revenue of the top 6 brands, the core 6 brands that we intend to pursue very strategically?
We don't give brand level forecast as well. So I'm sorry, I won't be able to discuss that.
And will it be possible to share what was the peak revenues of these continuing businesses in -- maybe in '19 or '20, whenever it is because see the business has gone a lot of restructuring. So it becomes very difficult for us to kind of work with numbers and project and estimate. So some further disclosures will be very helpful in terms of understanding where the business is going on. So maybe at least if you could share with us the peak revenues, the continuing business had reached pre-COVID.
So I would -- I'm sorry, we won't be able to discuss at a brand level, but I can say that the way the recovery has been robust in our business in Q2 and the way what we are seeing in the Diwali season that we think that at the end of this year, we should reach what the pre-COVID level of revenue was. And next year, we should grow over that handsomely. So we are on a good sort of recovery and the demand side growth right now. So we'have seen recovery from COVID. Now we are seeing growth over pre-COVID numbers. So that trend in the short run, should continue going and we will reach scale, which would have been higher than the peak in the past. Towards the end of this year also we should reach closer to where we were and then we'll grow from there.
Yes. But we don't know where we were. So how do we judge whether we are pre-COVID above or below. So that's where...
Yes. I think 1 broad number you can look at is that kind of pre-COVID run rate was close to INR 800 crores sort of run rate a quarter.
For the continuing business?
Yes, yes. So you can consider that as a broad range, then there will be growth.
Fair enough. Fair enough. That's very helpful. And is it possible to quantify how much network expansion would have happened in the last 2 years?
So this year, we will grow our network by more than 150 stores. That's a guidance and we should -- we are on course for that. Last year was COVID impacted. So that number was close to 100 because last year was very unique, COVID you know. And our expansion rate is now -- we're expanding really rapidly into the Tier 3, 4 cities. So what is 150 to 175 this year is likely to become 175 to 200 stores expansion next year. And that's -- again, a very focused area for AFL that we want to penetrate deeper into the Tier 3 and Tier 4 citiies and we have put a distribution structure already in place that will support this distribution expansion.
Fair enough. That's quite helpfull. And sir, just 1 last question from my side. On the online side, I'm sure you must be tracking it. Where is the incremental demand coming from? Is it more urban-centric or it's more rural areas? And the reason for asking this question is whether our existing demand which was kind of fulfilled from stores. Has that moved to online or we've been able to find newer locations and geographies where we are not present? And that is a new area where we are getting new sales from?
See, if you look at the online data, and we have a partnership with Flipkart Group on Flying Machine, and we work very closely with all the big total. We are the leader with each one of them. Now what we are seeing is that what started as an urban network phenomenon of online growth in the big cities. In last 2 years, it has gone to the smaller town and COVID sort of accentuated that penetration into the smaller town, and we are seeing very, very healthy pick up from Tier 3, Tier 4 cities online.Also in our store network, which is metro-centric and Tier 2, 3 cities, we are seeing good omni-connect. We are already reaching mid-teen level of omni business where consumers are linking off-line and online experiences. So through urban cities, we are seeing good traction. The growth is good there. But as a percentage, obviously, because of the lower base, the Tier 3 or 4 cities percentage growth is much higher. And we are seeing the appeal of online channel is -- and also the appeal of omni link store is going into the smaller tier cities also. It's quite visible.
One number which is interesting is that if you look at incremental sales, it's almost 50% now are outside of the metro and Tier 1. So what Shailesh was saying, the growth is faster in Tier 2, Tier 3. And in fact, it's a world where brands may be first experienced online and then our stores follow. So what we have actually done in some of our brands is when we see sales in certain pin codes reach a very high level, that's when one can open up a store in that catchment. So I think the world is quite omni and it's not a cannibalization, but cohesive throughput that comes from an online plus offline experience irrespective of town.
And this quarter, the online share of revenue is around 30%, right, that number.
No, it's 40-plus percent. 42% AFL revenue share came from online business. And that was a growth of INR 120 crores over same quarter last year. So we're seeing very good traction in online business.
Yes, that's a very large number.
It's a little higher because also offline was not fully back in quarter 2. I think you believe that a normal kind of share will be around 30% and not 40%.
I think 1 data point that really pleases us is that in the quarter 2 our online business of more than INR 300 crores. And we were always chasing INR 100 crore a month in the short run online revenue, and we crossed that consistently now. So that 1 milestone we have achieved and we are looking at scaling the new peak. So it has been very, very satisfying leadership stands on the online side.
I know it's really very well executed strategy. Best of luck, and we look forward to more disclosures, especially in the online business, given where the current market context is.
[Operator Instructions] The next question is from the line of Yash Mandawewala from Mandawewala Family Office.
So we've seen really unprecedented levels of inflation of late raw materials, packaging, almost every line item. We also have potentially a GST hike on our products since January. So how much would the MRPs have to increase by in percentage terms for us to absorb both of these items? And just broadly, if you can also give a sense of how are we planning to tackle these?
This question is very, very relevant in the current context. We have seen short-term increase in the cost structure. And we hope that the situation improves in medium term, short term. But currently, what we are seeing is that there is very little option. Efficiency, we have gone after in the last 2 years seen we've made our company very lean on cost structure. From this base, we are looking at industry practices and what we are seeing in the market is that a large part of this cost increase is likely to be passed on to the consumer, which could be -- will vary from category to category, brand to brand, but it could be from 5% to 8%, 9% right now.And you see this is a very fluid situation. We don't know how much more the cost will go up or hopefully how fast the cost may come down because we have seen that things cool down very fast also. So we will wait and watch. We will take the decision very close to the event. So we take well-informed decision. As far as the GST's increase is concerned that is at a price point, which is not very significant portion of our business. So most of our brands and most of our categories will not impact because it will impact much lower-priced businesses. So right now, our focus will be to manage the cost pressure and to see what the industry practices are on that, and we will follow and pass whatever consumers can absorb.
Got it. Got it. Do you -- actually, do you have any impact on final offtake as well if prices were to go up substantially?
See, there are 2 parts. One, right now, the demand side is very strong. And we are seeing consumers are really shopping after 2 years, I think, we got board of the COVID situation and with a revenge, they're traveling and they're shopping so demand pool is very strong right now. Cost increase is also a reality. Now if anybody's guess where how it sort of pans out, so we will wait and watch as to what happens.
Got it. Just 1 last question, which is on the footwear business. Can you just provide some more details on this part of the business. So what would the size of the footwear business be? And if it all sort of mid- to long term, what are the margins and inventory turns on footwear likely to be, in what range?
See, our footwear initiative has been largely on U.S. Polo business, and we invested ahead of time on adjacent category in our strongest brand U.S. Polo. So we created a footwear business, dedicated team -- we created dedicated team on innerwear. We added a dedicated team on the kidswear business. And Innerwear -- in the footwear business, if I normalize is now crossing INR 150 crores normalized time. It's a fairly profitable business with very good return on capital employed net.So it's a very good business with very healthy financial metric size. We don't give too much of details at the brand level, at a category level, but I can tell you that this is a category where we invested ahead of time. And we are very happy with that investment because in online space, in many portals, including Myntra, our footwear business has been winning awards. We are a market leader in that segment. So this has been a wonderful addition to our portfolio.
Do you think the ROCEs there can be on par, at least for our power brands, could it be on par with the apparel business in the long term?
Currently, it's higher than the apparel business.
Thank you. Due to time constraints, that was the last question. I now hand the conference over to Mr. Ankit Arora for closing comments.
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 would be happy to answer them offline.Thanks so much for your time and look forward to interacting with you again next quarter.
Thank you.
Bye, see you soon. Take care. Good evening.