KDDL Limited (532054) Earnings Call Transcript & Summary

[Audio Gap] Q1 FY '22 Earnings Conference Call. I'm joined by Mr. Sanjeev Masown, Executive Director and CFO of KDDL. And I would also like to introduce to you Mr. Ritesh Agrawal, who will be taking over as CFO of Ethos from Mr. Raja Shekar. Ritesh is a Chartered Accountant with a rich experience of more than 17 years, his previous assignment was with Spencer's Retail. We also have SGA, our Investor Relations advisers, on the call. I hope everyone has had a chance to go through our updated investor presentation uploaded on the exchanges. I'll start with a quick overview of the overall business. We had witnessed healthy recovery towards the end of the previous financial year. But during Q1 of this year, major cities and markets came under severe lockdown due to the second wave of COVID, which has affected manufacturing operations and performance, both at our factories as well as at our retail business. As you know, the second wave of COVID-19 was much more severe compared to the first wave, and market sentiment and customers sentiment was much lower. However, I am very present happy with the performance of both our manufacturing and retail businesses despite these difficulties and despite considering the demand suppression on account of the lockdowns. Let me give you a brief on the financial performance. First, on a consolidated basis for Q1 FY '22. Consolidated revenue for Q1 FY '22 increased by 162% Y-o-Y to INR 139 crores. Now you will appreciate, ladies and gentlemen, that our comparison with previous year, first quarter is quite meaningless because the last year, first quarter was a complete nonperformer. Although the quarter -- this current year quarter had a similar, even a more severe lockdown, but the performance has actually been very good. Nonetheless, I think the comparison with last year is a little meaningless. So I'll give you absolute figures, and the comparisons are anywhere there given in the presentation. Consolidated gross profit for Q1 FY '22 increased to INR 63 crores, sorry. Consolidated EBITDA for Q1 FY '22 stood at INR 14.9 crores as compared to a loss in the last year's same quarter. Consolidated EBITDA margins in Q1 FY '22 was 10.7%. Consolidated PAT for Q1 FY '22 was INR 2.8 crores as compared to a loss of INR 15.6 crores last year for Q1. 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 for reference. Coming to the business side updates, starting with manufacturing. This comprises of watch components, precision engineering and ornamental packaging businesses. In Q1 FY '22, manufacturing businesses revenue increased to INR 46.2 crores. The revenue share of watch components and precision engineering business for the quarter stood at 75% and 23%, respectively. EBITDA for Q1 FY '22 was INR 7.4 crores against a loss of INR 1.3 crores last year. EBITDA margins for Q1 FY '22 stood at 15.9%. Profit after tax for the quarter stood at INR 2.8 crores, again, compared to a loss of INR 4.8 crores in the same quarter last year. Revenue from watch components business stood at INR 35.6 crores in quarter 1 FY '22 as compared to INR 15.8 crores in the previous quarter -- previous year same quarter. Revenue for precision engineering business stood at INR 10.2 crores in quarter 1 of this fiscal as compared to INR 5 crores in quarter 1 of previous fiscal. During Q1 FY '22, the demand from domestic market was subdued as most customer operations were impacted. However, we expect the domestic demand to recover swiftly hereafter. The demand from Swiss market remained healthy and encouraging and maintained the trend of last few years with declining volumes in the lower price points, while the higher price points have continued to grow strongly. As shared in earlier earnings calls also, we are moving up the value chain and catering more to the higher-priced segments. As the second wave of COVID-19 receded, we have witnessed revival in demand in Q2, and we expect the demand momentum to continue and accelerate in the coming months. Our precision engineering business, Eigen, during the quarter, reported a revenue of INR 10.2 crores as compared to INR 5 crores in previous year same quarter and INR 11.6 crores in the previous quarter, that is quarter 4 of FY '21. So there is a slight fall from the previous quarter. But overall, it is very encouraging. In Precision Engineering business, too, the demand from domestic market was severely affected, while exports market for most of the segments, excluding aerospace, have witnessed healthy recovery. During the current financial year, the company has acquired additional equity shares of Ethos Limited subsidiary of the company from some existing independent shareholders and invested INR 7 crores. The rights issue proceeds have been partly utilized for the general corporate purposes, and the balance unutilized funds have been temporarily invested in deposits, cash credit accounts and current accounts. The liquidity position of the company continues to remain healthy and strong. Estima. During quarter 1 FY '22, Estima reported a revenue of CHF 548,000 compared to CHF 539,000 in quarter 1 of last year. EBITDA for quarter 1 of this year was CHF 38,000. This was marginally lower than the last year as the government support for employees on unemployment account was lower in this year. Estima reported a loss of CHF 61,000 during the quarter. We remain confident that in the coming period with normalization of market conditions, we will again witness healthy growth, and Estima already is back on track for growth and profitability. Now let me discuss our watch retailing business, Ethos. As I mentioned earlier, despite our retail stores being closed for a significant period during quarter 1 FY '22, we were still able to perform very well. During this period, many of the stores had to be shut down or operated for limited hours during the months of April, May and June. To give you a sense of it, our stores were operational for only 35% of the average total time during this quarter. Despite this, we recorded revenues, which were close to 90% of what we achieved in quarter 1 of FY '20, which means the period that was not impacted by COVID, we came to 90% of that despite stores remaining open only for 35% of the time. The lockdown restrictions have started to ease in the month of July and August. Even during the first half of August, all our stores were not operational, especially as most of Maharashtra was still under lockdown. These stores have opened recently, and now we are hoping for a very strong festival season recovery, and we are poised to grow with it. One of the most important factors which have led to a strong business recovery is our effort on building our digital capabilities. This has also been aided by the COVID-19 pandemic, which has generally resulted in more [indiscernible] to digital segments. Having a well-established digital presence has yielded strong results during this time. We recorded the highest-ever quarterly billings due to online leads at INR 43.6 crores in quarter 1 of this year as compared to INR 17 crores in quarter 1 of last year. Online billings contributed a significant 42% of the total billings in quarter 1 FY '22. Although sales will recover strongly from our retail channels as well, we expect digital presence to be an important focus area for us for our growth and profitability. The omnichannel strategy that we have adopted is vital for our luxury presence and it will lead because it caters customers off-line as well as online in a seamless and very contemporary manner. We have been able to significantly improve our stock-carrying months from 8.7 months in June '20 to 6.8 months in June '21. This improvement has been on the back of careful planning of inventory. In addition to this, we have negotiated with landlords to obtain relief on rents during the quarter, and we expect to obtain more relief in the coming few months. Post our last announcement, we have added 2 new stores in Delhi and closed 1 store in Navi Mumbai. Let me now give you financial highlights of Ethos for quarter 1 FY '22. I would also, in this, give a comparison with respect to quarter 1 FY '20, which was a normal pre-pandemic quarter to give you a sense of business recovery. Billings for quarter 1 FY '22 stood at INR 104 crores as compared to INR 32 crores in quarter 1 of FY '21. And in quarter 1 FY '20, it stood at INR 118 crores. So we are back to 90% of pre-COVID times, despite the huge lockdown in quarter 1 this year. Consolidated total increase is -- sorry, consolidated total income increased to INR 94.1 crores. This compares with INR 102 crores in quarter 1 of the pre-COVID year. Consolidated gross profit was INR 30.4 crores. And in Q1 of the pre-COVID year, it stood at INR 30.5 crores. So in terms of gross profit, we are back to pre-COVID level despite the lockdown this quarter. Gross profit margin stood at 32.3% as compared to 29.9% in quarter 1, 2 years ago, that is a pre-COVID year. Consolidated EBITDA stood at INR 11.9 crores compared to INR 12.1 crores in quarter 1 of FY '20, the last pre-COVID year. EBITDA margin stood at 12.6% as compared to 11.9% in quarter 1 of FY '20, 2 years ago, the pre-COVID year. So EBITDA margin is actually higher than pre-COVID times. Consolidated PAT, profit after tax, stood at INR 0.8 crores as compared to a loss of INR 10.8 crores in the last year same quarter and compared to breakeven of quarter 1, 2 years ago. Stock at the end of June quarter was INR 183 crores, lower by INR 15 crores, compared to the stock levels at the end of March '21. As our financials are impacted by Ind AS 116, adjusted financials are published in the presentation where you can have a look. I do wish to add some comments on our important growth business, which is the preowned watch business. As you know, this business is being run through our website, secondtimezone.com. The website has been witnessing increasing visitors in the recent months. It is the largest platform by far for preowned watches in India, and we believe preowned watch business in the long term has immense potential to scale up in a very strong profitability as well. I'm very pleased to share that out of the 2 new stores we have opened, 1 of it is the launch for Second Time Zone in Delhi. We aim this to become the most trusted and transparent omnichannel platform in India for trading in preowned watches. Apart from this, all our Ethos stores will become touch points for Second Time Zone. We will not stock or trade or sell preowned watches because we want to keep the 2 businesses separated for customer touch points, but we will facilitate interaction with customers who wish to trade in preowned watches through our stores as well -- Ethos stores as well. We are investing in this business to build an ecosystem, which will become one of the important growth drivers for our company in the future. The preowned business is not a simple business because we need a team of experienced watch experts who have the ability to rightly value the watches, authenticate the watches and repair watches for us to be able to give a credible warranty on the watches. As you know, trust is the cornerstone of everything we do. As we move into the season period, and there are reports of an imminent third wave of the COVID pandemic, we are convinced that we are better prepared to face any challenges that may come up. Robust recovery of consumer demand, a strong digital presence and a comfortable liquidity position allow us to be optimistic of the overall performance of the company in the coming future. I now welcome your questions and participation.

[Operator Instructions] First question is from the line of [Amit Shah] from [Ace Securities].

So my first question is how many stores you plan to open and close during next 1 year in Ethos?

Okay. Why don't -- [Amit], why don't you ask all your questions so we can answer them all at once.

Okay. Okay, sir. And my second question is, what can the sustainable EBITDA margin you can expect for Ethos business? And lastly, sir, what is the gross debt in manufacturing and Ethos business? Also, if you can give us cost of debt. That is all, sir.

Okay. So on the store opening and closures, I estimate that in the next 12 months, we have quite a few openings. In fact, some stores which are meant to open in March, and they are ready, for example, our store in BKC in Bombay, that is now slated to open in September. So including that, I think we will have as many as 5 to 6 store openings in the next 12 months. And many of them new projects which have been scheduled and postponed, there will be likely to be 1 or 2 closures. We have not yet decided that because it depends on the negotiations with the property owners, whether we can get an option of an early closure. But we foresee 1 or 2 closures in the next 12 months. EBITDA, sustainable EBITDA in Ethos, our goal has always been an EBITDA of 10% in Ethos. I believe we have had a gap of 2 years, these last 2 years, but we are now on the way to achieving that goal of EBITDA 10% over the next 2 to 3 years. Every year, we will see an improving EBITDA until it hits about 10%. Gross debt of KDDL and Ethos, I'm going to let our respective CFOs answer this and also the cost of debt. First, Sanjeev, maybe you can answer for KDDL.

Amit, the gross debt at KDDL is around INR 65 crores. And the consolidated debt, if we look, which is the combination of all manufacturing and retail, it's around INR 150 crores. Our cost of debt is varying from 8% to 10%, mostly the unsecured delta at a high cost. But the average, you can take around 9%.

Amit, do you want it separately for Ethos?

Yes, sir.

Okay. I'm going to let Mr. Ritesh Agrawal answer that.

The debt for Ethos, Ethos has a gross debt of INR 56 crores. And the cost of debt is very between 8% to 10.5%. So on an average, it would be close to 9%, 9.5%.

Next question is from the line of Vikram Suryavanshi from PhillipCapital.

Sir, basically, one question regarding other income. Was there a one-off in this quarter? Or what kind of sustainable other income we can see, if you can comment on that.

Other income -- are you talking about stand alone or consolidated.

Consolidated. It was around INR 5.7 crores this quarter.

Some of this rent -- yes, yes. So it's mostly, I think, in Ethos. And that is because this expediency that we are taking for rental relief, this is now showing up as other income. And this is the relief that is showing up for the agreed and confirmed relief for the entire year is taken a benefit as other income in this current quarter. So of course, this is not something that you can project at the same level going forward as the rental relief. It will be there in the next quarter also because some of the malls that we have not yet reached an agreement on rental relief. As and when the agreement is reached, then it will show up as other income. So that is the main cause of that.

Understood. And in case of manufacturing, how is the impact of this inflation in raw material in terms of margin? Because we have seen a bit amount of correction if you compare it to fourth quarter, obviously, it is not comparable, but a trend looks that we have some impact in terms of margin in manufacturing. Obviously, you've commented that domestic is not doing good. But if you can highlight on margin expectation or how that business can recover in terms of profitability.

Just 1 minute. Just 1 minute.

Yes.

Yes, Vikram, there is, of course, on the cost of raw materials, we do see an impact. However, typically, raw material cost in our manufacturing business tends to be on the lower side. So while the impact is there, it's not a very serious impact. And we are now in the process of negotiating prices with our customers to be compensated for this price increase in the inputs. The impact on the margin that you see is more because of product mix changes, which are a bit exceptional in this period where some of the higher-margin production was impacted more than the normal margin production. So that is due to a change in the product mix. And this will -- this is not a permanent thing, and you will see a reversal of this in the months to come. Overall, our trend in terms of margin on manufacturing will pretty much continue as it has. This is a temporary change due to a temporary product mix change. We can already see this correction happening.

Okay. And some repeating questions on Ethos side. What was the revenue from exclusive brands in terms of crores? And how many number of brands exclusive currently they have?

Just 1 minute. So the revenue for -- from exclusive brands was pretty good. It was INR 33 crores. And I think in terms of percentage, it also is at a very good healthy level of about 35%, if I am not mistaken. So it's going above our long-term sort of trend line on our target for exclusive brands. 32%, yes.

Got it, yes. And is there any change in number of exclusive brands or total number of exclusive brands currently with factoring for this INR 33 crores revenue?

There is no change. There is no brand that has been dropped. So I don't think there is a change. In this quarter, I don't think we have added any, although I do know that some new exclusive brands agreements are under discussion. And hopefully, we will be able to finalize a few more exclusive brands in the coming months, and I'll be able to share this information when that happens.

Okay. And last question from my side. If you can share that repeat sales as well as same store growth [indiscernible].

The repeat sales and same-store growth, just 1 minute. So Vikram, our same-store growth [Foreign Language] because against last year, it is 246% -- no, against last year, if I compare it, there is a growth of 246%. So last year, it's not really a comparison. Compared to previous years -- for the previous year, there is a decline in same-store growth of minus 18%. And I think the repeat sales percentage pretty much remains steady at about 32%.

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

Two questions. First, about the stock-carrying months, which have come down, which is really appreciable. Now going further, if the footfalls are increasing and we are going to -- planning to open 5 to 6 new stores, so how do we maintain the stock-carrying months at this level? Or what's the plan going further, that's one. Second question about the Second Time Zone. As sir mentioned that they could act as the touch points for Ethos. So what's our strategy over there? And have you been able to move our customers from Second Time Zone to Ethos in a way in the past. That I would like to know.

So Avadhooot, stock-carrying months in -- as the demand is increasing and we step on the growth pedal again, I think the stock-carrying months will go up a bit because the stock comes before the growth comes and especially as we're going to add some more exclusive brands, so the stock is going to go up. There is one more reason why the stock is going to go up, because we anticipate a shortage of stock of some of the best-selling brands. So because of logistical reasons and other reasons, many of the best-selling brands have actually limited their production and availability for India as well. So we are anticipating some difficulties in getting the stock over the next couple of months. And because we anticipate a very robust recovery, our strategy is to try to stock up as much as is reasonable so that we can capitalize on the demand growth. So I think some stock-carrying months will -- stock will increase in terms of carrying months going forward. However, overall, we do believe long-term trend is towards improving stock turns and reducing the stock-carrying months. Coming to Second Time Zone and its impact on Ethos and vice versa. So you see what happens is actually, they're both -- it's a very symbiotic relationship. They both help each other. I'll explain to you how, and it's very easy to understand. When a person comes to buy a watch, if at that time, the salesperson asks the person, "Sir, do you also -- are you also interested to sell any watch that you might have got, which you are not using or you are not fond off?" So a person who has come to buy the watch is very happy, and he says, "Yes, I might be." Many of them say yes, then they engage with the Second Time Zone team and they get a good deal. If they get a good deal for their watch, what it helps Ethos to do is to sell up. So let's say someone came with a budget of INR 3 lakhs to buy a watch, but now you can sell a watch for INR 1 lakh or INR 2 lakh, he will immediately think, "Yes, okay, maybe I should buy -- instead of buying the steel and gold watch, maybe I can buy the full gold watch at INR 5 lakhs. I'll get a much better deal." So it helps very much to upsell, right? And how Ethos helps -- so this is how Second Time Zone helps Ethos. How Ethos helps Second Time Zone, of course, is by its contact with so many different customers and to give them the ability to connect with Second Time Zone. So it's -- both are helping each other, and it's a symbiotic relationship. And I want to add this also, that for this to really have scalable benefit, the business has to be a certain minimum scale. Now if Ethos is present in 16 different cities with 50 different stores, you imagine the touch points, and we can reach and touch customers in every part of the country. Besides that, we have a large range of new watches and a huge inventory also of preowned watches in addition to the contacts. Now compare this with 1 single retailer in some city who may also be wanting to deal in preowned watches. He will have fewer watches, and he will have a restricted geographical region and of course, no digital presence. So success in the preowned business, whether it is for watches, whether it is for cars, whether it is for any product, depends on scale and digital presence. And that is where we are going to score above everybody else.

Our next question is from the line of Deepan Shankar from Trustline PMS.

Firstly, I wanted to understand the outlook for watch components manufacturing. So is there any active discussion with the Swiss watch makers with regard to China plus 1 kind of strategies?

Okay. Deepan, can you ask -- if you have any other questions, please ask them also.

Yes. Again, on Ethos, so are we expecting a very strong demand recovery during Q3 and Q4? And we had a fantastic quarter in the previous year also. So are we expecting growth over that base as well?

So short answer to both your questions is yes. In the manufacturing, yes, Swiss brands are interested to, let's say, shift or to hedge their risks and not rely only on China. So they are looking at India and they are looking at Switzerland buying more in Switzerland itself. And in Ethos, as I already mentioned in my speech, we are expecting and preparing for a robust recovery in quarter 3 and quarter 4.

Our next question is from the line of [Raunak Jain] from [Jain Capital].

Yes. so I have 3 questions, just list down. Firstly, can you give any guidance in terms of revenue and EBITDA for Ethos business for the next couple of years? Secondly, at what valuation you've been buying shares from or shares of the Ethos from shareholders? And lastly, is there any update on demerging Ethos business from KDDL?

So [Raunak], we -- on the long-term outlook, we are very optimistic in the long-term outlook for Ethos. And if this recovery is not hindered by any other surprises, we expect to be able to reach our goal, and our goal actually has remained unchanged. It was to do INR 1,000 crores of billing and 1,000 -- at a 10% EBITDA. And this was actually meant for FY '23. But since we lost now 2 years because of COVID and half a year because of 2019 because of other disturbances, we do expect still to be back on track and to be able to achieve close to this around FY '25 or at least come to the rate which will imply a INR 1,000 crore billing and a 10% EBITDA. And this is not going to be a one-shot increase. There's going to be a steady increase that we will see from hereon. As far as the purchase rate is concerned, I think you know that it is a matter of record that KDDL purchased shares at a rate of INR 250 per share. And the last purchase was a little bit lower from a shareholder who wanted exit. So we believe it was an extremely good deal for KDL to get Ethos shares at that rate. Your last question was on the demerger. As you know, the difficulty is -- has been the fact that SAIF Partners holds a certain significant shareholding in KDDL and the demerger would require them to get shares in Ethos, but since that classifies as FDI, there is -- it's impossible to allot shares to them. So consequently, it's impossible to do a demerger while SAIF is still a shareholder of KDDL. Now over the last 24 months, we have looked at several options. And a demerger in the classic sense doesn't seem possible, unless we can persuade SAIF Partners to exit. So that is one of the routes that is, of course, has been under discussion. And the other route, which has come under discussion, is to look at other possibilities for listing Ethos by way of an IPO. These are again, thoughts that are now being considered, and we believe we will come to some kind of a clear direction over the next few months.

The next question is from the line of Prateek Poddar, as an individual investor.

A couple of questions. One is, if I look at your presentation, one of the slides mentioned that in quarter 1 FY '20, the sales for Ethos was roughly around INR 100-odd crores. And this quarter, we had done INR 90 crores, yet the EBITDA margins have gone down from 12% to 3.3%. So maybe if you can help me understand where the bridge. Secondly, just on Ethos, how much is the CapEx requirement per store.

Again? INR 100 crores to INR 90 crores I know, compared to pre-COVID year? What is your question about EBITDA margin?

From INR 12.1 crores to INR 3 crores as per Slide 25.

Okay.

So that's question number one. Second is just on Ethos, what's the per store CapEx and what kind of set turns on a mature, steady state do we aspire or the business model helps us achieve and similar for second hand time zone (sic)[Second Time Zone].

Can you repeat the second question again? I was...

I was asking how much is the CapEx per store, generally, when you set up an Ethos store. And what kind of asset terms or revenue does that generate for you on a steady-state, mature basis, right? And similar economics, if you can give me for second hand time zone (sic)[Second Time Zone]. And if I may add, look, this quarter, if I see your standalone results, the margin compression on a quarter-on-quarter basis is quite substantial. If you can help me understand what happened over there. I think there are 4 questions.

Okay. So let me get back -- let me first answer, Prateek -- let me first answer your question regarding CapEx. So CapEx on a store depends very much on the format of the store. So as you know, if you've been following earlier calls, we have multi-brand formats, which are in the size of 800 crores to 1,000 crores. These are fewer now as we are tending more towards larger stores and flagship stores. We are -- and we are also doing mono-brand boutiques for very high-end luxury brands. Typically on a multi-brand store of 800 to 1,000 square feet. The CapEx would be about INR 1.5 crore. It could be less, a little bit less go a little bit more, but it would be about that. And this store would do a turnover of -- depending on the brand mix, it could do a turnover of about INR 10 crores to INR 12 crores in the first year or let's say, months 6 to 18 because the first couple of months it is always low. On the other hand, a super flagship store or a flagship store would have a higher CapEx. It could have a CapEx of as much as INR 2.5 crores to INR 3 crores. The size of the store would be commensurately larger, could be 2,500, 3,000 square feet, but then the turnover on that store goes up, could be as much as INR 20 crores to INR 30 crores in the first year. That said, the big advantage of a flagship store is that the same-store growth is sustainable for a far larger period in a flagship store than a smaller store. The third format or a multi-brand for -- sorry, the monobrand boutiques, which can be typically on the side of 400, 500 going up to 800 square feet, depending on the brand, and here, the CapEx can be about INR 1 crore, INR 1.5 crores. And in some cases, it is shared with the brand. In some cases, it is not, depending on the brand. And again, depending on the brand, the turnover could be anywhere between INR 8 to INR 10 crores to INR 15 crores per year. Does that answer your question for the...

Yes.

On the Second Time Zone, we've just done 1 store. We don't intend to do multiple stores for Second Time Zone. It's largely going to be a digital led format, probably with 1 lounge in Delhi, which is already there, and 1 lounge in Mumbai. Perhaps 1 more lounge coming up in Bangalore over the next 2 to 3 years. So we don't see any significant CapEx in Second Time Zone. Largely, the investments are going to be to create a very vibrant digital platform for the Second Time Zone stores. You had another question, which was relating to the...

The comparison on Slide 25.

To the EBITDA?

No, your revenues are down 10% versus pre-COVID levels, but your EBITDA margin or your EBITDA absolute basis, whatever there you may want see, that's like 1/4 of what it was. So I'm just trying to understand where is this...

Yes. Just hang on a minute. I have to check this. Just 1 minute.

Yes, sure. Slide 25, the number on Slide 25.

Prateek, we'll have to get back to you, the INR 12.1 crores is -- has some extraordinary elements in that, which we will have to check and get back to you. I've taken a note of that. Ritesh will get back to you before the end of the day on that.

Okay, sure. And lastly, on your stand-alone operations, sequentially, the margin decline was quite sharp despite revenue going down by 8% on a Q-o-Q basis, right? So maybe just some color over there.

Hold on a minute. You are talking about stand-alone?

Yes, which is Slide #5.

I'm just putting Sanjeev, our CFO, in KDDL on the line. Can you -- maybe you have to repeat your question, Prateek.

No, no. I was saying that if I look at your revenue on a sequential basis in stand-alone profit and loss, it's down 8% on a quarter-on-quarter basis. The EBITDA margin from 24.2% has become 16%. The gross profit is down just 11%. I'm just trying to understand what's happening over here? Is it a mix change? Or is it what is really driving the kind of sharp compression in margins?

Yes. I think this question came up. I get the question now. It is largely a mix change. It is largely a mix change because some of the more profitable segment with higher margins were more impacted during this quarter than they were in quarter 4.

And this comes back, right? That is what you stated in the period [indiscernible]?

Yes, it will.

Okay. And 1 thing which I noticed, you don't have an app. Why is it so? Like you want to do? You don't have an app, right? Do we have an app on the Play Store?

For Ethos, an app is under development. We had developed an app, but -- so our strategy is that when we come out with an app, which should happen over the next 8 to 9 months, it's going to be really a state-of-the-art. We do believe that 90% of business is going to happen through mobile platforms. And therefore, the configuration and the capabilities of the app are critical. So that's something that we are working on. And app had been developed, but it was abandoned because we believe that it was not really going to achieve what we wanted it to. So you are right, an app is extremely important in the future and it's work in process.

Okay. And sir, if I may just sneak in one question. You talked about asset terms on the various -- 3 types of formats, this broad indication of margins also EBITDA margins, which we can achieve in all these 3 formats, the MDO, the big format store and the exclusive store.

See, eventually, the EBITDA margins tend to pretty much go at the same level. However, as I mentioned, however, as I mentioned, it will be a little bit lower in the monobrand boutiques, right? Because the -- we -- there, we have to follow some principles and rules laid down by the brands. However, there's a huge strategic value to monobrand boutique because of 2 things. Number one, it cements a relationship with the brand also for your multibrand stores. And second, most importantly, it gives you access to some limited edition and hard to find pieces of that brand, right? The price that you pay for this strategic advantage and long-term advantage is a little lower margin. So that is one aspect. And in -- for the multi-brand stores, whether flagship stores or multi-brand stores, the EBITDA margin depends much more on the brand mix that you have in the store. And sometimes, the brand mix may not be entirely up to us because it depends on which brand is willing to be present in our flagship store, in which city. So it depends much more on that. But the main point, which I want to say is that the EBITDA margins, it increases, it improves over time. And the same-store growth is -- happens to be much more sustained and longer in flagship stores. So overall, over the lifetime of a store, a flagship store will deliver much higher ROI than a normal multi-brand store.

And sir, just can you help us understand in this quarter is phenomenal, right? Just a 10% decline over pre-COVID. This wave to be very intensive. Can you just help me understand how has this achieved? I mean what really went behind this?

You'd have to repeat that question. Your voice is not coming very clearly.

Okay. Am I audible?

Yes, it's better now.

Okay. I was asking, given COVID wave 2 and achieving 90% of pre-COVID levels sales is phenomenal performance. Just wanted to understand how was that achieved? And secondly, in the month of July, a lot of other competitors -- other peers, not in the same industry but in retail per se have reported July to be far higher than even pre-COVID levels, are you also seeing that?

July recovery is actually -- we see the same thing. And we hope we can surprise everybody with quarter 2 results. Why quarter 1 was good? When we started quarter 1, we were extremely afraid. We were extremely afraid because the lockdown and the mood was so much worse than April last year. If you remember, April last year, there was a full lockdown, but there was a mood of [masti], right? There was scare. In quarter 1 this year, when we started April, there was not a single family that we didn't know, which was not impacted by COVID. In our own staff, in our own teams, in our own stores, people were not only impacted, but people lost friends and family members. So the mood was extremely dark, very pessimistic, and we were extremely afraid how this quarter was going to turn out. What we were confident was that having gone through 6 months last year, having a strong liquidity position, having a strong stocking position and a strong digital network, which continued to engage despite COVID last year, we knew that it was not going to be an existential problem. Even if we would have lasted 6 months, we didn't expect it to last 6 months. But so we started quarter 1 in a very anxious way. However, as it went along, after 2 bad weeks of April, we saw the recovery happening. And here, I have to give credit to our teams, our sales team, our [indiscernible] team, our merchandising team. Despite all that COVID was throwing at them, they went around. They attended to work. They have worked from home. Deliveries were made, deliveries were promised. As soon as lockdowns open, deliveries were made people went to houses, people went to offices to deliver. And I think it is all of this put together, which has led to this great top line performance. Of course, it was helped by the fact that we announced very, very encouraging incentive schemes for the staff. We had an appropriate stocking. Investment in marketing was increased. The networking was increased. So I think a lot of things came together. I don't want to take all the credit, but I think the Indian consumer also at the end is going to shake out this COVID thing. Wedding started to happen again and gifting started to happen again. So I think Indian consumers are also saying that, look, get back to living. So I think it's a bit of everything, and we are seeing the same thing, same with a better impact in July.

And lastly, sir, just some comments on Ethos on the trajectory of employee expenses and other expenses. Will there be further increase from here on? I'm saying ex of store increase, right? If you increase the store, you will have a commensurate increase in cost and income ex of that. But on your base business of 46 stores [indiscernible].

Yes, there will be an increase in personnel costs as our increased -- as our network increases and sales increase. However, I think personnel cost as a percentage of sales will continue to steadily decline. It's not going to be a sharp decline. But as we get more operating leverage, I think that is going to happen.

[Operator Instructions] There's a question from the line of Adit Shah from Vibrant Securities.

Lalaram here. First of all, congratulations on a very good quarter, considering the second wave disruption. Firstly, I have a question on data points. So I will just quickly ask those. One is what is the gross profit from exclusive brands in terms of absolute amount INR crores? Number two is the per square feet at the end of quarter for Ethos. And number three, what is the sales -- sorry I joined late, so I could have missed this. What is the sales of preowned watches in this quarter. Fourth is, did I hear it correct that we are now open to the possibility of direct listing of Ethos via IPO and maintaining a subsidiary of KDDL, if the demerger and -- merger and vertical demerger and mirror shareholding is not possible? So the point being, are we open to direct listing of Ethos via IPO as a subsidiary. And maybe exposing ourselves to a holding company discount and which -- be able to fully unlock the value. So that was the first question. Then the other question is when compared to the pre-COVID quarter, we are saying that we were only opening 35% of the time. However, when I look at the OpEx, broadly is the same versus the pre-COVID quarter. So does it mean that we will -- the rent and all was similar after the compensation also? In terms of that rent and maybe employee expense is our biggest thing, they are like back to sort of normal steady state. That is the other question. Then on the rent concession, which on the other income, which you mentioned to a gentlemen from PhillipCapital that this was -- the other income was linked to rent concession. But I believe that we also have that -- some part of that in the revenue side, where if you compare the old accounting versus new accounting, there's a difference of INR 4 crores, 90 versus 94. So that INR 4 crores, I believe, is also due to that some of the rent concessions which we are getting, which we are basically showing as income. So I want to understand, are those 2 things different? Are we double counting that? I'm not very clear on that. So maybe the CFO of Ethos can help to understand, that will be helpful. I have a few more questions, but I think is it okay if you can start answering the and then maybe I can carry on.

So which of the -- hang on. So Lalaram, I am going to tell Ritesh, the CFO of Ethos, to answer these queries. And if -- Ritesh has just joined, so if he is unable to answer some of them, we'll get back to you on that.

So Lalaram, I have tried to -- try to capture your question. So if you don't mind, if you can go one by one, and I can answer you.

Yes, yes. The first one was, I got the sales mix of Ethos between exclusive brands and normal brand. I also wanted a similar split for the gross profit.

So gross profit on the exclusive brand would be -- definitely would be on a higher side because that is our -- the key strategy where we drive. And the gross profit for the house brand post close beyond -- around 40%, whereas the other brand is a little bit...

And, I think, Lalaram, you want the numbers in actual rupees crores, right?

Yes. That's what you used to give historically, correct. The absolute number in crores, yes.

Gross profit of exclusive brands in rupees crores, I'm not sure if we gave that, but let me share that with you offline because there is a certain gross margin on house brands that happens, which is about 40% of net sales. And the billings of house brands had been about INR 33 crores. But billings is not equal to net sales, so we have to do that arithmetic and get back to you on the exact or a more precise figure of gross profit on exclusive brands in rupees crores.

Okay. Okay. Sure. We can do that offline. Second question was what is the billing for the preowned watches in this quarter?

Okay. Billing for preowned watches is about INR 3 crores in this quarter, INR 3.5 crores.

INR 3.5 crores for the quarter.

Okay. So it seems that the number has stabilized at between INR 2 crores to INR 4 crores. I believe this...

So that's not true. So that's not true. So that's not true. You have to understand that the business of preowned watches cannot continue in a pure digital sense, because a preowned watch needs to be purchased for which a store needs to be -- for which you cannot have a lockdown. And then that watch needs to be examined and repaired and re-warranted for which we need our service centers to be open. And the service center was under lockdown in Delhi for all of April and May. So you cannot say that it has stabilized at this level. In fact, we are still projecting that our preowned business for the year will be more than 3x of the preowned business of last year.

And what was last year, sir?

Last year was about just short of INR 13 crores.

Wow. So we will be touching almost INR 40 crores?

Sorry, it was about INR 12 crores, not INR 13 crores, about INR 12 crores. I am estimating that, again, everything is with the proviso that there are no future lockdowns and disturbances, but I'm hoping that the preowned business will clock up to close to INR 40 crores this year.

Sure. That's very encouraging, sir. And in the last -- in the previous quarter, I think I had asked that you also believe that this business can easily touch INR 100 crore revenue run rate. That was what you had said. So do you think this is possible within, say, 2 to 3 years?

Yes. It is.

And that is possible with only, say, 3 physical stores in Delhi, Bombay and Bangalore?

Yes. Yes, it is.

That's wonderful. That's good to hear. Sir, I also want to understand some more color on this business. I know what -- how different is it from the new watch business? And what kind of impact will this have apart from top line on the business in terms of P&L, balance sheet, that would also be very helpful, sir. If you can comment there. And maybe...

No, I can only give very general comments. Lalaram, on this I can only give very general comments because it's a different -- it's a related business, but in many ways, it's a different business, and -- in general, I can comment that there is a strong symbiotic relation between sales of high-end new watches and trading in preowned watches, right? It's a little bit -- the closest anomaly -- the closest analogy I can give is with art. If you're an art collector, you know that there are virgin works of art. But if you know that there is a good resale value of this, you will invest more in that, and you will keep it longer. That is precisely how it works for collectors pieces and some of these high and very, very high-end watch pieces. People buy them knowing that there is a resale value. And if there is a good resale and residual value, which in some cases, may be more than the purchase value that helps to sustain the interest and the passion for high-end watches. So what I would request you to do if you want to understand the business more closely is visit some of the auction Internet sites for watches and visit some of the watches -- international websites for preowned watches. WatchBox is 1 of them. And there are 2 or 3 others, which I can share with you. But if you go to preowned watches and you go to the best website, you will see and especially on the auction sites. So many of the values that preowned watches are getting are several, several notches higher than the original price of the watch. And that is the real direction that this very high-end business is taking. It's becoming like a collector market with high-end purchases and sustained value. So it is -- in fact, it is becoming like an alternative investment group.

Yes. Got it, sir. Got it, sir. So also, what is our typical turnaround time if someone comes with a watch? "I want to sell this watch." What is the time you take to give an estimate of the price and maybe all the negotiations and what is the typical time for this?

If all our watchmakers are there in the service center where it's -- which is required to assess the watch, it depends on the type of watch. If it's a complex watch, which requires a lot of refurbishment, then it could take as long as 3 to 4 weeks. If it's not that, it could be done in a couple of days. We are talking about -- here, Lalaram, we are focusing on watches at a price point of 1 lakhs and 2 lakhs and more. We are really not diverting too many resources to sell preowned watches in the segment of INR 20,000, INR 30,000.

[Operator Instructions] Our next question is from the line of Aditya from APSK Advisors LLP.

We are very bullish on the luxury segment play in India. Ethos fits this frame perfectly. But now that there won't be a demerger, how do, us as shareholders of KDDL, minority shareholders, benefit if Ethos comes out with an IPO? In your previous calls, you have been saying that minority shareholders will be taken care of. So just wanted to know on that front.

So again, I think my comments have perhaps been misunderstood. We are examining every possibility that exists if a demerger is not possible. Currently, the possibility of a demerger with SAIF Partners' still invested is not possible due to the current legal position. If the laws would change and would allow FDI to participate in a multi-brand store network like Ethos, of course, that is possible or if SAIF Partners would agree to exit, of course, that is possible. So perhaps, we will have an investor who will come and give an exit to SAIF Partners at a price which they will agree to exit at. However, if that doesn't happen, then a demerger is not possible because of the legal constraints. And we have looked at every possibility and talked to experts across the length and breadth of the country, and everybody has come to this conclusion. Of course, there is the option of an IPO, which has been discussed. There are advantages and there are disadvantages. It is known, but no decision in this respect has been taken.

Okay. I just have a follow-up question. And since you've discussed with so many experts, what is the percentage that SAIF needs to bring down its holding so that a demerger is possible?

Zero. They need to bring it down to 0 because their entire holding is now classified as FDI.

FDI?

Yes. That's my understanding of the law and their own understanding as well. It's -- there used to be a threshold limit of 10%. But with their second tranche, the entire investment is now considered as FDI, and it needs to be brought down to 0.

Ladies and gentlemen, that would be our last question for today. I now hand the conference to the management for their closing comments.

So with this, I want to thank everybody for joining the call. And I hope we've been able to answer all the queries. There are some queries that were left, and we've taken note of them and we'll connect offline to answer them. Should there still be some left, please feel free to write to me or our CFOs or to SGA, our adviser. Thank you very much, and have a nice day.

Thank you very much.