Renaissance Global Limited (532923) Earnings Call Transcript & Summary

Good evening, ladies and gentlemen. I'm Margaret, the moderator for this conference. Welcome to the Q3 FY '20 Results Conference Call of Renaissance Global Limited organized by Dickenson Seagull IR. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aakash Mehta from Dickenson Seagull IR. Thank you, and over to you, Mr. Mehta.

A very good afternoon, ladies and gentlemen. I welcome you all to the Q3 and 9M FY '20 earnings call...

Sorry to interrupt you, Mr. Mehta. We can't hear you. Can you come closer to the phone, please?

Am I audible?

This is better. Thank you.

Yes. Good afternoon. I welcome you all to the Q3 and 9M FY '20 earning call of Renaissance Global Limited. We have with us Mr. Sumit Shah, Vice Chairman; Mr. Hitesh Shah, Managing Director. The discussion today may include some forward-looking statements and must be reviewed or considered in conjunction with the risk with industry in general and our business in particular. Now I hand over the call to Mr. Sumit Shah. Over to you, sir.

Good afternoon, gentlemen. On behalf of Renaissance Global, I welcome everyone to the earning conference call to discuss the overall performance during the quarter and for the 9 months ended 31st December 2019. For the benefit of audiences who are joining our conference call for the first time, I'd like to give a quick overview of the company followed with a review of the financial performance during the quarter and 9 months. After this, we shall take questions from the participants. Renaissance is a highly differentiated luxury lifestyle products company and is the largest manufacturer and distributor of branded jewelry to global retailers. We are known for designing compelling jewelry lines that allow our global retail clients to stand out and thrive in a competitive market. The company is focused on the licensed jewelry segment through Enchanted Disney Fine Jewelry and Hallmark jewelry collections and our own brand, IRASVA, through a joint venture with Times of India. We have exciting new product launches in FY '21 with Disney Treasures and Star Wars line of jewelry. As known to most of you, we acquired a U.S.-based company called Jay Gems in August 2018, which has the license for Enchanted Disney Fine Jewelry. Disney Enchanted is one of the premium brands with Princess brands being a $3 billion-plus brand. Our other leading brand, Hallmark, is a consumer brand with global reach in more than 100 countries. Going forward, our strategy is to grow our branded jewelry sales in existing markets, which is the U.S., U.K., Canada as well as to capture market share for Hallmark and Enchanted Disney Fine Jewelry in new geographies such as China, Middle East, India, Singapore, Malaysia, South Africa and the Philippines where we're potentially having discussions with retailers and currently distributing these products. We already have a subsidiary set up in China to market the Disney franchise. Further, in the current quarter, we've signed an agreement with Lao Feng Xiang, the second largest jewelry retailer in China for the distribution of Enchanted Disney Fine Jewelry across Mainland China. Hallmark Moments has been rolled out to over 2,000 stores now and will continue to contribute meaningfully to revenue growth this year. In addition to our branded play, we also intend to expand our gold jewelry products through further product development, innovation, 3D printing and wedding bands for Western markets. The company launched its own in-house brand, IRASVA, through -- into the Indian market through a joint venture with Bennett Coleman and Company Limited, which has committed to INR 350 crores of advertising in exchange for a 49% share in the domestic joint venture. The IRASVA Essentials line typically starts at INR 15,000 while the Gifting Collection is priced at INR 8,000. We're happy to announce that customers have shown a positive response to the IRASVA store. And at store level, we broke even in the third month of operations. Based on the current performance of the first store, we plan to open 3 more stores in Q1 FY '21. I'll now hand over the call to Hitesh to discuss the financial performance.

Thank you, Sumit. Good afternoon, everyone. Moving towards the financial performance of the company during the third quarter of FY '20. The company reported a total income of INR 893 crores against INR 831 crores during the corresponding period last year. This was a growth of 8% year-over-year. Slowdown in the Dubai gold business due to rising gold prices and the conscious position of the company to move away from low-margin product categories, has contributed to lower revenue growth. Gold business remained flat during the quarter while the studded jewelry business has grown by around 10%. In line with our vision, our EBITDA registered a robust growth of 18% to INR 69 crores with the EBITDA margin of 7.8% and a net profit of INR 44 crores, which is a growth of 17% over last year. Looking at our 9-month performance. Our total income grew by 9% year-over-year to INR 2,055 crores. Once again, our EBITDA reflects a robust growth of 26% to INR 145 crores with an EBITDA margin of 7.1%. Our net profit increased to INR 83 crores, registering a growth of 16% on a year-over-year basis. Our net debt-to-equity levels were elevated in March '19 to 0.16 due to the acquisition of Jay Gems. However, we have been able to bring it down to 0.51 as on December '19. Our long-term goal is to be at a net debt-to-equity ratio of 0.5. Due to our strong cash flow generation and disciplined working capital management, our consolidated year-over-year net debt has reduced by over INR 102 crores while our inventory levels have reduced by INR 243 crores. Further, our trailing 12-month return on equity stands at 13.7%, which was at 12.7% for the year ended March '19. Revenues for the full financial year are expected to be muted against last financial year due to us exiting the independent division, Simply Diamonds, and also on account of slowdown in the Dubai gold business impacted by the rise in gold prices. However, as we increase our share in the high-margin branded jewelry business, we expect EBITDA to grow at 16% to 20% for the year. In terms of geographic bifurcation, the U.S. contributed around 65% of our overall revenue during Q3 FY '20, with 24% coming in from Middle East. In the general product category, studded jewelry contributed 81% of the overall revenue during the same quarter while the balance was from the plain gold segment. Thank you very much for your kind attention. Now floor is open for Q&A.

[Operator Instructions] The first question is from the line of [ Nimesh Mehta from Alsha Capital Management ].

Sir, I have a couple of questions. Firstly is on our brand store, or IRASVA. Sir, presently, we have 1 store in Mumbai. And so how many are we planning currently in India? Or in any particular region we are targeting as such?

Sure, I'll take that question. So currently, there is one store, and we sell products through our website as well. The current expansion plan is going to be first focused on Mumbai in order to make operating costs and advertising efficient. We have currently signed 3 locations in Mumbai, which are slated to open in Q1 of FY '21. And I think the long-term 5-year plan was to open 25 stores over a 5-year period. However, we will be reviewing the plans based on the profitability of the current slate of 4 stores and then plan the long-term expansion strategy. We are quite happy with the performance of the current store. And in line with the current performance, if the new stores continue to perform, we may accelerate the expansion of the further stores. But currently, we have no further plans besides 3 stores in Q1 of FY '21.

Okay. So how much CapEx are you targeting for these investments?

So each store involves a capital expenditure of around INR 50 lakh for capital expenditure and about INR 20 lakh or INR 25 lakh for the security deposit. This is just fixed CapEx, and then there would be working capital which would be in addition to this. So the 3 stores would involve a capital expenditure and security deposit of around INR 2.5 crores.

Sir, this will be through our internal accruals or through bank or any kind of structure?

No, internal.

Okay. Good. Sir, there were some allegations on Times of India for having some tax -- not paying tax of around INR 28,000 crores. So such kind of a thing, do we have an impact on our store brand? Or is actually -- is that the case?

I am not aware of any allegation against our company of any tax. I'm not sure what you're referring to.

Okay. Okay. Good. Sir, and we have recently had a tie-up in China. And looking at the scenario of the coronavirus, so have you seen any orders getting canceled or any of that sort?

So our agreement with LFX was signed only recently, and our distribution plans will get delayed slightly due to the coronavirus. So we were anticipating rollout in May, June of calendar year '20. However, this may get pushed back by 2 or 3 months depending on how the coronavirus plays out. So currently, we don't have any ongoing orders from China. We just signed the agreement, and the brand was supposed to launch in the first half of the current calendar year. This, however, will get delayed due to the coronavirus.

So have you changed any outlook for this year due to this? Or it wouldn't have any impact on our outlook?

Since it was first year of operations, we had not factored significant revenue in our outlook. We have kept very minimal numbers. So the -- any impact on the numbers will be minimal or negligible.

Okay. Sir, something on the working capital situation. As I was going through the presentation, there was a slide looking at FY '19. So how do you see FY '20 to be panning out on the working capital as well as on the debt side?

Yes. So well, as we mentioned, we've reduced inventory by INR 240 crores year-over-year due to which there has been a significant reduction in debt as well. We continue to foresee disciplined execution against the working capital and debt. And as we've said, we had -- our debt/equity was at 0.75, and we've managed to reduce it down to 0.5 debt to equity. And we feel comfortable at these numbers and will continue to be disciplined with working capital. It was elevated last year due to the acquisition. And we've managed to liquidate a lot of the excess inventory that came with the acquisition, because of which we feel like where the inventory and working capital is now in good shape and the debt numbers are also extremely manageable.

[Operator Instructions] The next question is from the line of Siddharth Oberoi from Prudent Equity.

You had mentioned about net debt. So what would be the gross debt?

Should I answer that, Sumit?

Yes, please.

Yes. So the gross debt is around INR 486 crores, and there's cash on the books of INR 93 crores as of that date.

Okay. So minus this, you have come to the net debt?

Yes. And there's around INR 20 crores of current investment. So [ deducting the 2 is net debt ].

All right. Also, the margins, reported EBIT margins reported this quarter is 7.76%. How sustainable are these? Or is this a quarter effect due to probably the seasonal effect in the U.S.?

Yes. So I think that usually, the margins are highest in Q3 due to the Christmas quarter. So I would not annualize the margins for this quarter for the whole year. But I think that the 9 months margin will give you a more sustainable view of our margins, which are at 7.1% versus 6.1% last year. Although you do have to remember that there is an element of mix here against the gold and studded business as well. The gold business has been muted this year, and the growth primarily has come from the studded business. So given the gold -- studded jewelry and the gold jewelry mix and seasonality, we feel that 9 months is reflective of what would be sustainable on an annual basis.

All right. Also last time, you had mentioned that the company has now ventured into 2,000-plus stores in the U.S. So what has been the contribution of that in this quarter?

Yes. So I think specifically, Siddharth, the reference to the 2,000 stores was for the Hallmark brand. The Enchanted brand is in 3,000-plus stores. The Hallmark brand now has been rolled out to about 2,000 stores. A significant part of the rollout happened in Q3. It's not yet meaningful because we haven't yet received annualized sales. So it would not be a very meaningful number in Q3 '20, but we foresee that going forward from this year from Q4, Q4 '20 as well as FY '21, for it to be a meaningful percentage of revenue.

All right. And also last year in Q4 FY '19, you had a write-off. Because we had taken over Jay Gems, there was a onetime write-off of inventories. This time, do you expect in the last quarter, is there -- I mean there is some pending write-offs that is there. Do you think that would probably affect the Q4?

So I think that in general, due to the -- after the acquisition, we mentioned that there would be some inventory reduction and some write-downs due to the inventory reduction as there was excess inventory in the acquired company. We feel like a lot of the inventory cleanup has already been done. Over 90% of whatever had to be written off has been written off and deducted to gross margin. And the inventory is in a relatively healthy position. We don't foresee any meaningful write-offs going forward due to the acquisitions from any inventory-related issues other than the normal course of business.

Well, in that case then, the margins probably may be sustainable with 7%?

Yes. So 7%, so that is sustainable. 7.8%, which was in quarter 3, is not sustainable on an annual basis is what I was saying.

Okay. All right. Also, [ IRASVA ] 3 new stores are to come up in Q1, and you've already given the CapEx. So what has been the revenue of this store, the one that is currently that's made you think that it's time to probably expand further?

So currently at this point, we haven't disclosed it. Probably next quarter, we'll come out with a further disclosure around revenue and profitability of each of the stores. But essentially, the store, what we've discussed is that the store was profitable from the third month onwards at a store level. So the unit economics are favorable. And due to the unit economics being favorable, we feel like expanding the store base would be accretive to earnings. So we're not looking at growing the store base just to add to revenues. I mean we are extremely clear that if the unit economics make sense, only then will we expand on the store count of IRASVA.

All right. Also regarding this China situation, so there was a notification on the exchange where you'd mentioned that, that company has 2,000 stores, et cetera, in China, thousands of stores. So have you signed any contracts with them beforehand of some kind of an inventory pickup or something?

There has been a contract, and the contract has a test period. And beyond the test period, there is some minimum commitments that LFX will have to make. The numbers obviously are not disclosed yet. But yes, there is an agreement, and we've been negotiating the agreement over a long period of time. LFX obviously is keen to sell the Disney brand in China because it is a very popular brand in China. Disney Shanghai attracts a significant number of people to the theme parks. So it is a big brand in China, and LFX has committed to minimum quantities and purchases over 3 years. However, those will kick in after year 1, which is a test period when both us and LFX will invest behind the brand to create awareness. And if successful, then the minimum commitments would kick in.

The next question is from the line of [ Nishith Desai from Desai Investments ].

Sir, just I wanted a follow-up question on the EBITDA, EBITDA margin. So just wanted to -- if we can gauge an idea of yours on EBITDA margin outlook from 3 years now, sir. So will it be sustained in this -- at these levels, which is 7.5%, 8%? Or do you look at expanding from these levels?

Sure. So I think our long-term strategy is to change our business mix towards licensed brands and our own brand. Primarily, our business 2 years ago used to be manufacturing jewelry for retailers without brands. So the margin expansion that we are seeing currently is due to the shift to the licensed brands, and our view is that over a 3-year period, margins should gradually expand as a percentage of sales. And we continue to believe that margins will gradually grow. They would grow at a faster rate than sales due to our gradual transition towards branded jewelry.

Understood. So then what would -- basically what would be our revenue breakup or bifurcation between both licensed and branded products and the other products currently, sir?

Hitesh, you want to take that?

So around 20% of our studded jewelry sales is branded, and the rest is generic.

Okay. So going forward, sir, how do we see this mix changing from, say, 3 years from now?

So our view is that over a 3-year period, we'd like the mix between our own brand and licensed brands to be 50-50 between branded and generic.

Sure, understood, sir. Sir, I saw your products on Disney, and I feel that this [ looks really good ]. But I just wanted to understand, sir, amid what we're seeing as slowdown in the economy currently or, I would say, slowdown in consumption, what is your view on demand pickup for these products, sir?

So currently, our largest market obviously for the Disney products is in the U.S. We also sell in other markets, but our bulk of the Disney products are obviously being sold in the U.S. And the U.S. has record low unemployment rates right now, and the consumer market is very strong. So currently, we're seeing extremely strong traction on the branded jewelry side in the U.S., and we don't currently see any significant slowdown on the branded jewelry side. However, our revenue growth overall does not look extremely strong because of primarily 3 reasons. One is the Middle East gold business is -- has seen a slowdown due to volatility in gold prices. In the U.S., Jay Gems had a business of distribution of jewelry to independent retailers, which is small retailers with 1 and 2 stores across the country. We divested off the business and sold the business during the current quarter, actually in -- during quarter 2, so because of which the revenue growth in this quarter was muted. And we consciously made a decision to walk away from low-margin product categories, which did not make sense from a return on investment. So I think that while the branded business has been strong, the overall studded jewelry growth is about 9% to 10% because of the fact that there is certain areas of the business which are not contributing meaningfully to profit, which we are consciously deciding to walk away from in order to improve cash flow and reduce debt.

Understood, understood, sir. Based on the market types, sir, do you see sales -- do you see your sales going lucrative towards e-commerce side or on the stores business? How do you see it, sir?

So I think for the jewelry category in general, e-commerce is not a very meaningful percentage of overall revenue. So while our e-commerce revenues are growing, they are not a very meaningful part of the overall business.

Understood. And you don't see this e-commerce market opportunity going big in the coming year or the view is still there?

So I think that it would -- currently, it's in, I would say, high single digits. I would think that probably the penetration over a 3-, 4-year period would get to maybe 15% or 20%, but we don't foresee the majority of the sales coming through e-commerce.

Correct. Sir, lastly, I just wanted to ask you on the ROEs of the company, sir. So basically, I understand that currently, our ROCEs are not that attractive, okay, and that's why I feel that even markets are not valuing us up to the max. So I just want to understand from your end, sir, like if we want to see our return on equities going forward, how we should look at this, sir?

Yes. So I think that we are aware of the fact that the return on equity has been on the lower side. And if you look at our 3-year chart, we've improved our return on equity in FY '17 at 9.7% to 13.7% in the current year on a TTM basis. And we expect that we would like to sustain our return on equity over 15%, and that's something we feel reasonably confident that we should be able to achieve. I think that this has been our stated goal for the last couple of years, to get to 15%. I think once we get to 15%, we'll look at ways to improve it further.

Understood, sir. And sir, last -- my last question. Just on unbranded, out of interest, I just wanted to ask you like, sir, what differentiates Renaissance from other jewelry sector companies?

So I think that we've -- I would say that broadly currently, our differentiation is through 2 broad areas. Number one is our focus on licensed brands, which gives us moat on our overall business. So it's a very competitive market out there with large global retailers. We have marquee customers such as Walmart, Signet Group, Macy's that we sell to. Having licensed brands in the mix, which are desirable and required by retailers, puts us in a competitive position, which is favorable as compared to our competitors. And as a company, we've been extremely focused on working capital management. Jewelry is a working capital-intensive business. And I think that if a company does not keep a very keen eye on managing working capital, managing working capital levels, then growth becomes extremely challenging. So I would say that our focus on these 2 areas, and we've clearly demonstrated success with some of the licensed brands where it's been successful for retailers, so I think this gives us a little bit of a differentiation compared to other competitors in our industry.

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

Yes. Sir, my first question is on, how was the Disney brand being distributed in China until now like [ before our entry ]?

So currently, Enchanted Disney Fine Jewelry is not distributed in China at all. Disney does have licenses for costume jewelry in China but no fine jewelry brand in the diamond studded space. So it will really be the first entry of fine jewelry -- fine studded jewelry into China.

And what was the reason for this nondistribution in China until now, like any particular reason? Because China is a big market and Disney is a very strong brand. So it's a bit surprising that it's not -- it didn't have any presence in China until now.