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Hello, everyone, and thank you for joining us on Arvind Fashions Limited Earnings Conference Call for the Fourth Quarter and Fiscal Year ended March 31, 2020. I'm joined here today by Kulin Lalbhai, Non-Executive Director; Suresh, Managing Director and CEO; and Pramod Gupta, Chief Financial Officer of Arvind Fashions Limited. Please note that the 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 about our strategy and financial performance for the fourth quarter and year ended March 31, 2020. 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.
Thanks, Ankit. A very good evening to you all. I'm happy to be here with you to take you through our quarter 4 earnings details around Flipkart's strategic investment in Flying Machine as well as an overall update on the state of the business. Let me begin with the strategic partnership with Flipkart. The company is extremely happy to announce the strategic partnership with Flipkart Group for the youth brand Flying Machine. This is a very exciting partnership, which brings together AFL's strength in building aspirational brands with Flipkart's strength in the digital pay space. Flying Machine is already one of India's leading denim brands with a large share of revenues coming from the online channel. But through the Flipkart partnership, Flying Machine's dominant position online will further get cemented. And we will be able to build an exciting digital-first youth brand, which will not only scale up rapidly in the online space, but will also build a strong off-line presence. India's youth is now increasingly spending time and money in the online space. This strategic relationship will allow us to leverage Flipkart's reach and deep understanding of customer preferences to position Flying Machine as the preferred brand for young India. With this partnership, we hope to significantly accelerate Flying Machine's journey towards becoming a INR 1,000 crore-plus brand at the net sales value. As a part of this transaction, Flipkart will invest INR 260 crore in Arvind Youth Brands Limited, which is a 100% subsidiary of AFL, for a significant minority stake. Moving on, as is the case with all businesses, COVID has had a deep impact on the branded apparel business in the short term as well as how the market is likely to evolve in the medium term. I would like to touch upon the following on the call today: Number one, a brief update on our performance pre-COVID. Number two, how the company is handling the challenges of operating in this new reality, where I talk about cost, revenue management and inventory management. Number three, how we intend to manage our cash flows and liquidity through the COVID crisis. And number four, how we see the business evolving in the medium term. Let me start with the first. Starting with the Q4 results, we were largely on track to achieve our Q4 target before COVID impacted the business. This impact started around the first week of March. The business lost a top line of INR 300 crores in March due to COVID and that impacted our Q4 EBITDA by INR 135 crore. Before March, our power brands had delivered a 7% like-for-like growth in the month of January and February. And if it weren't for COVID, if we normalize for the COVID impact, we would have delivered a double-digit EBITDA in power brands. Our unlimited business and emerging brands completed a cost restructuring exercise last year and exited from unprofitable stores and channels. This allowed us to reduce capital employed in these businesses by INR 150 crores last year. With the completion of this cost exercise, we have significantly derisked this part of the portfolio and set it up for lower capital requirement and cash burn in the future. Our category expansion into innerwear, footwear, kids wear and beauty is on track and will continue to be a strong growth driver for the company in the years to come. Moving forward, we will focus our energy and investments behind 7 winning propositions: US Polo, Arrow, Flying Machine, Tommy Hilfiger, Calvin Klein, Sephora and GAP, and ensure that the capital employed and cash burn in the rest of the portfolio is minimized.Since the lockdown was announced, the company has been working overtime to minimize cash losses by drastically cutting down on costs, restarting the business effectively, managing the inventory position and strengthening the liquidity position of the company. In the 2 months of the lockdown, where the company was not able to register any sales, the fixed costs were brought down to 35% of earlier level by cutting down on all expenses. For the rest of the year, moving forward from June, our fixed costs have been brought down to 40% -- by 40% from last year's levels. This will allow the business to achieve cash breakeven, even at 65% of last year's sales. This large reduction in fixed cost has come from rental renegotiation, reducing head count and operating costs, restructuring our warehousing and supply chain costs and significantly reducing overhead. While some of these costs will be limited -- cost reductions will be limited to FY '21, we expect a structural cost reduction of INR 120 crores to INR 150 crores, which will be permanent in nature moving forward. We have taken all precautions to restart our operations safely, keeping the health of our employees and the safety of our customers as the topmost priority. The company has been quick to restart the business once the lockdown has come to an end. We have opened 800 out of our 1,200 stand-alone stores. While high street stores have reached 60% to 65% of pre-COVID level, malls continue to underperform with 15% to 20% of pre-COVID sales. Department store sales are currently mirroring that of mall stores, while multi-brand outlets are tracking a little lower than the high street stores. The online channel has performed extremely well for us, where we are already at 1.2x June '19 numbers, with a 3x growth in NNNow.com and marketplace business. At an overall level, for the business, we have reached 30% of our normalized monthly sales run rate. The company has also adapted its product offering to mirror the current requirement. We are seeing a much higher demand for casual clothing with a specific focus on t-shirts, polos, comfort wear, Easies, which is a part of footwear, and work-from-home clothing. Since the company's brand portfolio is dominant in the casual space, we have over-indexed these categories for the next few quarters and hope to gain market share for the same. We have also launched reusable mass in US Polo and Flying Machines, which have been received very well by the market. Our inventory position has been impacted by extremely low sales since March. Since a large portion of our SS20 inventory was not exposed to the market and is not seasonal in nature, we have repurposed a large portion of the inventory to be launched in autumn/winter '20 season. With this repurposing, we have been able to cut our autumn/winter buy by 60%. We've also brought in flexibility to vary our buys by 20% within the season. Through deep cuts in inventory for autumn/winter and flexibility in our supply chain, we hope to end the year with lower inventory than our March end position. The company has experienced cash losses in FY '20 due to a restructuring of the business. And now due to the COVID crisis, the company will see further cash losses in the current fiscal. In order to strengthen the balance sheet of the company, the Board has decided to increase the size of the rights issue from INR 300 crores to INR 400 crores. With the infusion of cash flow of INR 660 crores through the increased rise issue and the formation of the strategic partnership with Flipkart, the company will be able to reduce debt levels by a couple of hundred crores as well as fund the cash burn for this year. Purchases of inventory for SS20 and the cash burn due to COVID has resulted in a stretch creditor by a few hundred crores. But with this infusion taking place, we expect to regularize the creditors. In addition, the control over further purchases for autumn/winter season will reduce inventory levels and release cash. With a large non-debt fund infusion and strong controls on cost and inventory, we are confident that the company will be able to navigate this challenging period. While there is quite a bit of uncertainty in the short term due to COVID, we believe that the company is well positioned for the future. With the market seeing a significant skew towards casual wear post-COVID, strong brands in the casual space will benefit in the medium term, which will give Arvind Fashions an opportunity to gain market share. With Sephora, the company can take advantage of the increase in demand for beauty brand as do-it-yourself makeup will gain traction. AFL is also well positioned to take advantage of the new normal work-from-home culture, with its comfort wear and home footwear ranges. The early investment in technology is helping the company rapidly scale up NNNow.com and the marketplace sales, which are now at the 3x levels of pre-COVID. Post opening, fulfillment of digital sales is contributing to more than 20% of our overall store revenues. We have also introduced new digital capabilities in our store like shop the store from home, home delivery, curbside pick-up and shopping by appointment. Our brands have a strong position on third-party online platforms, which will benefit the company as more sales pivot towards the digital channel. Our strategic alignment with Flipkart will enable a significant scale-up of Flying Machine. With all of this, the company is ready for a step change in the scale of its own dotcom and omnichannel initiatives and a strong double-digit growth in overall online revenues for the years to come. AFL's early entry into small towns will become an advantage, as small town markets are less impacted by COVID. With the small town expansion story intact, the company plans to start store expansion at the appropriate time. COVID is likely to change the competitive dynamics of the apparel business and stronger brands are likely to gain market share. With 7 large aspirational brands, which will be the focus area for scale-up over the next 5 years, we expect a significant improvement in operating leverage and cash flows for the business. With this, let me end my opening comments and open it up for questions.
[Operator Instructions] We have a first question from the line of Manoj Bahety from Carnelian Capital.
A couple of questions. First is if you can help me understand how you are seeing the cash flows during FY '21, like around INR 620 crores, INR 630 crores kind of inflows you are getting. And you also mentioned that the debt reduction will be a couple of hundred crores. So balance INR 400 crores cash flow, do you think it will go mainly for loss funding for reduction in operating creditors? So that is my first question. I will come back with second question.
Yes. So as I mentioned, a couple of hundred crores will go towards debt reduction and the rest will go to fund the cash losses and normalize the creditors. Since we have -- as I also mentioned, we have brought in significant controls on costs, so that will also help us manage the overall cash loss for the year.
Okay, okay, okay. And out of this INR 400 crores, it will be mainly towards cash losses or it will reduce operating creditors also? Because I believe like we have like almost INR 1,000 crores, INR 1,200 crores of operating creditors also in our balance sheet, right?
So I'll explain. See, what happened is in the first part of the year, we had an SS20 season, which we had fully bought before COVID. And then the first few months have been the highest COVID losses and the business was shut down. So because of the combination of these 2 things, there was a stretch creditor which got created. At the same time, we have a stretch receivables because we also did not receive any cash from the market. Now the good news is that as the business is opening up, the receivables are also coming in. And now with the infusion coming in, we will be able to normalize the creditors and manage whatever is the cash loss for the year. Along with that, we believe we'll be able to bring down the debt by a few hundred crores.
Okay, okay, okay. And secondly, have you -- are you disclosing that what is the percentage of the stake, which Flipkart is going to get? You mentioned it is like a significant minority stake.
Yes. We won't be able to share any information beyond that. It's a significant minority stake in the Flying Machine.
Okay, okay. Just one more question. It is slightly longer term, like once we are back to a normalized business situation, how do you see our Sephora brand as well as innerwear category emerging over next 2 to 3 years?
Sure. I think Sephora is a very, very exciting business for us. Even last year, it saw not only rapid growth, but very strong like-for-like sales, and therefore, a much better profitability. And we have started the online journey also 1 year back in Sephora where we have started scaling up. And post-COVID, we are seeing a very, very high jump in the online sales also of Sephora, which shows that the brand pull is very high. So we do believe this brand will move towards the INR 500 crore mark, not only through store expansion and productivity increase of stores, but also with a step change in the online business because we believe beauty as a category online is set for an explosion. And prestige beauty, which is these higher price points, are now seeing more and more traction. So I think the future strategy for us in Sephora is not only continuing the store expansion. We have been opening anywhere between 8 to 10 stores a year. But also really doubling down on the online opportunity, which is looking very exciting. Innerwear, also, last year was a great year for us where we not only expand reach, but we also relaunched our comfort wear. And we believe comfort wear will be a very, very large part of the overall innerwear opportunity for us in US Polo. And as the markets open up, we are seeing that essentials are actually doing very well. Online has dramatically grown on the essentials side, both for comfort wear and innerwear. And even the MBO channel is slowly coming back to life. So whilst there is a short-term impact of COVID on all the off-line part of the business, we believe the innerwear, since it's an essential product, should bounce back faster.
We have next question from the line of Tejash Shah from Spark Capital Advisors.
Congratulations on the deal. Just one question -- so just one question from my side. In this environment, when everybody is actually fearful, at least in the urban centers are fearful, of the COVID and trial-based purchases actually are taking hit across categories, so wherever we have opened stores, what is our reading on the same -- are consumers taking risk of getting into trial rooms? Or it is largely, as you said, that the standard purchases like innerwear are going right away and -- but other things are not happening.
Sure. So Tejash, let me try and add a little flavor to this generic statement that off-line is under pressure. Now if you really try and de-average this, we are seeing a change in the way the consumer is behaving in different channels. So for example, stand-alone stores, consumers are perceiving stand-alone stores as being safer. So very quickly, we got our stand-alone stores coming back to 60%, 65% sales level. Whilst malls -- of course, malls opened 1 entire month after high street. And we have only had 3, 4 weeks of trading. But we are seeing that malls are taking a lot longer because possibly the perception of risk is higher. So MBOs and stand-alone stores, the customers are coming back quicker than in large-format department stores and malls. And online, we are seeing that not only has the overall sale gone up, but there is a change in also the mix where a lot of organic traffic is coming, which means there is paid and organic traffic in online. A lot of organic traffic is coming online, which means that there are people possibly who have the need or want to or desire to buy clothing, and they are choosing online -- proactively going online to search for the brands they love. So that, again, points towards perception of safety. Now coming to the product side, again, there is a lot of nuance. There are some categories which are seeing a lot of weakness. So if you look at formal wear, it is much weaker today, significantly weaker than casual wear. And within casual wear, also there is a nuance. So India has always been a very shirt-intensive market. We call it woven. What we are seeing for the first time is that T-shirts and polos, which is round neck t-shirts and polos, are significantly in volumes going above that of woven. So even within casual, because people are working from home, because people are not having to go to office, I think the knitwear and the real comfort wear is really growing. So what we are also doing is we are adapting our offering. And because we are already very, very strong in the polo and graphic tee and comfort wear category, we are going to double down on that and scale up. So we believe every -- the perception of risk will keep changing, but it is important as a company to focus on the channels where the customer's perception of risk is lower and the categories where the demand for the product is higher.
Very helpful. One more question, if I may. Sir, what is the path ahead for Unlimited from here?
Sure, sure. So Unlimited, what we had done last year, as we had shared with you, was we had exited ourselves from the unviable part of the business and focused on -- with 70 stores in the 3 states where the business is doing very well, where it has a higher recall. So what we have done is 2 things: one, with the onset of COVID, we have taken a very, very high -- a big lens we have put on costs. And we have succeeded in dramatically restructuring the cost of Unlimited, where the fixed costs are coming down by as high as 30%. The other thing which we have been able to do in Unlimited, which we, in fact, did last year is that we have moved from a seasonal purchase to every 2 months, we look at what is required and we purchased. So it dramatically increased the flexibility of our supply chain and removed the perennial issue which we had where we would have inventory building up. And we have, over the last, in fact, even in Q4, we saw that this strategy, this new inventory strategy is really successful in releasing capital. So even though you have COVID, where the sales are at 40% of where it was before, we have seen that with the cost control which we have put in, the overall burn of Unlimited will be very, very much significantly reduced compared to last year. And secondly, because we will release cash from inventory, we actually hope that Unlimited for the year will be cash neutral. Even though there'll be cash losses, the release of cash from inventory should neutralize that. So that is kind of the plan with which we are going ahead in Unlimited.
We have next question from the line of Nihal Jham from Edelweiss Financial Services.
My first question was if you could elaborate that when the Flipkart deal has happened, specifically, why have we only chosen Flying Machine? And why have some of the other also power brands not been considered as a part of the minority investment?
See, even a few quarters back, even pre-COVID, the thought was that we want to really energize and scale up Flying Machine. Because what has happened over the last 2, 3 years, is we have been able to position Flying Machine in a very, very interesting sweet spot, where it is being perceived as a very, very cool, young brand. And it is the brand of -- in our portfolio, which has, by far, the highest percentage of its sales from online because it is mirroring the place where the youth purchase. So as a strategy also in our group, it has been built as a digital-first kind of strategy. So when we decided to scale up Flying Machine and getting investments to scale it up, we were very clear that we want to get a strategic investor. And even within that, for us, our relationship with Flipkart Group is very deep. In fact, Flying Machine performed extremely well on both the portals already. So in a sense, it was a very, very natural fit that if we want to create a very, very disruptive business model because what are we trying to do with FM. It is not just that because you are partners, scale will come. We want to run this business very differently. Because in the future, I think brands can behave very, very differently in the digital world, where data and insight can be used to really micro target customers and then create products that customers want. So the vision behind this partnership is that if we can really start working very differently where all this rich customer data and insight is mined, and then we create a very disruptive supply chain to become very flexible in providing the customers with what the customers want real-time, then we will end up creating a very futuristic, different sort of business. And that is the hope or the ambition with Flying Machine.
Absolutely. Just a specific thought I was having. When I look at the 7 brands or specifically the power brand, that US Polo is definitely the most well-known brand in our portfolio. It -- as you've highlighted earlier, also has among the best return ratios and it has a casual wear-focused portfolio. So would a tie-up there have helped us get a higher infusion and also drive the growth of that brand, which is already well-known and successful even more?
See, US Polo is already a very successful brand online. US Polo is also a much broader brand, where it is straggling, youth, middle age and even the right up to age of 40, 45. So we are intending to broad base it and make it kind of available across channels in a balanced way, so its growth strategy is a little different. But even if you look at within US Polo, there are categories where we are working in a very disruptive way to grow online. So for example, footwear in US Polo has been a huge success. And more than 60% of our growth in footwear in US Polo is coming from the online channel. So when we thought of creating this idea of a disruptive new digital-first brand, currently, the -- as Board said, that Flying Machine is a very, very good candidate for -- in this. And that's why we chose Flying Machine as the platform.
Sure. That's helpful. The second question was that Arvind Fashion has been a company which has been casual wear-focused. And as you mentioned also post-COVID, this trend has definitely increased, currently, till work-from-home continues. What I want your thoughts on is that do you structurally believe that formal wear as a category growth rate has stunted or it will degrow? And if that is the case, do you want to then reposition your collection in Arrow going forward?
See, I don't think formal wear will ever go away, but formal wear is changing. And if you really look at even other formal wear brands, they are kind of repositioning or using dress-up casual as a growth driver. So for us also, we have significantly repositioned or changed the product profile and the look and feel of Arrow Sport. What we have also done, which we feel is a very exciting future-ready strategy, is to say that formal also need to become cool. Neo-formal or formals for the youth is different from classical formal. And that's why we have positioned Arrow New York, which is another sub-brand of Arrow, to go after the young, digitally native professional in the late 20s. So even that product range was completely re-ideated and relaunched towards the end of last year. So with these 2 kind of things in mind, we believe that Arrow has enough growth drivers. And I'm not a believer that formal will go away. I mean, it is going to definitely -- it's already a very large market, but we have to reinvent formals.
Sure. Last question from me. When you speak of NNNow.com, obviously, earlier, when it was a part of Arvind, we knew that initially the setup involved certain expenses to put the website up and going. Currently, is there a burn that happens in operating this website, or I mean, it's breakeven?
No, the margin model of the business has significantly improved. So there is no burn. In fact, in moving forward, we want to build an exciting, high-growth and profitable business with NNNow.com. So it's not a burn anymore for the business.
[Operator Instructions] We have next question from the line of Ayaz Motiwala from Nivalis Partners.
I have 2 questions from my side. One is the -- you draw up upon certain facts on mall-based and large-format retailers not scaling up as well as stand-alone stores or MBOs in your opening comments. And you also talked about the cost control and rental was one of these aspects of it. So my question to you is, is this going to transform the way retailing is done? Is it -- I mean, are we going to see malls being sort of replaced by the online channel over time? And is this the way forward from a company like Arvind, which is very forward-looking and does things on the cutting edge?
Yes. See, first of all, I'd like to just call out that it has been 4 weeks since malls have opened up. So it's very -- it's -- I would not go as far to kind of write an obituary to anything. I mean, it's very difficult to predict how things will progress because we don't know how we will be able to bring this disease under control. Just some statistics to share with all of you. China, which has brought COVID under control, is actually now positively comping on apparel as a category. Europe, which has brought COVID under some level of control, has almost got lifestyle back to 80% of original level. So the category does bounce back. Of course, the caveat is that the disease has to be brought under control. So I think the next 6 months are uncertain because we don't know how COVID would pan out. I think malls, globally, have also reinvented themselves because they are now less about just shopping, but they are experience centers. And I think human beings are going to continue to yearn for experiences. So I think any well-executed physical retail, which is experiential, is here to stay. Densities of off-line retail may change over time. So in the past, if a city like Delhi required 30 stores. In the future, it might require 15 stores with omnichannel built on top. Now almost 20% of our store revenue is actually fulfilling online demand. So the world is changing, but I don't think any particular format necessarily has to completely go away. We'll have to see what will be the channel mix 5 years from now. COVID has actually accelerated the trends which were there, which is increased digitization. But it doesn't mean that digital will replace experiential retail, which is what a great mall provides.
Yes. And so as a side question, would you say that in terms of your plans on store openings, which you all have a constant basis, is that going to be relooked at and malls that are already being revisited as a part of the cost control program, which is my second question following, but is that your basis for how you evaluate?
Yes. So what we had already started last year as a retail strategy is to say that in urban India, we want to invest behind very aspirational and experiential retail. That is why we upgraded a lot of our stores. And if you look at quarter 3 and quarter 4 for us in power brands, we got our like-for-like sales back up to 7%-plus. And that is the focus. That in urban India, one should go for iconic, very experiential retail. While parallelly, we have been expanding the network more in tier 2, tier 3, where we believe there is a lot of room still for expanding retail. So in urban India, we are going for experience. And maybe, in fact, the number of store count will come down. But the opposite is the case in tier 2, tier 3, tier 4, where we are -- we expect the whole expansion story to continue for a very long time to come. Because of COVID, what might happen is some of the long tail edge stores, which were borderline profitable or were unprofitable, possibly shutting them down would become a little accelerated. So as a part of our structural cost reduction, we have taken a call to shut down another set of stores post-COVID. So I think that's the only thing which has changed in COVID, which is we are taking a little harder view. And anything which is on the borderline of not making sense from a profitability perspective in retail, we would shut it down.
Can you elaborate, sir, on the second part on cost control? You said about INR 120 crores to INR 150 crores would be a structural reduction in the cost base with the combination of rental reduction, store closures, et cetera. Can you just elaborate a bit more on the efforts being taken by your company on that front, please? Meaning, what are the areas you're working on?
Yes, yes, yes. See, one thing we have done is we are trying to make our overall business more efficient. So we have seen a 20% reduction in our head count in head office. And that has come from a combination of, of course, we have exited some businesses last year, which allowed us to restructure and we have brought in a higher level of automation in the business, which has, again, helped us to become much more leaner. So when we were faced with the COVID issue, we were able to really do a lot of soul searching on this and become very lean. So one piece is around head count. The other piece is around the store network. So there are 2 pieces to this. One piece is, as I mentioned, there was a cohort still of stores, which was adding a negative contribution. So now with -- but in a normal market, you always feel that with some amount of focus and investment, you will be able to turn around that cohort. We have been able to now take a decision to close those stores. And that also is a structural saving because it will make also the whole working capital model better if the store network is a little healthier. And lastly, store OpEx also is a big item in businesses like us. So we have really revisited our whole playbook in terms of how to really tighten store expenses. And there also, we are expecting a 10% reduction. And lastly, on supply chain, we had already started a project last year, where we were consolidating our entire warehouse base and making it much more automated and best-in-class, and that also will bring in a significant saving. Luckily, we had started that project 3 quarters back, and we will get the benefit of it moving forward. So I think with all of this, this is a very critical piece, which is we want to bring a cost reset, which is not just for this year. This year's cost reduction is more here and now, renegotiating rentals and this and that, some of that would come back next year. But what we are talking about, the INR 120 crores to INR 150 crores, is cost which has gone away from the system.
Okay. And just to clarify, I may have heard it wrong. So I want to take the right note down, which is, you said fixed costs are brought down by 35% or brought down to 35%?
Yes -- no, no, no, brought down by 35%...
35%, and then currently to 40%. And then you said currently to 40%, right?
Correct, correct, correct. So we did in the first -- no, I'll explain. When we were in complete lockdown, those 2 months, we actually brought cost down to 35% of original fixed costs. Moving forward from June, we will be at 65% of original fixed costs.
Okay. So we will do on the way as we open, then -- okay...
And then once -- and once COVID goes away because of the structural fixes, we will be at 85%, say, from next year of original cost. So that's it. That's kind of the clarification.
Right. And you said you are now running at 40%, and you said you can breakeven at 65% of the last year's sales volume?
Yes, yes, yes.
So let this linkage to 65%, it seems to be some magical number, 65%, 70%. Listening into some of your mall owners in their conference calls, it sounds like they -- not promising, but they think that you can get to that sales volume number at which their old agreements kick in or as such. So like you remodeled your whole cost structure to break even at lower levels of 65%, 70%. What does it do to sort of rentals in that context? Does it get linked to sales at a lower level? Or how does that happen going forward?
So broadly, the same principle has applied that during the complete lockdown, there was almost a complete waiver of rental. And then in this period where we are below 50%, broadly, that is kind of the -- the kind of rental concessions that we have in the market. And it's tough to predict quarter 3 and quarter 4. If quarter 3 looks like quarter 2, then people will, possibly around August, sit down and figure out what needs to be done. So it's difficult to peg exactly how quarter 3 rentals will look like or quarter 4. I think in the spirit of survival and getting through this phase, everyone has to do something that works for everybody and a partnership model. And that's what I'm happy to share, that so far that is what has happened. So it's been the deep partnerships, which we have with the malls, have allowed us to kind of find a middle ground which works for everybody.
Lastly, Kulin, just an observation. I mean, the COVID crisis has pushed you all to do like this thing, the structural cost reduction in some sense. Did it need such a sort of bolt out of the blue for all of us to get to this program? Or you -- it's an ongoing program like you highlighted some of your other cost control programs?
See, to be honest, we've gotten into a strong cost mindset even since last year. But whenever a crisis of this proportion comes along, it causes you to put things in -- on a completely blank sheet and build up. So I feel that sometimes these crises allow you to think very differently, and in a sense, force you to think differently. And it's our duty as management to really come and try and deliver something looking at the challenge that is before us. So yes, I would say perhaps what you're saying is true, that does tend to happen.
Okay. I really appreciate your answers. I hope all the sales come back, and we all can go to malls and start buying stuff from your end.
We are hoping, too. We are looking at our friends in China and Europe and wondering when India will reach that.
We have next question from the line of Vaishnavi Mandhaniya from Anand Rathi.
So just looking at the segmental, like the group-wise performance, right? So comparing it to the normalized performance for Q4. So for power brands, right, like last year in Q4, we had a 14% EBITDA margin, which fell to, I think, around 10.2%. And for the full year, from 12% to 6.9%, right? So for Q4, if we said that in the first 2, 3 months, at least, we had a good 7% or so like-for-like growth, then why exactly is the degrowth in the profitability so sharp? Is it because of Arrow? Or is it because of the other power brands?
Yes. As we had said, when we had shared the Q3 results with you that we were expecting profitability to just come back to about double digits, for this very reason that we had one more quarter of the correction in Arrow to be with us. So per se, we were on course to achieve what was our guidance in quarter 3 because the Arrow correction was something which was something we knew and was going to happen.
So largely led by the Arrow correction?
Yes. And that, too, is specifically the correction in the trade channel. So that's been the reason why -- that was the same thing that we had mentioned in quarter 3 and quarter 4, that the correction in the trade channel, with the focus on the Arrow correction there, is the main reason why this difference.
So going forward, how should we see the margins in power brands playing out then with the cost reduction?
See, in the very short term, because of COVID, it is very difficult to give a guidance on growth or for that matter exactly kind of predicting when double-digit EBITDA comes back. But because we have done a very deep cost correction this year, which will help us kind of manage our burn for the year. Second half of the year, things will progress and things are moving up. But secondly, the structural piece, which I talked about, of cost, that would definitely help us moving forward, even in power brands, because even if we come back to 80% of original level, we could see a good profitability. So definitely, the cost cuts will help us as we move forward for the bottom line in power brands.
We have next question from the line of Vinod Bansal from Franklin Templeton.
Am I audible?
Yes, you are. Go ahead.
Sir, a couple of questions. One, staying on the cost part, this 35% to 40% cost reductions. You had about, what, INR 1,850 or INR 1,900 cost in this fiscal '20. 35% would broadly mean INR 650 crores. Could you break it down into your various cost segments? So how are you looking to reduce it, say, staff costs? How much will be building in rent? And how much in other OpEx, in terms of savings?
See, it would possibly not be possible to go into every cost head break up this year. But broadly, as I mentioned, out of that INR 600 crore-ish cost, we have around INR 200 crores which we are -- I mean, around INR 150 crores, which we are expecting to be structural. The other bit came from, obviously, this year because COVID has been a very deep impact. We have a significantly large saving also coming from rental, which is something which would continue for this fiscal but is unlikely to spill over to the remaining fiscal. And of course, during the lockdown period, we really tightened our belts, where all costs were brought to a minimum, including things like marketing, et cetera, which is why this year is a much larger saving than what we would expect as a structural saving.
So that I understand rationally. I'm trying to just see how strongly built this number, INR 650 crores, is. So let's talk about rentals. Have you already signed agreements or got into an agreement, if not signed, about the kind of renegotiations you are doing?
Yes. So whatever -- when we are saying we have brought our fixed cost down by 40% for this year, this is based on agreements which are signed. There would possibly, as I mentioned, be some changes that could happen if Q3 works a certain way. So if there is any further reduction, we would bake it in. But this is based on what we have on the table.
Is this overall in the numbers you achieved?
So as I said, we broadly had a rental waiver during the shutdown period. And whilst the sales are below 50%, broadly rentals are 50% of where they were. And some people have given an indication of certain cuts for the second half of the year. Those are still kind of -- we have only baked in a part of that, but that possibly could be in the vicinity of, say, 25% for quarter 3.
So for the second quarter, sales are below 50% of normal. What kind of waiver are you looking at?
It's around 50% waiver. As we speak, like in the month of June, July, we have been -- already, these are all confirmed waivers.
Right, right. So when you say 40% cost savings, it includes the complete rent waiver for the first 2 months, which is coming along with complete sales loss in the first 2 months as well.
Correct, correct.
Okay. Okay. Let's say, FY '23 -- or '22, if you had INR 1,850 crores, you would be -- you'll grow in line with sales so whenever recovery comes back. But sales as a percentage of cost will still be lower by the virtue of this INR 150 crores -- INR 125 crores.
Yes. The INR 120 crores to INR 150 crores that we are -- want -- I mean, that is what we are saying would be the permanent kind of cost that would go away. What remains to be seen is next year, can we come back to 100%? Will we come back to 80%? I mean, that's still an open question.
Right, right. So this INR 125 crores -- I'm sorry, staying with the question again, this INR 125 crores, INR 150 crores sustainable cost savings, it's not coming necessarily from rent?
No. In fact, it's not coming from rent at all. The only part of rent which contributes are those stores which we -- which were negative contribution stores, which we have taken a call to shut down, which is a part of the retail savings. The bigger part is, as I mentioned, the OpEx control also in the stores. And then the restructuring of our warehouse, manpower reduction at headquarters and controls on overhead. So these are the 4 broad buckets for the structural cost reduction.
Okay. So sorry, I'm clarifying this point again. You said at 65% of your normalized sales, you should do a cash breakeven. Is that understanding correct?
Correct.
The cash breakeven include the interest cost payments also.
Yes, yes. That's what we mean by cash breakeven, yes.
What's your implied EBITDA margin assumption in that therefore?
Sorry?
What was your implied EBITDA margin assumption in this math?
No. So if you look at it, we have fixed cost and we have the contribution margin that would come based on a lot of different factors, which channel, what discount, et cetera. But broadly, if you look at last year, our interest cost was around a INR 15 crores monthly run rate. You can add that back, if you want to do the math. But of course, interest costs, we expect it to come down post the fund infusion.
So during the course of last year, you had been shutting down some brands, I think, 3 or 4 brands. Are we done with that exercise completely?
Yes, yes, yes. We are completely done. In fact, the write-offs were there last year. So they are off the books, they're discontinued. Right.
For the full year, for the entire period, what kind of additional payments we have made to those 4 brand owners for the early engagement with those brands, which is a onetime expense which will not happen again?
So if you really look at the most part of the write-off was because we actually shut down the stores and we liquidated all that inventory. So the component of payout to brand out of that was very small. Suresh bhai, do we have a broad number on that, for the discontinued brands?
We had paid out INR 10 crores on the royalty.
Okay. So the item you used to share was INR 68 crores onetime costs in 1Q, et cetera, that was including the inventory liquidation, et cetera, was included in that?
Yes. Primarily, it is that, the store write-offs and the inventory liquidation.
What is that number for the full year FY '20?
Suresh bhai, what was the number for last year?
You're basically asking the discontinued...
Discontinued brand write-off, yes, yes.
Our total write-off is INR 73 crores.
INR 73 crores in FY '20. I suppose this is a part of loss that will not come back in FY '21?
That's right, yes. That's right, yes.
Okay. And last question, we had also started this program of being more disciplined in our receivables days. The channel that was on long lead cycles, you had stopped streaming into them -- you had stopped supplying to them. Now that the business had been stopped, it's been a couple of few quarters. Have you received all the money from that channel or some of it is still stuck, they have also delayed the payments for the past business?
No. Actually, that is what we really brought in a lot of controls there. And if we were to look at a non-COVID period, we would have seen a clear improvement. In fact, it had already started being clearly visible in the books from quarter 3 itself, that the debtors were coming under control. Unfortunately, with COVID, obviously, there has been a suspension. But we are not expecting any significant bad debts there. We are kind of whatever we were feeling, are the provisions that were required, we have taken in quarter 4.
Right. Again, I'm sorry, I'm trying to put it in a very simple manner. The channel to which we stopped supplies during the course of last year, this is pre-COVID. That's when you stop supplies. For our own doing, we didn't want to supply to them because of a long lead time. None of that is in the books right now, all has been received. That INR 780 crores receivables is not included in that channel.
Yes. So let me try and break it down. There were certain brands which we completely took out of that channel, which is we reversed the sale and took back the inventory. That is fully done last year, if that is the specific question you're asking.
No, my specific question was the INR 780 crores, does it include any money that is yet to be paid by that channel that doesn't work with us anymore?
No. That's -- what I'm saying is the books have been closed out on the discontinued brand. So there is no further money due out of those discontinued brands from the channel.
Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to Mr. Ankit Arora for closing comments. Over to you, sir.
Thank you, everyone, for joining the call. If there is any questions which have been unanswered, you have my coordinates. You can please reach out to me and I'll be happy to take them off-line. Thanks, everyone, for your time today.