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

Ladies and gentlemen, good day and welcome to Q3 FY '24 Earning Conference Call of Kalyan Jewellers India Limited. This conference call may contain forward-looking statements about the company which are based on beliefs, opinions and expectation of a 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. Thank you. And over to you, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on Kalyan Jewellers India Limited Q3 and 9 Months FY '24 Earnings Conference Call. We have with us Mr. Ramesh Kalyanaraman, executive director; Mr. Sanjay Raghuraman, CEO; Mr. V. Swaminathan, CFO; Mr. Sanjay Mehrottra, Head of Strategy and Corporate Affairs; and Mr. Abraham George, Head of Investor Relations and Treasury. I hope everyone got an opportunity to go through our financial results and investor presentations 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 opened for a 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 a 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. Good afternoon, and let me welcome everyone to the call. It has been a fantastic year, so far. All the quarters have been excellent. For most -- for the most recently concluded quarter, we recorded a consolidated revenue of -- growth of around 34%, India revenue growth of 40%. Consolidated revenue growth for the first 9 months of the current financial year is around 31%, and revenue growth in India was at approximately 36%. During the recently concluded quarter, we continued our strong expansion momentum, opened 22 new Kalyan Jewellers showrooms in India. While 7 of these were owned showrooms, we expect to convert those to FOCO showrooms during the ongoing quarter. And the proceeds will be utilized to repay the non-GML working capital loan in India. With respect to the divestment of noncore assets, we have secured the bank NOC for the sale and have completed the documentation with the buyer. In addition to the advance received earlier, we have received one more tranche of funds and expect to conclude the sale [ soon ]. Proceeds from this sale can also be utilized to repay the debt in India. We are well on track to achieve the debt reduction target set for the current financial year. We are embarking on a debt reduction journey in the Middle East as well. As I mentioned in our earlier interactions, in addition to new FOCO showrooms, we will also be converting a few of our existing owned showrooms into franchised showrooms and shall be utilizing the proceeds from the conversions to repay the working capital debt in that region. I would also like to spend some time on our digital-first platform Candere's network expansion plan. As we speak, Candere has 8 physical showrooms and it plans to add another 12 during the ongoing quarter. Aggressive network expansion plan has been drawn up for the platform during the next financial year, with 50 LOIs already signed and showroom locations beginning to be tied up. Let me give you an update about our international markets outside the Middle East. U.S. market for Indian jewelers and Indian jewelry has evolved over the years and holds significant promise. Even though we have been receiving significant number of inbound franchisee inquiry for U.S. market, we have decided to launch the first set of 2 pilot showrooms as company-owned ones. Post the pilot phase, all additional showrooms in the region shall be through franchisee model. We are upbeat about the upcoming new showroom launches and have launched first collections and campaigns for the ongoing wedding season across the country. Now I will invite Sanjay to take you through the financial highlights of the quarter. Sanjay?

Thank you, Ramesh. Good afternoon, everybody. We just completed a good quarter. And I shall give you some details about the numbers in this last -- just concluded quarter. We reported a consolidated revenue of INR 5,223 crores, a growth of 34.5% over the same period in the previous year. Consolidated profit after tax was INR 180 crores versus INR 148 crores in the same quarter of the previous year. Now, [ if I want to just ] break this up between the India and the Middle East, I'll start with India numbers. India revenue came in at INR 4,512 crores, a 40% growth when compared to the corresponding quarter in the previous year. India profit after tax came in at INR 168 crores compared to INR 133 crores in the same quarter of the previous year, a 26% growth. Moving now to the Middle East. Revenue for the quarter in the Middle East was about INR 683 crores, a 6% growth compared to the same quarter in the previous year. And the Middle East business posted a profit of INR 14 crores for the quarter compared to a profit of INR 17 crores in the corresponding quarter of the previous year. During this quarter just concluded, we opened 26 showrooms in India across the Kalyan and Candere formats. With this, I'm done with the summary of the financials, and we now open the floor for questions. Thank you.

[Operator Instructions] The first question is from the line of Shirish Pardeshi from Centrum Broking.

Congratulations for a good set of numbers.

[ Yes, thank you ].

Starting with the revenue growth momentum in the Middle East. And there is a loss -- I mean there is a PAT which has declined, so if you could give a little more color how you look at the next 2 to 3 quarters for the Middle East business.

Middle East, yes. So revenue has grown by around, what, 6.5%. And SSGs have been in the range of, what, 4% -- 5%. And the PAT degrowth which you see is predominantly because of the interest rate hike which has been there over the past 2, 3 quarters now. And there is at least a 2% interest rate hike which has been there when you compare to Q3 of last year. And one more reason is that franchisee share comes with a lesser gross margin. So these are the major 2 reasons why you see a degrowth in PAT even after a 5%, 6% revenue growth, but way forward, I think it should be good because market is still vibrant. And store expansion is also there and franchisee LOIs have also been signed for expansion there.

So a follow-up here. What is this 50 million corporate guarantees we have given? I mean, what is it is -- going to do to the impact on the Middle East business?

So the guarantee which you see is -- you know that, India, we had -- the franchisee was very successful because predominantly the major reason being we have tie-ups with banks and NBFCs here in India who fund our franchisee partners in their own terms. There we did not have such kind of a tie-up there. And the partners whom we were looking for also could not arrange any funding in that region. So now we successfully have tied up with financing houses, where they will fund our franchisee partners, the only difference being we will have to issue a corporate guarantee on their behalf. So that is what you see as that additional corporate guarantee which is given, but the advantage there what we have got is that, since we are in talks with the banks there -- because they also know, the rest -- next 2, 3 years, what is our plan in Middle East -- because franchisee is coming in and more liquidity is coming in. And over the past 2 years also, Middle East has been behaving good, okay? And we could actually release corporate guarantee from certain banks. So the additional corporate guarantee is not very high. So it is almost a neutral transaction, but the guarantee which you see now in the update is -- that guarantee is going to -- on behalf of franchisee partners, but we have released certain corporate guarantee also, so it's almost a neutral transaction which you see.

I understand, but sorry. I'm a little harping more. About 15 months before, we were also planning to fundraise in the international market. Now is -- those plans -- are alive?

Bond, you mean.

Yes.

So we are not sure about the bond market still because it's a bit choppy, but it's not a no. But as we speak, we don't see anything coming up very shortly.

Okay. My second question is on India business. I think the revenue momentum is stronger, but when I see the showroom contribution from the franchise owned is rising -- but it is not directly reflecting into the studded share. Studded share is still hovering between 27%, 28%, 29%, so what is the problem here? I mean I do understand you have been taking a lot of efforts to develop these stores and franchise, but I think I was expecting that we should be neck-to-neck with the competition, maybe about 30%-plus.

For 2 reasons; 1 being at the store level, especially in the non-South markets, studded ratio is still at -- in the range of 30%, but what you see here is majorly because, the first-time revenue which we get when we open a franchisee store, that studded revenue might not be at 30% because it depends upon market to market. For certain markets, we'll have to keep some hyperlocal gold jewelry, wherein the studded composition which we sell in that initial bulk revenue might not be the 30%.

Okay, okay. Got it. And the last: I think we see the festive season has seen a lot of discounting, so could you paint some picture how the competition behaved this time? Because everybody is trying to look at the same pie and the discretionary spends. So is the competitive intensity is -- now normalized? Or you think, even quarter 4, you will see the similar intensity.

Competition is part. You have seen it. I mean, every quarter, competition is there. Every market, competition is there. It's how you handle your competition during various times, right? So during the period immediately after Diwali, yes, you are right, we saw some heightened level of intensity in competition because the gold price suddenly started going up, where the local players in many markets, we've started seeing more competition. Otherwise, it's very flattish. So we also spend more on promotions and campaigns in those regions where we saw this level of competition intensity to match in our -- match in competition with them.

Okay. And just one last question for Sanjay. You have signed 50 LOI for Candere. At what stage do you think the store expansion will take up speed?

Sorry. Your voice faded. What stage...

So the presentation says that we have signed 50 LOI for Candere business.

Right.

So at what stage we see the speed will which -- will pick up. Is it going to [ bunch up ] in quarter 1 next year, quarter 2? Or it will be evenly spread out. Or we have plans to open few in quarter 4 also this year.

So we will open, I think, about a dozen in this quarter. The bulk of this 50 will kind of get spread out over next year. There's probably some upside on that number, but we'll talk of that later. This is the way I think it will build over the next year.

Yes. The reason why I'm asking -- is the off-line is -- going to really solve the problem for Candere's sales decline? That's the whole question. I think, 2, 3 quarters, we have been seeing there is a consistent decline.

I think the first point we want to communicate is that this is an omnichannel business and we believe the online business is going to be complemented. And as the off-line store network rolls out, we'll have a good network effect which will allow sales to come back. We are already seeing that in the 7, 8 outlets that we are operating now, and I think we are headed in the right direction on that. We are not doing anything new. We're just seeing what is already playing out in the market with other brands.

[Operator Instructions] Next question is from the line of Gaurav Jogani from Axis Capital.

Sir, first question is with regards to Q4. How are you seeing the trends emerging in Q4? The first month is completed. So one on that. And second, on the store expansion plans for Q4 specifically. I mean, what kind of store expansion plans do you have for Q4 and the year-end?

Yes. So momentum in Jan, it's continuing like Q3. The SSGs have been very similar to what we have seen in Q3. Momentum is strong. And store expansion for Q4, we will be opening at least 15 Kalyan showrooms and, again, 12 Candere stores. Middle East can be [ one ]. And next year, we will be opening 80 Kalyan showrooms in India. We will be -- international will be in the range of 4 to 5. And Candere is minimum of 50 because 50 we are talking about is only franchise. Candere expansion will be a mix of franchise and owned. So we are -- already signed 50 and we are still signing and we are looking out for locations, so Candere expansions, it should not be 50, should be a minimum of 50.

Sure, sir. Got that. And sir, you also mention that you're planning to open 2 showrooms in the U.S. market. So that will be inclusive of the 4, 5 guidance that you gave for the international market.

Yes. So that will include -- 5 will be including the 2.

Okay, okay, [ got it, sir ]. And sir, my question also again is with regards to that guarantee part, the guarantee thing, if you can explain it, sir, a bit better because it was a bit confusing. So it wasn't very clear...

So I will do a detailed explanation. Okay. So as you are aware, we launched our first franchisee showroom in the region recently. And we have signed 5 LOI for the current financial year. One of the key factors for the success of franchisee rollout in India has been because we have tie-ups with banks and NBFCs who will fund to our franchisee partners in their own terms, but unlike in India, the only difference in Middle East is that we will have to provide a corporate guarantee for these facilities which they provide to our franchisee partners. The corporate guarantee that you are referring to is for this purpose only. Okay, the additional corporate guarantee given is only, say, what, USD 10 million or USD 11 million. That will also come out because we are reducing debt in the Middle East because we are converting 3 showrooms there into franchisee, from owned. And this corporate guarantee of additionally USD 10 million or USD 11 million which is given now will also come out in the next 3 or 4 months, so it will be a neutral transaction, the only difference being, as of now, all the corporate guarantee, given for Kalyan Jewellers loan, but the corporate guarantee which we are issuing now is not for Kalyan Jewellers loan. It is for the loan taken by the franchisee partners, and we give the corporate guarantee on their behalf, okay?

Sure, sir. So in effect, I mean, while the total corporate guarantee will remain the same, now it will not be for Kalyan Jewellers stores, but it will be for the franchise thing.

Exactly.

Okay. Okay. And sir, like you mentioned that even in India there are banks and NBFCs who gave the franchisees funding because of us, but is there any recourse, I mean, in case of any [ call ] by the franchise partner in payments? Will there be any recourse to Kalyan Jewellers in that case or not?

No, no, no, nothing, nothing. Nothing at all.

Okay. And sir, my last bit is on the interest part, the interest expense part. I mean, if we will see on quarter-on-quarter basis also, the interest expenses largely remained flattish. And even on the 9-month basis, the interest expense is a bit higher, so if you can help us out. I mean, when can we expect this interest expense reduction going ahead?

So interest -- because we have hardly reduced about 150 crore of debt now. So interest reduction will be seen for the next financial year because, even as we speak in Jan, we have not reduced the debt because aircraft money is yet to come. Only INR 33 crore has come in total. And the store conversion money has also not come. All this will be coming in, what, maybe by March, so March might be the month where we save interest for the rest of the debt which we are planning to reduce. And next year, of course, the full 300 crore, 350 crore which we reduced this year, you should [ see interest again ]. Plus, what we are reducing...

Yes. So next year, what will be the guidance for the debt reduction?

So debt reduction for the next year, what we can estimate is 350 crore which we -- 300 crore to 350 crore which we reduced this year will be there for the full year. Next year, debt reduction will be in the range of 400 crore to 450 crore, out of which you keep an average of, say, 200 crore for the full year. So that will be the [ net ] debt reduction, if you are trying to calculate the interest saving.

Sure, sir. Okay. And sir, last bit is on the other income part, I mean, because you are also receiving some other income money because of the CapEx that you are incurring for the franchise partners. And typically, that is kind of a INR 4 lakh a month number in that sense. And with the franchisee numbers increasing, what kind of other income can be expected in the times ahead?

So we can't -- I mean, in terms of line items, this is going to be the only thing. There is going to be the rent that we claw back on the franchisee, the infrastructure usage fee. That's all, no other line items.

No. So my question, sir, was like, this year, by the end of this year, we'll probably have 80 franchisee showrooms that we will be closing this year. And probably, we'll be adding another 80 showrooms next year, so in effect, if I take an average, there will be around 120 franchise showrooms, say, for the next year. And on that, should I take a INR 50 lakh fee for the entire year? So that will be a right assessment in terms of other income...

Yes, yes, yes.

Okay, so that will be a INR 600-odd crore...

So I think what you -- I mean, in terms of accounting for it, what you're saying is right, but this is not just [ free ] income for us. There is a line item on the other side which is an expense, so I'm sure you've got that in mind.

Yes. So [ we'll probably ] increase the other expenses because depreciation is -- amount will also come in that line item, but accordingly, the other income will also come in.

Yes. So I mean it's going to be P&L neutral. That's the basic point that you should keep in mind.

[Operator Instructions] Next question is from the line of Ashish Kanodia from Citibank.

So the first question is, of the 80 new franchisee stores which you're planning in FY '25, how many of them will be under the revised terms where the CapEx will be borne by the franchisee partners and then there will be some margin benefit as well?

So maybe the first 30 to 35 showrooms will come with an older model where the CapEx is put by Kalyan. And rest 55 to 60 will be -- or sorry, 45 to 50 will be in the range of the new model, around 45 to 50.

Sure. And from -- while CapEx, I understand, on the margin front, what kind of an incremental gross margin will you get for these 45, 50 stores?

0.25 to 0.5. It depends because it's a -- it's not a plain vanilla model. It's a -- what we call performance-oriented model, which we have worked on this additional margin. So I think it should be budgeted in the range of 0.25 to 0.5.

Sure, sure, Ramesh. And secondly, I think, on the debt reduction, just wanted to understand. If I understand it correctly, you are saying, current financial year, which is FY '24, there will be a total 300 crores and 350 crores worth of debt reduction. And then in FY '25, what is the incremental number? Is it going to be 200 crores, or is it going to be 450 crores? I mean, incremental, what will be the '25 debt reduction?

Incremental should be in the range of 400 crore to 450 crore, but it will be done over the year, so for him to look at the interest saving, I told, okay, keep 200 crores as an average for the full year.

Sure, sure. And so just wanted to kind of -- more from a debt reduction, not from an interest, perspective. So out of this 300 crores, 350 crores, almost 130 crores will come through the sale of non-core assets. And the balance, you will be basically utilizing the free cash flow generation and just the conversion of stores, right?

Yes. So as we -- so 100 crores will come from the noncore because, even though it's 135 crores, net of tax, it's only 100 crores. And the rest is we'll convert the 7 showrooms which we opened in Q3 so that you -- meaning that comes in the range of about 150 crore to 175 crore, so majorly done, plus some cash generated. So it's almost done in the way we wanted.

Sure. That's helpful. And on the store part, you said you are planning to open 15 Kalyan showrooms in 4Q and 12 Candere. Now this 15 store, does it also includes your -- the 5 Middle East store?

No, no, no. It's India.

Okay. And so in 4Q, you expect to add 5 Middle East, right?

So out of the 5, meaning it can -- it might be in Q4 or partially in Q1. It includes 2 new showrooms and 3 conversions, so all 5 are not new.

Okay. Sure. Got it. And just lastly, in terms of the plan to kind of enter into U.S., sir. So firstly, what kind of, like, capitals you're planning to deploy in U.S. And the 2 stores which you are planning, have you already identified location, et cetera, and when the stores will most likely be kind of open.

So yes, locations have been identified. And again, we will be opening in the first half of the next financial year.

And what kind of overall capital deployment you kind of -- you're expecting to deploy for the 2 stores.

That's too sensitive because -- too sensitive info.

[Operator Instructions] The next question is from the line of Pulkit Singhal from Dalmus Capital Management.

This is the first quarter where we have very high revenue growth which did not translate to an equivalent PBT growth. In fact, there's a substantial difference in your PBT growth and revenue growth. I'm just trying to...

In Q3.

Yes, in Q3. So 40% is translating only to 26% PBT growth.

Yes.

Now I understand that we are in a major revenue expansion drive, store expansion drive. And also there's a business model change, right, which we are going for franchisees. Now in the process of doing so, are you seeing that this will be margin dilutive because you're going into areas which may require -- which may not be as comforting on margins as you might have initially thought it to be? I mean your thoughts on the same.

So we still stand by what we have stated earlier that PBT growth would be higher than the revenue growth for the full year. And if you look at the 9 months, the PBT margins have been similar Y-o-Y even after absorbing maybe 0.2% to 0.3% of preoperative employee expenses in Q1 and Q2. The impact of the preoperative employee expense is coming down and will fade further going forward, okay? And however, if you look at only Q3 in isolation, yes, you are right. There has been a degrowth in PBT as a percentage Y-o-Y. And for this also, there is primarily because of 2 reasons: a, baseline PBT for comparison itself should be 5.4% and not 5.6% of last year because we had very few franchisee shops operational last year and bulk of the revenue was from KJ-owned shops. This year, significant share of revenue is coming from franchisee stores, where the PBT margins is 5%, as I have previously told you. We -- there has been an increase of around 0.3% in advertisements, which was at a lower base in the last year since Diwali last year was in October. So otherwise, we still stand by what we said. We don't see any pressure in margins going forward and for the full year.

But when we look at it 2, 3 years out, this phenomena of higher revenue share of franchisees will always take place because you're incrementally always opening new franchisee stores.

Yes, yes, true.

So therefore, to that extent, this pressure should continue, right...

So only in Q3. Usually, our PBT margins are only in the range of 4.7%, 4.8%, okay? 9-month PBT is 4.8% last year and almost in that range before -- meaning this year also. So 4.8% this year, meaning 4.9% last year, okay, so it is in the range below 5%. All the PBT -- all the franchisee stores come with 5% PBT, okay? That is why we told you that revenue -- the PBT margin growth should be higher than our revenue growth. Q3 was an exception where the PBT margins were 5.6% last year. That is predominantly because of advertisement expense at a lower base, okay? So that is why we think that we still can stand by what we have said, and it will be done in such a way that our PBT margin growth will be higher than our revenue growth. And again one more thing what we have to keep in mind is that the franchisee stores also might come up with 5.25% to 5.5% PBT because we are working on a new model.

Right. So the new model comes into play and that helps the margins...

Not only that, but again, I told you, usual PBT margins are only 4.8%, so Q3 was exceptionally high at 5.6%.

Understood. I'm not thinking 1 or 2 years out. I mean, as I said, it increases, so you have higher mix of higher-PBT-margin new franchisees coming up...

Even -- yes, that is fine. Even if it is at 5% also, then it should go up because -- now you know that it's at 4.8%, 4.9% existing -- last year PBT.

And also, the deleveraging part, that should also kind of, I mean, in some ways help because the PBT margin is with certain assumption of [ your interest ] expense, right? Okay. And so...

Yes. I'm talking about without that.

Understood.

Even without interest savings, we should be at higher PBT margins than what we call -- the PBT growth should be higher than revenue growth.

Understood. And on A&P spends because this is something which is evolving. And maybe your current calculations -- I don't know how much they are factoring in, but is this a one-off? Or do you see an elevated A&P spend scenario going ahead?

Again, last -- in -- if you look at Q2, the A&P was only at 1.4%, which is 2.3% for Q3. If you look at 9 months, A&P is at 2%. So we should always budget for 2%. Diwali moving from Q2 to Q3 -- because last time, October second week was Diwali, so we started the campaign by September. This year, Diwali was only November, so we campaigned but started only by October. That is why the shift in expense is within the quarters, but within the year, it should be at 2%.

Okay. Okay. Just last question, on the studded share. As this first set of franchisee stores come in the base, [ their ] recurring revenue should have higher studded share, right?

Yes, of course, correct.

And so that will play out, hopefully, next year, although the initial -- I mean the new set of stores will again have the same problem...

Yes. So even if recurring -- studded share goes up because we are opening 80 showrooms, that comes up with a lower studded what -- because in Tier 3 showrooms we cannot keep a 30%. Maybe it might be 25%. Maybe it might be 26%. It depends upon that market, so that bulk revenue -- in that bulk revenue, studded ratio might be lesser.

Understood...

But again, margin -- meaning, the studded ratio, even if it grows, the margin is not going to be impacted because, even otherwise, franchisee revenue comes up with only, say, 5% margin.

Okay...

So only in the one time we are talking about. Otherwise, in the recurring stores, studded ratios are strong.

Right. Right. So recurring stores don't have higher PBT margin than 5%. Is what you're saying [ even ] when the studded normalizes?

Meaning very partially, but it negates to 5%.

Next question is from the line of Manish Poddar from Invesco Asset Management.