KDDL Limited (532054) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the KDDL Limited Q1 FY '21 Earning Conference Call. This conference call may contain forward-looking statements about the company which are based on the beliefs, opinions and expectation 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 would now like to hand the conference over to Mr. Yasho Saboo, Chairman and Managing Director, KDDL, for his opening remarks. Thank you, and over to you, sir.

Good morning, everybody. Welcome to our Q1 FY '21 earnings conference call. I hope everybody around you and you and your families are safe in this extraordinary situation. I'm here today with Sanjeev Masown, CFO of KDDL; and Raja Sekhar, CFO of Ethos and SGA, our Investor Relations advisers. And I hope everyone has had the chance to go through our updated investor presentation. Quarter 1 this year has been, as expected, severely impacted by the COVID-19 situation and the lockdown that was in place for a significant part of this period. The results that I will share are to be seen in this context and are, therefore, strictly not comparable with those of other periods. Let me start with the figures on a consolidated basis for the quarter. Consolidated total income for the quarter was INR 53 crores. In quarter 1 last year, it was INR 153 crores. Consolidated gross profit for quarter 1 FY '21 was INR 24.8 crores, this was INR 68 crores in quarter 1 previous year. Consolidated EBITDA loss for Q1 FY '21 was INR 6.3 crores. This was INR 17.9 crores positive in Q1 FY '20. Consolidated loss after tax quarter 1 this year stood at INR 15.6 crores as compared to a profit of INR 0.1 crores in quarter 1 last year. You are surely aware that our financials are impacted by the application of Ind AS 116 accounting standard, which impacts EBITDA and PBT to some extent. Hence, our Ind AS 116 adjusted financials are published in the investor presentation, which you may go through if you would so wish. I now come to the business-wise updates. Our manufacturing business comprises of watch components, precision engineering and ornamental packaging business. Our manufacturing business revenue was INR 21 crores as compared to INR 48 crores in the previous year quarter 1. The revenue share of watch components and precision engineering business for the quarter was about 72.4% and 23.1%, respectively. EBITDA loss for quarter 1 this year was INR 1.3 crores compared to EBITDA profit of INR 8.2 crores last year for the same quarter. Loss after tax for quarter 1 this year was INR 4.8 crores as compared to profit of INR 2.9 crores in quarter 1 last year. Revenue from watch components business stood at INR 15.7 crores in quarter 1 this year compared to INR 35.8 crores in quarter 1 of FY '20 and the revenue for precision engineering business stood at INR 5 crores this year in the quarter as compared to INR 10.6 crores in quarter 1 last year. This quarter was severely impacted by COVID-19 lockdown all over the world. Watch manufacturing activity, not only in India, but in Switzerland was practically closed, impacting the demand for our watch components business. In the last 4 months, however, the market is recovering, we expect an improving trend to continue as different countries and markets gradually normalize. While there has been some deferment for orders, we have not received any major cancellation of orders. And I can actually say that we are seeing a lot of green shoots arising out of new opportunities that may come the way of India. We commenced operation in all our facilities during May, in line with the customer requirements and compliance of the MHA and state government guidelines. However, facilities continue to operate at suboptimal levels. After July, gradual recovery is being witnessed in all businesses, and we expect manufacturing operations to touch pre COVID levels in the coming quarter. We also expect the exit of some weaker competitors from the market, both in India and abroad, and therefore, new opportunities for us in the medium term. In the prevailing situation of limited travel, canceled trade fairs and no physical presence to show our new products, we are aggressively reaching our customers with digital roadshows which are showcasing our USPs and new range of products. This has been appreciated by the customers and we have received some very exciting and favorable responses, which bodes well for the coming periods. We are also implementing several steps to improve productivity and optimize our cost structure to minimize the impact of the pandemic on our profitability. We are hopeful that our government's recent initiative of Atmanirbhar Bharat will provide new opportunities also for our precision engineering business. Many companies have now started acting on the China Plus One strategy with a move to diversify their supply chains and product inputs. We have witnessed increased inquiries from new markets and segments in the last few months from customers, both in India and abroad. About Estima, our Swiss company, the Estima acquisition was intended to expand our footprint in Swiss manufacturing. Although COVID-19 has increased the turnaround time for this business, we are confident that we will achieve great success by replicating the strengths and capabilities from our Indian operations and existing the -- and extending the existing strong customer relationships. The SWISS ORIGIN regulations will be the catalyst for the revival and growth of Estima. During this quarter, Estima reported a revenue of CHF 540,000 and a cash profit of CHF 25,000, which is a healthy and encouraging signal and validates our strategy and actions for the turnaround of the company. The Swiss government has also provided necessary financial support to the industry during the period of the pandemic, and it has helped in curtailing overheads and costs during this period. I will now discuss our watch retailing business under the subsidiary, Ethos. As we all know, retail has been one of the most severely affected sectors during the COVID pandemic and we have not been insulated in Ethos from this either. All our stores were completely shut in the month of April. As lockdown started easing from the month of May, stores became operational. And at the end of June, about 27 stores were functioning. Even the stores that were operational during Q1, were run for limited time with limited staff, social distancing and other security measures. Hence, our Q1 performance was severely impacted due to this, even as of today, not all our 47 stores are operating, at least 10 or 12 stores are still nonoperational. Our digital platform, however, was running and allowed us to maintain a cash flow with advanced bookings and deliveries that commenced after lockdown conditions were eased to allow e-commerce. We consider Q1 as a one-off highly exceptional quarter. We are witnessing very encouraging improvement during this quarter with increased footfall in our stores and increased engagement on our digital platforms. We expect things to move up steadily from here. Regarding the financial highlights for Ethos, our billings for quarter 1 FY '21 stood at INR 32.2 crores as compared to INR 118.1 crores in the last year same quarter. The billing for exclusive brands contributed INR 11.8 crores in this year's quarter 1 compared to INR 28.6 crores in last year's quarter 1. Same-store growth was negative 80% in quarter 1 this year. But as many stores were shut, this number does not hold much relevance. Consolidated total income for Q1 this year stood at INR 32.8 crores compared to INR 102.8 crores in Q1 of last year. Consolidated gross profit, this year, quarter 1 stood at INR 11.7 crores as compared to INR 30.5 crores last year Q1. Gross profit margin expanded by 580 basis points year-on-year to 35.7% in Q1 this year as compared to 29.9% in Q1 last year. And this really points out to the increasingly robust role of our exclusive brands in our portfolio. Consolidated Q1 EBITDA loss this year was INR 0.8 crores as compared to EBITDA positive of INR 12.1 crores in Q1 of last year and consolidated loss after tax Q1 this year stood at INR 10.8 crores as compared to a marginal profit in Q1 of last year. Our Ethos financials adjusted for Ind AS 116 standards are available on the investor presentation if anybody wants to look at it. The stock carrying months at the end of June 30, 2020, was 8.7 months. As highlighted in our previous earnings call, we had implemented our 3-pronged strategy of cost optimization, store optimization and digital strategy to tide over this crisis and also prepare to vault Ethos to a new phase of future growth. Negotiating with mall owners, we have been able to obtain waiver or reduced rent for most of our stores. We have also deferred various expenses, which can be delayed in the medium-term to conserve cash on a prudent basis. We have closed 3 stores in the first quarter of the year and further in -- we have further closed 3 more stores, 1 in Mumbai, 1 in Navi Mumbai and 1 in Hyderabad. With this, we have taken the total store count to 47. The total buildup area of these 47 stores is 64,118 square feet. I do wish to add that we are opening 4 new stores in the remaining part of the year, which underlines our confidence, which we are maintaining in the future and a fast recovery in our revenues. Our focus is on opening larger and better stores, while closing the smaller unprofitable or low-growth stores. We continue to invest on marketing through our digital mediums. Online billings contributed 53% of our Q1 total billings of this year. This was INR 17 crores out of billings of INR 32 crores in this quarter. So out of a total billing of INR 32 crores, nearly INR 17 crores came from the digital platform. We have the most advanced digital communication and e-commerce capabilities in the country for any luxury product. And with the change in consumer behavior, we are best positioned to leverage these capabilities and increase our market share substantially. We are confident to get past this crisis and get back on the growth trajectory. Our focus is to continue strengthening our exclusive brand portfolio across varying price points. This will help us to improve margins and continue to allow a differentiated buying experience to the end customer. Our preowned watch business, which we had launched recently through the website, secondtimezone.com has also been picking up steadily. We ourselves are in the learning phase for this business. But with our excellent after sales service, backed by our strong technicians and our watch expert team, we are very confident to build the preowned watch business also into a strong pillar. We can say with confidence that we have passed the worst phase of this crisis. We have learned a great deal from the quarter which has gone by, which has made us wiser and ready for the future challenges. We believe with best consumer experiences, backed by a strong digital marketing approach, the trust and authenticity of our retail stores, pan-India presence, we will continue to outperform competition, gain market share and gain profitability. I now welcome your questions and participation.

[Operator Instructions] We take the first question from the line of [ Raj Joshi from Ace Securities ].

Sir, I have -- yes. Sir, how much rental costs have we able -- have been able to serve in the Q1 through the negotiations?

Okay. If you have other questions, Raj, why don't you ask all the questions and we can answer them together.

Okay, okay, sir. So my second question is, as e-commerce may do well, so what is your strategy to increase the sales online? And the last one will be, have you signed any exclusive watch brand recently? If discussion is going on with any?

Okay. Let me answer your second and third question first, and I'll ask our CFO, Sekhar, to answer the question about rental. So to improve our e-commerce, as you know, our business is mostly on generating leads online and the sales are actually consummated either through the stores or through home deliveries or office deliveries, particularly during this time. So we are investing heavily on -- in various fronts, not only just in direct marketing, but also in creating stories on social media. So you will see a lot of stories on social media. They may be for our offers, they may be for the new brands that we are signing, they may be stories about new products. As we speak today, there is the -- just to give you an example, and there are such examples, which happen every month, every week. As we speak today, there is an exhibition in Geneva, which is going on. It is called Geneva Watch Days. About 14 of the top luxury brands are participating in this exhibition. I have to remind you that 3 of the top exhibitions were canceled this year. But this one, because situation has slightly normalized in Switzerland, this is happening in Geneva. Of course, there are no visitors from India, which is possible. But every day, we are organizing webinars, where the CEOs or the sales directors of the respective brands are interacting with customers in India on Zoom or other webinars, sharing the new product, sharing stories about the new products what offers they have, what new exciting finishes they are creating. So this is a kind of -- there is a kind of digital interaction that we are spearheading. Actually, almost no other retailer in the world is doing this, not only in India, I can say it for the world. Nobody in the world is taking such initiatives, but we are strengthening the e-commerce interaction and platform through this means. So from this, we are very confident that this -- the e-commerce platform will serve as a big springboard for future growth for us. For exclusive brands, we are in touch with almost let me say, 4 or 5 brands for exclusive arrangements. And I cannot reveal the names right now. But over the next weeks and months, I can tell you that we will be able to share some pretty exciting news. About rentals, let me ask Sekhar to give you the details about the rental savings.

Yes. So Raj, in terms of the waivers that we've got for the first quarter, Q1, it is approximately 60% of the rent that was payable as per the agreements. We've got waivers to the extent of about 60%.

The next question is from the line of Jeetu Panjabi from EM Capital.

Hope everything is well.

Yes. So far, so good. All good.

Okay. Yes, good, good. [Foreign Language] Yashoji, I just wanted to understand for both businesses, for both the manufacturing side and the retail side, separate questions. How has the last month been? What are footfalls? What are conversions? What are revenue trends that you're seeing there? And are you able to figure some sort of breakeven again? For -- this is for the retail side. For the manufacturing side. Again, what are revenue trends? And I heard you say you'll come to pre COVID levels by next quarter. So what does the order book look like? And I remember you last time saying that you've got a lot of inquiries for many, many components, but you were narrowing it down to a few. So a little bit of color on that. And the final question is, if you can -- and the CFO can talk a little bit about liquidity, cash flow, debt. How are you managing the financial side? And what's the road map over there as well?

Okay, [ Jeetu ], let me start with the manufacturing. So as I said, this is -- it's -- there is a very steady improvement. And I'm not only talking about leading indicators like projects and stuff like that. But actual operations, sales figures, all of them are going up. I can say that the recovery on the export side is clearer and more robust than the recovery on the domestic side, which is not unexpected because as we know that international markets have recovered faster than Indian markets, and I'm talking about consumer markets, right? So if watch sales in Europe and in China and in Japan and in Korea are recovering and U.S.A. is also now starting to recover, then our international brand partners who are making watches, they are starting to reorder, they are starting to -- so for example, we are getting reorders. We are getting increase in quantities of orders that have been placed. So there are all these kinds of signals coming up. On the precision engineering manufacturing as well, we are seeing these not only new inquiries coming, but also some deferments which were done, they are coming back and saying, no, no, now don't defer it, please give us as early as possible. So there are all these kind of signals which are coming up. Not only that, I do want to say this. I made a mention of Atmanirbhar Bharat, right? I strongly believe in that proposition. In fact, I wrote on that in an article that appeared in Indian Express. I strongly believe that not only Indian businesses, but the Indian consumers is also gunning to stop buying unnecessarily imported products and to give Indian suppliers a better chance. Not only in India, abroad also, I feel that the strategy of China Plus One is taking hold. People who have been completely or overwhelmingly dependent on China, today they are saying, look, we know that we can't reduce our dependence on China to 0. But maybe it can go from 100% to 60%, maybe it can go from 80% to 70%. China Plus One is the mantra that I hear. And I think India has a great role to step into that. We are certainly seeing a reflection of that in the interest that some of our existing customers and new customers are putting. In terms of numbers, you mentioned -- you used the magic word, which we are all using, breakeven, right? Of course, the first goal is to reach breakeven, right? Let's see. Let's see. It's too early to predict exactly when. I think, definitely, in the next quarter [Foreign Language] of course, [Foreign Language] we have to see to what extent that is possible because it has been an exceptionally difficult period. And even today, while we see a lot of positives going forward, right, a lot of hope and optimism for the potential and the opportunities that are coming, there are still uncertainties. Bangalore, a lot of our factories in Bangalore. So the number of infections there are still there. So sometimes people come, sometimes they don't come. Sometimes people go away to villages or their hometowns, they don't come back. Despite all of that, despite all of that I think it's only a matter of whether it's going to be 2 months later or 2 months earlier. But I see huge opportunities and new opportunities in the future on the manufacturing side. So we are very, very bullish over there. And I do want to say in the end that we have done a fabulous job in manufacturing also on using our know-how in the digital space. So we have -- typically, we used to participate in trade fairs, in -- whether it was in the Basel fair or the engineering fair in Geneva or visiting customers during the post summer holiday seasons because that is when they start their designing for the next year. None of that was possible. So instead, with all our new product developments, with our new quality tests, with our new many, many innovations that we've done, we created a digital road show. And what our customers tell us that we are the first watch component company that has actually done anything like that, first in the world. And we presented to our customers a digital roadshow, which was very much appreciated. So I think there's a lot of exciting things happening. And we -- it's difficult to say exactly when we will hit breakeven, maybe 1 or 2 months here or there. But I think from -- especially from Q4 of this year, we are really hopeful that things will normalize, and we will see many, many new opportunities. Coming to the retail side. Yes, there has been a steady improvement. Quarter 1, we can say, was about 25% of what we expected it to be. So there was a 75% fall. 75% fall in quarter 1 is not too bad compared with other luxury retail. I can tell you that in most cases, whether it is watches or other premium and luxury retail, the fall was as much as 90%. So 75% is nothing to be proud of, a fall of 75%. But I think when we benchmark, it's not too bad. This quarter, we expect to get to a much, much better figure. Generally, people are talking about a 35%, 40% sale in this quarter compared to previous year in discretionary retail. We expect it to be more than 60% to 70%. We are recovering to that extent. So we believe that the recovery is there and it will be sustained. And again, while there are uncertainties, we don't know what is going to happen. But we are also very hopeful of a robust festival and wedding season. So everybody knows that this -- that now the wedding season is coming. In India, weddings are important, people buy. But this year, maybe there won't be so much money spent on big events. There won't be so much money spent on travel abroad. So money may be spent more on gifts. And in wedding gifts, of course, watches and expensive watches is very much part of the shopping list. So without actually being able to predict much, we are keeping our fingers crossed and preparing for a robust festival and wedding season. We will come to know, October, November, December will be the acid test. But we are optimistic. We are preparing. We are well prepared, and we hope we will be able to surprise everybody in a very positive way. And as far as the last question, which was on the liquidity, I will let, first, Sanjeev, and then Sekhar speak a bit about that for KDDL and for Ethos.

So in the KDDL, our liquidity is strong and we are in a position to meet all our liabilities. And the first quarter as such was a something unpredictable and the outcome was not known. Still, we went ahead and used all the options which were provided by the government for deferring the payment. That was only for the initial few months we did. And as the businesses started improving, now this government support of the moratorium's extension also we are not using, and our liquidity is very comfortable to meet all of our liability. I hand over to Sekhar to say something about the Ethos.

Actually, can I -- can you'll quantify -- can you quantify the question in terms of how much liquidity we have and also what's the debt in each of the entities at current levels?

Every year -- we had shared earlier also the -- my total borrowing, say, is around INR 60 crores. And when I say the adequate liquidity is there, even if let's hypothetically assume there is no revenue in a month, I can easily meet 3 to 4 months of my fixed expenditures without having a 0 revenue or without having any revenues.

Great.

Yes. Sekhar?

From a -- from -- in the retail business also, we are very strong in terms of liquidity. We have unutilized limits as we are at this time today. Our total debt as of today is about INR 55 crores, and we have more than about INR 30-odd crores that are unutilized. Going forward, we -- even with the expansion that we are considering in terms of store openings, we believe that the internal accruals within the company as well as the unutilized limits should be adequate to take us to the end of the year. So we don't -- even with the very conservative projections that we have for billings going forward.

Okay. Excellent. Excellent. And the last 1 question, Yashoji, when you kind of think strategically saying, okay, look, the worst is behind us, we can see the road map, manufacturing will come back faster than retail for us. And also, you kind of say that -- when I hear you say that, look, in the next few months, we should hopefully turn the corner on manufacturing and the retail may take a little longer. But we're generally optimistic about how the road map goes. What are the 1 or 2 key things that's your thinking differently beyond cost control and tightening and shutting and all that. Anything strategically you're thinking different about the future today relative to 6 or 9 months ago?

Lots of things, [ Jeetu ], it's difficult to sort of put into 1 or 2 because it's not really just 1 or 2, which will lead to that. But what can I say, I think it's -- let me do on the manufacturing, for instance, right? On manufacturing, we are anticipating the trend towards more and more specialized products, right, in the watch business. I'm talking about in the watch business, right? So what can we do over there? So we are looking at working -- we have worked in the past also with international designers. But how can we add an element of storytelling in what we do; how can we work with new materials, whether they're technology materials. We are working excess -- very fast on the theme of sustainability. So the ability to use recycled materials in our production. This is a huge sort of awareness, which is building up in the business internationally. The ability to use recycled material, the ability to use eco-friendly materials. That's a very big part of the piece that we are building up in manufacturing. Because it is emotionally extremely important, and business-wise, it gives us a great edge. So these are some of the things. But there are many, many things that we are working on. In retail, I already mentioned the whole thing about -- so I don't know if in the last time we have done that, but we believe that there's going to be a very strong move away from people visiting stores. So when they visit stores, the stores need to be bigger, the stores need to offer a greater and a safer experience. We are moving towards that. On the other hand, we are moving heavily towards allowing sales to happen from a distance. So for example, building stronger e-commerce facilities, chat facilities, live streaming from stores. So you can actually see in your office, sitting on your desk, you can see a watch being presented as if you were at the store, except for the touch and feel. And then finally, a secure home and office delivery service, using white gloves. So I think there are a lot of things which are actually in the pipeline. And for all of this, I want to say is that we are sort of several notches ahead of the competition, not only in India, but also internationally. So I think we are thinking at the cutting edge, and we are going to see the result of that in the next financial year.

[Operator Instructions] The next question is from the line of Hemant Sreeram from Bearing Advisors.

Yes. Yasho, Sanjeevji and Sekhar, very nice to listen to you as always, and I hope all of you are safe. Three questions from my side. The first 2, I think, where most likely I'll expect a short and sweet response from you, so I'll start with those. And I'd like to spend some time on the third. So I'll just start with my first question. Which is what is the situation with the inventory buyback with the big watch big retail brands, especially in light of COVID? Are there any conversations going on or buying back inventory? If yes, how does that look like? If no, how does that look like? The second question is on the -- I'm curious to know the behavior of the precision engineering division through COVID. How is this business looking like, especially given the stress test that it is undergoing currently? And the third and the slightly longer one is on online retail itself. So you're looking at a phase where we are sort of prioritizing personalization, especially in the luxury brand, online retail buying experience. So in light of your enhanced focus, which, I believe, Pranav is driving very well on sort of pushing e-commerce, how are you leveraging data science to sort of personalize the buying experience for a watch buyer?

Okay. Let me -- so the first 2 sweet and short ones. Inventory buyback in watch business, it's very much not the norm, especially in the luxury business. In the luxury business, they don't buyback inventory at all. That is true whether it's COVID or not, exceptionally that can happen, and it is happening. In India, especially if we are directly importing, there is the added complication of sending goods back, claiming the duty and so on. That said, in exceptional situations, we are negotiating and getting that. It is more prevalent in -- or it is less uncommon, let me put it like that, in the lower end fashion brand segments. And there, we are doing a bit of inventory buybacks, especially in brands that we want to discontinue. I think I had mentioned in the previous meeting that in general, in our strategy, we are wanting to reduce the emphasis on lower price points, which are called fashion brands. That means price points below INR 30,000, INR 40,000. We are reducing our emphasis there, increasing our emphasis on higher price points. So this also means that we are getting out of some brands at the lower price points. It doesn't happen 1 day to the other. But in the next 6 months, you will see that we will have exited some brands and added some brands in the higher price point. So inventory buyback is quite exceptional. To the extent it is possible, it is happening. In the precision engineering business, it is a challenging time because we are a Tier 3 or a Tier 4 supplier. We are supplying to people who are supplying to other larger assemblers, who are then finally supplying the ready product. So there is uncertainty in the supply chain and it's going by fits and starts. Sometimes we get a thing for a delay, and then it is that, no, no, we need to do it immediately and so on. So the global supply chain from that point is a little disturbed and that is making the recovery a bit more difficult, but we are seeing that. For example, our goal this year is actually in the engineering business, we are hoping that we would probably achieve a sales similar to the last year, which is exceptional. We have very encouraging leads, both from existing as well as new customers and some very, very prestigious international customers. We've got new products, RFQs. The trend of RFQ is extremely positive. So I think a lot will be -- will actually become clearer when the manufacturing gets smoother. It is getting smoother every day now. More and more sort of less and less absenteeism, less and less frequency of people sort of going in quarantine because they have traveled from somewhere. I hope that if there are no further setbacks. I think from September onwards the manufacturing will get smoother, and we will see very positive results in the next quarter. On the last question, online retail and how are we personalizing the messages. I think, unfortunately, Pranav is not there as I mentioned, that there is a Geneva conference happening. So there are online discussions going on over there. He is best positioned to answer this. But we rely very heavily on profiling of customers, digitally profiling customers to the extent that they share information with us. And thereby tailoring what kind of offers, what kind of products we want to show to them. We also have a great program to actually educate customers about watch buying and watch collecting. So a lot of watch buying today in the specialist watch category is by watch collectors. They're not just buying a brand. They want to know why do I buy this brand? Why do I buy an Oris instead of another brand? Why do I buy a Girard-Perregaux instead of maybe some other brand, right? And this is about storytelling. And a lot of it is done through social media. And that automatically allows a certain profiling and a certain filtering of customers so that you can actually address the customers that you most want to. I mentioned again that we believe that this wedding season might be a little special. So we are now working on profiling and reaching out to younger people who are likely to be -- to get married this season, right? So typically, the older generation, when the kids marry, they want to invest more in jewelry because it is seen as an investment. However, we are aware that the younger people say, [Foreign Language] especially ladies, they would say, [Foreign Language] dad and mom, can I have 1 set less, but get a nice watch for myself, get a nice branded watch for myself. So we are trying to reach out in this way to people who are likely to marry and reach out to them with special collections, recommending what suits their profile, what suits their personality and letting them choose. And we are also training our staff actually to address this need more constructively. Let's see, October, November, December, the season is not far away. We will come to know how it works. But there's a lot of effort actually going on in the online business to be able to address specific customers with specific products and offerings.

Yes. Great to hear that. I think, perhaps I'll connect with Pranav off-line because I think the first wave of Internet commerce focused on low price and fast turnarounds as a philosophy. But especially with respect to luxury product businesses, I think the next wave will focus on personalization aided by discovery. I think you guys are doing a great job there already, but I think there's a large wave that you are best positioned to capture as compared to your competition. And I was just curious to learn from Pranav, the efforts that you are putting on that front. So maybe I'll connect with him off-line.

Sure. Thank you, Hemant.

And yes, I wish your factory personnel all the best. I think you have a top-notch operation in Bangalore, and I wish you everyone a safe time ahead.

Thank you. Thanks, Hemant.

The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.

Yes. Sir, could you just talk a bit about exit run rates in terms of SSG for Ethos in the month of July, August? How is the trends being seen? That is question number one. And second is just on the waivers which you have got, I think there was a mention of 60% rental waiver. What's the time line or time length of this? Is it like the full year? Or how are the new rental negotiations happening? That's two. And the third is in terms of opening bigger stores versus earlier opening smaller is what you alluded to in the start. Could you just talk a bit about in the normalized scenario, how would the breakeven look like or a payback period look like? 3 questions.

Okay. First question was about exit road same-store growth. Sekhar, can you add something there?

Yes. So you're looking at subsequent growth rates in the month of July, we had an overall growth of 7% compared to the same period in the previous year. The same-store growth was actually a negative 7%. That was on account of the side that many of the stores are not fully operational yet.

Sorry, if I may just ask, when you say a 7% negative, is it like-to or you have included in the base, even the stores which are not operational or couldn't be opened?

So it's like, it's same store. The number of stores that were operational last year, we compare it to the stores that are actually open as of now, some of them may not be actively operational, but we've included those too.

So if I were to say only or if I were to compare only active to active, right, because that's a -- that's the real measure of business. You're already growth in the month of July, is it?

Yes. Yes. Overall, we are at a growth of about 7% compared to the previous year.

This includes pent-up then?

Yes.

So I want to make 1 point here. July billings also includes pent-up billings of -- some pent-up billings of stores that were not open, but some bookings were done. So we have to keep that into mind.

And if I were to adjust for that, are you at least flat? I mean, have you reached a scenario, wherein your SSG...

No, no, no. We can say that July -- the sales of July is equal to the sales of July last year. No. If we take the actual -- so technically, if you take the actual billings in July, yes, there is a growth. But as I mentioned, there's an element of pent-up billings, which were not done in the month of June, which have come into July.

And if I may ask, sir, 1 small clarification. In the month of July, are there any bookings which were done in the month of March, April, May, but the guy couldn't come and pick up and since he's got billed in July, is that the thing? Or you are assuming that it is just that the April, May, June pent-up would have come in July?

No, no, no. There actually -- so again, there are bookings that were done. But store was not open, so they couldn't come and pick up the watch. As the store opened in July, they came and picked up the watch then. And we bill when they pick up the watch. So it's not just a general, it's -- so it's not a general comment about May-June [Foreign Language] demand [Foreign Language] July [Foreign Language]. These are actual bookings, which people had made and the watch was waiting for them to pick it up.

And how is August looking like, sir, if I may ask?

August, is actually similar to July. We don't have the exact figures, right, but similar to July.

There is no element of pent-up in August, right? There shouldn't be any element of pent-up.

There could be. There could be. So I'll just give you an example. I mean, Bombay stores opened in August 30, right? Bombay was not open, no mall in Bombay was open in July, either.

Yes, yes. Not in August also.

So some home deliveries in Bombay were done in July. But people who wanted to come to the store or pick it up or who didn't want people coming to the store, they have picked up in August. But obviously, the pent-up billing in August will be less than July.

Less.

And just for the information right now. I mean, Chennai stores are not yet opened. We've got 4 stores in Chennai, they're still not open. In Bombay, I think Thane is still not open. Thane and Vashi, there are 2 stores which are still not open. So there's still -- Delhi Airport, the duty-free store that's not open yet. That was one of our highest grossing stores. Yes, can you hear me? Hello?

Yes, sir, we can hear you. So Mr. Prateek Poddar, do you have some more questions?

Yes, I think only one -- first question was answered. There are 2 more questions.

Yes, Prateek, can you just tell me the other 2, sorry?

Sorry, the rental waiver, right? You said 60% waiver for rentals, the time line for that, the lengths for that?

So that is the waiver for the first quarter. Prateek, that's the waiver for the first quarter. It's almost impossible to get malls to give you a waiver for the whole year because they don't know what is the situation going to be in the whole year. So obviously, there is -- typically, there is a higher waiver for the period that the malls were not operational. And from the time they get operational, there is a lower waiver. And over time, it goes. And there is an additional clause that if business revives faster then the waiver can be ratcheted back. So it's a hard negotiation with malls.

Is there any rental renegotiation, sir, because...

Sorry?

I mean a multi -- is there any rental renegotiation because multiplexes or other apparel stores have gone in for renegotiation of rentals and even have got written commitments from mall owners in terms of recalibrating rentals. Are we also -- have we also got that benefit?

Actually, I don't see the benefit in that for us. Because I'll tell you, most of the people have got benefits by increasing revenue share and decreasing the fixed rental. That is what most of the players have done.

Correct.

We don't see a big benefit in that for us. We have that option. We chose not to take that.

But why, sir? I mean, last question.

We believe that -- yes, we believe that we are going to actually try to get much more growth in future years and in future months. So we believe that with the increasing market share, with our digital platform, we are actually better off with a lower revenue share. It may give us some benefit. It might have given us some benefit in the immediate future. But in the long term, we are happier with a lower revenue share. See, in our business, the -- actually, the gross margins are lower than in many other businesses. So we've got to be cognizant about that.

Understood. Understood. That's a good one. And sir, last question on opening big format stores versus small-format stores and their payback and profitability. Last question, and I'm jumping back into the question queue.

Yes. So see, in -- typically, I can say that large format are not only more profitable, but you're able to sustain longer-term growth, same-store growth is much higher in that. We are seeing that across the flagship store that we opened in Hyderabad, for instance, we can see it in that, the flagship store that we opened in Delhi, we are seeing it. And in Mumbai, in January, we are opening our first large flagship store at the BKC, the new Reliance Jio World class center which is coming up. So that's a 2,300 square foot flagship store that is opening. So we see not only that the stores actually breakeven. No, they don't breakeven faster, they breakeven a little later, but the profitability is higher and sustained growth is much, much longer.

[Operator Instructions] The next question is from the line of [ Rekha from Kitara Capital ].

I have a couple of questions. One is regarding cost reduction. One is that you mentioned that we've got a waiver on 60% of the rent payable. But in addition to that, have we taken up any other cost reduction measures? And how much of it is permanent in nature? Secondly, if you could quantify the contribution of exclusive brands to gross profit in the quarter, please?

Okay. Okay. Let me answer the cost reduction. Of course, there are reductions other than rent as well. So there has been a reduction in personnel expenses, obviously. There have been some reductions, which will be permanent. There would be some -- there are some reductions, which may be at least for 6 to 12 months, but later, we might have to revise some positions. But I believe that there will be some kind of a reduction in personnel cost, especially as a percentage of the business. Thirdly, on admin expenses, there have been reductions most prominently on traveling. That is there. Of course, in store running, also to the extent that stores are not running, there is a reduction in costs there. We have rationalized some other expenses as well. But on the other hand, the one expense where we are not cutting back is actually marketing. We are not cutting back on marketing at all. In fact, we are increasing our investments there. So that's pretty much it. It's still a little early to say what part of this is going to remain permanent. But what has got -- what it has done both in the retail and manufacturing segment is that it has actually prompted us to do a pretty serious review zero-based upwards. What is it that is really needed, what is adding value and what is just there because it was historically there. And that exercise has helped us a lot. It has helped us to cut extra fat. We hope we are not cutting into any muscle. But if we ever get that, then we're going to reinstate that. I think there will be a permanent reduction in the cost structure. At this moment, it's difficult to say how much it will be. As a percentage of our revenues, for sure, there is going to be a shaving of cost there.

Okay. Also on the marketing cost, do you have any budget as to what percentage of your sales you plan to spend on marketing since you mentioned that you'll be increasing this going forward?

I'm not sure if we're going to be increasing it as a percentage of revenues. But typically, we've been at about 2% of our revenues into marketing. And this is obviously always leveraged by contributions from brands also. They also contribute to -- and then there's what we call Co-Op marketing, which happens.

Correct.

And then was your question on contribution, the contribution of house brands.

53% in gross margins.

53%. And in revenue?

34%.

So the exclusive brand contribute about 34% to the revenue, but 53% to the gross margin.

Okay. And this is for Q1, you're saying?

It's for Q1.

Okay.

That's a typical ratio, by the way. Obviously, the contribution, the -- yes.

[Operator Instructions] The next question is from the line of [ Ankit Agarwal from Arc Capital ].

Yes. Sir, I have a couple of questions. The first one being, sir, you mentioned in your opening remarks that you have around 47 stores as of now. So what can the number be by the end of the year? Will you add or reduce any more stores? And the second question is, sir, how is the preowned watch business scaling up?

Okay. [ Ankit ], we expect to end the year by about 50 -- with about 50 stores. So we will be adding 4 stores. Maybe we are going to close another store. But between 50 to 51 stores, we expect to end the year. And as far as the preowned business is concerned, the preowned business depends on purchase and sales. So in the lockdown, even purchase was not possible. So when purchase is not possible, then obviously sale doesn't happen. So now with the lockdown opening, the business has restarted, and it has restarted only in July. So we will see the trend. But overall, the trends are quite encouraging. There is growth over last year already. We can see growth over last year.

[Operator Instructions]

I think there are no more questions there, I mean I see...

Sir, yes, looks like no further questions. You may please go ahead with your closing remarks, Mr. Saboo.

So I want to close this meeting with a thanks to everybody for joining the call. And we hope we've been able to answer most of your queries. You may contact SGA in case of any further queries. Thanks very much.

Thank you. On behalf of KDDL Limited, we conclude today's conference. Thank you for joining. You may now disconnect your lines.