Kalyan Jewellers India Limited (KALYANKJIL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Kalyan Jewellers Q4 FY '22 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aniket Sethi from ICICI Securities. Thank you and over to you, sir.

Thanks Neerav. Good afternoon everyone, thank you for joining. At ICICI, it is our absolute pleasure to host the Q4 FY ‘22 and Full Year Earnings Call for Kalyan Jewellers Limited. From the management we have with us, Mr. Ramesh Kalyanaraman, Executive Director; Mr. Sanjay Raghuraman, CEO; Mr. V Swaminathan, CFO; Mr. Sanjay Mehrotra, Head Strategy and Corporate Affairs and Mr. Abraham George, Head, Treasury and Investor Relation. With that I will hand it over to Mr. Ramesh for the opening comments post which we will open the flow for the question and answer. Thank you and over to you, Ramesh sir.

Good evening, everyone. Thank you. FY 2022 was an excellent year with revenue growth of 26% over FY 2021, recording the highest revenue in the history of the company so far. This is despite disruptions to business due to COVID second and third wave during Q1 and Q4. We ended the year with a PAT of INR 224 crores. However, if you look at the PAT for the last 3 quarters, our PAT was at INR 275 crores. Now let me give you an overview of the recently concluded quarter and some important decisions taken during the quarter. We announced the board approval for the appointment of Mr. Vinod Rai as a Chairman and Independent Non-Executed Director on the Board of the Company. This appointment underpins our continued focus on not only strengthening the board, but also emphasize on corporate governance. Q4 FY 2022, as you are aware we started with a very high base, we faced disruptions to showroom operations during the first half of the quarter due to Omicron. The quarter also saw extreme volatility in gold prices driven by the geopolitical situation in Ukraine and its related impact on demand. We ended the quarter with a marginal de-growth, but if you ask me as a team, we are extremely satisfied with outcome. 2023 financial year Akshaya Tritiya was excellent with significant traction across all regions including the non-South markets. We witnessed significant growth not just in terms of value, but also footfalls. April and first week of May have been very encouraging both in India as well as Middle East and it is in line with our plan for the current year. For the current financial year, in India, we target to open 12 to 15 new showrooms. Over and above that, the franchisee owned showrooms which we plan to open during the year will also be there. We have made significant progress on our franchisee plans with 6 signed LOAs in place already. We will be opening our first franchise store during the first quarter. Now an update on our Middle East businesses. We were cautiously optimistic on the region since resumption of business post-COVID, and after seeing the region witness good traction over the last 3 consecutive quarters, we now plan to restart our calibrated expansion there. The expansion will be fully funded by the internal accruals from the region. Further, like in India, we have already received enquiries from potential franchisee partners for the Middle East as well. We plan to launch franchise operations in the region after successful launch of the first set of pilot showrooms in India. Our online platform, Candere has drawn up plans for its next phase of growth on the back of stellar performance over the last 3 years. As a part of the plan, Candere will open its first showroom during the first half of the financial year. Last financial year, saw significant improvement in the share of new customers driven largely by the shift from the unorganized sector. While we expect this share to grow organically, we are also planning to widen our customer base through the introduction of innovative new product segments for brands and collection. Another area of focus for the current financial year is to further improve the share of gold on lease. Gold on lease as you are aware helps us not only save interest, but has a natural hedge embedded in it. We could improve the share of gold on lease to some extent during the last financial year and given the current level of operations, there is limited scope of further improvement. We have now drawn up plans to convert a portion of exchanged gold that we receive from customers also into gold on lease thereby providing further headroom. To sum up, with the continued momentum across all markets with India own store footprint growing by approximately 10%, franchisee model taking good shape, Middle East showing positive signs and Candere moving into the next phase of growth, we as a team are very excited about the current financial year. I will now hand over to Sanjay to take you through the financial highlights for the quarter as well as for the financial year. Over to you, Sanjay.

Thank you, Ramesh. Good afternoon, everybody. I am really happy to be talking to you all after a great financial year performance. I shall share some details now starting with the just concluded quarter. In Q4 of FY ‘22, the just concluded financial year, our company reported a consolidated revenue of INR 2,857 crores, a marginal de-growth of about 6% compared to the corresponding quarter of the previous year. Consolidated EBITDA came in at INR 218 crores versus INR 228 crores in the corresponding quarter of the previous year. And consolidated profit after tax, PAT came in at INR 72 crores versus INR 74 crores in the corresponding quarter of the previous year. I shall now give you a breakup of the Q4 performance starting with India numbers. For the just concluded quarter, our India revenue was INR 2,399 crores versus INR 2,615 crores when compared with the corresponding quarter of the previous year. And our India Q4 EBITDA came in at INR 188 crores versus INR 194 crores when compared with the corresponding quarter of the previous year. Profit after tax in India for the quarter came in at INR 70 crores compared to INR 66 crores in the corresponding quarter of the previous year. During the quarter we had no wholesale bullion sale and our gold coin sale to retail and corporate customers was about INR 59 crores, approximately 2.5% of total revenue. Moving on now to talk about our Middle East business. Revenue came in, in the Middle East at INR 425 crores quite similar to the level in the corresponding quarter of the previous year. EBITDA in the Middle East came in at INR 33 crores versus 30 crores in the same period of the previous year and profit came in at INR 4.3 crores versus INR 7 crores in the same period of the previous year. Moving on now to talk about our e-commerce business, Candere posted revenue of INR 39 crores in the quarter versus INR 22 crores in the corresponding quarter of the previous year. The business recorded a loss of INR 2.7 crores in the quarter versus a profit of INR 53 lakhs in the corresponding part of the previous year. Moving now to talk about our full year performance for the financial year 2021-2022, at a consolidated level the company revenue came in at INR 10,818 crores a growth of 26% over the previous financial year. Consolidated EBITDA came in at INR 815 crores versus INR 594 crores in the previous financial year and consolidated profit after tax for the year came in at INR 224 crores versus a loss of INR 6 crores in the previous financial year. With this, we are now done with the summary of the financials, and we can take questions. Thank you.

[Operator Instructions] The first question is from line of Gaurav from Axis Capital.

Sir, my first question is with regards to the store expansion plan that you have laid out for FY ‘23. So if you can just repeat that again if I heard it right it is 12 to 15 showrooms in India that you will be opening by your own and in addition to that there will be 6 stores that will be opened on a franchisee basis. So is that right?

Yes, so 12 to 15 showrooms is what we want to open with our own internal accruals and then 6 LOAs we have already done, so minimum franchisee store which will come in this year will be 6.

Sure. If you can highlight some -- what are the terms of this franchisees how will this be on a FOCO model, COCO model if you can give some details here.

Sanjay, do you want to?

This model is a franchisee owned company operated model as in FOCO. The intent of -- the way the model is going to work is, we will be selling inventory to the franchisee at a suitable trade discount, franchisee will invest in the inventory as well as the fixed assets in the showroom, and will be responsible for all the operating costs. Our staff will be managing the showroom, so that is the company operator side of it.

Sure. Sir, one clarification here. I mean, the inventory will be given by the company that is directly selling to the company -- to the franchisee. And the staff expenses will be in our books, right, on Kalyan Jewellers books?

Yes, yes. We have set up the model such that this should deliver to us PBT, very similar levels to what we are already delivering now in the comparable non-South markets, about 4.75%.

Okay. And sir, in terms of the store size, if you can give any color of how much the store size will be and what will be the minimum inventory that initially will be sold to these franchises?

So you are asking how much inventory will be held there?

Yes, exactly. I mean, the first lot that will be given to these franchises, the initial part.

This is mainly going to be in Tier 3, Tier 4 and maybe some Tier 2 markets in the region of about INR 20 crores to INR 25 crores is how we are thinking about it.

Okay. Would that understanding be that, I mean, the booking for you, the sales would be x of the franchisee discount, I mean, whatever the sales we have done. How will be the accounting for this -- would happen in our P&L as well? I mean, we will book the sales and the commensurate cost will be taken x of the franchisee margin?

Like I said, we will sell this at a trade discount to the price at which the consumer buys. We will book revenue when we sell to the franchisee, all of it on cash-and-carry basis.

Okay. Sure, sir. And sir, just one last question from my end is in terms of the good traction that you have mentioned about the April and the May month. If you can highlight how the performance is if we compare this to the pre-COVID normalized quarter, if you can give some color vis-a-vis that?

Yes. So if you look at -- Ramesh here. If you look at the traction, it has been very good because, yes, Akshaya Tritiya, it is coming after two years. I cannot give any figures because unfortunately, we will not be able to, but we see a very substantial growth when you even compare with the pre-COVID level. If you look at the first 40 days, there is a good growth which we see.

And sir, is this only a phenomena for the organized player that you see or what is leading to the strong growth? I mean, is it again that market share gain? Or is the demand momentum is strong to that?

So one thing is very sure. There has been a good shift of unorganized to organized in the last couple of years. And we have already built a good customer base, lot of fresh customers we have gained over the past many quarters and these people have also started coming in, again, for the second time purchase. So the stickiness in our trade is very high. So over and above that, this momentum is still high especially for organized players because organized players have gained a good traction over the past 2 years when it comes to, what you call, the new customer gain which we have got in the past couple of years and of course, Akshaya Tritiya, people have not seen for 2 years now. So that also has contributed this momentum.

Sure. And sir, one last set of questions for my end. If you can just highlight the expansion plans for the Middle East and Candere, that would be it from me.

So Middle East, because if you see, notice last 3 quarters, Middle East have been consistently performing. It has been in the range of 85% of the pre-COVID levels and you all know that we had reduced our footprint in the range of 10% to 15% in that area during the first COVID wave a couple of years before. So it is almost, SSG level, it is almost pre-COVID levels now or more than pre-COVID levels in Middle East. So for the past 3 quarters, we were continuously monitoring that Middle East market and now we decided that we will slowly start our expansion. So we will open a couple of showrooms in Middle East with our own internal accruals and it will be fully funded by Middle East itself from the internal accruals which that market makes and over and above that, franchisee, we have already starting to get some inquiries there without even -- you know that we have not advertised, we have not done anything in markets for franchise. It is all mouth publicity between them, but we are waiting. We will not launch a franchisee store in Middle East unless and until the pilot in India is completely over and we are satisfied.

And Candere also, we are planning to opening our showrooms, right, for this year for Candere?

Yes, so Candere, if you have seen, we have a very good revenue growth in Candere. And just if you notice, we -- all the revenue growth is from online space itself for us because we have not opened any physical store till today. Now, because we want to go to the next phase of expansion in Candere, we are slowly starting to expand in physical space also because it gives better conversion to the online space et cetera., if we have a physical store. And the first store we want to open before the end of the Q2, this year. We have already identified the space and the interior fit out et cetera., have began.

The next question is from the line of Aniket. Please go ahead.

On the quarter on a Y-o-Y basis, the non-South revenues has grown while South had a degrowth. Why the divergent trends for this quarter?

Okay. So if you remember last year, Q4, our South revenue growth was higher than the North-South. So South had grown by 70% in Q4 last year. And non-South had grown in the range of 40% in the last year, okay? Because I had told you the reason where we saw a lot of migration happening, people from the non-South markets also, they started migrating to their own hometown, and we got that revenue in South. So the base was already high, at pan-India level, but South, where the base was extremely high. So that is why the revenue has a degrowth in South India more than in non-South, this time.

Understood. Second, on the asset side in the stand-alone balance sheet, there is INR 113 crores of loans and advances, which was not there last year. What does this revenue pertain to?

Swaminathan, do you want to take it?

[indiscernible] during this call.

Sorry?

Yes. We will come back to you during this call.

Okay, sure. The next -- studded has seen a good increase, 200 bps. And -- but you have also kind of articulated that some of it is coming from the low-value studded. So if you could just split and how much is the margin differential in low-value studded versus the active studded business which you do?

So the low value and the usual studded, there is a difference of 10% in the gross margin level.

And this 200 bps increase, how much would be on back of the low-value studded?

So that particular percentage of low-value studded, it is a very competitive information. So I think…

Lastly, Ramesh sir, just wanted to hear your thoughts that given gold price has seen some decline in the last 2, 3 months. So how is the consumer behavior during this time?

More or less down. The volatility has reduced a bit over the past 30, 40 days. So when there is extreme volatility in gold prices, people just take a pause for it to settle down at some level, so that was the major issue rather than the gold price going up steeply. Okay? There was a hesitation when the price was very volatile, but that hesitation is almost settled down at least for the next -- for the past 30, 40 days, but of course, if the geopolitical issue again worsens and if the price gets more volatile, then it is a different issue, but as we speak today, it has settled down.

The next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, I just was trying to understand now. You spoke about the store expansion as well as the franchisee root store. So that effectively means about 18 to 20 stores we are looking to open in this particular financial year which effectively means about 12% to 14% increase in our total retail footprint as we speak now, right?

Yes.

Yes. So overall -- so that's the trend that we are looking to continue over the next 2 to 3 years, a little on the medium-term basis, about 12% to 15% kind of a store growth?

So there are 2 things here, okay? One is, yes, as you rightly said, 12 to 15 new showrooms, we will put in our own internal accruals in India. And 6 LOIs franchise, we have already signed. So that is the minimum number of franchise store, which we will do this year, okay? And the pilot will be for 3 franchise. And if the pilot works out very well, it might go beyond 6 also, okay? There is a correction needed, then we will limit it at 6, that is the plan for this year. Next few years, the franchise model if -- and one thing what I want to tell you is, of course, all the stores cannot be compared with the existing stores today because franchise comes with a lesser bucket. Lesser bucket means lesser revenue. So if the footprint expands by 12% to 15%, it does not mean that revenue will increase by 12% to 15%, okay? That, of course, I know that you -- right now, but I just wanted to highlight that point, but over the next few years, the franchise plan if it is laid well, the number of stores which we might open will be, what we call, it can go beyond 18 stores.

Correct. Correct. Fair enough. That's okay. So in the past as well, we have spoken about doubling our revenue to INR 20,000 crores maybe in 3 years by 2025, right? That's the vision we have given out earlier. So that factors in the franchise plan as well, and to what extent?

So franchise actually has helped us to accelerate the plan, okay? Otherwise, we would have opened only 12 to 15 showrooms every year because that was our plan. And now franchise can help us to achieve it more faster. And the number of franchisee stores can again be more than what it is for this year, okay? So our objective is to reach that benchmark.

Okay. Okay. And that you need at least 20% CAGR revenue, right, over the next 3 years. So that's what we are kind of looking at?

Yes.

Okay. Okay. And in terms of margins, I think we have spoken earlier as well improvement -- steady improvement in margins, right? So currently, I think we are at about 8%, 8.5%, right? So about next 2, 3 years, how the margin trajectory would look like? If you can provide comment on that, that would be very helpful.

So first thing is that, predominantly all the new showrooms, the 12 to 15 showrooms, which we mentioned will be in non-South markets. All franchisee stores will be in non-South markets, okay? So this will surely help us to improve our margins because as you all know, we have a 10% margin difference between South and non-South. And if the number of stores outside South India goes up and if the revenue outside South India share improves, it is going to improve our margins. And that is our primary intention. So 2% margin growth improvement over the next 3 years is what we are looking for.

2% margin -- like about 10% to 11% from -- currently, if I see second half, first half was kind of impacted due to Omicron. Second half..

You are talking about EBITDA?

Yes, EBITDA.

EBITDA, I will tell you when franchise comes in, the EBITDA numbers may change. So that's why I'm not talking about the EBITDA margin level, but I'm talking about the gross margin -- gross profit margin level, it will be increasing by 2%.

2% improvement. Over next 3 years?

What we target for the next 3 years. And one more thing, I have to highlight here is that gross margin also when you check franchisee, you know that we are going to sell at a trade discount. Okay? So margins will not be like a retail, right? So for all of you to understand better, we will give you numbers in detail, so that you exactly know what is happening.

Yes. But our investment in franchisee route would be much lesser, right?

Investment is 0.

Yes. So the return on capital?

Return ratios will be very high, meaning improvement will be, what we call, very much better because we do not invest anything there, but revenue comes in at a PBT level of what is it in Q3, Q4.

The next question is from the line of Shirish Pardeshi from Centrum Capital.

Three questions. I'm referring to Slide 31. And in that slide, way forward FY '25, you have mentioned that we will reach to 10% EBITDA margin. So my question is on EBITDA margin. You touched upon gross margin. But then the larger question is that how would you plan to achieve? And of course, gold metal loan is one of the things which is there. But what are the low-hanging fruits if you can fast track the margin growth?

Yes. So first of all, the EBITDA growth will be actually done in 2 ways. One is that the gross margin itself will improve because the South, non-South revenue mix is going to change, studded ratio is going to improve. Over and above that, there will be an organic growth in studded ratio, which will help us to improve our gross margin. That is one lever to improve our EBITDA margin. The second lever to improve our EBITDA margin will be the operating leverage because all the extra revenue which comes in, it comes at a lower cost because the corporate expenses are already taken care by my existing showrooms. So both this applied together, our intention is to move the needle up by 2%. We are approximately at 8% now, which we want to move it up by 2%.

But operationally, I mean, what I think, there, you will definitely have the inventory gains on the studded portion?

So studded, if you see, we, as a player, we have competition with unorganized as well as regional players, okay? We have only a few markets where we compete only with the listed players. So where -- if you are referring to the INR 190 crores, which -- what we call, the inventory gain, which I heard in a recent call, for us, we have actually not increased our diamond rates in almost any market, except for a very few markets where we compete only with the listed players. So in short, you don't have inventory gain as of now.

My second question is that, on the Candere business. That business, I mean, pure play online business showing a very good traction. And now you mentioned, I heard that you are doing one pilot for opening up a physical store. Now, 2 questions there. Is it going to be a pilot like franchise or we are putting our own? And what is the thought process? I mean, where do we want to grow this business? I mean, in a medium to long term, maybe another year or so? What kind of network you are trying to build.

So here, first of all, it is not a franchisee. This is our own store, which we are going to do because you know that the CapEx for online showroom is in the range of only INR 2 crores to INR 2.5 crores. And it is -- for ourselves, it is a pilot wherein we really want to look at the math, how the showroom operates, how the conversion rates are, what the stock rotation, stock turn, et cetera, are. So yes, there is a possibility of franchise in the future. But as we speak, at least for the next, what we call, first set of showrooms, we would not look at the franchise on a physical store for Candere, okay? And that is how we are looking for Candere. But if you look at the growth, we have been growing at a very, very, very good pace for the past 3 years, okay? And it continues what we feel with the physical stores also coming in, I think the conversion rates are also going to be better and Candere is going to see the next phase of expansion is what we see.

So what I understand, you are essentially talking about the omnichannel attempt?

Yes. So omnichannel works in 2 ways, okay? Omnichannel works for Kalyan Jewellers wherein a lot of people do online research on the products which they want, okay? And they end up shopping offline, okay? That happens in Kalyan Jewellers even now, but Candere offline store actually more than the omnichannel. It gives a better conversion rate wherein many people want to have a physical touch and feel of the product where this so-called Candere store will enable them to have the touch and feel of the product even though some inventory is not the pure gold, it is only a dummy product which they can see physically, it will look very similar to gold, but they will be able to see the exact feel of the product and order it for us. So that is how Candere physical store helps more than the omnichannel network.

Ramesh, let me dwell on a little more on this. So you essentially say that this will be a physical store will be much smaller size in terms of its specs?

Correct.

And that will be more of a lead generation than selling a physical item or no?

Yes, yes, yes. So it will be more of a conversion rate increase rather than selling it physically.

Okay. So your inventory or your merchandise which you are going to sell through Candere store which will be completely different and it will complement your online Candere channel?

Correct. Because the products which are showcased in that Candere store is what is already displayed in Candere. So the digital catalog which is already there in the Candere platform, that same catalog is going to be there in the physical store as well as original products and dummy products will be displayed in the Candere physical store which will improve the conversion rates.

Okay. And you just mentioned that you need about INR 2 crores, INR 2.5 crores CapEx?

Yes.

So essentially, it would be roughly about 3000, 4000 square feet?

No, no, no. Not about the square feet, so it is only 1000 square feet showroom but you will have to give a lot of, what they call, experience in that store where again the digital catalog itself will be displayed there where they can see products online there. They will be able to see that same product at the physical space there. So more than the square feet, the ambience, the product placement, the digital experience which we will give everything will count. So that is how we are looking.

Okay. Okay. My next question is on the pilot what you are saying. You essentially said that you're looking for non-South for franchise on company operated store. So would you be able to share what kind of size you want to experiment or you will still go with the current size of your stores of 14,000, 15,000 square feet.

So the size will be -- if you look at Kalyan Jewellers now, we have showrooms which are of a bigger size in Tier 1 market. Tier 2 markets come with a smaller size, Tier 3 markets we already have that comes with a lesser size, okay? Even showrooms which we opened recently, for example, we opened in Bombay itself in Matunga that comes with an average of 4000, 5000 square feet. So that is the space which we are looking for on the non-south markets where we are going to bring in franchise.

Okay. So one related question. If franchise will be in the Tier 1 existing store location or you are you are trying to look at the different locations?

No. So it will be in non-South markets and it will be in towns where we don't have showrooms and it will be basically in Tier 3 and Tier 4 cities basically and a few Tier 2 cities.

Okay. My last question on the FY '22. What is the studded component? And if you can help me, where do you want to settle now in next 2 years because things are normalizing very quickly.

So studded is already at 24% plus now on India basis. On a console, it is at a range of 22% now. And it is almost in a pre-COVID level today in India, but of course, with the additional -- meaning, the new set of studded is also inside this 24%. So way forward also, if the SSG is going to be 6% to 7% which usually used to be pre-COVID, the conversion rates might be better for customers, upselling might happen properly, and there will be an organic growth for studded jewelry. Over and about, the major driver for improvement in studded jewelry is going to be your expansion in non-south markets.

Okay. So essentially, you're saying that you will -- you see that expansion will take you to 25% plus?

Yes. You are talking about console or India?

India.

It's already at 24.8% -- 24.6% or 24.8% is what Q4 recorded.

So my question was 24.3%, which is saying on Slide 35. But you said that pre-COVID…

Yes. So it should be upside of what 25%. And year-on-year, it will keep on increasing. And in the next 2, 3 years, I think it should be near, what you call, 28% to 30% because our non-South expansion is going to be very rapid.

No. I am only referring because in the sometime previous call, you said that once studded reaches 30%, definitely we will go beyond 10% EBITDA margin. So I think I am just trying to correlate that.

It is in the similar line. So you said it right.

Next question is from the line of Gautami Desai from Chanakya Capital.

Sir, my questions are, what was your gross margin this quarter on studded and gold. That is my first question. Second question is, for this quarter, what was your gold on lease percentage and exchange percentage? And third is, would you like to comment on your inventory days this quarter? I mean, what is expected and going forward what is it that you are expecting.

Okay. So first thing, gold versus studded margins, we usually don't give because it's a very competitive information. I am very sorry. But if you look at exchange, exchange has come up by 3% quarter-to-quarter and year-on-year, okay? Exchange of gold.

What did you say, sir?

3% growth -- 3% more exchange.

So that makes it how much, sir, total?

It is 30-odd percent, 30.5 percentage was the exchange old gold in Q4. It is 3% more than Q3 and 3% more than last Q4.

Okay. And how about gold on lease, sir?

Gold on lease is approximately 1,500 kilos versus 1,400 kilos -- INR 1,500 crores versus INR 1,400 crores in the last quarter. So exact number is, INR 1,496 crores now versus INR 1,418 crores last quarter.

Okay. And how about inventory, sir? You said like you were operating at like your whole year was not looking 2.4x, 2.5x, but you said your current inventory turn when we spoke last time was that much. So then are you in line and would you like to talk something about your inventory days.

So if you look at inventory turn, first of all, we would like to take it maximum 2x -- 3x plus because then only you will be able to substantiate your margins, et cetera. You will not be only a player who look at stock turn, meaning then it will be a [Foreign Language] local kind of player, okay? So stock turn, we will be looking to be in the range of 3. And stock turn will also improve, year-on-year. Because now if you look at Kalyan Jewellers showroom there are showrooms which have lesser stock turn that especially in the flagship stores which we have because we do not go only by stock turn in those showrooms because that is the flagship store of that particular state or region. But if you look at the small showrooms which we are opening and opened in the last financial year, the stock turn will be more than what it is on an annualized basis for the existing showrooms average route. So our intention is to take the stock turn to 3-plus, not more than that, and if you look at annualized our stock turn today, it is at 2.3, even after Q1 getting affected.

Okay. So annualized is 2.3?

Annualized is 2.3, but annualized number can be misleading for you because Q1 was not there, almost.

Right, right, right. Would like to say something on the current going rate of your -- let me assure you, the day you reach this 3x plus inventory turn, the valuations will be at a different level.

No, we do not go on valuations, but on a performance, we surely go with you, meaning this is a cycle which every brand will go. It is a natural progress where your stock turn should be or will be lower in the flagship stores because you will need to invite customers, people have to see the experience and we will have some buffer stock because we might go wrong when we go to newer markets then post that when you come to Tier 2, your stock turn will be better, Tier 3 stock turn will be better, new showroom stock turn will be better, and that is a natural progression which every retailer will have and that is where we also go.

Sir, your current run rate would be say like 2.4 or 2.5?

Current run rate, if you look at the last 3 quarters, yes, it should be.

[Operator Instructions] The next question is from the line of Aejas Lakhani from Unifi Capital.

Congratulations on a good set of numbers. Sir, a couple of questions. The first being that your Middle East business has...

Aejas, sorry to interrupt you. Your voice is not very clear. May I request you to speak from the handset?

Is this better?

Much better.

So my first question is that in the Middle East, you have now sort of stated that it will be a calibrated expansion, that too with the capital that is generated from the Middle East operations. So sir, the first, again, query on that is that, that business employs, give or take, INR 1,800 crores to INR 2,000 crores of capital and does not sort of generate significant return ratios for us, and that drags down the entire company level return ratio. So could you speak a little bit more about your optimism for the Middle East business?

Yes. So Middle East, you have to, first of all, see that market. We have created a base in that market. We are the #3 player, #3 player in terms of market share in that market. And if you look at Middle East, now, the extra revenue which we make, from that market will surely help us to improve our margins, EBITDA margins everything. We are almost in that area where we have at least stabilized in that big market in the universe. So if you look at now people are starting to expand in that region where we have already completed our expansion in the 4 big countries in Middle East and we have a good market share in those areas. And if you look at the EBITDA margins for the past couple of quarters, it has been in the range of very similar to India now and all additional new showrooms which we are going to put there and all additional revenue which is going to come from that market will surely improve our ratio. So we will have to have some patience there, and imagine a situation where we get franchisee options also there, bring in additional revenue on the top level. It is completely going to change the color of that business which I think we have to wait and watch for the next couple of years.

Got it. And sir, given that the Middle East has their own cycles because it's linked to oil and crude. So do you see the cycle playing out for the next couple of years where there is entire stability in that region? Or do you see any further volatility in that region?

So if you look at the market for the past 3 quarters, okay, that is why we were cautiously waiting for that market, okay? If you look at 3 quarters, it has been consistently performing. The gross margin has organically improved because of the consolidation of the market. OpEx is under total control. EBITDA margins are in the range of India. And now if you see, the market is very stable, okay, according to us. That is why we have decided to expand a couple of showrooms there. And we will also try out franchisee options after the India pilot is over. So if both applies properly, wherein the franchisee also starts in Middle East, that is going to see a totally different color for which I think will take a couple of years. But as we speak, we don't have any, what we call, ambiguity in that market, and we are very positive now because no other player has built a platform like we have. That is our major advantage.

Got it. That's helpful. And sir, if you look at the average revenue that -- I'm talking about the domestic business here, that the average revenue that we earn from our stores is, give or take, INR 70 crores. So I just want to understand that as you are opening these 12 to 15 showrooms which as I understand likely to be smaller and the franchisees are also going to be in Tier 2, Tier 3 towns. What do you think will be the revenues from these slightly more compressed showrooms?

Participants, please stay connected in line for the management turn.

Got disconnected. Yes, could you hear my question?

Yes. So I get you. The average revenue per floor is in the INR 70 crore level even after the affected Q1. On an annualized basis, I think it will be more than about INR 85 crores, INR 90 crores. I'm talking about the existing showroom levels. For the new stores, the per store revenue might lesser than that because all stores are not into what you call in the bigger towns. So I think for the new showrooms, we should keep a level of INR 70 crores.

Okay. So did I get it right when you said that the existing more mature stores have now reached the run rate of INR 80 crores to INR 85 crores on a store level?

Yes. INR 85 crores to INR 90 crores is the level for all the stores put together if you look at on an annualized normalized basis. Because now it is at INR 73 crores because Q1, there was no revenue.

Right. Okay. Got it. Got it. And sir, just could you speak a brief about the OpEx because you would have had some rental savings for the year as well. So going forward, is there -- will the OpEx be in this current range? And will the advertising spend also be in the current range? Or we should expect some higher numbers here?

Perfect control. OpEx will be in the similar lines how it is as of now. So if you look at Q2, Q3, Q4, we have not got any savings from COVID. So, it is going to be under the same level.

Got it. So I'll take -- I'll extrapolate the 3Q, 4Q numbers. Got it. And sir, lastly, you mentioned at the start about how the exchange that you get, which you said is 30.5%. You mentioned about that you're going to move to the gold on lease. So I've not understood how that benefits us. So if you could expand on that a little bit?

Abraham, do you want to take it? Do you want to take it?

So this is something which we are exploring right now. So the way we can do it is by selling our old gold, which comes into our system through a bullion sale and then convert that money into gold metal loan, but we are still looking at that option we are evaluating all the plus and minus of that because of course, it has the advantage of taking our gold on lease, percentage up, but we are looking at all options. We have instruments in MCX where we can sell these metal through MCX and even some of the industry leaders have also started doing this practice. We are also evaluating that.

Okay. And like could you quantify how this can help us in terms of how would this benefit us? I mean, I know, of course, that gold loan is in terms of the rates are lower. But what is the…

No. With this option, we are not aiming at increasing or reducing the interest rate. In fact, with this option, we are trying to -- gold loan has 2 advantages. One, it reduces the interest rate, secondly it also acts as a hedging instrument. So with this, we are trying to increase the gold on lease which would help us the hedging percentage. So we do not need to create additional contracts for it for hedging.

Okay. I probably take it off…

The details of this, we can take it. But effectively, in a nutshell, the old gold that comes into our system, we will have to find a way to sell that and create cash. And using that cash, we'll have to create gold metal loan.

Got it. And sir, could you also just speak about the competitive intensity you face in the non-South market? I mean, is it more regional? Because I understand a lot of the gold players are still more South-centric. So who is the large competition you face in the non-South market, except for the listed leader?

The competition actually comes -- Ramesh here. So competition from regional players, unorganized segment. There will be players in that particular market. So each micro market, we will have competitors. That is how we see competition and not with only 1 player or 2 players, because we are a heavy hyperlocal player as you know and we do not only compete with national players. So last 3 months. the competition intensity of course, have been there in many pockets even within organized space.

Okay. Okay. And sir, just one thing is that are you -- in the non-South markets where you're expanding the 12 to 15 stores, is it that the plan is that where you already have a presence in a particular city, you're adding a store there or adding a new geography in terms of a new city in that state?

So let me tell you, in almost all the states in this country, except for the small states in the Northeastern part, we have stores and we have good market share in almost all the states. So the showrooms which we are opening is not new geographies, but of course, new towns in states we are already present. And again, there will be some showrooms, which is adding stores in some metros, a few metro markets where we are already there like Bombay, Delhi, Kolkata. Swaminathan, should we answer the question which Swaminathan wanted to come back, so that it does not misses out? That advance or something. One second.

This is Swaminathan. The question regarding advance, it's majority due to reclassification. Last year, it was in current and this has moved to noncurrent. The remaining amount of about INR 30 crores is to loan to Candere.

Shall we move to the next question?

Aniket, I think you had that question. Hope Swaminathan answered you.

Yes.

The next question is from the line of Shirish Pardeshi from Centrum Capital.

I have 2 questions. While looking at the stand-alone for FY '22, I think since the time the IPO happened, the ad spend is one of the key criteria for you. And I see that we have spent almost INR 193 crores as a percentage of sales is about 2%. So in the next 2 to 3 years, when your store expansion is going to be very strong, what kind of ad spent if you can give me an absolute number or maybe as a percentage sale that would be very helpful to model.

So if you look at this financial year also, we actually opened 18 showrooms, okay? And this ad spend of around 2% is coming even after the expansion. So while we are expanding into markets, the ad expenses is not going up steeply is because we are not going out of our core markets. We are there -- we are expanding only in the markets where we are already having showrooms because we already have showrooms in almost all the states in this country. So ad the phase where we had to invest a lot of money on advertisements have actually gone and on a medium term, I think the ad spend will come down to the range of 1.8%, that is our target, a medium-term target.

And if I may ask, I mean, it's a curiosity having [indiscernible] who is your creative agency? The reason why I'm saying this is because I recently came across the Marathi version for enticing the consumer and it was very impressive, so that is why out of curiosity, I am asking who is your creative agency you follow?

Yes. So thank you for the compliment. But what we usually do is that we work with multiple creative agencies from every region because this hyperlocal flavor never comes from one particular, what we call, creative agency, okay? So we have tie-ups with a lot of hyperlocal creative agencies across India, and we utilize them to create ads for that region, so that it has a [Foreign Language] local flavor.

No. I really compliment because the flavor and the taste and the people who have seen has really impressed. And getting that local flavor, I was pretty excited. My last question is on the BIS Hallmark. I mean, since the time we have been interacting, we have been talking about formalization. But do you really see on ground things are changing quicker, faster? Maybe if you can give me some example which markets whether it is seriously seen because south was, I would say that it was more formalized while north and central was little, there is a lot of scope so you tangibly see these things are taking shape and size?

So if you look at Q4, we have seen markets where the inspection from those departments have started and the intensity, of course, the expectations from each person is different. So the intensity has been mild, but instruction et cetera., has been started. We think that it will surely improve over time, I mean, the intensity because it is the government’s vision to bring in 100% hallmarking and also the HUID code. Their objective is very clear. So we still have scope for the shift from unorganized to organized, post the implementation of hallmarking and the strictness which the government departments will bring in.

But then formalization, will you think will have some role to play in a full speed in FY '23 second half?

Yes. So very hard for us to comment on the actions which the department has to do. But technically speaking, yes.

The next question is from the line of Nilesh Shah from Moon Capital Management.

Ramesh sir, my question is on the metal gold loans. You mentioned it has gone up to INR 1,500 crores now and in the past on the calls, you had mentioned there is scope to take it up to about INR 1,800-plus crores, so what is stopping us from getting to that number?

Yes. So INR 1,800 crores what we target, and it has to -- actually, it had to be happening in Q4 itself, but we had a technical, what you call, issue with a certain bank where, Abraham, you want to…

So as of now, for the quarter, we have increased it by approximately INR 80 crores from Q3. Like Ramesh was mentioning, there was a technical issue with one of the banks with the gold metal loan limit. So that has been sorted, and we are just starting to become gold metal loan from the beginning of next week. So we can take it up to approximately INR 1,800, so we stand by that INR 1,800 crores. This bank limit will take it further.

INR 1,800 crores is excluding the -- what we're trying to do now with the exchange gold, right? This was supposed to be on an as-is basis.

This INR 1,800 crores, like I was mentioning to Aejas a little earlier, this INR 1,800 crores will be gold metal loan without the new model that we are trying to explore. The new model will not give us any interest rate benefit. That will only be to create a hedging instrument.

And there was a second question, why is that the case? The way, I see this is that basically, even Titan is doing it now every quarter when they are reporting bullion sales. So you will be doing it the same way, you will be reporting bullion sales and then whatever you have as your metal gold loan, that substitutes the interest, your term loans basically. And I am assuming your term loans kind about maybe 10% and metal gold loan is at about 4%, 5%. So there is a clear 5% point sort of interest savings if I can put it that way which accrues to your bottom line. So why did you say that there is no interest benefit out here.

No, this old gold, the metal we have to fund it somewhere, right, because that's the metal that we already purchased. That purchase happens with our own cash.

Yes. But you are doing a back-to-back transaction to seller the same day I am assuming, right?

So this gold metal loan will be a cash funded gold metal loan because we'll be keeping cash to that extent and then taking gold metal loan. This is not out of the bank funded line of credit. Because first, we have to fund the purchase of this metal from customer. Then we are trying to replace that old gold in the gold metal loan. So when we take the gold metal loan after that, it will have to be funded with cash.

But the last bit out here, the customer actually paid cash for his old gold? Or is it that he gets to pay lesser amount when exchanging his old gold?

If it is an exchange, it will be -- he has to pay less for his purchase. But our own customers, we give a facility for customers to come and sell gold also to us, extreme cases.

Of this 30%, which is exchange, gold exchange for sales, how much of that is customers just coming and giving back their old gold without taking anything else? And how much of it is actual exchange?

Very insignificant portion that the customer will give us for cash.

Right. So then it should be an initial benefit, right, Abraham. I mean, if I'm not clear, then I will take this offline. I'm just not clear as to how this is not going to be interest accretive or PBT accretive.

Yes, we can take this offline because there is -- we will have bank limits as well which will be appreciated when we go this path. We will take it offline.

[Operator Instructions] As there are no further questions, I now hand the conference over to the management for closing comments.

Thank you very much for the patience. I think this quarter is also going to be very good and the financial year also, we are looking forward. Any questions over and above this, please reach out to our IR team. Thank you.

Thank you very much. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, you may now disconnect your lines. Thank you.