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

Ladies and gentlemen, good day, and welcome to the Q1 FY '23 Earnings Conference Call of Kalyan Jewellers India Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Agarwal from Strategic Growth Advisors. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on the Kalyan Jewellers India Limited Q1 FY '23 Earnings Conference Call. We have with us Mr. Ramesh Kalyanaraman, Executive Director; Mr. Swaminathan, CFO; Mr. Sanjay Mehrottra, Head of Strategy and Corporate Affairs; and Mr. Abraham George, Head of Investor Relations and Treasury. Mr. Sanjay Raghuraman, who is the CEO, is unable to join the call today due to some personal exigencies. I hope everyone got an opportunity to go through our financial results and investor presentation uploaded on the company's website and stock exchanges. We will begin the call with opening remarks from management, following which we will have the forum open for question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and the disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Mr. Ramesh Kalyanaraman, Executive Director of Kalyan Jewellers India Limited, to give his opening remarks. Thank you, and over to you, sir.

Thank you, and good afternoon, everyone. The recently concluded quarter has been yet another positive one for Kalyan Jewellers, and we are witnessing continued robust momentum in both footfalls and revenue across all our markets in India and Middle East. We launched our first franchised showroom in Aurangabad during the recently concluded quarter. And as we speak, the store is performing as per our expectations. We are on track to launch the remaining pilot franchisee stores before the start of the festive season. We have built a meaningful pipeline of additional franchise stores on the back of very encouraging response from the potential franchisee partners. Given the robust pipeline of franchisee showrooms and stability in the operating model of the already launched showroom, we believe we can advance the launch of the next set of franchisee showrooms. In the Middle East, we continue to see strong momentum driven largely by the overall economic recovery in the region and return of tourist traffic. We remain confident on the market and we will be looking for calibrated expansion through internal accrual from the region. Our online vertical Candere continues to show traction, and it will be embarking on the next phase of growth, starting with the launch of the first physical showroom before the start of the festive season. Mr. Vinod Rai has been formally appointed as the Independent Chairman by the Board of Directors with effect from July 1, 2022. Before I pass on to our CFO, Swaminathan, who will take you through the financial highlights of the quarter, I would like to highlight about the remarkable transformation in the profitability of the business when compared to the pre-COVID period. Our consolidated PAT over the four trailing quarters has been approximately INR 380 crores compared to INR 140 crores, INR 150 crores achieved in the few years prior to COVID. Let me conclude by saying that we are confident about the current financial year. Our Q1 performance has been impressive with a continued traction during the current quarter, along with the robust store expansion plans for the rest of the year, we are extremely excited about the revenue growth as well as the overall profitability of the business. Over to you, Swaminathan. Thank you.

Thank you, Ramesh. Good afternoon. We are really happy to be talking to you all after a great quarterly performance. For the recently concluded quarter, our company reported a consolidated revenue of INR 3,333 crores, a growth of over 104% compared to the corresponding quarter of the previous year. Consolidated EBITDA was INR 264 crores versus INR 69 crores in the corresponding quarter of the previous year, a growth of 283%. Consolidated PAT was INR 108 crores versus a loss of INR 51 crores in the corresponding quarter of the previous year. Now let me give you the breakup of the Q1 performance, starting with India. For the recently concluded quarter, our India revenue was INR 2,719 crores versus INR 1,274 crores when compared with corresponding quarter of the previous year, a growth of 113%. Our India Q1 EBITDA was INR 218 crores versus INR 50 crores when compared with the corresponding quarter of the previous year, a growth of 336%. Our India PAT was INR 95 crores compared to a loss of INR 43 crores in the corresponding quarter of the previous year. Now let me share some information about our Middle East business. Our Middle East revenue for the quarter came in at INR 574 crores compared to INR 340 crores in the corresponding quarter of the previous year, a growth of 69%. Middle East EBITDA was INR 47 crores versus INR 18 crores over the same period of the previous year, a growth of 161% Middle East profit came in at INR 14 crores for the quarter compared to a loss of INR 9 crores in the corresponding quarter of the previous year. Moving on to our e-commerce business. Our e-commerce initiative Candere posted revenue of INR 44 crores versus INR 24 crores in the corresponding quarter of the previous year, a growth of 83%. The quarter recorded loss of INR 1.2 crores versus a profit of INR 31 lakhs for the corresponding quarter of the previous year. Coming back to KJL during the quarter, we had no bullion sale, and our gold coin sale to retail and corporate customers was approximately INR 13 crores, which is approximately 0.46% of our total revenue. During the quarter, we opened four showrooms, including [ Technical Difficulty] With this, I'm done with the summary of financials and now open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Aniket Sethi from ICICI Securities.

It's again nice to see the comment on good new consumer recruits in your presentation after it was skipped in the previous quarter. So two questions there. First part, I wanted to understand, is this largely pertaining to the non-South market? Essentially, what I'm also trying to understand is what would be the difference in contribution from new consumers, rather new customers in your South versus non-South markets on a same-store level basis? The second part is, while I understand it's more of a secular trend, the new consumer recruits, but do some factors lead to acceleration in specific quarters?

Yes, so the growth from new consumer has been very similar across both the markets, South and non-South. And the difference in overall growth rates is because of the impact of lockdown in the base period.

Okay. You mean the base period had some impact of lockdown and rather the sequential quarter, and that's why the gains from new consumers were lower. Is that what we are pertaining to?

Yes, yes, yes. So this year, we see more new consumers from non-South markets, okay? That will be because of the lockdown impact. And also because we are opening new stores basically in the non-South markets, the new customer growth will be more there.

Okay. And what -- the understanding is, let's say, see, you would be gaining -- rather the share of new consumers from unorganized players would be higher, right? It's slightly difficult to gain share from the branded players. But given that thing is that the gains from non-South markets should be higher from the South markets on a like-for-like basis. Is that understanding right?

No, can you repeat that question, again?

South market, let's say, from an industry perspective, the organized -- the share of organized players is estimated to be higher in the South market versus the non-South market. And a lot of your new consumer recruits would be coming from the unorganized market as well, right? The share would be higher from those particular segments. That should be a key advantage for some of the new consumer recruits from your non-South markets.

There are two things. First of all, even though in the organized segment, South is like more organized than non-South. But we have still got a majority or a good portion of non-South, what we call unorganized players in South also. So we are gaining market share from there. But when you come to non-South, yes, the unorganized to organized shift is more aggressive there because there is more vacuum from unorganized players. And again, we have opened new showrooms there last year in non-South markets, okay, and South markets. So we will get a new customer growth in the stores which we opened last year.

Understood. That's helpful. Second, on the franchising bit, can you share some details on how are you selecting your franchising partners, the franchise partners? Are these parties -- are these the interested parties in the jewelry business? Or you are looking mainly at financial investors?

Yes. So we are not looking for franchisee partners to get involved in the day-to-day operations at all, okay? So we don't give any preference in experience in the industry because of that. But we have a process put in place where it will be multistage background checks and threshold for net worth, et cetera. And we have a consultant who does the job for us.

Okay. And till now, how many -- let's say, is this like you signed with a single franchisee and he is expanding your store or it's more like every store is a different franchisee altogether?

It is different, which we have signed. So we have signed six LOIs, and we have not signed more than that now because we are just waiting for the first set of franchise to open and get operated. On the franchise, which we have already opened in Aurangabad, it is performing like what we wanted. But we have a pipeline of other franchisee partners who are interested to work with us. We have put them on hold because we want to just get settled more with the existing franchise, which is already there and what we are planning to open in the next couple of months.

And all the franchising is done in the non-South, right?

Everything is non-South. So not only franchise, all the stores planned for this financial year are in non-South, almost all the stores.

Got it. On the OpEx bit, given expansion, you'll see some operating leverage. So just on the ad spend, if you can just clarify. So you had broadly INR 200 crores of India ad spend in FY '20, the last normal year. So any guidance you have on the absolute numbers given you don't look to enter any new cities? Or we should continue to look at this number from a percentage of sales basis?

So we should -- if you look at Q1, it was at 2.2%. But on a year level, I think we should be looking for, what, 2 percentage. That's our target.

2% on a yearly. Okay, got it.

Anything between 1.8% to 2%. So our target is 1.8%, but keep it as 2%.

Got it. If I can just squeeze one last question. On the jewelry hallmarking bit, any incremental update you can share on all the compliance, whether it has increased or same versus what it was some time back?

So they are keeping on fine-tuning the hallmarking procedure wherein there was some loophole where 22 carat and 21 -- 22 and 19 were made compulsory hallmarking. So people used that gap wherein the 20 carat, et cetera, were sold without hallmarking, okay? So that gap is also being solved now. So a couple of months before that is also solved. So they are tightening the process and we expect that further, there will be what we call strengthening stringent processes, et cetera. And next 12 months, I think it will be fully set. That's what we feel because with the increase in duty, surely government will also understand that, that should be also tightened. So there will be more incentive to actually tighten the process.

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

Congratulations for good [indiscernible] So I have three questions. The first question, which comes to my mind that Candere has been growing much faster. But surprisingly, you have booked the losses of about INR 12 million in this quarter. So if you can quantify what is it exactly? Is that OpEx is going up and because of that, this is in nature or it's onetime we have taken some correction?

So, Candere, as you rightly said, it has been growing in the range of 80% year-on-year, right from when we acquired it. And now we are looking for the next set of or the next phase of expansion where we have already started investing in upgrading the software, upgrading the team I guess, the marketing spends, et cetera, because we are gearing to the next phase of expansion. As I told you, we are planning to open the first physical showroom before Diwali this year, and we are looking forward for that.

Okay. Okay. So this store, again, will be in non-South market or it will be in metros?

It's in Mumbai. It's in Mumbai.

My second question on Slide 36, when I see it's heartening to know that the non-South revenue has moved up from 30% to 34%. I think directionally, it is picking up. But I was a bit surprised that studded has not moved in that ratio. I mean studded has moved from 20% to 24% in this quarter. So any thoughts how you look at the rest of the year for non-South revenue and the studded portion to move up?

Yes. So if you look at Q4 versus Q1, okay? So Q4 versus Q1, the studded ratio was almost stable, where it is around 24%. Even though actually Q4, the non-South revenue mix was higher than Q1, okay? But of course, we know that year-on-year is not the right comparison because of the disruption. And the thing which you are seeing is year-on-year, wherein you know the markets were completely uneven, the opening, the closing, et cetera, due to the disruption of COVID. So if you look at quarter-on-quarter, it is more or less stable at 24%.

Yes, I got that, Ramesh. My only point what I was trying to say that...

How to increase it, right?

A lot of energy to get our studded portion up and even non-South. So what is it that we can expect in the balance of year?

Okay. So we have a constant push to increase the studded share and the standard share will be higher mostly in the non-South markets. And usually, Q3 and Q4 are more non-South heavy, okay? And Q1 and Q2 are South heavy. So if you look at Q3 and Q4 should do more studded in a usual scenario. And again, all the new stores which we are opening, we are opening in the non-South markets, which is going to take your standard ratio higher and subsequently, margins will also be higher. That's our target.

Okay. In the domestic business, the growth is superb. But if you can say that how much was the grammage growth, that would be really helpful.

Grammage is almost stable Q4 to Q1.

No, what is that number?

Number. Okay, I'll just give it to you, okay, in kilogram. You can go forward. I will come back to you and give the number.

Yes. My last question is on -- of course, we have seen the gold metal loan is one of the things which is impacting. And we have seen that the cost is also coming down. But margin has not moved. I mean we are still at 7.9% with the recovery which has happened. I think maybe after five, six quarters, we have seen a normalized quarter and we had good season also. I'm sure in the second half, season will be much more better, sharper. But what is it that at this time, we can expect 8.5%, 9% EBITDA?

So here, first of all, 8% EBITDA in Q1. Q1 is a more South heavy quarter. Q2 will also -- we think that it will be in the similar lines. But Q3 and Q4, we estimate to have a better EBITDA margins than Q1 and Q2. And to your question, where it will reach 9%, as we have told before, once the non-South revenue mix increases, the gross margin will increase and the EBITDA margins will also go up. So if you look at our expansion will be focused in the non-South markets, and that is where -- or that is the direction where we are going to go also.

Okay. The last question, you did say in the beginning that we have opened the Aurangabad store. And you did say that there are some more stores which will come in the franchise owned company-operated model.

Yes.

So if you can tell some time lines, whether this will be before the season, next season or it will be during the season or post quarter 3, quarter 4?

The pilot franchise stores, we had planned for six numbers, correct? One is already done. Rest five will be done before Diwali.

Okay. Before Diwali.

Yes.

And can you share a month's experience, what is it that you have experienced in Aurangabad?

It is -- meaning regarding the store success, there is no challenge at all because we have been expanding over new markets for the past many years. So the only area was to fit in the working, what you call, dimensions where it is well on track. It is now more than a month now. And the operating model, which we had set has got stabilized.

So my question was, let me redesign the question. Is it more of a yellow metal demand, which is happening because that's a Tier 2 market, we can say that? Or what is the local consumption pattern? Is it pure gold? It's a studded gold or it is purely a studded?

No. So studded ratio usually outside South India is more than 30%, okay? But in Tier 2 -- in South India, it's in the range of 21% to 22%. So this being a non-metro and a Tier 2 market, it is in between the South and the usual non-South percentage. So it is -- in short, it's between 22% and 30%. But that was estimated as well. And regarding your -- the volume, it was 4,000 kg.

4,000.

Yes, and just for you to understand, we actually try maximum to increase our studded ratio. So we as a brand more than volume, of course, we target on our revenue. And also we try to push to the studded where we do not focus on more of a gold volume. We focus on revenue growth because we also, as a brand, push studded jewelry.

[Operator Instructions] The next question is from the line of Nillai Shah from Moon Capital.

Sir, I have a few questions. The first one is just if you can qualitatively talk about how the trend is panning out in July and maybe starting of August without getting into numbers, that will be helpful.

So July, as we speak, the momentum is very good. It is actually the footfalls, the momentum, the consumer sentiment, et cetera, are extremely positive. And in Middle East also, the trend is being very positive as we speak, and we expect a good season.

Okay. That's good to know. The second bit is on the interest cost. Now given that our metal gold loan component is moving up, which you highlighted last quarter. And will that more than offset any interest cost increase that you will see because of the environment at this point in time, which is to say that on a sequential basis here on, should we be expecting a marginal drop in interest cost for the company every quarter?

Yes. So if you look at -- there has been some interest hike in the recent past for the non-gold loan quotient, okay, in Q1. And we should also expect that there is some hike in the interest rates. But of course, as you rightly said, we were at INR 1,500 crore gold loan in the last financial year, which is now at INR 1,600 crores. And as we speak, it is INR 1,650 crores, okay? And that will negate most of the cost increase because of the rent. And we can expect a minimal, what you call, reduction in interest because there is an interest cost hike, which is happening now when compared to last year.

Yes. So, it'll offset that interest rate hike is all I wanted to know. Yes, so that's good to know.

Yes, it should gain some also.

Got it. Moving on to the balance sheet. Your P&L seems to be on track. You've delivered the last few quarters of strong growth and the margins also seem to be seem on track. So if you just can talk a little bit about the ROE profile of the company strictly on the basis of calculation, annualized at about 12% at this point in time. But if I was to, let's say, remove off some of the fixed assets, which are probably being used for collateral against your gold metal loan, you are clocking ROEs of about 14% or so and ROCEs, which are probably in the ballpark of 14% to 16%. Does this mean that at the store operating level, the ROEs ex franchising would be upwards of 20%?

Okay. So I will answer what you call part by part, where, yes, ROE is now at 12%. And yes, there are collateral which has been mortgaged in banks for our exposure, which is a traditional way of getting bank loans in our country, especially in our sector. When we move on to franchise, where our owned store expansion is lesser than the franchise, and we have more liquidity in the system in terms of reduction of own store expansion. When we go and reduce the bank loans, these collateral will come out, and it will surely help us to have some free cash, which will again increase our ROE.

Got it. But can you confirm whether at the store level today, you are running with ROEs, which are in excess of 20%?

Yes, correct.

The next question is from the line of Pankaj Bobade from Affluent Assets.

Congrats on a very good set of numbers. Just wanted to understand, given that -- this is -- the like-to-like comparison for last -- same period last quarter would not be the right one. The thing is that whether this momentum of, say, approximately 3% PAT margin would be sustainable going forward? Or do we see anything -- I mean, it's coming down at some lower level?

No. So Q1, if you look at Q1 has been very good. And if you look at our four quarters, because why I'm telling four quarters is because we have got what we call disrupted four quarters together post-COVID for the first time. So if you look at the PAT number there, it is INR 380 crore plus, okay, which is like 2.5x when compared to our FY 2020 PAT, okay? So EBITDA margins are at 8%. Gross margins are getting stabilized at around 15%, 15.5%. And Q3 and Q4 are better EBITDA margins because of better gross margins. So I think it should be more than sustainable.

Okay. Sir, my second question would be in one of the last call, you had mentioned that with the franchisee business model coming into play, our margins would expand. Can you please throw more light on the same? How would it happen?

Yes. So margins will expand at the PBT level, meaning not on the EBITDA level because as you know, franchisee, the EBITDA margins will come down because we are not going to get the whole gross margin to our books, but because it's a FOCO model at the GP level and the EBITDA level, it will be lesser. But on a PBT level, it will expand.

But as you mentioned in previous participant's answer that you are looking for an investor who would not be in day-to-day -- would not be interfering in day-to-day operations of that specific franchisee?

Yes.

So how -- he would be just investing in the location -- I mean, the property, right?

They will be investing in the inventory and the CapEx, and we will be managing the store for them. And it's a gross margin share where the OpEx will be borne by them, except the salary cost. So PBT level...

OpEx will be borne by them and...

In short, no, in short, the PBT levels will be same or more than the PBT levels now for the existing stores.

[Operator Instructions] Next question is from the line of Deepak Poddar from Sapphire Capital.

Sir, I just wanted to understand, first up, I mean, number of stores we are looking to open both on the own side as well as the franchisee side in FY '23?

Yes. So if you look at our expansion, it is going on track. We already opened four showrooms in Q1, out of which three are in the non-South, out of which one is franchise. We are getting very good response from the franchisee partners. So there might be a chance -- change in the composition between the franchise and owned store. Expansion plans are on target. We will see how it gets stabilized. And then we will come back to you on the exact composition between franchise and owned store. As we speak, the plan is to have 12 owned stores and 6 franchisee stores for this year.

Okay. So total 18. And this composition is subject to change maybe on the interest on how the franchisees are performing, right?

So as you know, franchise, we don't want to lose the opportunity of the prospective franchisee coming on board. There might be a chance in composition between franchise and owned store. It will depend upon the stability at first. And the first store is already stabilized, but we are waiting for the next set of showrooms also to get opened and then decide on whether to change the composition or not. But even if it happens, it is good because, as you know, PBT levels, it's the same. And we might have to convert a few of our own stores, which is planned to the franchisee people, but it will be only delayed by a quarter or by a couple of months.

Okay. So fair enough. That I understand. And you did mention that PBT level is same for owned versus franchisee stores, right?

Yes. Maybe better also.