MANAGEMENT DISCUSSION AND ANALYSIS INDUSTRY STRUCTURE AND DEVELOPMENTS Retail has played a major role in supporting the global economy. In developed economies, retail is one of the most prominent industries. Improving GDP growth, greater disposable income, and increasing consumer spending are driving retail industry and offers opportunities for retail segment players. Total retail sales in North America reached $ 5,254 billion in 2015, including $ 4,785 billion in the US alone. More than a fifth of the world's retail sales occurred in the US, making it a highly lucrative market to operate in. Retail sales tend to be driven by personal income, consumer confidence and interest rates, therefore retail sales trends tend to resemble that of the economy at large. In 2016, US retail sales are expected to grow to around $ 5 trillion in value. The UK retail industry is valued at around £ 340 billion/$ 500 billion, rebrsenting 18% of the country's GDP. Consumer spending has been the main driver of UK economic growth, aided by high employment, low interest rates and benign inflation. The US has well-established distribution channels for retailers operating varied formats. Significant opportunities for growth exist in the US retail market for online retailers. In 2015, retail e-commerce sales amounted to $ 340 billion, likely to grow to $ 400 billion in 2016 and further projected at $ 480 billion by 2018. E-commerce sales have been gaining market share, accounting for around 7% of total retail sales in 2015 as compared to 6.4% in 2014. The jewelry segment in US grew 2% in 2015, at $ 63 billion and fashion/imitation jewelry outgrew this pace by growing 3%, highlighting its growing popularity. In UK, jewelry sales rose 1% to £3.2 billion in 2015 with imitation jewelry being major driver. Online retailing has become increasingly attractive for a wide range of products as the internet search is comparatively user friendly with better bargains. Taking a cue, leading retailers, to increase consumer engagement, have been focusing on creating a strong brsence through online sales channels, supplementing their existing stores. The increasing use of mobile technology is an additional factor in making online retailing attractive and convenient. An increasing amount of website browsing is occurring through customers using mobile devices, both smartphones and tablets. In 2015, around 20% of online spending in Europe was done using mobiles. In UK, this number was higher with 28.6% of customers using their mobile devices. The major growth in online sales is the result of higher sales via mobiles/tablets as compared to using PCs and laptops. Vaibhav Global has a growing mobile commerce brsence in the US and UK markets and is slated to benefit significantly from these evolving trends. Overall, the retail industry is dependent on macroeconomic factors such as GDP, disposable income, and consumer spending. Consumers will continue to drive growth in organized retail by expanding the market and compelling retailers to widen their offerings in terms of brands and in terms of variety. Also discounted retailers will continue to be favored. As developed countries emerge from recessionary trends, and unemployment rates beginning to fall, the retail industry is experiencing signs of renewal in growth. <http://www.statista.com>; <http://www>. retail-week.com multichannel/online-retail/uk-online-retail-sales-exceed-100bn-for-first-time-in-2014/5068051.article <http://www.retailresearch.org> <http://www.retailresearch.org/onlineretailing.php> <http://www.cdotsys.com/market-analysis-for-jewellery->industry/ BUSINESS OVERVIEW Vaibhav Global is an electronic retailer of fashion and lifestyle products in the US, UK and Canada markets sold on our proprietary TV shopping and web platforms with direct access to 110 million TV households. The Company delivers deep value proposition to discount seeking customers and has developed a robust B2C franchise in its focus markets organically. This is an achievement very few Indian companies have been able to accomplish. The Company has expanded its portfolio, focusing on adjacent product categories that target similar market segments. While fashion jewelry forms a large part of the portfolio, the Company also sells lifestyle accessories, home textiles and cosmetics all of which are targeted at the same customer and enable access to a larger part of the customer's shopping value pie. Products sold in developed markets are either sourced from micro-markets across India, China, Thailand and Indonesia, or manufactured at the Company's facilities located at Jaipur, India. During 2015-16, revenues were lower by 7% to Rs.1276 crore. While rising competitive intensity and some key technology transitions undertaken over the last two years have had an impact on our volumes and topline, we have made several initiatives that we believe will help us consolidate our market position and enable us to resume on our growth path. Revenues in the retail segment declined by 4.9%. Wholesale revenues were lower by 25.1%, also due to our strategic decision to de-focus from opportunistic trading in loose gemstones. EBITDA margin during 201516 was at 6% of revenues compared to 10.7% of revenues in the brvious year. This was the impact of larger organizational capacity created by the Company for growth, which did not materialize during the year. With the current capacities across functions, we can now deliver reasonable growth without having to make any significant investments over the medium term. Profit after tax (before exceptional items) was 3% of revenues. In 2015-16, realizations were consciously increased to adjust for the additional customer benefits of Budget Pay and easy returns provided to customers. TV realizations increased to $24 compared with $23 in the brvious year. Web realizations increased to $15 compared with $14. Going forward, our objective would be to maintain realizations at current levels across an expanded portfolio of products and categories as we believe we are in a sweet spot to serve our customers' demand and aspirations. During the year, cash flows from operations were impacted due to additional working capital absorbed by the introduction of installment payment and easy returns for our customers. As a consequence, we have invested in additional working capital float, which is now in the system and is enabling us provide more beneficial terms of trade to our customers. We believe this investment to drive deeper engagement in the market and deliver positive returns in the medium term. Over the last two years, we have invested in expanding our physical infrastructure, customer interface, technology platforms and people resources. We believe that these investments will allow us to meet our full potential to make deeper inroads within our targeted markets by delivering a deep value proposition from our portfolio of high quality fashion and lifestyle products. CSR ACTIVITIES The Company believes that corporate social responsibility delivered in the context of its business makes it more effective and sustainable. VGL is sensitive to the needs of local community and impact of operations on them. As a responsible corporate citizen, our Corporate Social Responsibility (CSR) Strategy complements our business philosophy and objectives. The Company ensures community ownership in all initiatives and helps to manage self-supportive community based institutions. We encourage collaboration with various NGOs to support in CSR activities at group level. During the period under review, VGL contributed a sum of H137.71 lacs to various social institutions in areas of mid-day meal, education, health and scholarship. The main beneficiary have been recipient Akshaya Patra, Umang, Manav Seva Sangh Prem Niketan , Jan Chetna Sansthan, and Hare Krishna Movement. At group level, the following major initiatives were undertaken : • VGL sponsors one Akshaya Patra mid-day meal for every item sold at The Jewellery Channel, a step down subsidiary, UK and is currently feeding 14,186 students everyday. • Programme spanning across 141 schools in Jaipur with 10+ vehicles providing logistics support. • Donation of Rs.75,000 to Umang that strives for an inclusive society that provides equal opportunity for all, by enhancing the quality of life of individuals with various disabilities. SWOT ANALYSIS Strengths • Exclusive end-to-end business model covering the entire electronic retail industry across the US and the UK, delivering strong growth momentum, expanding market share, maintaining stable margins and generating robust cash flows. • Low-cost operations at both retail and manufacturing levels. • Efficient sourcing units that allow expansion in other product categories. • Successful homegrown brands such as ILIANA, Rhapsody, J Francis, Karis, Elanza, Strada, Genoa and Eon 1962. • Successful in-house curated collections such as Royal Jaipur; Tribal Jewels of India; Treasures of the Orient; Bali Legacy; D'ltalia; Milaan, etc., • Exclusive designer brands such as Guiseppe Perez; Stefy by Stefania and Ivano; Jewel Studio by Prachi; Jewel Studio by Shweta; Rachel Galley; Lucy Qj Sugar by Gay Isber, etc., • Scalable business model with limited capex requirements. • Strong managerial and talent pool across operations, technical and strategy functions. • In-depth knowledge and vast experience in the jewelry and retail markets. • Highly experienced senior management team and Board of Directors. • ISO 9001-2008 certified world-class gems and jewelry manufacturing facility. Weaknesses • Exposure to foreign exchange and raw material price instabilities. • Fewer cutting-edge technologies when compared with European jewelry manufacturing countries like Italy, Spain and France. Opportunities • Large potential of increasing revenue per household. • Deeper penetration of adjacent product categories. • Acquisition potential for an additional 40 million TV households in current markets. • Launch of mobile commerce applications that add a new dimension to our customer engagement initiatives. • Faster electronic retail segment growth vis-a-vis the overall retail segment (in target markets). • Strengthening asset base with the latest manufacturing and product development technologies. • Reinforcing the low price point 'discount' model in both the US and the UK markets, which should receive stronger traction as the 'value' retailers have always done well in any market cycle. • Potential to replicate the end-to-end discount electronic retail business model in other developed and developing countries. Threats • Increase in rough and gemstones prices. • Low cost end-to-end business model being adopted by existing or new competitors. • Heightened competitive intensity with externally-funded players looking to drive aggressive strategies in the market. OUTLOOK Based on the growing visibility of our retailing platforms — Liquidation Channel in the US and the Jewellery Channel in UK — we believe that we are well-positioned to grow our market share in target markets and create customer loyalty by constantly delivering deep value to the discount seeking buyer. This has been augmented by ongoing focus on new product development and entering adjacent product categories targeting similar customer segments and following their buying behavior. We have continued to invest in the business to improve our competitive positioning and value proposition to buyers. We have recently made several initiatives to further strengthen our competitive positioning. During 2015-16, we also operationalized new facilities at a Special Economic Zone (SEZ) in Jaipur that expand our annual manufacturing capacity to 6 million pieces. We expanded the outsourced call center to a facility in Mexico. We will continue to invest selectively in future growth opportunities and expect returns on these investments to follow in the coming years. Currently, we believe that VGL is one of few Indian companies to successfully create a strong, respected and sizeable B2C franchise in developed markets globally. This also makes us unique from the consumer's perspective as our extreme cost consciousness translates into better value in our products, thereby deepening the relationship. Given that most of the initiatives have been completed successfully, we see strong reason to grow reasonably over a period of time and deliver value to our shareholders. RISK AND CONCERNS The Company is exposed to various risks which are normal in any business enterprise. Accordingly, the Company has a strong risk management policy in place which is developed by taking in account all possible risks. The risk management system enables it to recognize and analyze risks early and to take appropriate action to overcome or minimize the same. The business risks and opportunities so identified are integrated into the business plan and a detailed action plan to mitigate the identified business risks is thereafter drawn up and its implementation monitored. INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY The internal control framework is designed to ensure proper safeguarding of assets, maintaining proper accounting records and providing reliable financial information and other data. This system is supplemented by internal audit, reviews by the management and documented policies, guidelines and procedures. The Company has a well-defined organization structure, authority levels, internal rules and guidelines for conducting the business transactions. The Company intends to undertake further measures as necessary in line with its intent to adhere to procedures, guidelines and regulations as applicable in a transparent manner. M/s S.S. Surana & Co., Chartered Accountants , an external independent firm carries out the internal audit of the Company operations and reports its findings to the Audit Committee. Internal Audit also evaluates the functioning and quality of internal controls and provides assurance of its adequacy and effectiveness through periodic reporting. Internal Audit is carried out as per risk based internal audit plan which is reviewed by the Audit Committee of the Company. The Committee periodically reviews the findings and suggestions for improvement and is apprised on the implementation status in respect of the actionable items. DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL PERFORMANCE On a consolidated basis, the Company recorded total operating revenues of Rs.1276 crore in 2015-16, which rebrsents decline by 7.2% compared with Rs.1376 crore achieved in 2014-15. The Company registered a net profit of Rs.40 crore in 2015-16 as compared with Rs.103 crore for the financial year 2014-15. The decline in profits is mainly due to lower top-line, higher debrciation and airtime cost. A. Retail via a 24x7 TV Shopping Network TV home shopping sales comprises 73% of the total retail sales through live shows on all major cable, satellite and DTH platforms. Your Company sold 5.9 million pieces during the current year against 6.8 million pieces during the last year. Average selling price per piece was $ 24 as compared to $ 23 in the brvious year. B. Web Sales Almost 18% of total sale came from the web which was decreased from Rs.256 crore in 2014-15 to Rs.223 crore in 2015-16. Web sales comprise catalogue sales, rising auction and live TV streaming. Volumes under this segment were decreased from 2.9 million pieces in 2014-15 to 2.3 million pieces in 2015-16. Average selling price per piece was $ 15 as compared to $ 14 in the brvious year. C. B2B Sales B2B sales comprise wholesale distribution to various retail chains in the US and the UK as well as opportunistic sale of rough gemstones to various manufacturers. B2B sale was Rs.121 crore for the current financial year as compared to Rs.161 crore in brvious financial year. DEVELOPMENT PLANS We are keen to invest in expanding marketing, operations, human capital, facilities and technologies to build the infrastructure that will enable us to meet customer expectations by delivering a deep value proposition to discount-seeking consumers. HUMAN RESOURCES , MATERIAL DEVELOPMENTS AND INDUSTRIAL RELATIONS FRONT INCLUDING NUMBER OF PEOPLE EMPLOYED Your Company recognizes the importance of its human capital. VGL continues its focus on development of human resource which is one of the most critical asset. The Company firmly believes that engaged and competent employees are critical to fulfill its business objectives and hence all the HR initiatives were aimed at creating alignment and stimulation so that the employee can fulfill their potential and deliver value for the enterprise. We continuously aim to provide career development and growth opportunities to our people. It provides dual opportunities for people to grow in the managerial and technical capabilities aligned with their career aspirations. The Company is committed to create an environment of learning and development, promote internal talent and develop cross functional expertise. The Company has embarked on several human resource initiatives to enhance the productivity of the organization and each individual. VGL has laid down high emphasis on driving an effective and transparent performance culture. Top performers and high achievers are recognized for their exemplary performance as part of the rewards and recognition. In order to enhance employee motivation and build a performance driven culture, the HR team pursued numerous employee engagement programs and cultural & sports initiatives. The people oriented best HR practices enables the Company to attract and retain the best of available talent. Some of these initiatives are: i) Regular medical examination of all employees. ii) SDMH Blood donation camp 30th April and 1st May, 2016 iii) Mehek Diya Foundation Blood Donation Camp — 13th May, 2016 iv) Employees Stock Option Plan (ESOP) v) Performance-based incentive plan vi) Suggestion-based reward program vii) Succession planning through identification of second level of managers of all units, locations and functions viii) Identifying potential talent and offering growth opportunities within the organization ix) Reward program for employees who have obtained qualification while working in the Company x) 360-degree appraisal system xi) Training & employing specially abled people in association with Youth for Jobs(NGO) xii) Weekly Quality awards to encourage employees xiii) Annual Function — 20th March, 2016 xiv) Employee & Family engagement through celebrations of festivals like Christmas and functions like Children's Day, Women's Day The Company continued to maintain amicable industrial relation footprint by focusing on increased worker level engagement through formal and informal communication and training forums. As on 31st March, 2016, the Company had 3,711 employees which will increase in line with the growing business aspirations in the current fiscal year. DISCLAIMER CLAUSE Statements in Management Discussion and Analysis describing the Company's objectives, projections, estimates, expectations or brdictions may be forward looking statements within the meaning of applicable securities laws and regulations. Actual results could differ materially from those either exbrssed or implied. Important factors that could make a difference to the Company's operation include among others, economic conditions affecting demand/supply and price conditions, variation in prices of raw materials, changes in Government regulations, tax regimes, economic developments and other incidental factors. For and on behalf of the Board of Directors Sunil Agrawal Chairman & Managing Director DIN: 00061142 Place: Jaipur Date: 19th May, 2016 |