Operator: Ladies and gentlemen, good day and welcome to the Q2 FY27 earnings call of Siyaram Silk Mills Limited, hosted by MUFG Intime. As a reminder, all participant lines will be in listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchtone phone. I now hand the conference over to Ms. Devanshi from MUFG Intime. Thank you, and over to you.
Devanshi Dadhich: Good afternoon, ladies and gentlemen. I welcome you to the Q2 and H1 FY27 earnings conference call of Siyaram Silk Mills Limited. To discuss this quarter's performance, we have from the management, Mr. Gaurav Poddar, President and Executive Director, Mr. Ashok Jalan, Senior President and Director, Mr. Surendra Shetty, Chief Financial Officer, and Mr. Sunish Jaiswal, Vice President, Finance. Before we proceed with the call, I would like to mention that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties.
Devanshi Dadhich: For more details, kindly refer to the investor presentation and other filings that can be found on the company's website. Without further ado, I would like to hand over the call to the management for their opening remarks, and then we can open the floor for question and answer. Thank you, and over to you, sir.
Gaurav Poddar: Good afternoon, everyone, and thank you for joining us today for Siyaram Silk Mills Limited Q2 and H1 FY27 earnings conference call. As we approach the festive season, I would like to extend my warm wishes to all our shareholders, investors, analysts, and stakeholders for a happy, healthy, and prosperous Diwali. We are pleased to have you as we discuss the Company's performance and key developments during the quarter and first half of the year.
Gaurav Poddar: We trust you have had the opportunity to review our financial results and investor presentation, which have been made available on the stock exchanges and on the company's website for your reference. Siyaram Silk Mills Limited has built a strong reputation as one of India's most trusted names in premium fabrics, apparel, and textile products.
Gaurav Poddar: Backed by decades of expertise, a diversified brand portfolio, and an extensive distribution network, the Company continues to cater to evolving consumer preferences across categories. While remaining firmly rooted in its rich textile heritage, the Company is advancing its Siyaram 2.0 journey through a sharper focus on design, merchandising, and retail-led growth, expanding its presence in the value fashion and ethnic wear segments.
Gaurav Poddar: Our retail growth strategy continued to make steady progress during the first half of the year, supported by the measured expansion of ZECODE and DEVO across key markets. As on date, we have 38 ZECODE stores and 23 DEVO stores, taking the total store count to 61 stores as against 70 stores that we have guided. We are confident that we shall be able to close the store count at 70 stores across the two formats by FY27.
Gaurav Poddar: Importantly, this expansion continues to be funded entirely through internal accruals, reflecting our disciplined approach to growth and capital allocation. Coming to the overall industry environment, despite uneven monsoon and increasing inflationary pressures in key raw materials, the demand across textile and apparel sector remained broadly stable during the first half of FY27. Retail activity received support from seasonal consumption and occasions such as Raksha Bandhan and Onam.
Gaurav Poddar: We also continue to see opportunities in Tier 2 and Tier 3 markets, where rising aspirations and expanding reach of organized retail are supporting consumption. With a larger part of the festive season falling in the next quarter, a significant portion of the festive-led consumption is expected to be reflected in Q3. We are also optimistic of the upcoming festive season, and it will give a boost to our performance, and we also revise our revenue guidance to 14% to 15% for this year. We at Siyaram continue to execute our strategic priorities with discipline and agility.
Gaurav Poddar: Our focus on product innovation, retail expansion, and brand development enables us to strengthen our market position while creating a strong foundation for future growth. Our company has delivered another quarter of strong performance with total income of INR 827 crores in Q2 FY27 compared to INR 719 crores in Q2 FY26, a growth of 15.1%. For H1 FY27, total income stood at INR 1,293 crores as against INR 1,118 crores, growth of 15.6% in the corresponding period last year.
Gaurav Poddar: Despite a relatively measured demand environment, we continue to remain focused on driving sustainable growth while maintaining prudent financial management and operational discipline. In line with this commitment, the Board of Directors have approved first interim dividend of INR 4 per equity share of INR 2 each in FY27. This reflects the Company's disciplined approach to rewarding shareholders consistently over the years. We will continue to execute our strategy with discipline while creating long-term value for our stakeholders.
Gaurav Poddar: On that note, let me invite our CFO, Mr. Surendra Shetty, to take you through the financial highlights and key operating metrics for the quarter. Thank you.
Surendra Shetty: Thank you, Gaurav, and good afternoon, everyone. Let me take through the Company's standalone financial performance for the quarter and H1 ended 30 September 2026. For the Q2 financial year 27, the total income stood at INR 827 crores, compared to INR 719 crores in the Q2 of financial year 26, excluding non-recurring other income of INR 24 crores. During the quarter, fabrics contributed 77% of the revenue, while garments accounted for 16%, and yarn and others contributed 7%.
Surendra Shetty: EBITDA for the quarter stood at INR 131 crores in Q2 of the financial year 27 compared to INR 121 crores in Q2 of financial year 26. Profit after tax for the quarter stood at INR 75 crores in Q2 of financial year 27, as against INR 87 crores in the corresponding period of the last year. For the H1 of financial year 27, total income stood at INR 1,293 crores compared to INR 1,118 crores in the H1 of financial year 26. EBITDA for the period stood at INR 170 crores, while profit after tax was INR 86 crores.
Surendra Shetty: The company's balance sheet continues to remain healthy, supported by prudent financial management and disciplined approach to capital allocation. Our debt equity ratio as of 30 September 2026, stood at 0.58. With that, I conclude my remarks. We would now be happy to take the questions. Thank you.
Operator: Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while a question queue assembles. The first question is from the line of Dev Gulwani from Care PMS. Please go ahead.
Dev Gulwani: Good afternoon, Gautam sir. Congratulations on great set of numbers despite delayed festive season, and you have even increased the revenue guidance. First question is, what was the volume growth and value growth this quarter in the fabric segment? Hello?
Gaurav Poddar: Yes, Dev. In general, as we mentioned over the previous few calls, we do not look at it as a breakup of value and volume because there is a change in mix of suiting and shirting that keeps evolving over a certain period of time. However, just as you asked in the fabric business, roughly the volume percentage has been an increase of roughly 2.5% and value has been roughly 11%. But again, it is better to just look at an absolute value rather than looking at a volume mix and a breakup of volume and value.
Dev Gulwani: Understood. What price hike has the company taken in current quarter to offset the impact of higher raw material prices?
Gaurav Poddar: As we mentioned in the last call as well, raw material fluctuation has been quite drastic, and that depends on a commodity price and demand supply scenario to that extent, and that happens in a more immediate manner. However, as a branded player, we face the consumer through a channel. It is a branded consumer product, and we cannot follow the exact same trend of raw material pricing going up as well as going down.
Gaurav Poddar: It is a more gradual approach to price hike, and I think over the last six odd months, we have cumulatively taken a price hike of about, I think, between 4% to 6%, in that kind of range. That happens in a very gradual manner, and it takes a larger period of time to absorb everything. The raw material side, looking at the geopolitical tension at the moment, still remains uncertain. One has to wait and watch how much, what needs to be done. Because there is even a chance, if everything settles down, for things to correct.
Gaurav Poddar: We wouldn't want to overdo too many things, and that is why also it helps to be taking a gradual approach.
Dev Gulwani: What was the reason behind declining gross margin? Majorly it is through raw material inflation, but also the contribution of ZECODE and DEVO is also declining the gross margins?
Gaurav Poddar: As you mentioned, it's largely the impact of the raw material pricing that has had an impact on the gross margin and EBITDA to that extent. For DEVO and ZECODE, we maintained a 150 basis point maximum drop in EBITDA. Throughout the year, we'll hit that number. We are quite confident of matching the guidance that we've given.
Dev Gulwani: What was the revenue contribution from ZECODE and DEVO this quarter?
Gaurav Poddar: In total, if you look at the H1 of the year, then the retail ZECODE and DEVO business together has contributed to about in the range of INR 65 crores to the top line.
Dev Gulwani: Okay, if you can provide only from ZECODE for this quarter.
Gaurav Poddar: We haven't been giving you a breakup of these numbers, but the large part of the revenue comes from ZECODE.
Dev Gulwani: The company has also opened 17 stores in the H1. Given the pace of expansion, can we expect the company to achieve 75 to 80 stores by end of FY27 compared to the guidance of 70 stores?
Gaurav Poddar: So at the moment, we are very confident of achieving the guidance of 70. We have hit already, I think, 61 and things on track to go past 70 now. The fact of the matter is that a lot of these properties are built to suit, and they are in different stages of construction and therefore giving an accurate number sometimes delays things. We would stick to this number of 70 and then let's see how it goes, and we will keep you updated on the progress.
Dev Gulwani: Okay. Thank you, sir.
Gaurav Poddar: Thank you.
Operator: Thank you. The next question is from the line of Dixit Doshi from Whitestone Financial Advisors Private Limited. Please go ahead.
Dixit Doshi: Yeah, thanks for the opportunity. I think you said that retail sales was INR 65 crore. If I am correct, it was INR 30 crore in Q1. It is more or less kind of flattish compared to Q1. Any particular reason for that because we have opened new stores also, and also some festive weddings were there in Q2 as well.
Gaurav Poddar: I would not look at it as a quarter-on-quarter number. This comprises obviously of ZECODE as well as DEVO. If you recall in the first quarter, particularly in April, there was a very good festive wedding season as well. We cannot look at it on a quarter-on-quarter basis. We have given a guidance of approximately INR 160 crore by the end of the year, which we are very confident of achieving.
Dixit Doshi: Okay. Now that it has been two years we started this retail operation, can you share any more metrics? Is it possible to share more metrics of the retail business?
Gaurav Poddar: We have been indicating that this season now we are just approaching the festive season in this quarter. We had the first festive season last year, but that was on a very, very small base, I think about totally less than 20 stores, both of them put together. This is going to be the first festive season where we have some kind of a store volume to talk about, and we want to wait till the end of March before we can share something.
Gaurav Poddar: I think that the progress that we have made qualitatively, if I speak, has been very positive, and we are very encouraged with the feedback and incrementally, we have made a lot of learnings and implemented those learnings and seeing results of those learnings. We are very happy with the progress that we have made in a short time, and we are very optimistic about the retail business.
Dixit Doshi: In ZECODE now we have 38 stores. I think we started with Bengaluru, but we were planning to go outside Karnataka as well. Have we done any expansion outside Karnataka, and how has been the response there?
Gaurav Poddar: As you rightly said, ZECODE we started with Bengaluru and Karnataka. Now, I think about 19, 20 of these stores are within Bengaluru and suburbs itself. About 10 to 12 stores are in rest of Karnataka. Then we have opened Hyderabad and Chennai as indicated in the last call. We have, I think about three, four stores in Hyderabad and two, three stores in Chennai that we have opened. Incrementally the store openings will be largely in these two areas apart from what more we find in Bengaluru.
Dixit Doshi: Okay. Have we finalized anything in terms of store expansion for next year?
Gaurav Poddar: No, I think we are looking this year for the moment. At the end of this year in the call, we will give you a guidance for the next year.
Dixit Doshi: Okay. Last one.
Gaurav Poddar: Of course, there will be store expansion, but we will be able to give you a more concrete number by the end of the year.
Dixit Doshi: Okay. You did mention in earlier calls that for ZECODE we have to constantly do the expansion. DEVO is a kind of model where after a certain point, you can wait for stores to become profitable. Then you can expand aggressively. Is it fair to assume that for next year, most of the expansion will be ZECODE?
Gaurav Poddar: Yes, that is fairly a correct assumption. For example, by the end of this year, DEVO will have approximately in the range of 20 to 25, something like these kind of number of stores. Which we feel is a good number to be able to run an operation with. These DEVO stores are already focused in North India, so Delhi, UP, Punjab, and Rajasthan. So it helps us to be in a particular cluster with a particular kind of taste.
Gaurav Poddar: For ZECODE, like you mentioned on our previous call, we said that we need to have a faster pace of expansion just to be able to manage buying at those volumes and being able to turn around product at a quick pace because we are in the fast fashion business. So most of the expansion next year is going to be ZECODE.
Dixit Doshi: Okay. Last question from my side is, any rough timeline by when the preference shares will be listed?
Surendra Shetty: As on today, looking into the circumstances, we will say around 6 months minimum it will take.
Dixit Doshi: Okay. 6 months more. Okay.
Surendra Shetty: Minimum.
Dixit Doshi: Okay. That is it from my side. Just a suggestion that if possible by year-end, once we have more stores seeing to Diwali, if you can share more metrics on the retail side by year-end, it will be very helpful. Thank you.
Gaurav Poddar: Thank you.
Operator: Thank you. The next question is from the line of Santosh Shetty from LGC Capital. Please go ahead.
Santosh Shetty: Hello, sir. Just a single question. You had mentioned that several ZECODE stores have already turned EBITDA positive. Has the number of EBITDA positive stores increased during Q2? Are you seeing a visible improvement in store level profitability as stores mature?
Gaurav Poddar: Yeah. So thank you for your question. We are not tracking it on a store-by-store basis as you are mentioning. We are looking at it as a more holistic number. When I indicated that we are seeing some stores as being EBITDA positive, it was not to give a count indication, it was just to give a general directional kind of feedback because we are not giving any quantitative numbers, and for some time, it will take some more time because the volume is very small now. Yes, directionally, the positivity is there. The H1 of this year has been much better than the H1 of last year.
Gaurav Poddar: It is not just the old stores that we see that are improving in terms of the metrics, but even the newer stores with the learnings that we have and the new stores that we open, the sizes that we open, or the locations that we choose, we are using those learnings from our experience and opening better stores. So, in general, the mood is good and the feedback is good. The product is being accepted well. So in general, we are very optimistic about ZECODE.
Santosh Shetty: Thank you so much, sir. Thank you for answering the question. All the best.
Gaurav Poddar: Thank you.
Operator: Thank you. The next question is from the line of Minesh Verma from Daruka Securities. Please go ahead.
Manish Verma: Good afternoon, sir. Am I audible?
Gaurav Poddar: Yes, we can hear you.
Manish Verma: Sir, I just had two set of questions. The first one being, I think you have reiterated an upward revision in your growth guidance. What are the key factors behind this?
Gaurav Poddar: So, if you see the H1 of the year, we have been able to hit about 14% to 15% kind of growth numbers, and that gives us confidence going forward. Along with that, the festive season is pushed to the Q3, which was earlier in October last year. So we estimate that to help us as well get some boost. Then, the confidence going into the retail business also in the number we indicated, we seem to be doing as per that. So generally, we feel that we can achieve this 14% to 15% kind of growth number, and that is why we are happy to share that with all of you.
Manish Verma: Got it, sir. The second one would be, you had earlier indicated that Tier 2 and Tier 3 markets would offer a significant growth opportunity. How have the demand trends been in this market during the festive seasons?
Gaurav Poddar: Festive season is just starting out, but if you recall about 2 years ago, rural demand was really weak and that is one of our main markets for the traditional business, particularly the fabric business. Over the last year and continuing to this year, we have seen recovery in that. So Tier 2 and 3 are very important for us, for our fabric business. Festive season has just started, and we are optimistic that the wedding season and the festive season continues to do well in these markets.
Manish Verma: Got it, sir. Thank you. That was all from my side.
Gaurav Poddar: Thank you.
Operator: Thank you. A reminder to all the participants to press star and 1 to ask a question. Ladies and gentlemen, if you wish to ask a question, you may press star and 1 on your touchtone telephone. The next question is from the line of Lohit Saini, from Jayram Stock Brokers. Please go ahead.
Lohit Saini: Hi, sir. Thank you for the opportunity. I am new to the company, so just wanted to know that how does the management differentiate ZECODE from existing fast fashion brands, and DEVO from existing ethnic wear retailers? How do you see the long-term revenue and profitability of both relative to the company's existing fabric business?
Gaurav Poddar: If you look at both these businesses, first of all, ZECODE and DEVO are in completely different market spaces with completely different consumers and different price points, different business altogether. But obviously, there is competition in both these segments. The apparel market in India, when you look at it, is a very large and fragmented market where no one player has a significant market share in the branded category in terms of consumption.
Gaurav Poddar: The largest point of difference or the moat that we would like to say for both these brands and our overall business in terms of retail has been that since we come from a background of textile and a background of understanding yarn and fabric, we believe that we can provide a better product. We understand product, we understand how the back end of the product works, and that we believe is the biggest benefit that we have as a textile company going into retail.
Gaurav Poddar: In terms of actual differences, I think that ZECODE and DEVO both are Siyaram's interpretation of what fast fashion and ethnic wear should be for the Indian market and the Indian consumer as we understand it. There are a lot of players in both these markets who are doing a lot of good things. Either they are national brands or even regional brands. There is a lot of competition, and there is a lot of good competition as well. People are doing a lot of good work.
Gaurav Poddar: We also have our eye out to understand what good is happening in the market, the benchmarks that people have, and we want to interpret that in our own way with our own product and our own values that come from the lineage of Siyaram.
Lohit Saini: Okay, sir. Do you plan to go in the north of India?
Gaurav Poddar: In terms of DEVO-
Lohit Saini: Any plans there?
Gaurav Poddar: In terms of DEVO, we have started with north of India, and in fact, all our stores are based in north, Delhi, NCR, UP, Punjab, and Rajasthan. For ZECODE, we started with south of India, and for the moment we are focusing on the south of India. It's a large cluster, and we are focused on a clustered approach as that's how we started and that we believe very firmly in. As these clusters grow, then we'll keep informing you and keep moving ahead.
Lohit Saini: Okay, sir. Thank you.
Gaurav Poddar: Thank you.
Operator: Thank you. The next question is from the line of Sohani Singh from ROS Capital. Please go ahead.
Sohani Singh: Hello, sir. Good afternoon. I had one question. Given the encouraging response from the retail business, what are the milestones which were needed to be achieved before considering a more aggressive store rollout or franchisee-led expansion model?
Gaurav Poddar: Good afternoon, Sohani. As when we started out with this project, retail as a business has been new to the company. The product is something that we believe is our strength, but retail operations as a business is something that is new. We started out with two different teams and two different setups for DEVO and ZECODE because they are two completely different set of businesses. Of course, ZECODE is a fast fashion business, which is a less cyclical business, less seasonal business, more throughout the year. In terms of just key metrics, there are so many things. It is not just one thing.
Gaurav Poddar: One is that the brand is completely new for the consumer, so it takes time for the brands to be a consumer awareness for these brands. But in general, we want to establish so many things together. We are setting up a completely different warehouse, completely different IT systems. It is a whole new team, and we are working on a very lean structure where it is almost like a startup when you look at how the business is being expanded. All those building blocks are being put in place.
Gaurav Poddar: One of the things is not just the store as a consumer sees it, but also the supply chain and the back end of the operations that we want to solidify. That takes a lot of time. In the beginning, when you start any business, particularly one that is as complicated as retail, there are a lot of errors and a lot of changes that needs to happen. The idea was that we need to do that on a smaller scale where it is more manageable and less impact on cost or profitability for the company.
Gaurav Poddar: That is the idea. As we see progress in ZECODE, we will continue to open stores in ZECODE. DEVO, we reached a certain store count to be able to make that more operationally efficient. As we continue to see more progress, we will keep opening stores and keep updating you.
Sohani Singh: Okay. That helps, sir. Thank you.
Gaurav Poddar: Thank you.
Operator: Thank you. A reminder to all the participants to press star and 1 to ask a question. The next question is from the line of Praveen Sharma, an individual investor. Please go ahead.
Praveen Sharma: Yeah. Hi, good afternoon. Am I audible?
Gaurav Poddar: Yes.
Operator: Yes, sir.
Praveen Sharma: Yeah. Sir, thank you for giving me this opportunity. I have two questions. First is on this DEVO, also on the ZECODE, we are not offering products on e-commerce, either D2C or marketplace, correct?
Gaurav Poddar: That's right.
Praveen Sharma: Yeah. Because for DEVO, at least, I am calling from an experience wherein we needed certain things for the wedding, but it was not available even in a city like Delhi, just to get like Fabindia and all they offer. So I think if there is not a specific reason not to go for D2C model, at least e-commerce website, I think that should be enabled because that is not a cluster approach in DEVO.
Gaurav Poddar: Yeah, thank you for your feedback. See, e-commerce and website has been consciously kept out of the plan so far. It is not to say that that is never in the plan. Consumer today is an omnipresent consumer where they look at a D2C brand or a consumer-facing brand in all formats, and we recognize the importance of that. But this has only been about 2 years or less in terms of age for retail, and there are so many things to do, and we do not want to divert our focus into doing too many things at once.
Gaurav Poddar: We are already running these 2 brands, and we are focusing on a cluster, and we are doing so many things at one time, and that is why this is on the back burner. But eventually, and when we do it, we will do it properly. That is the idea. So I think that is something that will be looked at in the future. It cannot be avoided for sure, but it is not in the immediate plan as of now.
Praveen Sharma: Okay. Because for DEVO, when you have a store, one in a city or 2 in a city, one can offering that D2C wherein it helps the customer. Once I visited the store, once I know the quality and if it is enabled, one can actually buy it through the e-commerce channel very easily. So that is just, and I think that should be done, at least for DEVO. The second question is, what is taking 6 months of the time for listing these preference shares? Is there a specific reason? And there is another question associated to it, is the interest will be payable from the date of allotment or once they are listed in the 5-year
Surendra Shetty: Interest is payable from the date of the allotment every year. Yearly. As far as the listing is concerned, necessary application with BSE and NSE has been made. As per whatever we are getting the feedback, it minimum takes around six months. That is the reason. We do not have any history in precedent for this. We think that being given the knowledge to us, what we are telling that minimum six months it will take.
Praveen Sharma: Okay. Thank you.
Operator: Thank you. The next question is from the line of Vinay Shukla from PhillipCapital India. Please go ahead.
Binay Shukla: Yeah. Hi. Thank you for the opportunity. Sir, first question is on CapEx. So you have guided for around INR 100 crore of CapEx in 2027, including INR 46 crore for retail expansion. Just wanted to know how much of this have you spent in the H1 of the year? Also, do you expect any changes to the CapEx plan for the remainder of the year?
Gaurav Poddar: So cumulatively, we have a CapEx for the H1 of the year of about INR 51 crore. We had indicated about INR 100 crore for the whole year, and we believe that we will be in line with that spend.
Binay Shukla: Understood, sir. Just second and last question from my side that is on festive season. So the festive season generally contributes significantly to overall sales. Based on the trends seen so far, how has the customer demand been during the festive period compared to your expectation?
Gaurav Poddar: The festive season has just started, so we see that retail movement has seen a lot of uptick to follow the festive season and in terms of that. We believe that that will continue. For the retail business, it is direct business, but for the wholesale and channel business, it is a lag that comes in. We believe that as dealer inventory starts clearing out, there is going to be demand. That is why we have increased our guidance to 14% to 15%, because we believe that we should have a good festive season ahead.
Binay Shukla: Understood, sir. Very good. Thank you.
Gaurav Poddar: Thank you.
Operator: Thank you. The next question is from the line of Deepak Malhotra from CapGrow Capital Advisors LLP. Please go ahead.
Deepak Malhotra: Hi, am I audible?
Gaurav Poddar: Yes.
Operator: Yes, sir.
Deepak Malhotra: Hello. Yeah, thank you. My question is basically regarding in terms of the earlier legacy business and the new business which the company has got into. When we look at the legacy business, you have been very strong in the fabrics and even doing very well in the garments. As you enter into the new retail businesses, which is DEVO and ZECODE, there is already a lot of competition there. When we see the existing players there, they have been really bleeding. If we see that. I don't take names here, but even specialized players, they have been suffering heavily.
Deepak Malhotra: Some of the larger players who have got into have again faced the brunt of the competition. The retail expansion basically incurs, at the end of the day, a large CapEx. It also brings it into the Ind AS, complications which again basically gets into the way of valuing the company the way it should be looked into. My question is, with the kind of inflationary pressures which you are facing on the raw materials front, how do you really see the competition landscape at present and your strategy going forward? Thank you.
Gaurav Poddar: Deepak ji, first of all, as you mentioned, the legacy business is something that the company has been doing for now almost 45 odd years. In the fabric business, that is some kind of a leadership position that the brand Siyaram enjoys and other brands in the company. We are present in terms of the rural markets, I think every retailer, or most of the retailers would have our brands on their shelves. It is a brand that is known to most people in the country today. We enjoy that kind of trust and the brand recall, and we are very fortunate to have that.
Gaurav Poddar: As we look forward to the next phase of growth for the company, we believe that retail is the next frontier. We believe that direct to consumer and particularly in channels where the company has not been present in, which is fast fashion as well as ethnic wear, was something that as a big opportunity that is available. If you see the fast fashion industry as a whole, it is growing more than 2 times the speed of the regular apparel industry. There are several players, like you mentioned, and each player has their own strategy. But no single player is a large percentage of that market share.
Gaurav Poddar: Even the largest few players would not be a very large number in terms of market share percentage. That gives a very strong indication of how fragmented the Indian market is and how large the Indian domestic consumption is. Today, in the apparel business, whether it is ethnic wear, fast fashion or any other category, a large part of the business in the apparel business is still unorganized. That shift to organized retail is going to boost the market share for everyone, not just for us.
Gaurav Poddar: Today we are only 2 years old and a very small player in this retail business. But when we approach this business, we do it with our own strategy. That was one of the reasons for the conservative growth. We want to get the business right, get the model right on a smaller scale. We have indicated an EBITDA loss percentage, drop-down of EBITDA by 150 basis points. We stuck to that number in the first year of the business. We have given a similar kind of number in the second year for this business, and we are confident that we will achieve that.
Gaurav Poddar: We have already indicated earlier that ZECODE, for example, has seen some stores which are EBITDA positive at store level much earlier than expectation. This is because we approach the business in our way, and we believe that we want to get the business right. We understand product and retail is of course new for us, but we are making good progress in that. As we open more stores, we use the learnings from previous stores. We use technology to help us expand this business. While there is competition, there will be competition in whatever we do.
Gaurav Poddar: But we believe that this is an important growth prospect for the company and will take the company forward in the coming time. Last year, retail as a percentage was about 3% of the company's turnover. With the given INR 160 crores, that is going to increase to 5%, 6%, 7% of what the company will do this year. So we are very confident of this new project, and we are very conservative in terms of how we want to open stores so that it does not impact the bottom line too much adversely. Company is already generating enough cash flow. All the growth is happening through internal accruals.
Gaurav Poddar: So we are in a well-positioned environment to be able to use the cash flow generated by internal resources to be able to expand the company into a new segment which is related and which will take the company more consumer-facing.
Deepak Malhotra: Yeah, but if we look starting either with garments, fast fashion or ethnic wear, I again do not want to get into publicly listed companies on a con call like this. But they are facing, I can tell you, tremendous pressure, in terms of the CapEx they have undertaken, and we have not seen the ROIC on the same at all. While your point is valid in terms of there being enough opportunity in the space in all these three segments. But if you look at the balance sheet and the profitability these companies are reporting, that is a challenge. So is all I am trying to say. That is my concern, actually.
Gaurav Poddar: We are aware of the challenges of the market and how various people are approaching that challenge. We believe that there is value to be taken out from this segment, and that is why we have entered this segment. There is no point in entering a business without profitability, and that is something that, as a company, we value a lot in. So when we spend more money and do capital expense on a project, there obviously has to be some kind of return.
Gaurav Poddar: This is a new business for us, but so far we have been very encouraged with the kind of response, and we have to approach it in our own way, and so far it seems to be the case.
Deepak Malhotra: Okay, so one last point. How do you see the inflation which is seeping in the P&L numbers? Basically, what kind of recovery do you see going forward, say over the next year or so? Because these are challenging times.
Gaurav Poddar: So it is very difficult to predict how the geopolitical scenario will pan out. Still, the scenario is quite unstable, and therefore it is difficult to give you a certain number. There has been a sharp increase in raw material prices, and as a brand, we have been able to pass on some part of it to the consumer, and that normally is a gradual process. So as and when we move forward, we see how things are and how things pan out and accordingly take the required decisions. We have always had an EBITDA guidance of about 14%. We believe that it is too early to change that guidance because there is a lot of uncertainty.
Gaurav Poddar: This 14% obviously is without the 150 basis point drop. So far we want to stick to that number and then see how it goes, obviously with this uncertainty being there. But as the market pans out, that is for everyone. So we have to, as an industry, face it and then take the required actions.
Deepak Malhotra: So if you were to. Sorry. Just on the last point, in terms of quantifying. Raw material inflation, have you seen in the past also such instances? Because the company has such a long-standing history. And how were you able to come out of that?
Gaurav Poddar: All these cycles, they are all cyclical in nature. It can never be permanent. There have been many instances where raw materials have shot up drastically. COVID also being one of the most recent ones, where there has been drastic increases, there has been absolutely no demand, and the company has come out of it even stronger than before COVID.
Gaurav Poddar: So I think the history of the company, the strong position of the company in the fabric, in the traditional business, and the strong cash flow the company generates helps us navigate these difficult times and also helps us to establish new businesses like your concern earlier on.
Deepak Malhotra: Thank you so much, and wish you all the very best.
Gaurav Poddar: Thank you so much.
Operator: Thank you. Participants, if you wish to ask a question, you may press star and one. The next question is from the line of Soumya Raghuvanshi from Nirva Securities. Please go ahead.
Soumya Raghuvanshi: Good afternoon, sir. Thank you so much for taking my question. Management had stated that larger format for ZECODE stores were delivering better outcomes than smaller stores. Has this trend continued or does it influence your future store expansion strategy?
Gaurav Poddar: Yes, that is a trend that we are seeing very clearly because the main reason for that is that the product portfolio and the offering to the consumer that we have in ZECODE is a very large one. There is men's, women's, kids, there is beauty products, footwear, fragrances. There is a lot of variety. It is a complete lifestyle store. To be able to give the consumer a better ambience and display everything in a proper way, we feel that that kind of store size is very important. Obviously, when you go to malls, then sometimes you have to compromise on that.
Gaurav Poddar: Plus you get a larger single floor plate, which helps us display better. It is a mixed variety, but definitely the larger store flow plates help us be able to present ourselves better.
Soumya Raghuvanshi: Okay, sir. Just a last question from my end. The retail business continues to require investments while the core business generates strong cash flows. How are you thinking about balancing growth investments, dividends, and future shareholder returns over next 2, 3 years?
Gaurav Poddar: If I look at the history, then the company has been giving continuous dividend every year, and that has only been increasing over a period of time. That has been what the company has been doing over the past so many years. Now, of course, this new retail business requires CapEx, but that capital allocation also is very prudent and in a very limited manner. We spend about INR 1 to INR 1.5 crores of CapEx and of furniture and security deposit per store and about INR 70, 80 lakhs of inventory roughly that a store needs. So that also is on a very conservative and a tight budget.
Gaurav Poddar: As we move forward, I don't see that the internal accruals, the cash flow generated by the company every year is significantly more than the requirement for the retail expansion. Of course, how the dividend and how the returns pan out is something the board takes a call every quarter, but so far we have been able to manage that well.
Soumya Raghuvanshi: Okay, sir. All right, sir. That is it from my side.
Gaurav Poddar: Thank you.
Operator: Thank you. The next question is from the line of Shalin Seth from Cirrus Finder. Please go ahead.
Shalin Sheth: Hi, for that.
Operator: Sorry to interrupt you, sir. Shaleen, your voice is not audible. It is breaking.
Shalin Sheth: Hello?
Operator: Hello? Mr. Shaleen, can you hear me?
Operator: Mr. Shaleen? We move on to the next participant. The next question is from the line of Yash Mehta from Grid Security. Please go ahead.
Yash Mehta: Hello, am I audible?
Operator: Yes, sir. You are audible.
Yash Mehta: Yeah. I have a few set of questions. Firstly, the EBITDA margins have declined YOY despite healthy revenue growth. Was this pressure primarily due to retail investments or gross margin contraction, higher employee costs, or the marketing spends?
Gaurav Poddar: The largest part of the decline in EBITDA has been the raw material costs that have played a part. Of course, retail has been a part to play, but that is well within our budget that we have indicated earlier. But the raw material has been the largest cause.
Yash Mehta: Okay, understood. Also, the retail expansion continues to be funded through internal accruals. As the store network scales further, do you expect the funding strategy to remain unchanged?
Gaurav Poddar: That is something that we will have to take a call. So far, we have been indicating on an annual basis. This year, we have given a target to reach about 70 stores at the end of the year. That, we believe, will be all internally funded. For the next year, we still have to devise and indicate a plan for opening stores, and accordingly, we will also tell you how that will be funded.
Yash Mehta: Okay, got it. Lastly, I just wanted to know, are Tier 2 and Tier 3 markets continuing to grow faster than the larger cities? Also, how are the consumer spending patterns evolving over the premium and value segments?
Gaurav Poddar: It is difficult to tell you whether Tier 2 and 3 are growing faster than the larger cities, because the traditional business on the fabric side is largely in the Tier 2, 3 cities, whereas the retail business that we have now is more metro-oriented. Most of the stores are in Bangalore, Chennai, and Hyderabad. Markets are looking good. The festive season, it seems promising. We have given an increased revenue guidance, which indicates our confidence in the business and the market at the moment. We are very bullish on the guidance that we have given.
Yash Mehta: Got it. Understood. Thank you so much.
Gaurav Poddar: Thank you.
Operator: Thank you. Due to time constraints, we take that as the last question. I would now like to hand the conference over to Devanshi for the closing comments. Ms. Devanshi, we cannot hear you.
Devanshi Dadhich: Taking the time out for this conference call today.
Operator: Sorry to interrupt you. Devanshi, we could not hear you. Can you please repeat?
Devanshi Dadhich: Yeah. Am I audible now?
Operator: Yes. Please go ahead.
Devanshi Dadhich: Yeah. Thank you. I would like to thank the management for taking the time out for this conference call today, and also thank all the participants.
Operator: On behalf of MUFG Intime, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
