KDDL Limited (532054) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to KDDL Limited Q3 FY '21 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the 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. Yasho Saboo, Chairman and Managing Director, KDDL Limited, for his opening remarks. Thank you, and over to you, sir.

Thank you, and good afternoon, and welcome to everyone for our Q3 FY '21 earnings conference call. As usual, I'm joined by Mr. Sanjeev Masown, CFO of KDDL; and Mr. Raja Sekhar, CFO of Ethos; and SGA, our Investor Relations advisers. I hope everyone has had the chance to go through our updated investor presentation. During this quarter, we witnessed a strong recovery in business with the relaxed lockdown restrictions. Our manufacturing business almost reached last year Q3 levels. Ethos revenue was a bit lower as compared to quarter 3 of last year, which was a bumper quarter. However, we witnessed very strong growth in profitability in both manufacturing and in Ethos business through cost optimization initiatives. Let me start by giving you a brief financial performance report on the consolidated basis for Q3 FY '21. Consolidated total income for Q3 FY '21 stood at INR 178 crores compared to INR 204 crores in quarter 3 FY '20, down 13% Y-o-Y. Consolidated gross profit for quarter 3 FY '21 was INR 70 crores as compared to INR 79 crores in the previous year same quarter, down 12% Y-o-Y. Consolidated quarter 3 EBITDA this year stood at INR 26.6 crores compared to EBITDA of INR 27 crores in Q3 FY '20, down just 1% Y-o-Y. We were able to largely contain any fall in EBITDA with a strict control over operating expenses. Hence, our Q3 FY '21 EBITDA margins expanded by 170 basis points Y-o-Y to 14.9%. Consolidated Q3 FY '21 profit after tax stood at INR 9.7 crores as compared to INR 4.4 crores in quarter 3 FY '20, up by 121% Y-o-Y. You must be aware that our financials are impacted by the application of Ind AS 116 standards. Hence, our Ind AS 116 adjusted financials are also published in the investor presentation for reference. I will now come to the business-wise updates. Our manufacturing business comprises of watch components, precision engineering and ornamental packaging. In quarter 3 FY '21, the manufacturing business revenue stood at INR 40.8 crores as compared to INR 42.3 crores in quarter 3 of last year. The revenue share of watch components and precision engineering business for the quarter was 70% and 26%, respectively. EBITDA for quarter 3 this year stood at INR 7.7 crores compared to EBITDA of INR 6.4 crores in quarter 3 of last year, up by 21% Y-o-Y. Profit after tax for quarter 3 FY '21 stood at INR 2.9 crores as compared to a profit of INR 1.6 crores in the same quarter last year, up by 85% Y-o-Y. Revenue from watch components business was INR 29.3 crores in quarter 3 FY '21 as compared to INR 30.6 crores in the previous year and INR 25 crores in the previous quarter of this year. Revenue of precision engineering business for both quarter 3 last year and quarter 3 this year was at INR 10.8 crores, so almost exactly the same. During quarter 3 of this year, the revenue of the company improved by 18% over the quarter 2 of the same year, and we reached close to the pre-COVID levels. During this quarter, Swiss watch exports worldwide remained impacted due to the second wave of COVID-19 in Europe and in U.S.A. We expect markets to reach normal levels over the next 2 quarters. We also observed a clear trend of Swiss watch demand growing at higher price points, while lower-priced watches are declining. We are also realigning our product portfolio in the watch component business and moving up on price point with higher-quality and higher-product features. We also witnessed a healthy recovery of demand from the domestic market and expect this to gain momentum as the vaccination program lowers the risk of COVID in the country. Our precision engineering business, Eigen, witnessed a revenue growth of 15% in the quarter and recorded a revenue of INR 10.8 crores compared to INR 9.4 crores in the previous quarter. The sale revenue is similar to the corresponding quarter of the last year as already mentioned. The product portfolio and mix of different segments have gone -- has undergone a major change as some sectors like aerospace and electronics continue to remain quite severely impacted due to COVID-19, and we expect these segments may reach normal levels only over the next 2 quarters or so. But meanwhile, we are witnessing healthy growth of inquiries and RFQs, especially from the auto segment and the electrical segments, this trend mainly driven by the China Plus One strategy of major global players. We believe that the government initiatives of Atmanirbhar Bharat and the increased thrust on domestic sourcing will provide additional opportunities for Eigen in the coming quarters. The cost optimization initiatives undertaken by us during this period has yielded an improved EBITDA and PBT, evident from the fact that the company reported a higher EBITDA and PBT despite the revenue being lower compared to the previous year in the same period. During this quarter, our EBITDA and PBT increased by 51 -- sorry, 21% and 54% Y-o-Y, respectively. We believe that with the normalization of market conditions, the profitability of the company will be much healthier and stronger. A few words about Estima AG, our subsidiary in Switzerland. During this quarter, Estima reported a revenue of CHF 369,000 and an EBITDA of negative CHF 118,000, which is lower than our original estimates and plans. This is primarily due to the impact of the second wave of COVID-19 in Europe and in particular in Switzerland. Estima reported a loss of CHF 183,000 during the quarter, though the revenue during the quarter was higher by 8% compared to the previous year. But as the overheads approached near-normal levels, the loss was a little higher than expected. However, the good news is that the revenue of the company for 9-month period FY '21 was CHF 1.25 million as compared to CHF 1.2 million reported in the corresponding period of the last year. The EBITDA loss for the 9 months is only CHF 66,000 compared to a loss of CHF 844,000 in 9 months of FY '20. All these indicators clearly justify that our strategy and action plan to revive and turnaround Estima and record growth and development are in the right direction. Now let me discuss our watch retailing business, Ethos. During quarter 3 this year, we witnessed a strong recovery at Ethos, led by a good festive season and the end of the lockdown. Although footfalls have yet to achieve normal levels, and it is also important to note that during the last year, we had 55 stores operational at this time as against only 47 stores operational this year, yet, our revenues in the quarter 3 of this year were lower by only 14% as compared to last year. We have met the challenges of the current year with great agility. We have achieved significant cost cutting, both temporary and permanent, and focused on maintaining liquidity by rationalizing investment in inventory and other capital expenditures. This has helped Ethos become leaner and more profitable with higher margins, leading to 64% Y-o-Y increase in profit after tax. Here are the financial highlights of Ethos for quarter 3 FY '21. Our billings for the quarter stood at INR 154 crores as compared to INR 179 crores in the last year same quarter and INR 120 crores in quarter 2 of this year. Of these, the billings for exclusive brands for watches contributed INR 38 crores in the quarter 3, that is 25% of the total billings for the quarter. Consolidated total income for quarter 3 FY '21 was INR 138 crores as compared to INR 159 crores in the previous year same quarter and INR 107.6 crores in quarter 2 of this year. Consolidated profit -- gross profit for quarter 3 stood at INR 40 crores compared to INR 44.5 crores in quarter 3 of last year, down by 10% Y-o-Y. However, gross profit margin expanded by 130 basis points Y-o-Y to 29.3% in this year quarter 3 as compared to 28% in quarter 3 of last year. Consolidated EBITDA stood at INR 22.2 crores as compared to INR 22.6 crores last year quarter 3, down 2% Y-o-Y. However, through cost optimization initiatives, the margins expanded by 200 basis points to 16.2% in quarter 3 of FY '21 as compared to just 14.2% in quarter 3 of FY '20. Consolidated profit after tax for quarter 3 '21 increased by 64% Y-o-Y to INR 7.7 crores as compared to INR 4.7 crores in quarter 3 of last year. Stock at the end of the quarter was at INR 188 crores, which is lower by INR 30 crores compared to the stock levels at the beginning of the financial year. A few words about our digital strategy. We are cognizant that Internet-led sales is going to play an increasingly crucial role as many customers have now become comfortable to buy and research luxury watches online. Such billings contributed to more than 40% of our billings in the 9 months of FY '21 until December. Hence, we continue to innovate and spend on marketing through digital mediums to keep the overall engagement high. During quarter 3, we have added 1 store at Lucknow, while we have closed 1 store situated at the domestic terminal in Mumbai as a part of our store rationalization exercise. Hence, our total number of stores remains the same at 47 during the quarter. Our strategy is very clear and consistent. We will invest money where we have the visibility of the returns and growth and take money off the table from places which are proving to be a drag on our profitability. Our preowned business is being run through our website, secondtimezone.com. This website has also witnessed increasing visitors in recent times. We believe that the business of preowned watches in the long term has a good potential to scale up. With our strong team of technicians, watch experts and excellent after-sales service, we are confident that this business will scale up steadily. To conclude, there have been many fast-moving changes for the good at Ethos. Going ahead, our focus will be to continue building our business on the back of our omnichannel strategy, our excluded -- our exclusive brand tie-ups, the pan-India network, high standard of watch servicing and after-sales service. We believe that with the economy now recovering strongly, we can look forward to a very vibrant growth in the coming quarters. I now welcome your questions and participation.

[Operator Instructions] The first question is from the line of Abhinit Kulkarni from Equity Investing (sic) [ Tequity Investing ].

Congratulations on a great set of numbers. There's one question I had on the recent CRISIL credit rating report, wherein the company has said issuer not cooperating. So would you like to comment on the same?

I'm going to let Mr. Raja Sekhar answer that, Abhinit.

Abhinit, we actually changed our rating agency. CRISIL was the rating agency 3 years -- a couple of years ago. And it seems as a part of the direction from SEBI, they need to monitor the company post change for the next 3 years. And this can be based on whatever information that they can fetch from the public domain. But from our side, we have changed our rating agency, and we can send you the rating reports of the rating agency that we've considered now.

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

Yes. Sir, as the online sales are doing well, do you plan to slow down on new stores opening?

Isha, do you have other questions? If you can ask all your questions, then we can answer them together.

Yes, sir, I have one more question that what was the revenue from preowned watch business in Q3? I have just these 2 questions.

Okay. So let me try to get you the figures of preowned watches. But -- so as far as stores are concerned, we are certainly slowing down the opening of new stores. You can see that in fact, net -- there's been a net reduction. And there are several reasons for this. But one of the reasons, of course, is the fact that Internet-led sales has become a larger part of the business. We are moving -- also in price points, we are moving towards higher price points where store presence is relatively more important. But once again, good news is that even at higher price points, Internet-led sales are quite vibrant. So going forward, in the future, we do expect a slowing down in the expansion of physical retail space. And mostly, we will be concentrating on large stores, which become destinations rather than mere delivery points. Does that answer your question?

Yes, sir. And what was the revenue from preowned watch business in Q3?

Yes. I'll just give you that. So in Q3, the revenue was about INR 3.7 crores from preowned watches.

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

Sir, just one question. Could you talk about your cost cutting initiatives on the Ethos side and how sustainable that is? And -- sorry, second question is, you said that last year, we had higher count of shares -- higher count of stores actually. Right now, it's 47. But from an SSG perspective, this quarter, what would be the SSG growth?

Okay. So on cost cutting, as I mentioned, it is -- there has been both temporary and permanent cutting. Temporary cutting, of course, came through rent renegotiations which happened, but they were temporary. So most rentals are back to normal levels from this quarter. And of course, some was on some cutbacks on salaries and stuff like that, which also has been fully restored within quarter 3 itself -- at the start of Q3. So those were the temporary cutbacks. Of course, there were other running expenses, like traveling and a lot of other expenses. Everything was examined in great detail, and whatever could be slashed was slashed. Some of it, of course, has come back. Some of them will come back as things normalize. But on the other hand, there have been some important permanent cuts also, and these mainly come from closure of stores. So the active closure of stores leads to cost cutting across the board. It cuts running expenses. It cuts stocking. It cuts your interest costs. It cuts store maintenance, depreciation and, of course, rent and manpower costs. So that is -- those are permanent costs. And the fact that in quarter 3, we are almost back to the same turnover. And in quarter 4, I'm reasonably sure that we will exceed the quarter 4 turnover of last year, for example, in January, we have been higher than last year at a lower cost base, seems to suggest that a lot of the cost efficiency is actually permanent. So that is on cost cutting at Ethos. As far as SSG...

I'm so sorry to interrupt.

Sorry, go ahead.

Yes. Yes. Sir, just one small clarification. The temporary cost cuts were all normalized at the start of this quarter, right, just to get the context, be it rental...

No. I wouldn't say they were all normalized because we did have some rental rebates continuing until the end of this quarter, until the end of quarter 3 and some nominal reduction actually even continues in quarter 4. But the bulk of it happened in quarter 1 and 2, obviously, because that was the full lockdown period. And -- so largely, I would say it is normalized, not completely normalized. But I would say by the end of quarter 3, definitely largely normalized. And by the end of quarter 4, it will be completely normalized. Okay. Now same-store growth in quarter 3 has been a minus 16%. And for 9 months, it has been minus 31%. But you have to see that same store, we count only as stores which have had a full 12-month operation. So a lot of the new stores, which came up last year, are not really included in our same-store growth calculation.

Got it. Got it. Got it. And lastly, sir, the strategy of analyzing stores, is that now something which will continue going forward also? As in they will be more calibrated in the opening of stores, and you will open them in the boundary line, which you have defined in your presentation, right, in terms of premium location as well as high-footfall location. That stands, right, now?

Yes. Yes, absolutely. As I mentioned in the previous question as well, the store strategy is rationalized to a large extent. We are very clear where we want to go and more clear on where we don't want to go. So it has to not only fulfill a strategic need, but we don't want stores to act only as delivery points. We want stores to become destinations. And therefore, a lot of our new stores, wherever we are doing, are flagship large stores, among the largest in the city wherever we are. We opened our stores in -- the first flagship store was opened in Hyderabad. It was in 2019, in around July or June of 2019, and it has had a fabulous response because it has become the destination store in Hyderabad. Similarly, Kolkata, we opened a 3,000 square foot store in Kolkata, and that has become a destination store. Then we opened in Chanakya in Delhi, the luxury mall. That's a set of 4 stores. That complex is more than 2,500 square feet. And that again, has become a destination in its own right. And the latest one is actually going to open now in Bombay, hopefully, in March at the BKC, which is again a 2,300 square foot store, which will be the largest watch store in all of Bombay. So we are very focused on what kind of stores, where we are going to open them and the role that they've got to play in the future.

And sir, given that you have this focused approach of having very strong filters to open a store, then the number of stores will be very limited, right? In the sense, it will not -- I mean, as long as the destinations don't become, as you said, as [indiscernible] in a very high-reputed area and -- so it stands at premium more. If that is not there, you will not go and open a store, which means that the number of...

We haven't hesitated to cut down stores that are not -- which are not falling in line with our strategy and our growth, and we will not hesitate in future either. So we're pretty rigorous on cutting down stores that are not performing or not growing and instead putting money in locations, brands and strategies which will deliver a return.

And lastly, sir, any update on the rights issue? And there was a talk about acquisitions from the rights, given the challenging market, which COVID [ escalated ] for other competitors. So any update on that?

So yes, I mean, you might be aware this question also was asked the last time, and we wanted to be clear that we are not doing the rights because we need the money right now for our liquidity. We have an extremely strong liquidity position, both in KDDL and Ethos. So the rights are really planned because we foresee a lot of opportunities coming up. Some of them have been in the pipeline. The irons are in the fire. But because this extended lockdown and -- particularly in Europe, in Switzerland, where we are under discussion for many of these so-called opportunities, there is -- we didn't feel a great sense of urgency on the rights issue. So that's why it has not been sort of completed. However, we are very close to now completing all the formalities at the Board level, and we expect to go through with the rights issue in the next couple of weeks.

Got it. And lastly, just a basic question. There's a difference between billings and revenue. What is this, if you can help me understand?

Can you say that again? It was not clear.

In your presentation, on Slide 21, billings and revenue, there is a difference. I'm just trying to understand what is the difference. Why is there a difference between billings and revenue?

So billings is the gross billing, including GST, and revenues is net of GST.

We'll move on to the next question that is from the line of [ Atul Kothari ] from [ Progwell Securities ].

Just a couple of questions. Sir, is it possible for you to quantify the cost reduction accrued to us due to the closure of stores?

Okay. What else?

And secondly, sir, if you can let us know as to what the gross margins in our preowned watch business? That's it from me now.

Okay. I think on the cost reduction, total cost reduction due to closure of stores, we may not have the figure ready right here. But we'd be happy to get back to you and give you an indication about what has been the cost reduction, the permanent cost reduction due to closure of stores. Gross margins in the preowned business, I just -- so the gross margin in the preowned business is between 23% and 25%.

The next question is from the line of [ Ankit Agarwal ] from [ ARC Capital ].

So the first question is about the Swiss watch market. So can you give us some idea about the current demand?

Current demand in India or what...

Both abroad as well as in India.

Well, I mean, the basic trend, which is an unmistakable trend, is that the higher price points, demand has revived and is likely to grow pretty robustly, whereas at lower price points, price points below $500 export price, those have been in continuous decline over the last 6 or 7 quarters. So lower price points are declining, higher price points are going up. This is an ongoing trend, which will further accelerate over time. The trend in India is maybe not as sharp. But overall, the Indian trends are following similarly, where we see a revival -- a faster revival in the higher price points and less of a revival at a lower price point.

Okay. Fine. Understood. Sir, I have 2 more questions on the Ethos business. So how many stores are you planning to like open in the next 1 year or maybe close?

Just one minute. As of now, one store opening is planned in this financial year, probably in March, provided the mall opens. That's the store in Mumbai at BKC. And we are targeting another 4 store openings in the next financial year, 3 of which will actually be mono-brand boutiques for very, very well-known and key luxury brands. So these will be extremely important, strategic as well as financial new stores that we will open. And one will be a multi-brand store. So a total of 1 plus 4 openings in the next, let's say, 12 months or so. And we do have at least 3 closures, which are planned. At least 3, we will continue. Every quarter, we sort of review our stores. If they are marginal performance, we try to improve it. And if it doesn't improve, we close it. But at least 3 stores are definitely slated to close when their agreements come to an end.

Okay. Fine, sir. And one last question is on the CapEx. So what's the expected CapEx in the manufacturing and the Ethos business?

In -- are you talking about next year?

Yes. Next 1 or 2 years.

In the manufacturing business, in the next, let's say, 15 months or so, we are expecting a CapEx between INR 12 crores and INR 15 crores. This is also because, obviously, this year, there was practically no CapEx, very low CapEx. Even in the last fiscal year, we didn't do much. But we are seeing a very vibrant demand coming back. In our watch component business, we are seeing a lot of demand revival as well as in our precision engineering business because, especially on export customers, there is strong evidence for customers adopting a China Plus One policy, which means even if they are very dependent on China, they want at least one supplier outside China, and that is helping us. And even for domestic players, I think there is a clear trend for reducing the dependence on China and sourcing more internally. So we are the beneficiaries of this tendency, and we want to be prepared both in terms of quantity, quality and infrastructure to cater to this demand.

[Operator Instructions] The next question is from the line of [ Priyanka Singh ] from [ Atidhan Securities Limited ].

I have 2 questions. The first one is, are the Q3 manufacturing business EBITDA margin sustainable going ahead? And also, what is your total debt and cost of debt separately in our manufacturing and retail business? And has the cost of debt come down for us in the last year?

Right. So [ Priyanka ], let me just understand your question. Your first question was whether the EBITDA margins in the manufacturing business are sustainable, correct?

Correct.

Absolutely. Yes. Yes, they are very much sustainable. In fact, they have been pretty much at these levels, and we believe these are sustainable for the foreseeable future. So this is the first. Your second question was about -- sorry, can you say that again?

Yes. So...

Was about the level of debt, right? Was about the level of debt in manufacturing. Just hold on, I'll ask Sanjeev for the answer.

In manufacturing, our total debt, including working capital limits, is around INR 80 crores as at the end of December.

Okay. And retail?

Ethos, we have a debt of about INR 47 crores as of December 31.

Okay. And has the cost of debt come down in the last year?

Cost of utilizations are a little bit lower, but the debt has not gone up, whether it's the same or the debt is down, and the cost of debt is coming down.