KDDL Limited (532054) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to KDDL Limited Q2 FY '21 Earnings Conference Call. 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 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. Yasho Saboo, Chairman and Managing Director, KDDL, for his opening remarks. Thank you, and over to you, sir.

Thank you, and a very good afternoon, and welcome to everyone for our Q2 FY '21 earnings conference call. I hope you and everybody around you is safe and in good health. As usual, I'm joined by my colleague, Mr. Sanjeev Masown, CFO of KDDL; and Mr. Raja Sekhar, CFO of Ethos; and SGA, our Investor Relations Advisors. And I hope everyone has had the chance to go through our updated investor presentation. During Q2 FY '21, we witnessed an encouraging recovery in businesses as compared to the previous quarter. Our retail business Ethos has almost reached similar levels to last year, whereas our manufacturing business also continues to gain traction month after month. I'll start by with a brief on financial performance on a consolidated basis for Q2 FY '21. Consolidated total income for the quarter stood at INR 139 crores as compared to INR 158 crores in Q2 of last year, down 12% Y-o-Y. Consolidated gross profit for Q2 FY '21 stood at INR 54 crores as compared to INR 68 crores in Q2 FY '22, down 21%. Consolidated Q2 EBITDA stood at INR 17.4 crores as compared to EBITDA of INR 18.1 crores in Q2 of the last year, down only 4.4% -- 4.4% Y-o-Y. We were largely able to contain the fall in EBITDA, with strict control over expenses. Our Q2 FY '21 EBITDA margin expanded by 110 basis points Y-o-Y to 12.5% on the back of various cost optimization initiatives. Consolidated Q2 FY '21, profit after tax stood at INR 3.8 crores as compared to a loss of INR 1.3 crores in the same period last year. You must be aware that our financials are impacted by the application of Ind AS 116 accounting standard, which impacts EBITDA and PBT. Hence, our Ind AS 116 adjusted financials are also published in the investor presentation. I now come to the business-wise updates. Our manufacturing business comprises of watch components, precision engineering and ornamental packaging business. In Q2 FY '21, manufacturing business revenues stood at INR 34.6 crores as compared to INR 49.4 crores previous year. The revenue share of watch components and precision engineering business was 71% and 27%, respectively, for the quarter. EBITDA for Q2 FY '21 was INR 5.3 crores as compared to EBITDA of INR 9.2 crores in the same period last year. Profit after tax in the quarter stood at INR 0.6 crores as compared to a profit of INR 4.2 crores in Q2 FY '20. Revenue from watch components business stood at INR 25 crores in the current quarter, as compared to INR 35.8 crores in previous year same quarter and INR 15.7 crores in quarter 1 of this year. Revenue from precision engineering business stood at INR 9.4 crores in quarter 2 as compared to 11 -- sorry, INR 12.2 crores in quarter 2 of last year and only INR 5 crores in quarter 1 of this fiscal year. During Q2 FY '21, the revenue improved by more than 60% over Q1, but we are yet to reach the pre-COVID-19 levels of business operations. During the second -- due to the second wave of COVID-19 virus, especially in large Swiss watch export markets such as U.S. and Europe, the improvement in demand for Swiss watches has been gradual. Nevertheless, Swiss watch exports are continuously improving and are expected to reach previous year levels by quarter 4. Some of our customers have deferred their orders, but we have not witnessed any significant cancellation of orders. Our order position for next few months is as per or better than our forecast. And -- but a lot depends on the through sales of watches, in the festive seasons in most of the important global markets between November and January. Our precision engineering business, Eigen, witnessed a decent recovery in quarter 2, and its revenue improved from INR 5 crores in quarter 1 to INR 9.4 crores in quarter 2. This improved position is still lower than the revenues recorded in the previous year corresponding period. Some of the industrial sectors, especially Aerospace & Electronics have been severely impacted due to COVID-19, but we expect that these sectors may reach normal levels by next year. We continue to witness an encouraging increase in the flow of inquiries and RFQs, both from domestic and export markets from other segments such as auto ancillaries, industrial and instrumentation industries. Also from consumer durables and some of the segments and accounts which show healthy potential in the coming quarters. We also believe that the initiative of the government, Atmanirbhar Bharat and increased budget allocations for defense sector will provide enhanced opportunities for our Eigen business. We remain confident of achieving healthy revenue growth in the precision engineering business. Various cost initiatives taken by us during these last 6 to 8 months has helped us to lower our breakeven point considerably. This is also evident from the fact that the company reported profit for the quarter despite the revenue being lower by nearly 30% compared to the previous year same period. We believe that with the normalization of market conditions, the profitability of the company will be healthier and stronger due to the cost rationalization measures. We expect the business operations of the manufacturing business to reach pre-COVID levels during -- in the next 2 quarters. We continue to believe that prevailing situation will also create exciting new opportunities for the company as some of the weak players might exit the market. Basically, about Estima AG, our Swiss subsidiary. Our idea behind the acquisition of Estima AG was to expand our footprint in Swiss manufacturing. COVID-19 has increased the lead time to turn around this business, but we see encouraging signs all around. During this quarter, Estima reported a revenue of CHF 342,000 and was at a breakeven level for EBITDA at -- on EBITDA basis. This is broadly in line with our internal plans and expectations. Estima reported a PBT loss of CHF 69,000 during this quarter. Let me now discuss our watch retailing business, Ethos. It gives me immense pleasure to share with you that our watch retailing business is coming back on track with a strong performance in quarter 2. This is due to the strong foundation of the omnichannel strategy, exclusive brand tie-ups, Pan-India network, flagship stores and redouble emphasis on aftersales service. We are optimistic that the momentum will continue to gain ground during quarter 3 and quarter 4 and give us results that are better than our original COVID forecasts. Let me now give you financial highlights of Ethos for quarter 2 of this fiscal year. Our billings for Q2 FY '21 were INR 120 crores as compared to INR 123 crores in quarter 2 of last year. And INR 32 crores in quarter 1 of FY '21. Thus, it means there is a huge improvement over quarter 1, and we are almost back to the previous year levels for the quarter. Of this, billings for exclusive brands for watches contributed nearly 32% and accounted for 44% of the total gross margin. Consolidated total income for Q2 FY '21 stood at INR 108 crores as compared to INR 107 crores in Q2 FY '20 and INR 33 crores in Q1 FY '21. Consolidated gross profit for Q2 FY '21 stood at INR 31.5 crores as compared to INR 29.1 crores in previous year same quarter, a growth -- a handsome growth of 8.5% on a Y-o-Y basis. Gross profit margins expanded by nearly 200 basis points Y-o-Y to 29.3% in Q2 FY '21 as compared to 27.3% in Q2 FY '20. Consolidated Q2 FY '21 EBITDA stood at INR 16.9 crores as compared to EBITDA of INR 10.8 crores in Q2 FY '20 registering a growth of 56.3%. Consolidated profit after tax stood at INR 3.3 crores in Q2 of this year as compared to a loss of INR 2.8 crores in the same quarter of the previous fiscal year. Stock carrying months at the end of September 2020 was 7.9 months, again, an improvement. We continue to work towards cost optimization in various ways. In-store of rationalization, the store count at the end of the quarter stood at 47 stores. In the current year, we opened 1 store each in Lucknow and Delhi, while we closed down 8 stores. With respect to cost optimization strategy from our negotiation with the mall owners and real estate partners, we have been able to achieve a handsome reduction in rent and waiver at most of our stores, and we have also deferred various expenses, which can be delayed in the medium-term to prudently conserve cash. All of this can be seen an improvement in our expenses and in the bottom line. In our digital strategy, we continue to spend on marketing through digital mediums as we have witnessed continuous flow of visitors on our Ethos website. Online net billings contributed nearly 46% of our H1 FY '21 billings. Our preowned watch business which we have launched recently through the website secondtimezone.com, has continued to pick up. We are ourselves in the learning phase for this business. And with our excellent after-sales service infrastructure, backed by strong technicians and awards expert team, we are confident to steadily build the business of preowned watches. Coming back to company matters, I would like to add that the Board of Directors have also approved a fundraising plan in KDDL by way of a rights issue. The fundraise has been approved up to an amount of INR 30 crores by way of a rights issue. And this is intended to be utilized towards growth and development of the company as we see several exciting new growth opportunities likely to come before the company in the quarters to come. I now welcome your questions and participation.

[Operator Instructions] The first question is from the line of Deepan Shankar from Trustline PMS.

Congrats for the Ethos best performance. So just wanted to understand this strong Ethos performance will it be reflected by strong demand for our products or we are seeing increase in market share due to unorganized players going down or imports coming down. So how are we expecting this demand to be sustained over the next few quarters?

Deepen, if you have other questions, why don't you ask them all right now, and we can answer them all?

Yes. Yes, sure. And also, I just wanted to understand the contribution of exclusive brands during the current quarter and as compared with the last year.

Okay. So as far as sustaining is concerned, I think it's a little bit of all factors. What we see is that there is a revival of demand. I think people have got a bit sick of just sitting at home. So there is a revival of demand. It is a festival season, but don't forget, it is also the wedding season. People are traveling less. So we assume that they may be spending less on travel. But they won't be cutting down on purchases. I think we have seen a combination of this, together with the fact that some of the weaker players may not have the kind of digital reach that we have. So many customers who may not be willing to visit the stores are still able to purchase using our digital platform. It is partly that. Imports has no real bearing on this because most of the watches that we sell, in fact, all the watches that we sell are imported. And while there were some months and there were some supply disruptions, but more or less, it is now being normalized. So I don't think there is any disruption on imports as such. But what I can say is that since the import has not revived as much as our sale has revised it is a strong indication that we have gained market share as compared to our competitors. I believe that the demand will be sustained. The festive and the wedding season will continue up to January. And of course, a lot depends always on this quarter 3. And so far, the indications are that it should be as per our expectations or a little better.

Okay. Okay. And on exclusive brands?

On exclusive brands in quarter 2 of this year, 32% of the revenue was accounted for by the House Brands. And in the previous year, it was...

22%.

It was 22%.

Okay. So this is 1 of the main reasons for gross profit expense finances?

Yes, it is.

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

So 1 question is more on the manufacturing side. If you -- I heard you say that the orders got deferred a little bit and that you -- it seems like the next few months or next quarter is going to look good. Can you give us some color, was it -- was there some customers who just stopped? Or are there all customers getting you similar feedback that they've pushed out the orders because the global watch market is soft. And how are you -- are there alternate products that are taking up the capacity there? And do you kind of think by the March quarter, you'll come back to the production levels or the revenue numbers on the manufacturing side that you saw at a high level that you saw a year ago?

So Jeetu let me just if I remember what you started with? Yes. See the deferment has not really been because of demand issues. I think a deferment has been because of lockdowns that happened. So it's a sort of a chain effect in the supply chain, right? So let's say, March, April, May, China lockdown. So many of the components come from China. Then April, May, June, July, more or less, Switzerland was semi lockdown. 2 months it was completely lockdown and then it started and they have their holidays. So knowing all this, some of the orders were postponed now. What was already -- what was already sort of in the pipeline, we didn't accept the deferment. So they deferred the deliveries of July, August, September by a little bit. The other deferment which happened was typically orders, which should come in the month of August, September, immediately after the holidays, festive holidays, they got deferred to, let's say, October, November, and now we start seeing them coming in. The sale is actually set for the domestic demand as well. It got deferred, and now we see it coming in. So it is much more to do with the supply chain. I think demand, overall, of course, it is less, but I think China is picking up. Most of the other markets are also picking up. So for example, in September, the Swiss watch exports were down by only 10% compared to last year. And October, I presume there will be a -- decline will be even less. So we can say that demand is going to be back to normal. And the deferments were also iron out by December or so this year.

Okay. And do you think...

Now, if you see the precision engineering business, again, there were deferments from large companies like ABB and the auto components company. They are deferred. Similarly, on the aerospace sector, we have a very big customer on the aerospace sector. And aerospace, you know what the situation was, everything was deferred. But now we see a revival of all of this coming. So over the next 3 to 4 months, we expect things to normalize.

Okay. Okay. The second question is your rights issue. Is that money more needed at the retail side as your contribution to the company equity? Or is it more needed at the manufacturing side?

It is more needed in the retail business, Jeetu. We see some exciting opportunities coming up on the retail side. Some of them you will hear over the next couple of weeks and months as we are in the process of finalizing some. And others, we believe are in the pipeline and will turn up once the COVID situation normalizes. We had expected COVID to normalize by August, September, and that is why we had earlier planned that the opportunities may start coming up already by September, October. Now as we know, Europe has gone into a second wave, and we believe things would normalize now only by February, March. And we need to be ready for when the opportunities come up there. But clearly, to answer your question, the opportunities are much more in retail than in the manufacturing side.

Okay. And when you said opportunities, are you -- I mean, are we talking about acquisitions? Are we talking about new alliances. I mean, just give us some color without...

It's about new alliances with some new brands. It is about increased alliances, strategic alliances with existing brands. We are pursuing the acquisition of 1 or 2 existing distribution arrangements here. So unfortunately, we are not able to travel many of these require a face to face discussion. That's why I'm saying that some of this may actually happen when travel gets okay, when the overseas international representatives are able to visit us, and we are able to visit them a lot is, therefore, started to happen in the month, February, March, April.

Okay. Okay. And last one, last question on the retail side. I mean can you give us some color on how -- what percentage of business was resourced and are there some stores that are working, not working? Are you planning to cut down some stores, or add some stores of normal rationalization that happens? Just give us some thought process on that as well, please.

So I think the e-led billings, the e-commerce led or the Internet-led billings were more than 50% during the last quarter, which is very unique. Obviously, it was -- obviously, it was because in quarter 2, many stores were still closed. I mean Bombay was closed until, I think, August, almost the middle of August. Chennai was closed even later. However, now, all stores are open, except, of course, the 8 stores that we closed down. Delhi is duty-free, which is 1 of our best-performing stores, is still not active. We are still running it on a pure revenue share basis. But as you can imagine, the flights, there are hardly any regular flights. So it's more for namesake, and it's continuing. But other than that, all stores are operational. We will -- as I mentioned in the speech, we have started 2 stores, 1 in Delhi, Vegas Mall and 1 in Lucknow. And we will start a new store in Mumbai, very close to where you are in the Maker Max, the new mall coming up in BKC. That is expected to start in January 2021. As of now, there are no firm closures in mind, but we are considering a possible closure of 1 or 2 more stores, which we will consider the performance during the season period. And if it is not something extraordinary, we may select them for closure.

Okay. And 1 -- actually 1 final piece, where are we on inventories? Are we -- is that number contained? Or have you added?

We are -- on September, we closed at about 7.9 months of inventory. Again, it's a little bit higher, but that's also because of the way we calculate it and if the sales is lower than the inventory in terms of number of months, it becomes higher. But overall, I mean, again, I say this all the time globally, this is much lower than the global standard, global standard for luxury watch retail is 11 to 12 months of inventory. We are at 7.9 months. We -- our long-term goal remains to be in this down to about 6 months.

The next question is from the line of Prateek Poddar from KBC & Associates.

Sir, could you just talk a bit about September growth rates exit rates? Because I remember last quarter you talked about pent up demand, in the sense, yes. So could you just talk a bit about how was September growth versus last year?

Okay. Prateek, I'm just pulling that out, we're pulling that out. Do you have any other questions?

Yes. Also, if you can talk about how has the festive season sales gone? And the cost rationalization efforts, how sustainable it is? It looks like you have just any sense you said in the opening remarks, we have deferred cost. Is it permanent or it is temporary? Lastly, also, sir, there is an FD. I mean you're asking for -- you've gone on sort of circular where you're asking for fixed deposit from shareholders? Why do we need that is the last question?

Okay. Let me ask you -- let me answer the last question. We have FD since ever. We have FDs from shareholders. And I think the announcement is a regular announcement that happens after every AGM. Sekhar, correct?

Yes.

So that's a regular announcement that happens both in Ethos as well as in KDDL. As far as the cost rationalization, is concerned, there are 2 aspects to it. One of them was what you could say, temporary, whether it was in terms of some salary cuts or deferment of some bonuses. As of last month -- as of this month, all salary cuts have been restored. I think our team has worked extremely hard during this time to deliver the results under very, very trying conditions, sometimes half the store staff down with COVID infection interruptions and so on. So we felt that with the results and the performance getting back on track. So we've restored all the salary cuts. So on the salary front, whatever cost reduction was happening, that is now -- that's now back to normal, except, of course, where there are store closures. So where there are store closures, where the cost reductions are permanent. On rent, most of the rental relief came in the first 2 quarters, quarter 1 and quarter 2 of course, because during this period, most of the malls were closed, especially in quarter 1. Quarter 3, most malls are operating normally. So rents are also back to normal. Nonetheless, I think there will be a cost rationalization, which you will see. But of course, it cannot be at the same level as is reflected in H1 returns. September exit rate, September, we had a billing of -- I think the question is that in the quarter, there's also pent-up demand.

No, only. That's why only September over September billings?

So we'll just give you the reports. So the billings in September was about INR 40 crores. So it is equitable, yes.

And last year, also, it was the same, sir?

Last year was about INR 47 crores.

Okay. Sales down roughly around 12%, 13%?

Correct.

Got it. Got it. And sir, how is the festive mean for you?

So the festive season, obviously, we are hopeful that quarter 3 will be significantly better than quarter 2. So far, it seems to be. Festive season is a misnomer sometimes in our business because people say that Diwali [Foreign Language] actually Diwali [Foreign Language], but a lot of the purchase happens is related to weddings and anniversaries and celebrations, which also tend to bunch up during this quarter. And the wedding season, as you know, last up to December and goes into January as well. So really, a lot depends on the next 6 weeks. We are seeing positive -- we're seeing -- we can say with confidence that it was better than Q2. How will it compare with the same quarter of last year, that remains to be seen. Last year, we had a very strong quarter 3 after a weak quarter 2, right? If we can get anything close to that, I would be very, very, very happy indeed.

Got it. And sir, just lastly, just double checking this. FD is just an announcement, it's not that you want to raise funds as of now why are that weak, right? I'm just double checking it.

No, it's just an announcement.

It's just an announcement.

The next question is from the line of Aimee Truesdale from Jupiter Asset Management.

Just a quick 1 for me, actually. We've heard in the press before discussing this 0 GST for overseas visitors. Just would be great to get your thoughts on whether you think that's a likely development. And if there are any other tax or duty related developments that you think we should be aware of?

Aimee, could you repeat the question, please?

Yes, sure. 0 GST for overseas visitors, do you think -- does that sound like a likely development? And are there any other tax or duty related developments that we should be aware of?

Okay. Just give me a minute, please?

Sure.

Aimee, it is true. There was some talk about creating a structure for allowing relief from GST for overseas visitors. We haven't heard anything further, and we don't believe there is anything in the pipeline that will show up early. There are no other new developments on GST for the moment. It remains stable, very fast.

[Operator Instructions] The next question is from the line of Isha Savla from Arya Securities.

Sir, I wanted to know that what could be the sustainable EBITDA margin in our manufacturing business going forward?

Okay. Do you have any other questions, Isha? We can answer all of them.

Yes, sir, I have 1 more question that can you please give some idea about the current demand situation of this market? And also, I wanted to know that what digital initiatives the company is taking on e-commerce, right? That's it from my end.

Okay. Okay. Isha, the first question about EBITDA margins. The current margin is about 15%. We believe sustainable margins are 18%-plus and we should recover to that in the next couple of quarters. Our current demand, you were talking about current demand in the Swiss market.

Yes, sir.

So as I mentioned to you, our demand really comes from our Swiss watch exports we have and Swiss watch exports are up to about 90% of the previous year levels. So we believe that the demand will continue to recover as it has recovered over the last couple of months, and we expect quarter 4 to pretty much be equal or better to last year's quarter 4 in terms of demand from Switzerland. And your last point was regarding the e-commerce initiatives. I would recommend you to please look at the investor presentation where this is shown. Briefly, I can tell you, we work on an omnichannel platform. Through digital marketing, we create leads. The leads come to our call center. They are first track there. The first level of interaction is done with customers there. And finally, the customers are encouraged to visit the stores closest to them where they can physically see the watch and the sales are then finalized at the store level. So it's an omnichannel platform where the physical stores and the digital platform work hand in hand to give an optimal customer experience.

[Operator Instructions] The next question is from the line of Lalaram Singh, an Individual Investor.

Sir, my first question is that in the precision engineering business around a couple of years back, the momentum was good, it was targeting around INR 100 crores revenue run rate from that business. However, things have sort of become sluggish and we have got stuck at maybe sub INR 40 crores, I think. So do you want to comment on what exactly is happening there and what are the hurdles we are facing? And any particular time line, where do you think the growth momentum can again come back? So just I want a kind of comments there. My second question would be on the Ethos. I suppose that we have bought back around INR 6 crores worth of shares from 1 of the investors. So any further buyback because of certain put options in the SHA? That is the second question. And the third question would be that Ethos performance was at par with previous quarter last year, while I think the square feet is -- must be lower, I believe, and even the timings were lower. So do you want to comment on what was like-to-like growth on a store basis, considering -- assuming that...

Can you repeat the third question? Can you please repeat the third question?

The third question is that I believe that in this quarter, compared to the previous quarter in the corresponding year, the number of stores which are opened would be less or in terms of square feet also. So do you want to share a number in terms of like-to-like growth on a per square feet basis, sales per square feet basis growth. Could I get across my point?

Just give me a minute. Okay. So Lalaram on same-store growth, it's been about minus 6%, in Q2. There is a certain complexity that comes about the way we calculate because we consider same-store growth only for stores, which have operated over 12 months. Whereas there are some stores, which were, let's say, which opened in September or October. And we are seeing a very good growth over there, but we are still not counting it as same-store growth because a full 12-month year, a full fiscal year, they haven't spent, they would among the next year. But clearly, you have seen that despite a -- despite fewer stores, our billing has been nearly the same, and our margin has actually been better. So I think what your hunch is probably correct over there. As far as the Ethos put options are concerned, there were several shareholders, which had put options. All but these which have now been exercised, which have been disclosed, which you know about. These are the only put options, and there are no other productions. For Eigen engineering performance, I'm going to pass the mic to Sanjeev to explain the situation there.