KDDL Limited (532054) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the KDDL Limited Q4 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Yashovardhan Saboo, Chairman and Managing Director, KDDL. Thank you, and over to you, sir.

Thank you. So this is Yashovardhan Saboo, and a good afternoon, and welcome to everyone for our quarter 4 FY '21 earnings conference call. I'm joined, as usual, by Mr. Sanjeev Masown, CFO of KDDL; and Mr. Raja Sekhar, CFO of Ethos Limited, is joining us. He's not in the office, but he's joining us on the conference call, and we are joined also on conference by SGA, our Investor Relations advisers. I hope everyone has had a chance to go through our updated presentation, which is uploaded on the exchanges. FY '21 was, no doubt, a very challenging year for the company as it was for the country. Nevertheless, we recovered and bounced back stronger in both our manufacturing business as well as our retail business as the year went by. Business recovery was led by demand revival as the economy unlocked as well as on the back of several cost-optimization initiatives, leading to a strong improvement in profitability. I'm also pleased to share that recently, we have successfully completed the rights issue of INR 25 crores in KDDL, which was oversubscribed by shareholders. The rights issue proceeds will be invested in Ethos for working capital requirements and future growth and general corporate purposes of the company. We continue to remain very positive on the future growth prospects of the company. I'll give you a brief on the financial performance on a consolidated basis. So consolidated total income for quarter 4 FY '21 increased by 30% Y-o-Y to INR 178 crores, while total income for FY '21 was down 16% Y-o-Y to INR 549 crores. Consolidated gross profit for Q4 increased by 30% Y-o-Y to INR 77 crores, while for the full year, it was down by 18% Y-o-Y to INR 225 crores. Consolidated EBITDA for the quarter increased by 125% Y-o-Y to INR 27 crores, while for the year, it was down by 14% Y-o-Y to INR 65 crores. Consolidated EBITDA margin for the quarter expanded by 650 basis points to 15.3%, while for the year, it expanded by 30 basis points to 11.8%. Consolidated profit after tax for Q4 stood at INR 9.1 crores versus a loss of INR 5.1 crore in the same quarter previous year. Clearly, a spectacular turnaround. While the profit after tax for the year stood at INR 7 crores versus a loss of INR 1.9 crores in the previous year. You are surely aware that our financials are impacted by application of Ind AS 116 standards, which impacts EBITDA and PBT. Hence, our Ind AS 116 adjusted financials are also published in the investor presentation for reference. I come to the business-wise updates. Our manufacturing business is comprised of watch components, precision engineering and ornamental packaging. In quarter 4 of FY '21, the manufacturing business revenue increased by 24% Y-o-Y to INR 50.5 crores, while for the full year, it was down 19% to about INR 147 crores. The revenue share of watch component and precision engineering business for the quarter was 73% and 23%, respectively, while for the full year, this share was 71% and 25%. EBITDA for quarter 4 increased by 116% Y-o-Y to INR 12.2 crores, while for the full year, it was down by 19% to INR 24 crores. EBITDA margin for the quarter expanded by 1,030 basis points Y-o-Y to 24.2%, while for the year, it dropped by -- marginally by 4 basis points to 16.2%. Profit after tax for quarter 4 FY '21 stood at INR 4.7 crores versus INR 0.5 crores in quarter 4 of previous year, while for the year, it stood at INR 3.4 crores versus INR 9.1 crores in FY '20. Revenue from watch components business stood at INR 36.7 crores in quarter 4 of FY '21 compared to INR 30 crores in the previous year same quarter, while for the year, it stood at INR 107 crores as compared to INR 129 crores in the previous year. Revenue from precision engineering business stood at INR 11.6 crores in quarter 4 as compared to INR 10 crores in quarter 4 of the previous year, while for the full year, it stood at INR 36.9 crores as compared to INR 43 crores in the previous year. During quarter 4, the revenue of the company in this current -- in FY '21 improved by 20% over the previous quarter as well as the corresponding quarter of FY '20. A little bit about the market. The Swiss watch market continues to show a steady recovery. The market trend for the last few years with declining volumes in the low price points will continue, while the higher price segments are continuing to grow strongly. We are gradually moving up the value chain by regular interaction with customers and providing customers with the highest level of product and service, thus actually catering more and more to the higher-priced segments. There was a healthy recovery of demand from domestic market in quarter 4. However, due to the second wave of COVID-19, we have witnessed some moderation in demand from the end of quarter 4 and during quarter 1 of FY '22, as many states and cities are under strict lockdown. However, we expect the demand to recover swiftly as the economy unlocks again. In our precision engineering business, Eigen, during the quarter, we witnessed a revenue growth of 7% from the previous quarter and 16% from the corresponding quarter of FY '20. The demand from some of the segments, like aerospace and electronics, have continued to remain severely impacted and also during the second wave of COVID-19. Similarly, the auto segment is also under some pressure. However, we expect that the demand from all segments may reach to near-normal levels over the next few months. The cost optimization initiatives undertaken by us during the wave have led to improvement in EBITDA margin by 58% compared to previous quarter and 116% as compared to corresponding quarter of FY '20. The EBITDA and PBT levels for the quarter was 24.2% and 13.6%, respectively. We believe that with the normalization of market conditions, post recovery from the second wave, the profitability of the company will be stronger and healthier. Estima AG, our Swiss subsidiary, during the quarter 4 of FY '21, it reported a revenue of CHF 755,000 and an EBITDA of CHF 217,000. Estima reported a profit of CHF 166,000 during the quarter. During this -- during the full financial year FY '21, Estima's revenue was CHF 2 million as compared to CHF 1.8 million in FY '20. The EBITDA stood at CHF 134,000 for FY '21 versus a negative of CHF 1.16 million in the previous year. For the full year, Estima reported a marginal loss of about CHF 107,000 in FY '21 as compared to a loss of nearly CHF 1.4 million in FY '20. All these financial indicators clearly point to a steady recovery in Estima. We remain confident that in the coming period, with the normalization of market conditions, this company, too, will experience healthy growth of revenue and a return to profitability. Now let me discuss our watch retailing business, Ethos. Continuing with a strong recovery in the second and third quarters, the company enjoyed a robust recovery in the final quarter of the year. The company's billings grew by 37% over the same period of last year. The same-store growth during this period was 34%. This led to one of our most profitable quarters with EBITDA increasing by 105% and PBT increasing by more than 200% over the same period last year. For the year as a whole, as mentioned in our previous con-calls, we met the challenges of the pandemic with agility and nimbleness. We implemented significant cost cutting and focused on maintaining liquidity. We closed underperforming stores and negotiated rental release with landlords. We rationalized manpower costs and running costs. Investment in inventory was reduced significantly. This exercise has led to a transformational benefit of our company. Hence, although our revenue [Technical Difficulty] by 12% in FY '21, our EBITDA increased by 4%, with 210 basis point margin expansion. During the month of March, the second wave of COVID-19 hit us starting from Maharashtra and spreading to other parts of India. Lockdown restrictions were brought back. Hence, most of our stores had to be shut down in the month of April and all our stores remained closed for May. Starting early June, the stores have now started to be operationalized. As of today, 27 of our 46 stores are operational. We expect that all our stores will be fully operational in the coming 1 to 2 months. We are now much better equipped to understand and plan our future growth plans. Our strategy would be to go for bigger flagship stores rather than smaller stores. Our flagship stores attract much higher footfalls and traffic -- and digital traffic, and it leads to a higher revenue per square foot, and hence, higher per-store profitability. Here are some financial highlights of Ethos for quarter 4 and for the full year FY '21. Our billings for the quarter increased by 37% to INR 143 crores, while for the full year, it dropped by 14% Y-o-Y to INR 449 crores. Of these billings, the billing for exclusive brand for watches contributed INR 40 crores in quarter 4, that is 28% of the total billings for the quarter, while for the full year, it contributed INR 130 crores, that is 29% of the total billings for the year. You will remember that our strategy with exclusive brands is one of the pillars of our growth and profitability. Consolidated total income increased by 36% Y-o-Y to INR 125 crores in quarter 4, while for the full year, it was down by 12% Y-o-Y to INR 403 crores. Consolidated gross profit increased by 44% Y-o-Y to INR 37 crores in quarter 4, while for the full year, it was down by 7% Y-o-Y to INR 121 crores. However, the gross profit margin expanded by 170 basis points to 29.8% in quarter 4, and the same expansion of 170 basis points also for the full year to 30% in FY '21. Consolidated EBITDA more than doubled to INR 17.8 crores in the quarter 4 of this year, while for the full year, it increased by 4% to INR 56 crores. As a result of our cost optimization efforts, EBITDA margins expanded by 480 basis points to 14.2% in quarter 4, and it expanded by 210 points for the full year to 13.9%. Consolidated profit after tax turned around from a loss of INR 4.4 crores in quarter 4 of last year to a profit of INR 4.5 crores in quarter 4 of this year. And for this year -- for the full year, the PAT turned around from a loss of INR 2.5 crores in FY '20 to a profit of INR 4.7 crores in FY '21. Stock at the end of the year was at INR 198 crores lower by INR 21 crores compared to the stock levels at the beginning of the financial year FY '21. Along with the stores, our focus continues on the digital part of our business to drive our future growth. Our online-generated billings increased by 8% Y-o-Y to INR 172 crores in FY '21 as compared to INR 159 crores in FY '20. As a percentage of total billings, it formed 38% of the total billings in FY '21 as compared to 30% in FY '20. During the lockdown days, online business have proven to be a stable business generator for the business. So we continue to innovate and spend on marketing through digital mediums to keep the overall engagement high. We continue to witness ever-increasing visitors on our Ethos e-commerce website as well. A few words about our preowned watch business. Our preowned watch business, which is being run through our website secondtimezone.com, has also witnessed increasing visitors and a huge increase in engagement in recent times. We believe that the preowned watch business in the medium and long term has a great potential to scale up steadily and, in fact, quite quickly. Before concluding this speech, I would like to say that FY '21, being the most challenging year, also gave us an opportunity to think about new ways of doing business and deeply analyze the cost structure to make it more efficient. I now welcome your questions and participation.

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

Congratulations for a great set of numbers. Initially, just wanted to understand whether we will be able to sustain this kind of strong numbers even during Q3 of -- for Q2 or Q3 of this year? So is it possible to maintain this strong set of numbers?

Okay. Deepan, if you have any other questions, can you also ask them, so we can answer all of them at the same time?

Sure, sir. And in terms of manufacturing outlook per se, for FY '22, how are we planning to improve?

Okay. So we are very hopeful that the strong turnaround will actually be sustained. Obviously, quarter 1 of this current year, unexpectedly, with this lockdown, all the stores remaining shut, this is obviously a dampener. However, still we expect this quarter results to be far better than previous year same quarter, even though actually the stores were shut and the mood in the consumer sentiment was actually much darker than last year. Because last year, although there was a lockdown, there was no impact of the lockdown in terms of COVID. This year, [Technical Difficulty] virus and the illness and the infections have hit almost every family, so the mood was very pessimistic. Nonetheless, I think through the sustained efforts, our actual results for the quarter will be better than last year. And if the bounce back of the economy, which we expect to be, will be the same as last year, we don't have any reason to believe it will not be. We certainly expect the same performance of quarter 4 to actually continue even in the forgoing quarters. What you must remember is that quarter 4, like quarter 3, is one of the special quarters, right? And last year, it was also there because a lot of the wedding got postponed to the fourth quarter, and wedding is the large part of buying for watches. So we don't know how it will go this year. But broadly speaking, I think we are very optimistic that it will be quite a positive year. And we should see a very good growth this year. As far as manufacturing is concerned, once again we are very optimistic and to show good growth and a good revival. I can say that on the export side, which is almost 60 -- more than 60% of our business, the revival is faster. We are seeing quite a robust growth or robust revival there. Domestic segment, which has started to revive in quarter 4, again, has gone into a bit of a shell because of this lockdown everywhere. But we are hopeful that the rebound will be strong. What we saw last year, the same thing will happen this year. And therefore, we are actually gearing up for quite a strong rebound.

Okay. Okay. Sir, 1 point on gross margin expansion. So is it majorly due to our contribution of higher selling price points have increased in our billings? So is it due to that?

You are talking about Ethos?

Ethos only.

Yes. It's a combination of various factors. A large part of it is because of the increased percentage of exclusive brands on which we enjoy a higher margin. So that is the single largest reason why there has been gross margin expansion. And of course, we are also conscious and reducing -- or not encouraging so much the sale at -- products or ranges where the gross margins are less. So there is a very conscious effort and strategy for gross margin management, which consists of many steps. The main of this is actually this product exchange.

The next question is from the line of Manish Dhariwal from Fiducia Capital Advisors.

Am I audible?

Yes, you are.

My question was -- there were 2 questions that I had. One was about the inventory that you maintained in the retaining business, which obviously there's a significant amount and a lot of capital that's kind of locked into this part of the business. So I wanted to get some flavor on how the obsolescence and how the -- like the stock which is more than a year old or things like that, I mean how is that managed? And -- that is one. And second, I wanted to understand that, see, the overall business, there are like a lot of verticals in your consolidated business, where [indiscernible] manufacturing, the buyers and the other parts and to selling the overall watch and like the repairs, et cetera and each of them have different margins. Like your entire business have better margin and the retailing business have significantly lower margin comparatively. What is the blended margin? How do you track the company's overall group's performance? And what are the markets that you keep in mind towards the margin side of the whole activity?

Okay. Let me answer your first part on the inventory and obsolescence. So inventory in the Ethos business actually has gone down from around INR 220 crores to about INR 190 crores. So there's a reduction by about INR 20 crores. In terms of months, it has gone up a bit, obviously, because the sales has gone down, which was impacted by COVID. During that time, the sale is impacted, the stock obviously cannot be reduced instantaneously. However, in the business of sale of luxury watches, if you compare with any international benchmarks, the stock of 8 months will actually be among the lowest among international watch retailers. The norm for international watch retailers and luxury segment is usually more than 10 to 12 -- or in the range of 10 to 12 months of sales. So that is a feature of this business because you need to keep a large range of watches and people will buy only when they can choose from a large range of watches. However, on the other side, in the luxury watch business, the risk of obsolescence is actually very, very low because if you're a luxury buyer, you know that luxury watches usually continue on a catalog for years and years. Unlike fashion watches, which there are 2 collections every year and after 1 or 2 years, the watches become obsolete. In the field of luxury and premium watches, the watches continue on the catalog and part of the range for years. And even after they have taken out, sometimes they are collected by collectors and they continue to have secondary value. So therefore, there is very little chance of obsolescence. In fact, sometimes old watches become premiumized because of their shortage and their collection desire by collectors. So that is why you'll also see that there is hardly any provision made by our auditors, who constantly check on this matter for obsolescence or any nonmoving stock as such. On your second question about how do we monitor the group margin. Now obviously, they are different businesses. And the different businesses have very different characteristics. So the group -- the overall consolidated mixed margin is actually a resultant figure, right? It is not a strategy that we have to achieve so much. The strategy is for different businesses. And if one business with a lower margin increases, right, the overall mixed margin may go down. But that's not the point. I think we have to see the ROCE and ROI of individual businesses and maximize them. If we maximize the individual businesses, typically, the consolidated margin will also improve. So we really monitor the market for individual businesses much more strongly and for the business as a whole, it's essentially just the resultant figure.

As a follow-up, see, the overall [ adjusted issue ] creates shareholder value, which we are like very focused on. So which vertical -- because see, each -- this also has distinct capital demand. So from the capital allocation perspective also like -- so over the next 3 to 4 years, which are the -- what are going to be the valuation drivers for the organization, the shareholder value drivers? It basically means ROCE and increased ROI?

We focus on ROCE. Manish, in our businesses, we are focusing on ROCE.

Fair enough. So which businesses are going to be the drivers for the ROCE expansion in the next 3 to 4 years, was something that I wanted to get a handle on? I did want to...

Manish, there are 2 main businesses, right, the manufacturing business and the retail business, right? So obviously, the retail business ROCE has to improve. It's a large part of the business. So that is going to drive the ROCE up. In the manufacturing business, there are 2 parts, the precision engineering and the watch component. Watch component ROCE is high, we're going to sustain that. In the precision engineering business, we are going to improve the ROCE. So overall ROCE will increase.

Okay. And second thing, the used watches business, how -- what's the plan on that? Is it going to become a significant value driver?

Yes, it will. We are considerably expanding that business. We have just set up the state-of-the-art service center. In the last con-call, if you were there, I had mentioned that, that having a service center to check, repair and authenticate the watches is a very fundamental pillar for the preowned business. That service center has come up. It's the largest and best equipped independent watch service center in the country, I can easily say that. And we are also just going to open -- this is prevented by the lockdown -- it was prevented. But in the course of next 2 weeks, we will be opening India's first preowned watch lounge, and we see a very bright future for this business.

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

I just wanted to [indiscernible] broad thinking, so we'll start with the manufacturing side, what the trends were getting from the international customers? Is the order inputs continuing to look good? Is the order book -- I mean, next 12, 18 months, does it look like the scale-up happens in a significant way?

So Jeetu, in manufacturing, on the watch component side, we are seeing a pretty strong recovery on the export side, right? And that's at least partly due to a lot of the moves that we made over the last 2 years. We must be one of the first watch component companies in the world to take to digital marketing, to take to social media, which has helped us to gain visibility in some very large and top customers. So we are focusing on increasing our market share there. Of course, we were a little worried with this second lockdown because when India comes under lockdown, the media that India got for the lockdown was not very positive. You are aware about that, right? The second wave and all the international media was very critical of India's handling. So we did our bit to assuage any anxieties of our customers. And fortunately, there has not been too much of an impact from that, and we are seeing our order book remain quite strong. So as I mentioned already in the first question, we are pretty confident of a strong bounce back on the export side of watch component business. Domestic side of watch component business, though quarter 1 has been weak, but I -- again, I'm very confident of a strong bounce back because most of the domestic players are now going for a shift from China to domestic. So we expect that to start playing out now. We've been speaking about it last 2, 3 months -- 2, 3 quarters, [Foreign Language] China, this strategic shift [Foreign Language]. You know these things, these shifts don't happen instantaneously. These are strategic decisions and they are implemented over quarters. But we see that to start playing out now. And on the precision engineering business, we have banked a lot on the aerospace and electronics side of things. We had mentioned in the last -- previous year also. Now aerospace and electronics got severely sort of impacted because of COVID. However, still, we see growth, but we were seeing the kind of growth which we were expecting, we were expecting like a 25%, 30% growth. I think that will be tempered and it will be more like a 20% kind of a growth. So overall, we are very confident of a strong bounce back in manufacturing, both the segments, watch component as well as precision engineering.

Okay. Wonderful. Sir, second question on the -- we raised the rights issue against the capital, how does that change our aggression or what are we going to do differently now based on that? And what plans are we rolling out based on that?

So large part of the rights issue, it was actually for investing in Ethos. So that is going to happen over the next couple of quarters. The plans in Ethos are really to take up some of the strategic new opportunities that are coming up. Just coming up, as I'm saying, but they're also slipping a little in time, let me say, because of the lockdowns and continuing waves and so on and so forth. So for example, there are a couple of strategic initiatives of some brand tie-ups and some location tie-ups, which does require a face-to-face meeting with the brand. In Switzerland, the luxury brand until you can meet them face-to-face, you share your plans, they're not going to sign up on a Zoom call, right? And unfortunately, the meetings that were planned in March, they got obliterated. The meetings that were planned in June have got obliterated. So now we're planning a meeting in August-September. And I think it's very exciting what are the new opportunities coming up for strategic tie-ups in Ethos. And I hope over the next couple of quarters, you will -- or the next couple of months, why quarters, we will be able to share more specific news on some of these tie-ups. I can already tell you, for one -- one, I can already tell you that we have signed up and are moving ahead with doing 2 monobrand boutiques for Omega. These are the only 2 boutiques coming up for any brand in the last -- in this year and in the last year in the whole country. And one is in Bombay, which will greatly strengthen our position in Bombay, okay? This is the first boutique of Omega in -- or let's say the first largest boutique of Omega in Bombay. And one in Chennai, again, that will be the largest boutique of Omega in the country and the only boutique in Chennai.

And the economics of it [indiscernible] from our point of view?

Yes. Yes, of course. There are -- so these are -- when you do a boutique with a brand like Omega, right, if Omega is the second largest brand in the world, right, and it is growing and it's very strong. And when they do a boutique, then you get special -- as you know, you get special boutique additions, it gives you relationships with customers and so on. So it's very much part of our strategy. And similarly these brand relationships and presence -- large dominating presence in cities is going to help us to increase our market share. So typically, for example, in Bombay, our market share has traditionally been weak. In Chennai, it has been weaker because our entry into Chennai was very late. So we have identified which cities our market share has large potential to grow. We are focusing on that, which are the brands that will help us to grow. Some brands may not be very keen to grow in India right now, others are. So these are all these discussions and relationships that we are nurturing, and you will hear much more about this in the months to come.

Okay. Wonderful. And the last question is, I'm assuming that, obviously, this quarter has been quite -- would have been a weak quarter on the retail side because of this COVID issue. But is there signs that things are going to come back in a better way and things are going to looking upwards? And also the current question is how are we doing on working capital and inventory on the watches on the retail side?

So in terms of liquidity, we are very strong. There's absolutely no issue. Stock is under control. We will take up the stock. Consciously, we will take up stock this year because that is one of the elements of gaining market share. When we are going to start with a couple of new brands, we will take up the market share. And we will -- the stock will go up. But again, in terms of month of stock, it will remain very much under control. As to when the bounce back will happen, can't say. Maybe it's already happening as stores open. We don't see a very strong yet because stores have started opening only 1 week ago. But I personally believe by the middle of July, we will see a good trend, and then we will be able to say how strong the bounce back will be. There will be a bounce back that is for sure. We have to also -- on the other hand, consciously in our head, we have to factor that as the economy opens, the number of cases in COVID may go up because full vaccination is going to still be some months away. So the chances of the third wave can't be rolled out. We are only hoping that if a third wave comes, it will be handled efficiently, quickly without -- or with very little disruption as compared to the second wave.

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

Sir, I have a question on the manufacturing business. Sir, what was the sustainable EBITDA margins in that business?

There are 2 businesses, right? In the manufacturing, there are 2 main businesses. On the -- sorry, hang on, just let me pass this on to our CFO, Mr. Masown.

Ankit, Sanjeev Masown here. Regarding your question of sustainable EBITDA margins in the manufacturing, our margins broadly range between 18% to 20% depending upon the mix of the businesses, which are taking the higher share in the coming year. As the precision engineering normally has a lower EBITDA margin, we believe still after that, we will be in a position to maintain 18%-plus of EBITDA as the exports are likely to go up.

Okay. That is helpful. Sir, and I have 1 more question, that's on the rights issue. So I just wanted to find out more about how the money is going to be utilized for Ethos like? Can you just provide some more color to it?

I think it was clarified earlier also by Mr. Saboo, that mainly the purpose of rights issue is to invest further in Ethos and for the emerging opportunities and the further growth and development of Ethos. As the initiatives and the plan gets finalized, accordingly, the investments will be done in Ethos in the coming few quarters.

[Operator Instructions] The next question is from the line of [ Aditi Sawant from AGM Advisors. ]

Yes. Sir, I have 1 question. What is the demand outlook for our watch components and precision engineering business?

Aditi, do you have any other questions? If you can put all of them together?

No, no. That's it.

So as I mentioned, demand -- let me go to watch components first. We are seeing a very robust bounce back of demand from the export side. Domestic side has flattened a bit because of the lockdown. But we are in touch with our domestic customers, all of them, and they're all indicating a bounce back to start from next quarter, that means from July onwards. So we are quite confident about that. Similarly, on the precision engineering side, we expect the bounce back to happen in all sectors. In the aerospace and electronics sector and auto sectors, these are 3 important sectors, there, we believe the bounce back will be a little bit slower. Whereas in other segments, it will be -- it is already we can experience it to be quite strong.

[Operator Instructions] The next question is from the line of [ Atul Kothari from Progwell Wealth. ]

Yes, am I audible?

Yes, you are.

Sir, I have 3 questions. My first query is, what can be the sustainable EBITDA margin for Ethos business? That's number one. Secondly, what is the gross debt in our manufacturing business and Ethos business? And what is the cost of that? And last, as online business has been improving, what kind of initiative company is taking on the digital front?

Okay, Atul. So your first question was on what is the sustainable EBITDA margin in the retail business, right?

Yes.

So our target is to achieve a 10% EBITDA. We have already gone to about 7%-plus 2 years ago. We believe we can go from where we are to about a 10% EBITDA over the next 2 to 3 years. 10% -- between 10% and 11% is a sustainable EBITDA margin in the retail business. Your second question was relating to -- can you just remind me the second question?

So the gross debt for both manufacturing and Ethos business, retail business?

Okay. I'm going to let our CFO Mr. Masown for KDDL and then Mr. Sekhar for Ethos to answer this on the quantum of debt and the cost of debt.

Stand-alone manufacturing part, our total debt is around INR 75 crore. This includes the working capital limits utilization. The interest rates are sub-9% for the manufacturing.

For Ethos total debt as of 31st March was about INR 52 crores, and the average cost of debt is about 10.6%.

Okay. Okay. And lastly, regarding the online business, so what are the initiatives the company has taken on that front?

Atul, that's a very, very -- that's a very wide canvas for us. A business of INR 180 crores through online-led business in the luxury segment is practically unprecedented. You will not see any business in India generating that kind of online-led billings, especially in the luxury segment. So this is achieved through an omnichannel platform. We physically -- the physical stores combined seamlessly with our digital initiatives, whether it's our website or digital marketing, through social media marketing and our call center information center, where we have a team of 40 people, answering queries live, taking questions, these are watch consultants, specialized watch consultants. They will discuss and direct customers to the stores where the final deal is closed because everybody, on the luxury side, would like to see the watch before they buy it. And -- so obviously, there are initiatives on marketing. There are initiatives on consumer service. There's use of technology. It's a very, very vast canvas, which we are doing, and we expect this part of the business to grow very steadily. Already about 38% of our business is coming from online leads and which is a significant part, and we will maintain this. This will be sustained.

[Operator Instructions] The next question is from the line of Avadhooot Joshi from Newberry Capitals.

Online billing segment has been doing pretty good. As sir mentioned, 38% of the billings have come from online billing. And in the second last slide, we have mentioned about the rationalization of the stores. So I would like to know how we're going about the rationalizations and reducing the operating cost accordingly? That's the only question I have.

So Avadhooot, that's an excellent question. You see, let me explain it in terms of a strategic viewpoint. Going further, we believe that in luxury business as well as in any other business, the starting point of purchasing is increasingly going to be the Internet. People will research on the net first before they come to buy, mostly. Even if they come to a store first, they will look at the watch, but before buying it, if it's a high-value purchase, they will first research it also. So that interaction between physical and digital space becomes extremely important. But what is the reason for a person to visit a store? It -- in the past, it used to be like a convenience store. There's a store next to you, so it is convenient to go to that store and pick up something. And therefore, the model was that in a city like Bombay, there are -- Bombay is not really one city, Bombay consists of at least 10 or 12 smaller cities. So in each part of Bombay, you must have a store, so that people don't have to travel far to pick up something. This model is turning on its head now. We are saying a person can experience all the watches sitting at his home on the Internet. Then why does he go to the store? He goes to the store only once in a while. But when he goes to the store, he wants to have a fabulous experience. Then he wants to see a large range. He wants to have a large store. You have to have specialists attending to him or her. He has to have a great experience, a great ambience and so on. That is not possible in small stores, right? To give -- to deliver good experience, you have to have great ambience, you have to have skilled staff, you have to have knowledgeable staff, you have to have a fantastic selection of products and so on. But when you have that and you create a large store, then people are willing to travel 20 minutes more to go to a flagship store. A person will travel from Worli to BKC or from Malad to BKC, which he will not do -- obviously, he will not be willing to do that to pick up some food. But for a large store, just like Louis Vuitton will not open stores in every part of the city. They will open 2. But when someone wants Louis Vuitton, he will go there because it is not only to pick up a bag, it is to experience Louis Vuitton. And this is the cornerstone of the strategy of rationalizing. We are saying no point in being in small stores that can't deliver experience. Go to large stores, create fantastic stores, employ the most skilled and knowledgeable salespeople, use technology to deliver experience along with people skills, have a great collection of brands and a great stock over there and then people will come from far and wide to experience the store. We are seeing this turning into reality. For example, in Hyderabad, we had 3 stores. We closed them all and opened 1 large store. This 1 large store delivers more sales, double the sales that the 3 sales -- stores put together delivered at a lower rental and a lower operating cost. So the overall profitability goes up. The economics of these large stores are actually much better than of smaller stores. So that is the strategy for the rationalization of stores.

[Operator Instructions] The next question is from the line of Adit Shah from Vibrant Securities.

I had 3 questions. Number one is, we have been buying stake in Ethos, I think, to upward auction being exercised by an investor. Just want to know how much more do we need to buy back because of that agreement? Number two is the implied valuation, I believe, that would say, [ buying ] is around INR 360 crores, can you please confirm that number? Because last time when we raised money in -- last meeting, when we raised, Alchemy, I believe the valuation was INR 450 crores. So I want to confirm that valuation has gone down to INR 360 crores for Ethos? Third question is in the manufacturing side, is it possible for us to enter adjacent parts for watches like cases or straps, anything like this is it plausible in the future? And one more question is on Ethos since we have a very good digital presence, is it possible to expand the target territories beyond India to markets like Sri Lanka or Nepal or beyond India, basically? Is it possible to foresee something like that with Ethos?

So let me answer your last question first. Of course, it is possible to foresee markets beyond India. However, we are convinced that there is no future market with opportunities even remotely equal to India. So we have a lot to do. We have a great potential to grow in India to increase our market share and to ride the wave of the increasing demand for luxury watches that is going to come. So we believe it will be a mistake to take off the focus from India and go to a smaller city country like Nepal or whatever. And many people from Nepal and Sri Lanka actually come to India to buy. So we are certainly not looking at going out of India for the time being. However, 1 or 2 years down the line, if this strategy will change, we will come to know because we are constantly monitoring the situation. Now I come to your first 3 questions. One is regarding the buying of shares from an existing shareholder, consequent to a contractual obligation, right? The shares which were to be purchased, they were all purchased already last year, I think in October-November. We have clarified earlier also in the last con-call -- in the last call also that there is no more obligation after that last purchase was made, okay? Number two, there is the valuation that was done, which was about INR 250 per share was consequent to the contractual obligation that this is a price that will be paid. It was not based on any fresh valuation done for Ethos. That was the agreed price on which the previous investor had a put option. They exercised the put option, and we purchase the shares. We believe it was a good deal to purchase the shares at that price and that valuation was a favorable valuation for us. And you are right, it was a lower valuation than what we had purchased earlier. We do not believe that there has been any depletion or diminution in the value of Ethos. In fact, the value of Ethos has actually gone up. Your third -- your other question was -- I'm sorry, what was the remaining questions?

My remaining question was in the manufacturing side, is it possible -- or is it -- are you exploring adjacent components within the watch, like cases...

Yes, it is possible. It is possible, and we continue to explore those possibilities for adjacent areas in the watch component business.

Okay. And sir, the latest filing which we have made today, I believe, for buying -- increasing stake in Ethos is that a primary capital increase into Ethos?

Sorry, I didn't understand that.

So I think today, there was a filing with respect to increase of stake of -- in Ethos, was that the primary inclusion of capital?

Are you talking about the rights issue?

No, no, no. So there was a filing, I think, where our stake in Ethos has gone from 75-point something to 76, so that was because for primary infusion of capital or did we...

No. KDDL has purchased more stores of -- more shares of Ethos from an investor.

But that was not because of that put -- okay. But that was not because of that put option.

No. It was not because of any put -- it was not because of any contractual -- prior contractual obligations like a put option or anything.

Okay. Did we foresee any further such transactions? Is there -- do we foresee that?

Well, there are shareholders out there, it depends on the price. If the price is favorable, we are always happy to increase our stake.

Okay. And sir, last question is, in case the demerger is unable to go through because of the legal obligations on the regulation side, is it possible to directly list -- are we open to directly listing Ethos as an IPO?

I think we are looking at all -- no, we are looking at all the options. For us, value discovery is extremely important, not only -- it's not only important for the other nonpromoter shareholders, for the promoter shareholders also it is important, the value discovery, because I believe our business must reflect its true values. And in the current structure, it is clear that the true values are not fully reflected. So we are open to all the possibilities. We know that there are limitations due to the certain shareholding structure within KDDL. We are looking at various options. We have discussed with experts also. I'm not in a position to give you any concrete direction, but I can tell you that we are very actively looking at all possibilities to make this happen at the earliest.

Got it. So just -- we know that this is something which has been -- we are trying to do for a long time. But do you have any -- as a promoter, do you have any particular preference? Because if you do...

Hello?

Hello?

Yes. Sorry, you got cut-off. Yes.

Am I audible now?

Yes, you are.

Yes. So my question was that while demerger and giving shares correctly to the existing KDDL shareholders looks the best outcome for everyone. Obviously, that has got sort of delayed because of the reasons as we told. So is it -- I mean, as a promoter, do you have any particular preference because an IPO might be a straightforward route to list Ethos, but it will attract a holding company discount at KDDL level. But as a promoter, are you open to that? I mean what is your preference, given a choice because the other thing is taking -- is much longer time to sort of solve?

Adit, as I told you, we are examining all the possibilities. And frankly, on this call, I think I'm more obliged to answer as the CEO of the group, I think promoter is not only one. The promoter options are considered by promoters on a different forum. But I can tell you that we are open to all options and whatever maximizes value for shareholders as a whole is going to be preferred. I don't think we want to say that shareholder value should be maximized for one group or another group I think we have to be fair to shareholders, especially shareholders which have been with us for a long time, who have supported us, that has been our ethos, that has been our philosophy. And therefore, we -- there are 2 things. We want to do something that is fair and releases -- leads to value discovery for all shareholders. And second, we want to be very sure that it is within the boundaries of the law. We don't -- and in some of these matters, there are some ambiguities. So we don't want to do any brinkmanship. We are very clear [Foreign Language]. We are not going to do any -- we're not going to enter any even dark gray areas or white, anything, will be purely within the boundaries of the law. So it is taking a little bit more time. And frankly, right now, in the context of last year and this current quarter, our priority is to keep the company on track. If you remember, I don't know if you joined the conference call 12 months ago, in the month of June 2020, at that time, the questions were, are you sure you're going to survive? Are you sure your company will remain liquid, okay? That was an existential moment. And I think we have shown in these last few months and quarters that not only have we survived, we have actually become stronger. Today, our liquidity is stronger than any time in the past. Our strategy, our growth, our future prospects are better than last year, better than 2 years ago. So that has been our real focus. I think now that the company is going to be -- both the businesses are going to be back on track, we're going to start to focus again on this matter of demerger or IPO or what we can do. It has -- I agree, it has been delayed. But a lot of plans have been put on hold because of this 15 months of COVID. So -- but we are very clear that we will find a solution and the solution will be fair for all.

Sure. I appreciate your answer on that. Just want to pitch in a couple of more questions if time permits?

We have another person waiting for some time. So if you don't mind can you come back later? Yes?

Sure. Sure.

The next question is from the line of Manish Dhariwal from Fiducia Capital Advisors.

I wanted to understand how is the revenue from the online segment calculated? Because you explained that it's basically a joint approach that works, that a person basically looks up on the net and goes to get the feel of the watch in physical store and then maybe the sale gets concluded. So how are you kind of determine that this [ 38% ] is from online?

So when there is an online lead, if a sale happens from an online lead -- can you hear me?

Okay. Okay. Okay. Yes. Yes, I get it.

Then it is counted. If a sale is initiated at the store, then it is not counted as an online lead. If a sale is initiated through the Internet, whether concluded directly at the Internet or concluded at the store, it is counted as an online-led sale.

Okay. Okay. Okay. Sir, another question was that -- sir, like, you said that you are -- the strategy is starting to open large-format stores. But then you also mentioned that you're opening like 2 exclusive Omega stores. Now the strategy actually is pretty much opposing each other. And in the presentation you also mentioned that all the expenditures on the store, et cetera, is like yours because the brand is not going to be investing on the store. So how -- I mean, can you kind of explain to us the strategy in that sense, that you have an exclusive store alongside the large format store?

So Manish, in the field of luxury watches, there are some of the large luxury brands, which in the top malls in the top cities want an exclusive brand boutique because that brand boutique becomes a showpiece for the brand, okay? Now therefore...

I thought that was not your strategy.

Sorry?

But I thought you wanted to go on to the large-format strategy where you were able to offer a bunch of brands, where you were able to offer the variety and...

Yes, Manish, we are doing both. A monobrand boutique for a large brand works because a collector who wants a specific brand will always get a larger range in monobrand boutique than you would get in a multi-brand store. However, customers who want to see a collection of brands prefer to go to a multi-brand store. Now there are only a handful of brands for which a monobrand boutique strategy works. And that also works only in the large cities and the large malls. So Omega can't have 5 different boutiques in Bombay, even in Bombay. They will have 2 big max. Now why is it important for us as a luxury player to do the monobrand boutiques for these -- some of these big brands? Number one, it helps to build a strong relationship with the brand. And that relationship is of great strategic value. Secondly, there are products which the brands make it available only at the boutiques. They don't give those products to the multi-brand stores. So in order to be able to offer those products to our client database, again, it is beneficial for us to have monobrand boutiques. But again, I'm saying monobrand boutiques are a strategic goal, it doesn't mean that they lose money. Some of our monobrand boutiques are among our most profitable store. But you can't grow only with monobrand boutiques because monobrand boutiques will -- they account for 20% of the turnover of luxury watches, less than that globally. We need a combination of both: large flagship stores for multi-brand centers and selective -- selected monobrand boutique for highly strategic brands in highly strategic locations.

Wonderful. Wonderful. Wonderful. Lastly, sir, what's your smartwatch strategy? Like with the Apple Watch and the Samsung watch and the works coming in. So what is your strategy on the smartwatch segment that's coming up quite very strongly?

No, we don't have any strategies. That's a different business from ours.

Okay. So you mean you're out of it, right?

Yes. The margin on an Apple Watch is 7%. Apple Watch, all the smartwatches...

You're working on an EBITDA margin -- targeted EBITDA margin of 10%, so I guess an Apple Watch, which has a very high turnover, might not be a bad idea.

No. It's a different business. Smartwatches are sold as electronic products. So that business is more akin to someone who's selling laptops, someone who's selling -- it is not an accessory of style, it's a functional accessory. And they have a very, very high end and a very strong functional accessory. But watches sell -- the traditional watches and luxury watches sell for a different emotional -- it satisfies a different emotional need. Someone who's buying an Apple Watch, okay, and spending whatever INR 70,000, INR 80,000, INR 1 lakh, whereas someone who's spending INR 10 lakh, let us say, on a Rolex, they have very different emotions. And maybe the customer will buy both, an Apple to go to the office, a Rolex to wear in the evening.

[Operator Instructions] The next question is from the line of Adit Shah from Vibrant Securities.

My question was that in the preowned watch business, I missed the revenue figure for this quarter.

I'll have to get back to you on that. For this quarter means?

For this quarter, what was the revenue from preowned watches?

You mean quarter 4 of the previous year?

Of this year, this year, this year. Current quarter, basically.

Current quarter is not yet over.

So I mean current, meaning the ended March '21.

Okay. I'll have to get back to you on that.

Okay. Secondly, the stores which you're mentioning for preowned, is it already sort of opened because I see address in your Instagram page, there's a physical address. So is it open or you're going to open there?

I'm not sure what is the address. Of course, there's an office for the preowned business. And the lounge is not yet open. It should be opening in the next few days. We're just waiting for the lockdown to be fully over. And it's in the same complex as our office, but it is not yet opened.

Got it. And do you want to share any further plan for the next year? Do you want to open more than 1 in the next year or so for the preowned watch business?

We will. As the business grows, it is our view to open 1 preowned lounge in at least definitely Delhi and Bombay, maybe one of -- a few of the other cities. But we have to learn from our experiences in Delhi and Bombay before we go to other cities.

Okay. And is it possible with the preowned watch business to be like a INR 100 crore business in the next 2 to 3 years? Is it possible?

Yes, it is.

Awesome. One last question on the manufacturing side. I think we did, I think, sort of highest ever revenues or close to that, and I think PAT was also the highest ever. So for the next year, is this momentum -- and I think you alluded to that earlier also, that in certain areas, for example, export market is really bouyant. But if you were to give us a guidance for the next year overall, do you continue seeing momentum on the profitability as well? I think our overall -- the highest ever profits which we made was INR 14 crores, INR 15 crores in FY '19. So basically, can we go beyond that in '22? That was my question on the manufacturing side?

When we go 2, 3 years from now, we start to enter some areas of speculation from my business. However, as I mentioned earlier, we do believe our business -- our manufacturing business will continue to show growth, strong growth, double-digit growth. And we believe profitability will be maintained or even higher. I think Mr. Masown already shared what we believe are the sustainable EBITDA level. Of course, the efforts are always to improve the EBITDA levels. But sometimes we have to do a trade-off between EBITDA and growth. And we are conscious of both the things. So overall, I think there's going to be a good trade-off in maintaining high profitability as well as strong growth.

[Operator Instructions]

Good. Thank you. I think there are no more questions, and I have another meeting to go to. So please allow me the closing remarks. I want to thank everybody for joining the call. And I hope we've been able to answer your queries. If you have any further queries, please contact SGA, our Investor Relations partners. Thank you very much.

Thank you. On behalf of KDDL Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.