KDDL Limited (532054) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to KDDL Limited Q2 FY '22 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Yasho Saboo, Chairman and Managing Director, KDDL Limited, for his opening remarks. Thank you, and over to you, sir.

Thank you, and a very good afternoon, and welcome to everyone for our Q2 FY '22 earnings conference call. I am joined by Mr. Sanjeev Masown, Executive Director and CFO of KDDL; and Mr. Ritesh Agarwal, CFO of Ethos. And we also have SGA, our Investor Relations advisers, on the call. I trust everyone has had the chance to go through our updated investor presentation already uploaded on the exchanges. Let's start with a quick overview on the overall business. We witnessed a strong recovery in the business during the quarter 2 of FY '22 in both our manufacturing and retail businesses as the economy recovered back strongly after the second wave of COVID-19. There was encouraging demand in the manufacturing business as watch manufacturers increased their business operations, leading to better order inflows. And our retail business, Ethos, posted a strong recovery in sales led by reopening of malls and complemented by strong online-led sales. A brief on the financial performance on a consolidated basis for the quarter. The consolidated revenue for Q2 FY '22 increased by 39% Y-o-Y to INR 193 crores. Consolidated EBITDA for quarter 2 increased by 33% Y-o-Y to INR 23.2 crores and consolidated PAT for the quarter increased by 76% Y-o-Y to INR 6.6 crores. I now come to the manufacturing business, which consists of watch components, precision engineering and the packaging business. In quarter 2 FY '22, the manufacturing business revenue increased by 53% Y-o-Y and 15% quarter-on-quarter to INR 53 crores. The revenue share of watch components and precision engineering business for the quarter stood at 72% and 24%, respectively. Revenue from watch components business increased by 53% Y-o-Y to INR 38.4 crores and from precision engineering business by 33% Y-o-Y to INR 12.5 crores. EBITDA for quarter 2 FY '22 increased by 84% Y-o-Y to INR 9.7 crores, and the profit after tax increased almost 7x in the quarter 2 FY '22 to INR 4 crores. During this quarter, the demand both from domestic and export markets improved. Most customers ramped up their operations as market conditions were reaching near normal levels. The major growth of the demand was witnessed from the exports market. We expect the positive demand to continue going ahead as the economy continues to unlock and manufacturers ramp up their capacity to cater to the additional demand. The demand from the Swiss market particularly remained healthy. The trend of declining volumes in the low price point continues, while the higher price segments are growing strongly. We continue to move up the value chain on the back of an excellent product portfolio and service, catering more to the higher price segments. With this, our product portfolio is aligned with the market demand, and it leads to a higher overall profitability for the company. In our Precision Engineering business, Eigen, the demand was better compared to the last quarter, majorly due to the robust demand from the exports market, including a revival in the aerospace industry. Domestic demand continues to show a gradual recovery but with cyclical variations in different segments. We are witnessing a healthy flow of inquiries and RFQs from many large accounts and customers mainly in the export market, and expect this trend to continue. These market developments give a positive outlook on the growth of our Precision Engineering business. At Estima, our Swiss hands manufacturing company, the demand has been stable with a good recovery. We remain confident that in the coming quarters, with normalization and improvement of market conditions, we will see healthy growth of revenue and a turnaround to profitability in this business. We expect all our manufacturing businesses to continue the growth momentum and post healthy growth across the major markets and economies. During the current year, KDDL has raised INR 25 crores through a rights issue, and the proceeds of the rights issue was planned to be invested in the material subsidiary, Ethos, to the tune of INR 18.75 crores, and the balance was for general corporate purposes. The company has already utilized the amount allocated for general corporate purposes, and the investment in Ethos will be done by participating in the rights issue of Ethos Limited. The Board of Directors of Ethos has already approved the rights issue of the amount not exceeding INR 25.5 crores by issue of up to 4.58 lakh equity shares of INR 10 each at a premium of INR 5.40 per share. KDDL holds about 77% in Ethos, both directly and indirectly, and KDDL will participate in the rights issue. Now I come to a discussion on our watch retail business, Ethos. As I mentioned in my introductory speech, the recovery in the Ethos business was led by reopening of the stores and a strong online-led sales across the country. In Maharashtra, the malls were allowed to be opened only much later, and even then, only fully vaccinated staff and customers were allowed to enter. Despite these challenges, Ethos posted a strong revenue growth during quarter 2 on Y-o-Y and on Q-on-Q -- quarter-on-quarter, basis. Even if you compare [indiscernible] pre-COVID quarters, our quarter 2 FY '22 revenue is up by 28% as compared to quarter 2 of FY '20, that is the year 2019-'20 that's the pre-COVID year. And our H1 revenue compared to the pre-COVID year is up by 8%. This, as I mentioned, despite the fact that the first quarter of the current year was -- witnessed a complete shutdown in the country and up to the middle of the second quarter, Maharashtra remained under lockdown. Our profitability was impacted, if you compare with last year, on account of normalization of operating expenses. In H1 of the current year, the rental waiver has been much lower at about INR 2.6 crores as compared to over INR 5 crores in H1 of FY '21. We continue to see an even stronger performance in quarter 3 on the back of a good festive season. The upcoming wedding season is further expected to boost the demand for luxury watches. And luxury watches continues to be one of the best gifting options during this wedding season. One of the key highlights, which I would like to mention, as it is already mentioned on our website, is that we have signed an agreement with some new luxury watch brands. This includes Bovet, a very well-known brand with several prestigious international awards. And I may mention that one of the awards is the most prestigious Aiguille d'Or, which is the Best Watch of the Year awarded by GPHG, the Grand Prix d'Horlogerie de Genève 2021, that is the world's most prestigious or logical awards. So Bovet won this award for the best overall watch in 2018. And of course, they have several other awards as well. We have also signed agreements with other high-end luxury brands such as Czapek and Armin Strom, both being in the ultra-high-end luxury space. This is in line with our strategy to build our exclusive brand portfolio, which will lead to improved profitability and also to shift our weight into the ultra-high-end segment, which is booming strongly globally. One of the most awaited flagship store of ours at the Jio World Drive mall in Mumbai at the Bandra Kurla Complex area was inaugurated during the month of October. This was ready in the month of March of this year, but due to the extended lockdown, we couldn't open it. It is now open and has received excellent response. We will continue to follow the strategy of opening large flagship stores, which will create -- which will offer a great experience to customers, it will attract higher footfalls and generate much higher revenue, profitability and year-on-year growth as compared to smaller stores. One of the most important factors [indiscernible] strong recovery is also on account of our efforts to keep building on our digital capabilities. Having a well-established digital presence has strongly yielded results during these times of COVID when we were suffering from lockdown and other disturbances. We recorded a robust quarterly online billing at INR 52.9 crores in quarter 2 FY '22. Online billings contributed about 34% of the total billings in this quarter. Although the sales will grow strongly from our retail channels as well, however, we expect the digital presence to continue to be an important focus area for us. An omnichannel strategy, which Ethos led over the last 5 years, will continue to cater to customers off-line as well as online as per their preference in a seamlessly continuous way. We have been able to improve our stock carrying months from 7.9 months in September 2020 to 7.3 months in September '21 on the back of careful planning of inventory and purchase decisions. As mentioned earlier, the Board has approved the rights issue of up to INR 25.5 crores in Ethos, which will strengthen our balance sheet. We plan to utilize these funds for inventory in the newer stores, build digital capabilities and on various business development initiatives. Before coming to the financial highlights, another new initiative that we have taken recently is signing up with Rimowa, a luxury luggage brand of the LVMH Group. Ethos has signed a franchisee contract with Rimowa for the opening of the first Rimowa store in Jio World plaza Mumbai. Founded in 1898 in Germany, Rimowa is part of the LVMH brands portfolio since 2017. It is a global leader in premium luggage and essential tools for a lifetime of travel, and it is a brand with a huge heritage since 1898. This is a very significant step for us because it represents our first foray into luxury goods other than watches. Let me now give you the financial highlights of Ethos. Consolidated total income for Q2 FY '22 increased by 27% Y-o-Y to about INR 137 crores. Consolidated reported EBITDA for Q2 FY '22 was down 9% Y-o-Y to INR 15.3 crores. Consolidated PAT for Q2 was down by 20% Y-o-Y to 2.6 crores, primarily due to the impact of Ind AS 116. Stock at the end of September 2021 quarter was at INR 212 crores as compared to INR 182.5 crores in September 2020. As our financials are impacted by Ind AS 116, our adjusted financials are published in the presentation, which you can look at both for KDDL and Ethos. Our preowned watch business is -- which is being run through our website, secondtimezone.com, has also witnessed a huge increase in visitors in recent times. It is the largest platform, largest by far, for preowned watches in India. We believe the preowned watch business, in the medium and long term, has a great potential to scale up with a robust profitability. Our Second Time Zone lounge in Delhi has also witnessed good interest. We aim to become the most trusted and transparent omnichannel platform in India for trading of preowned watches and other luxury products. With that, I come to an end of my speech, and I now welcome your questions and participation.

[Operator Instructions] The first question is from the line of Rahul Agarwal from InCred Capital.

So I had questions on the new brand tie-ups, congratulations for that. Just wanted to know on the luggage side, will the unit economics be very largely different versus watches in terms of inventory terms, asset terms or margins? Secondly, if you could give some color in terms of what's really happening on the premium luggage side in India, as in how big is the market, who are the leading players and what are the Ethos' plans over the next 2 years. And what Rimowa can actually add over the next 2, 3 years? And how is that franchise contract -- I thought that's a franchise agreement you signed with Rimowa, how is that different versus any other type of -- so that's the first basically large question on the luggage side.

Okay. If there are other questions, Rahul, why don't you go ahead and ask all of them so we can answer them together.

Sure. Secondly, on the Bovet [indiscernible] tie-up. So as I understand, it's exclusive to Ethos. So does that mean nobody else sells it in India? That is one. And secondly, the idea for the company essentially was to get into higher price range. And as you said, it's the first entry into larger share of exclusive brands, ultra-high-end watches. So what's the price range of these watches? That was my second question.

Okay, thank you. So, Rahul, on luggage, obviously -- so first thing about the brand. Rimowa is, of course, as I mentioned, an extremely well-known brand. It's part of LVMH Group, which is the #1 group globally. And LVMH Group acquired this brand a couple of years back, I think about 3 or 4 years ago. It really sits at the very top end of business luggage and business-led high-end luxury luggage and travel accessories. You can see their boutiques pretty much worldwide in the leading malls. I believe that when we opened the boutique in Mumbai, it will be the best offering for professional business and high-end leisure travel. It -- with -- I think the price point would be about 20% or 30% or a little bit more above their nearest competitor. The business, I'm not really going to be able to give you really forward-looking figures on projection of sales. But you asked whether the basic economics are very different from the Watch business. No, they are not. They are not, except one significant point is that the amount of inventory in terms of months of stock that we have to hold is probably going to be lesser because the range of stock is also lesser than so -- in a typical watch store, we would hold at least 300 to 400 SKUs. That might not be the case in the case of luggage. But otherwise, the economics are not very different whether any thought in terms of margins or whatever. I believe this has a very strong potential given the fact that in India, we are just at the cusp of international business, business travel and so on. I know that there has been a lot of interest in this brand. We were not the only ones chasing this brand and trying to get them -- trying to do this franchise with them. We're going to start with 1 boutique in Mumbai. And hopefully, this will be followed soon with another boutique in Delhi. And then we have to -- and it's really -- we're in discussions on evolving the complete strategy for India. So I -- you -- again, luggage was one -- luggage, like travel, was one of the most severely hit businesses over the last 2 years due to COVID. But as you know now, travel is going to come back with a bang. It's already back with a bang, and we can expect a very strong takeoff when we start with this project. As far as Bovet is concerned, yes, it's a high price point watch, very exclusive. They make everything in-house, and I will encourage you to check out their website and all the fabulous distinction that this brand has got. Their price points essentially start from around INR 15 lakh and go all the way up to INR 1 crore and often even higher. They are specialized on bespoke watches. They make a range of watches that [indiscernible] wants and ultra-high-net individuals want them customized or want a specific watch customized with special painting or special features. They are very well positioned to do that. And yes, it is exclusive in the sense that there is going to be no other party in India, which will carry these watches. The first boutique with Bovet will hopefully open in the first quarter of next calendar year.

Got that. Just a follow-up on the Rimowa theme. Could you help me understand any sense of the luxury premium luggage market in India? I mean what's the size like? And secondly, the follow-up on...

Can I get back to you on this?

Yes, sure. All right. I'll come back in the queue.

I don't have it readily with me, but I'll get back to you on this.

The next question is from the line of Deepan Sankara Narayanan from Trustline PMS.

Congrats for good set of numbers. Firstly, on Ethos side, so we are quite happy to see the sales number increasing at a very good run rate. But we are a little more concerned on the fixed rate expenses, which has gone up by 55% to INR 23 crores. So now as the stores are fully opened now our total expenses have been fully recognized, so therefore, we can assume that incremental revenue addition will contribute maximum to the profitability?

Yes. Sorry, your question was not very clear. Can you just repeat that, Sankara, please?

Yes, our total fixed expenses like employee costs and other expenses, put together, has increased by 55% this quarter for year-on-year. So now as the stores are fully open, so we can assume that costs have been recognized fully. So incremental revenue addition will be mostly coming down to profitability. Is this the right assumption?

Partially, yes because you are comparing with last year, right? So last year, there was a huge rental waiver that was given by all malls, which has not happened in this half year, and especially not in quarter 2, right? Because last year, practically all malls gave 70%, 80%, some malls even gave 100% waiver for several months. That is not the case this year because the malls also have suffered. So that is one big reason. So to that extent, yes, the costs are now -- what you're seeing is normalized, despite the fact that the sales was impacted. This year, the sales was impacted by the closedown, but the costs were not that much lower. And on manpower costs, last year, we had reduced manpower and also enforced some salary cuts during the first half of the year like most other companies in the retail business. This year, we took a very conscious decision not to do that. And whether a store was closed or not closed, there were no cuts in salary. And of course, the costs were very normal. So in a sense what you're saying is correct. The cost base is the normalized cost base. And of course, as a percentage of revenue, these costs will come down when sales go up in the next few -- in the coming quarters.

Okay, okay, that's great to hear, sir. And also, this exclusive brand contribution, what is the contribution for the current quarter? And also, what is the plan of CapEx for full year? So we are saying we are adding a few more stores in this luggage and also Bovet exclusive stores. So what will be the CapEx amount for this year and next year?

The contribution of exclusive brands in H1 -- just hold on, let me just get back to this, is about 26%. I have to mention that we took a strategic call to withdraw some exclusive brands from some third-party websites and platforms. And that was a strategic move because we want to control the pricing of these brands more and want to offer much more through our own website. So that has led to little depression -- temporary depression in the sale of exclusive brands. But this is temporary, and we expect it to bounce back strongly and in a more healthy fashion within the next 2 quarters. As far as the CapEx is concerned, on the exclusive brands, though the percentage has come down in absolute terms, the value has remained the same, and we expect a very strong bounce back in this quarter. As far as your question on CapEx is concerned, let me see if we have the figures of the balance CapEx. But if I were to -- so I know that Rimowa store will not be fitted out in this financial year. It will probably start quarter 1 of the next financial year. The Bovet boutique is already under fit out. I expect that CapEx is not going to be very, very high in this financial year and the remaining part of this financial year. Probably of the order of about INR 3 crores to INR 4 crores, maybe a little bit more. Big max INR 5 crores.

Okay. Sir, and lastly from my side, like can you update us in terms of process for a demerger or IPO, which you are planning for Ethos. When this process is expected to get completed?

Sankara, we are in -- this is under active discussion. We have been in touch with some advisers, and we have been advised that we should be cognizant of the current healthy situation in the capital markets. So this is under discussion. And as soon as we have a final decision on this, of course, we're going to come back to you pretty soon.

The next question is from the line of Vikram Vilas Suryavanshi from PhillipCapital.

Congratulations for a strong recovery and I think you recovered pretty strongly in the manufacturing also. I think I have got answers for most of the questions, but on taking further to the kind of recovery we have seen in manufacturing, how is the outlook for growth for precision as well as the watch, if you can highlight? That was one question. And second, will you normally share the numbers for the Estima also. So how was the number for this quarter in terms of revenue impact that we gave?

Right. For the Estima numbers, I'm going to reach out to Sanjeev, he's on the call. Unfortunately, we're not in the same place. He's actually visiting Bangalore, the precision engineering company. So he's going to answer that. But your first question was on manufacturing and the outlook there. We're very -- we have a very positive outlook on manufacturing. On watch components, as I mentioned in my initial speech, I think we are seeing a strong demand coming from the high-end segments in export. And this is more profitable than the other segments. So while the quantity is not growing, the value is growing and the value addition is doing, and that's good for us. On the precision engineering side, again, we are conscious of the fact that the growth in this business has not been as what we had projected earlier. These things happen when you set up a new business. Sometimes your initial projections and thoughts have to be calibrated and rethought. In the precision engineering business, we are changing to stress more on the higher value and higher profitability segments like aerospace, defense, electric vehicles and similar segments and away from some other segments. We believe that there's a strong growth potential in this, though what we realized is that in -- especially in the aerospace and defense, there has been a slowdown owing to COVID, but it's going to pick up rapidly. The gestation is not going to be very quick. But I think you will start to see a great momentum after 2, 3 quarters in the precision engineering. On Estima [indiscernible] there, can you answer the question on Estima?

Vikram, you wanted to know the revenue and the profitability of the Estima for the quarter and the H1?

Yes. For the quarter results. Yes.

For the quarter as such. This quarter -- I readily have the revenue numbers for the H1, which is around 1.2 million revenue, which is CHF 1.2 million. But I can just give you an indication that in the quarter 2, the revenue was almost double compared to the previous quarter. So the revenue growth is decent growth which is happening. In the quarter 2 the situation was more or less normal. And with the normalization of the operations, all the expenditure and the overheads is also back to the normal level. The last year, there was some reduction and some support from the government. Now we have normal overheads and the revenue is also on the growth and normal levels. Hello? Yes. Any more questions?

And one typically also broadly, how was the repeat sales just for [indiscernible]

In Ethos?

Yes, in Ethos, sir.

I think the repeat sales is -- I'm going to get the exact figure for you, but I -- from what I understand it's pretty much in the normal region of about 33%, 34% when I last saw it. But I'll get back to you with the exact figures, Vikram.

[Operator Instructions] The next question is from the line of Ronak Vora from AUM Fund Advisors.

I had one question on the Ethos. Basically, is -- so I just wanted to understand our 3- to 5-year vision. So do you want to create a luxury-focused distribution channel for all the luxury brands out there, like the way you are entering in luggage segments, are we planning to enter any other segments like eyeglasses or something like that?

Okay. Ronak, why -- if you have other questions, why don't you ask all of them.

No. I just had one question and one follow-up on the same.

Okay. So in a 3- to 5-year vision, yes, we do have the vision to expand to luxury segments outside watches. We believe that the experience we have in the luxury business, the experience to understand and manage luxury brands, the -- our understanding and insight of the luxury customer in India, the creation of our omnichannel and digital platform, especially suited for the luxury business, it's not of FMCG or a fashion business. Luxury business has its own specialty. And we've -- I think we've got great insights -- unique insights on that. So we believe we can leverage this to outside the watch business. Luxury luggage and travel, of course, is one segment. As we -- as you -- as I mentioned, we made an entry into this with the franchise of Rimowa, but of course, there are a lot of other closely related luxury segments as well, and we are discussing and looking at various segments including branded jewelry, which is very closely linked to watches, branded and -- internationally, jewelry is very close and many retailers internationally who retail watches also retail branded jewelry. So an extension into branded jewelry is pretty logical, and we are looking at that. And there are other segments also that we are looking at in the luxury segment and our 3- to 5-year vision certainly captures that.

Okay. And, sir, in terms of growth or top line focused for Ethos. So where do we want to see in the next 3 to 5 years? Is it like 3x or 4x going ahead or just to give a whole picture of what your internal targets are?

Well, we'd love to. We are ambitious. And we have -- we continue to discuss how we can make our targets more ambitious and more aggressive. I'm not really sure whether we can share exactly what targets, but I can assure you that there's going to be very strong growth going forward. About 2 or 3 years ago, we had said that in 4 years, we will -- 4 to 5 years, we will hit -- our target is for INR 1,000 crores turnover and 10% EBITDA. This was something that we spoke of about, I think, it was 3, 3.5 years ago. If you take away the 2 years -- gap years of COVID, I think we are on that track. And 2 years from now, we should be close to those kind of targets. But that's not the goal. That's only a steppingstone. I believe there is a lot of growth left after that. What I would like to say is also this. India is just at the threshold of a consumption boom, especially in the premium and luxury segments. We are approaching the threshold level of a per capita income of $2,500. It's around this threshold, that disposable income and nonessential spending starts to take off. Luxury spending starts a little bit higher. I believe Indian GDP growth will meet its high targets of 8% or around that over the next few years. There will be a rapid growth in wealth, especially in the higher segments. And therefore, there is a reason to believe that in the luxury segment, there will be strong growth, definitely double-digit growth, probably more than just simple double-digit growth, it will be a healthy double-digit growth. So we have a very positive outlook on a 3 to 5 years' time frame.

Understood. And sir, lastly, on the reselling models. So can you just give me a brief overview and -- to the company. So I'm not sure when you are talking about this, if you can just touch upon it.

So we've spoken about this several times, Ronak, and I would encourage you also to visit the website, secondtimezone.com. If you happen to visit Delhi, do visit the Second Time Zone lounge that we have. That gets you a sense. It's not only the numbers that matter. I think the finesse, and what we are trying to do, which is very important in the luxury business, I would encourage you to sort of feel that. As far as the business is concerned, buying of preowned watches, we buy preowned watches, we refurbish them -- we check if they are authentic, we refurbish them. We offer them for sale with a 2-year warranty. Everything is done officially. These are officially imported watches. Everything is sold officially, and yes, it's a business that is growing very rapidly, not only in India but globally. If you Google preowned watches, you will see several global websites there have grown rapidly over the last 3 to 4 years, and we are experiencing the same trend in India.

The next question is from the line of Ronak Jain from Jain Capital.

A couple of questions from my end. Firstly, at what valuation you will be losing the money through rights issue in Ethos? Also secondly, what can be the sustainable margins for Ethos business once business normalizes postpandemic?

Sorry. Can you repeat the second question, Ronak, please?

Yes. So what is the sustainable margins for Ethos business once the business normalizes postpandemic?

So the rights issue of Ethos is at INR 540, premiums of INR 550 total. And that translates to a valuation of about INR 1,000 crores.

Okay.

Sustainable margins in Ethos, as I mentioned, we -- our goal is to get to an EBITDA of about 10%. We believe an EBITDA of 10% to 11% is a sustainable margin in Ethos. It will take some time to reach 10%, about 2 years or so because we are still -- the operating leverages are now starting to kick in. And the gross margin growth, which comes from a greater share of exclusive high-margin brands, that is still playing out. And over the next 2 years, then we will reach the stable.

The next question is from the line of Pratik Poddar, individual investor.

Just 2 questions, sir. In your journey towards 10% EBITDA margin, what is the gross margin you are targeting? That's question number one. And second, across your format in Ethos, if you can just help me with the net working cycle and the inventory, which is required to be carried. Just 2 questions, that's it.

Right. So in the EBITDA calculation, I don't think the gross [indiscernible] from where we are. The EBITDA is emerging, as I mentioned, largely due to operating leverage kicking in. Yes, the gross margin changes a bit, but again, not very substantially from where we are due to the fact that a higher share of the business is going to come from exclusive brands, which typically have a higher gross margin. So there's probably going to be something like -- I don't know, something -- I estimate about 0.5% increase in gross margins. But a larger part is going to come from the operating leverage side of things. And net working capital, so currently, we -- about 4 or 5 years ago, we were at about 9 months of working capital at cost. Currently, we are down to about 7 months. I believe this is the level that we would stay at. Paid inventory is less because we do enjoy credit period from brands, which varies from 15 days to 180 days, depending on the brand. So paid inventory would probably be about 4 to 5 months. I believe this is the level where it would stay, broadly. I do want to add that this compares actually pretty favorably with global benchmarks on inventory levels in the luxury watch business. Globally, they tend to be in the region of 10 to 12 months. But of course, globally, since the interest rates are [indiscernible] India, the cost of money is lower, we need to be more circumspect, we need to be more careful about what we order, what we stock. And I believe we can operate at a level 25% or 30% below or even more 30%, 35% below what our global benchmarks.

So if I may ask a follow-up? Just the difference between paid inventory and inventory at cost of 7 months, is it that a part of inventory is on a return basis, where it is being funded by the brand owner?

No, no. What is -- my inventory is, let's say, 7 months. But on an average, if I enjoy 2 months of credit, then my paid inventory is only 5 months. So it's essentially the credit period -- the average credit period from my vendors, net working capital months.

Understood, sir. And the last question, sir, watches is a very long tail business. For that omnichannel is critical. With us not having an app, how much of a big business opportunity are you looking over there? Because it would be very critical for you to...

Pratik, watches is a very long-tail business.

In the sense, you need a lot of SKUs, right? It is not a standard [indiscernible] right? So it's like books, to be honest, if I were to draw a comparison. It's like books and hence, omnichannel is something which is of -- which is required, right? Everything can't be stored in -- can't be -- I mean, you can't put everything in a store. So from that perspective, just trying to think about not having an app of our own and the opportunity which we are losing because of that.

Excellent question, Pratik. First of all, an app is under development. And that's one of the big moves that we are doing. In fact, last year, an app, a version was ready. We were not satisfied. Our CEO, Pranav, was not satisfied. His aim is to create an app, which is at global levels. So we are back to that. And I think next year, you should see the app. That's one point. So that's a very, very valid point. Second, mostly all watches are displayed in stores, whatever we have -- we don't have too much stock that we keep in the warehouse. And that's again a global -- that's globally the scenario. In the luxury field, it is not a very long-tail business. In the fashion watch business, watches in the INR 20,000, INR 30,000, INR 10,000 price point, it's right. But in the luxury business, the reality is that most of the successful luxury brands, they're cutting back on their range. They're not offering a very wide range. They're offering specialized products. And I don't know if you know, but in some of the top brands, their top-selling models are actually difficult to find. So you can't really go into a Rolex store and ask for every model. There are waiting lists. And it's not only for this brand, it's for several brands. There are waiting lists on their most popular models. So the long tail is less valid now than it was, let's say, 5 years ago.

Sir, in that case, going forward, do you expect the 7 months of working capital -- inventory to go down further, maybe to 6, 5?

Ideally, we'd love to do that. But -- we'd love to do that, right? But you know it as much as I do, that an Indian customer today wants the same experience in India -- in a store in India as he would want in Dubai or Singapore or London, right? They don't want a different experience. Now if they go into a boutique, let's say, an Omega boutique in London, and they see a range of 250 watches over there, and if they come into an Omega boutique in India, and they see only 100 watches of their selection, even though I may be priced very competitively, and even though [indiscernible] don't worry, I'm going to get it for you in 3 weeks. The general reaction is [Foreign Language], right? So if we are to benchmark ourselves with global standards, we've got to keep that range to make the Indian customers believe and truly believe that shopping in India is better than shopping abroad. This is something which we have succeeded to do, and that's why a lot of our customers are people who used to buy abroad, but now they're buying in India because the price is competitive and the range is excellent. So we'd love to be more -- to cut down stock further, but I believe it's more important to make sure that the experience we offer to our customers is the same. It's better than what they get in a London or a Singapore. And I know a lot of our customers today actually believe it. So I think it's a matter of balancing these 2 objectives.

And, sir, this luggage brand, will it be a part of standard group or you'll have a separate subsidiary like the baby app for Ethos?

I don't know. So again, I mean, how big it grows and what happens, we can't really predict at the moment, but at the moment, it's not planned as a separate subsidiary.

Do you have all India rights for this? It's a master franchise agreement for all India, pan-India or it's regional?

I'm not in a position to divulge too much of that detail yet. But as of now, this will be the only boutique of Rimowa in India.

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

One comment was of the withdrawn of exclusive branded watches from third-party website. In line with that, I have also heard that there is shortage of exclusive brands in the market. And I think this strategy of management is in line with the same. I would like to know because this will -- going further, this will add to the profitability. I would like to have a view from management.

Mr. Joshi, I think our strategy on exclusive brands is evolving. And it's based on the success we are seeing. Our digital platform -- our communication and digital platform, we are successfully establishing the presence of exclusive brands in -- among the Indian customers. And it's important that the -- let's say, the credibility of the exclusive brands is not impacted adversely. So -- and one of the aspects is to be able to control the pricing. So as you know, on third-party websites, sometimes that's not very easy. If a stock is held for a longer period of time [indiscernible] more and so on. And that sometimes leads to a problem because we don't want a brand -- exclusive brand portfolio to be brands to be selling at huge discounts. We don't see the need for doing that because they're established, and customers are picking up these watches. That's also a feedback that we have from our brand partners in Switzerland or elsewhere who say, look, you're doing well, why -- don't -- please don't discount the brand because it's -- somehow beyond a point, it impacts the credibility. So we want to control the discount. We want to have a greater say in how the brands are presented, with what environment, even on the online space. And yes, it's part of the evolving strengthening and evolving strategy of exclusive brands.

The next question is from the line of Adit Shah from Vibrant Securities.

Lalaram here. Really happy to see the business doing really well within the company. I have a lot of questions. So should I just ask them together?

Yes, yes, please go ahead.

Okay. My first question is on the Ethos side. The third-party website, I believe you're referring to the likes of Tata CLiQ, Nykaa and even Myntra where we see a lot of your exclusive brands. So firstly, do we only put the exclusive brands list them on these websites, number one, can you confirm that? Number two is what percentage of sales do we derive from these websites as of today, of our overall pie? Then I want to know that Ethos valuation after the rights issue, it seems that it will be almost doubling compared to our last fund raise, which was happening at around INR 250. So actually, it is more than doubling. And even if I take a look before that, I think in April, when I believe Alchemy and other guys have invested, it was INR 292 per share. So even if I take that as the base, it is almost 88% higher. So I would love to know why we believe that the business valuation has doubled. And that would be helpful. Then my question is on value unlocking in Ethos. Is SAIF Partners Holding the only deterrent for demerger, which means that if they exit KDDL completely, will there be no further hurdle in demerging and listing? Can you please confirm that? My next question is on onboarding Patrik Hoffmann on the Board, who is an esteemed individual and used to head JLC and also, I think, right now he is involved with a very big preowned global watch platform. So I want to understand what is the kind of value which we are expecting to derive from such an esteemed personality? And how that can help for us, given that we are still largely an India-based company, more than new watches and preowned. So are we looking to further go beyond India in preowned or new watches? In fact, something which is why someone like Patrick would be helpful? So I had -- a lot of questions are there but maybe if you can answer these, then I have 3, 4 more questions. Sorry, sir, for this long list.

No problems. No problems. So yes, you are right about the third party. These are platforms like Tata CLiQ and largely, we are doing our exclusive brands on this eventually because we don't really want to compete with other retailers who want to put on other watches. We want to have our own portfolio there. But as I mentioned, we want to control the things better. So we are being more discerning about which kind of platform we're going to feature our watches. For the percentage of sales, we will come back to you. We need to get this figure. I don't have it readily. Ritesh, our CFO, will get back to you on this. On the question of Ethos valuation as to why we believe the value has doubled, frankly, it's not only me who believes. It's the shareholders of Ethos. And I'm a very, very small shareholder of Ethos, but it's the shareholders of Ethos who believe that because we are expecting quite a great response on this rights issue. So the reason for the jump in valuation are actually pretty clear, right? You are -- the previous valuations were all done at either a time when we were impacted by COVID, we couldn't see the future very clearly or it was on the back of 1 or 2 difficult years when we were still looking at all the regulatory headwinds and so on. I think we are through with that. We are looking at blue skies, we are looking at all the leading indicators. They are looking positive. And I think there's every indication if you see macroeconomics, if you see valuation of KDDL, if you see the response to the rights issue, so while as you know, valuation is not an exact sign, it is based on assumptions, but I believe we are not off the mark on this valuation because the reasons for the increase in valuations are pretty clear. I think the proof of the pudding is in the eating and if the rights issue is successful, and obviously, this was discussed with the major shareholders of Ethos and their views were sort of taken before the Board of Ethos decided on a value. I believe the proof of the pudding will be in the eating and we will see that pretty soon. As far as recovery is concerned, I think the shareholding of SAIF is obviously the most important hurdle. And frankly, I have come to a point where I'm saying, unless there is -- unless that is resolved, there is no point in discussing all the various scenarios. Various scenarios are possible, but until SAIF divest from KDDL or there is a change of law, there is nothing to be done. So let's come -- we'll cross that bridge when we come to the point. We have discussed with SAIF on a number of occasions in the last [indiscernible] if they have any intentions of divesting. Right now, it doesn't seem to be so. But when they do, then, of course, we will tackle this issue very proactively. Your last question was on Patrik Hoffmann. Indeed, a very valuable addition to the Board. It's not only that we will get international expert only because if we want to expand internationally. Our business is international. Our business depends on relationships with global brands. It depends on how Ethos is viewed globally. Today, if you go and see globally top watch retailers, you will see names like Watches of Switzerland. I encourage you to go and check out Watches of Switzerland. It's a U.K. company, it's a listed company. They did an IPO 3 years ago. Have a look at that. It's comparable in its business strategy to what we are doing, right? Similarly, if you see Seddiqi, if you see Hour Glass, these are the leading retailers -- you see Bucherer in Switzerland, these are the leading retailers, and they have -- they are globally recognized. We need Ethos, if you want to grow and become the most powerful and the most respected watch retail or luxury retail brand in India, we need to have an international outlook. And for that, we need to have these international associations for which just sitting in India is not enough. So I think Patrick brings a lot of that international perspective. And while there are no immediate plans to go outside India, who knows, who knows? I think this -- the coming generation of Indians no longer recognizes the geographical boundaries of India, right? This is a great thing about the younger generation. [Foreign Language] we may say that, okay, India is -- we have to somehow grow within India. I think the generation says wherever there is an opportunity, we will go. So I don't think we have any predefined boundaries. We have -- it's still early days. I like to say that Ethos is like a start-up. People say normally Ethos is 12 years old as a separate company, yes, but we are in a start-up field. The luxury watch business is a start-up in India. So we are a startup. So the sky is the limit as far as I think. So Patrik Hoffmann is an addition keeping the future in mind.

Understood. Sir -- yes, if I can ask a couple of more questions?

Yes, please.

Yes. Firstly, really loved the way you explained the value addition of Patrik Hoffmann, in the sense that Ethos needs to be valued by the Swiss brands, and we need to be accepted well, although we are present in India, but I think that was something which I didn't think of, so thank you so much. And having been a shareholder of KDDL for the past 2 years, I've been a huge admirer of what you have been doing in luxury retail. And the reason why I could sort of stick with -- as a shareholder even during the lockdown was things were just not looking -- there was nothing right was the fact that you have built such great capabilities of digitally servicing the customers...

I got your message also. Thank you very much. You've been a constant force. You've encouraged us and you've also questioned us. Very much appreciate it. Thank you very much. Please, can you check on your questions because I think there might be some others who may be wanting to ask as well.

Okay. So I will keep it short, I will keep it short. Okay. Okay, sir. My question next would be, I think, only 2, one is Rimowa. So Rimowa, I just want to understand that at what level have you thought through this? Is this more like -- I mean, the discussions with the brand, have the discussions been around how many stores we need to open over the next 12 months? Or is it still that we'll open 1 store and we'll see how it goes? Is that what the level of discussion is? Number two is what are the gross margins in this business? That's it.

Right. So Rimowa, for them, India -- they know the potential of India, but they are stepping here for the first time. For us, the luggage business is a new field. So in a sense, you can say 15 years ago when we entered into the watch retail business, we said this looks like a great field. Let's enter in, and we started with 1 store. Today, we are at 50. There were several brands who entered India with Ethos when India opened. Carl F. Bucherer was one of them, right? Today, it is at 14 or 15 of our stores. We have remained the exclusive partner for the brand for the last 16 years. So typically in a situation like this, where the brand is entering India, we are entering in a new segment. There are 2 -- of course, the brand doesn't want to enter India to open only 1 boutique, right? And we don't want to start a business to do only 1 boutique. However, it must start with 1 boutique. There will be learning from this. And we will go forward, and hopefully, we will expand steadily as we have done in the watch retail business. So it may be in other segments as well. What we are clear is this: going forward in segments like luggage, branded jewelry, other luxury products, it will mostly be a very active combination of online and digital -- online and physical. In fact, the online platform will be a very important part, if not the predominant part. So -- and that is a sentiment that is shared mostly by all the brands, which they are saying that we understand that while we may need a certain number of boutiques in the country for a physical presence for the luxury experience, the digital presence, being able to serve the entire country, through digital names is extremely important, and that will be a central theme in our strategy going forward. It's difficult to place exact numbers, but of course, we have a lot of optimistic outlook on the luxury luggage segment as well as other segments that we are eyeing.

Thank you. Ladies and gentlemen, due to time constraint, we will take that as a last question. I now hand the conference over to Mr. Yasho Saboo for closing comments. Thank you, and over to you, sir.

Thank you very much. I thank everybody for joining the call, and I hope I have been able to answer most of the queries. In case there are queries still remaining, please contact SGA, our Investor Relations partner. We will get the queries and we'll do our best to answer them very promptly. Thank you very much, and have a nice day.

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