Renaissance Global Limited (532923) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Renaissance Global Limited, RGL, Q4 FY '20 Earnings Conference Call, hosted by Dickenson Intellinetics Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aakash Mehta of Dickenson Intellinetics Private Limited. Thank you, and over to you, sir.

Thank you, Ayesha. Good evening, everyone. I welcome you all to the Q4 and FY '20 Earnings Call of Renaissance Global Limited. We have with us Mr. Sumit Shah, Vice Chairman; and Mr. Hitesh Shah, Managing Director, from the company. The discussion today may include some forward-looking statements and must be reviewed or considered in conjunction with the risks in the industry in general and our business in particular. Now I hand over the call to Mr. Sumit Shah. Over to you, sir.

Good evening, everyone. On behalf of Renaissance Global, I extend a warm welcome to everyone on this earnings conference call. We are going to discuss our financial performance during the quarter and year ended 31st March 2020. In these unprecedented times, I want to just start off by saying that I hope everyone is staying safe and everyone's families are doing well. For the benefit of the audiences who are joining our earnings call for the first time, I'd like to give a quick overview of the company, following -- followed with a review of the financial performance during the quarter and the year, after which we shall take questions from participants. Renaissance Global is a highly differentiated luxury lifestyle products company and is the largest exporter of branded jewelry to many global retailers around the world. Our strategy is to grow our business through licensed brands and our own brands globally. The company is focused on branded jewelry through its licensing arrangement for Enchanted Disney Fine Jewelry, Heart of Hallmark jewelry collections. We have recently launched another brand called Disney Treasures, which includes iconic Disney characters with major retailers in the U.S. As most of you know, we acquired a U.S.-based company called Jay Gems in August 2018. This company owned the license for Enchanted Disney Fine Jewelry. Enchanted Disney Fine Jewelry uses IP of Disney Princesses, which is a $3 billion-plus global brand. Our other leading brand, Hallmark, is a leading 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 are the U.S., U.K. and Canada; and to capture market share for Hallmark, Disney Fine -- Enchanted Disney Fine Jewelry and Disney Treasures. We also plan to expand into new geographies, mainly China and the Middle East. We have set up a new subsidiary in China to market the Disney franchise. We have signed an agreement with Lao Feng Xiang, the second largest retailer of jewelry in China to distribute Enchanted Disney Fine Jewelry across Mainland China. We plan to launch in China once the COVID-19 situation settles down. Hallmark Moments has also been rolled out to over 2,000 stores and will contribute meaningfully to revenue growth in FY '21. The company also launched its in-house brand, Irasva, in the Indian market through a joint venture with BCCL, which has committed to INR 350 crores of advertising in exchange for 49% of the joint venture. This is a separate joint venture, which markets jewelry in India. The COVID-19 pandemic has created massive economic disruption and has affected the overall industry significantly. Restrictions on manufacturing, distribution and exports have adversely impacted our business in the near term, but we believe that this does not affect our long-term vision. Our operations were shut down since the lockdown was imposed in India on 25th March 2020. We have been able to resume production in our Bhavnagar facility since 25th April 2020, and our Mumbai facility is partially opened from 13th May 2020. Most of the global retailers were shut down since mid-March and have gradually resumed operations from mid-May. The launch of Enchanted in China has been delayed due to the current situation. We hope to launch in China in the second half of 2021, and our expansion plans for Irasva have also been delayed due to the pandemic. We expect to resume our plans in the second half of 2021. We believe that the first 2 quarters of FY '21 will be extremely soft due to loss of retail sales, due to store closures, lower discretionary spends and overhang of inventory. We expect things to pick up in the third quarter of '21 and normalize by the fourth quarter of FY '21. Through disciplined financial management, we've increased our return on equity from 9.7% to 13.5% over the last 4 years and have generated over INR 200 crores of cash from operations in the current financial year. We are committed to prudent high-quality growth going forward. Now I would like to turn over to Hitesh Shah for a discussion of our financial performance.

Thank you, Sumit. During the fourth quarter of FY '20, the company reported a total income of INR 453 crores against INR 705 crores during the last financial year, which is a de-growth of 36% year-over-year. In addition to the slowdown in the Dubai gold business due to rising gold prices and the conscious decision of the company to move away from low-margin generate product categories, cancellation and deferment of orders due to COVID-19-related shutdowns led to this revenue de-growth. Our EBITDA, however, witnessed a robust growth from INR 10 crores in Q4 FY '19 to INR 26 crores in Q4 of FY '20 on account of improvement in gross margin as well as cost reduction. With an EBITDA margin of 5.7%, net profit after tax stood at INR 9 crores for the quarter. Coming to the full performance for the year FY '20, total income declined by 3% year-over-year to INR 2,510 crores. However, EBITDA witnessed a robust growth of 37% to INR 171 crores with an EBITDA margin of 6.8%. Profit after tax increased to INR 92 crores, registering a growth of 18% on a year-over-year basis. The company's net debt-to-equity levels were elevated in March '19 due to the acquisition of this Jay Gems. However, with strong cash flow generation and disciplined working capital management, we have been able to bring down the net debt-to-equity from 0.76 in March '19 to 0.52 as on March '20. The year-over-year net debt has been reduced by INR 139 crores, and the reduction in the inventory levels is to the tune of INR 198 crores year-over-year. The company generated a positive operating cash flow of INR 203 crores for FY '20. The return on equity stands at 13.5% for FY '20, which was 12.9% for FY '19. In terms of geographical bifurcate -- distribution of revenues for the year, U.S. contributed 58% of total revenues, Middle East contributed 30% and the balance 12% from -- was from the rest of the world. In terms of the product category distribution, studded jewelry constituted 74% of total revenue, whereas plain gold was 26% of the revenues for the year. Thank you very much for your attention. Now the floor is open for Q&A.

[Operator Instructions] The first question is from the line of [ Shruti Sharma ] from Mehta Securities.

Sir, am I audible?

Yes, yes.

Okay, sir. Sir, I have a few questions. Firstly, I wanted to ask on the Mumbai, the one store, which we have, Irasva store in Mumbai. So in the presentation, you have mentioned that we have planned to open 25 stores in India in over -- in next 5 years. So in this year and next year, how many stores are we planning to open?

Yes. Thank you. So I think the plan was to open 4 stores in April to June time frame prior to the COVID situation. We've actually signed leases on 3 additional stores in Mumbai. However, due to the COVID situation, we are reevaluating our expansion plans. The long-term plan to open 25 stores remains intact. However, the timing may get affected due to COVID. We plan to still open the additional 3 stores, which we've signed leases on in the current year. However, the timing of this is going to be uncertain due to the lockdown and various permissions. So currently, it's difficult to give any visibility beyond that because we'd like to see the performance of the stores as they open up and time our expansion according to the performance of the stores.

Okay, sir. Fair enough. Sir, secondly, I wanted to ask on the -- I mean, due to this COVID situation and then the entire lockdown scenario, how are the sales -- store sales? And are we moving towards -- more towards the online sales? What is our strategy on the same?

Yes. So internationally, what our retail partners are telling us is that the lockdown sales have been encouraging. Obviously, they are still significantly below 1 year ago levels. But our -- most of our retail partners have disclosed that they are above initial projections. We've made concerted effort to move sales online as well. And during the current COVID situation, a lot of our brands have seen significant expansion in online sales. Our digital penetration is still low. So a lot of this growth through digital channels will not meaningfully impact revenue, but there's definitely been a shift in consumer sentiment to buying online, which allows us to interact directly with the customer and gain relationships with the consumer directly.

Okay, sir. So going forward, are we planning to come up with our own online platform, where we can actually see a big shift in the sales going forward?

So we currently have an online platform. Enchanted Disney Fine Jewelry is currently sold to consumers in the U.S. online, and this was launched in February pre-COVID. And it has helped in the current situation.

The next question is from the line of Mihir Desai from Desai Investments.

Sir, my -- one of my question was that, sir, if we see our revenue mix, so if we compare Q4 '19 and Q4 '20, sir, the revenue share has been marginally increased at plain gold jewelry against studded jewelry. Sir, can you please elaborate on this, like is this something structured -- structural change? Or if you could elaborate on this, sir?

Yes. So I think that it is just a timing issue. I think our plain gold business is primarily in the Middle East, whereas the studded gold jewelry -- studded jewelry business is global. I wouldn't say that one quarter is any indication of a structural trend. We expect the ratio to be 75-25. And if we look at full year FY '19 versus FY '20, it's remained stable in that range. So we would say that the studded jewelry to the plain gold jewelry mix would remain in this ratio, if, in fact, the studded segment would increase in penetration going forward with the increase of branded sales.

Okay. Understood. Sir, my next question is on our balance sheet front, sir. So according to what the situation which we see due to COVID which has arise, that will definitely somewhere or the other would impact the demand. So now, sir, our focus would be still on expanding our reach or expanding our stores? Or would be more focused on further strengthening our balance sheet by further reducing our debt and improving our ROCE? Or -- so just wanted an idea from you, sir?

Yes. So I think that, as I said in my opening remarks, that it has to be prudent growth. We are not going to compromise one for the other if it makes financial sense. We've -- in the last 1 year, post the acquisition of Jay Gems, we've deleveraged our balance sheet significantly. We will continue to do so in the current year as well. However, if there is -- there are opportunities to increase penetration and to grow, I think this would be the perfect opportunity to grow because a lot of the competition will be focused on conserving cash and on fortifying the balance sheet. So I would say that it would be a prudent growth approach, nothing too aggressive. But as we see opportunities, we plan to continue to grow the business because we don't see this as a situation that changes anything long term. It's something that will definitely mean that our business has to pivot to more digital distribution and distribution through digital means, and that's how consumers are interacting with our brands. We do plan to continue on growing the business, however, prudently, and ensuring that our return on equity continues to increase.

Correct. Correct. Understood, sir. Sir, one more thing on the raw material front, sir. Sir, this quarter, we have seen a significant decline in our COGS. So do we see this trend continuing going forward? Or what would be a stable trend which we can gain for or we can gauge for coming year or quarter, sir?

So I feel like, meaningfully, as we've stated over the last couple of years since we acquired Jay Gems, we plan to continue our shift towards branded jewelry as well as now through digital means of distribution, which will mean expanding gross margins and increasing EBITDA margins. I think it's a little bit early to tell where the EBITDA margins will stabilize, but we've been able to year-over-year increase the EBITDA margins from 4.8% to 6.8%. So we feel good about our ability to increase EBITDA margins gradually and improve the quality of the business overall to a more cash-generative high ROE business.

Understood, sir. Sir, one last question from my end. Sir, what is your view on gold prices going forward amid seeing the situation in the current market? Sir, what would be the outlook on the gold price, if you could just elaborate some your view?

So I think as a company, I mean, clearly, we don't have a view on gold prices clearly in terms of kinds of uncertainty. We've seen in the past that gold prices have been a safety trade. But again, as a company, we don't take a view on gold. We try to be as fully hedged with our gold position as we possibly can be. Difficult to say what would happen with gold prices, and it depends on how long the crisis continues and what happens to other asset prices.

[Operator Instructions] The next question is from the line of Anurag Randev from Edelweiss Broking.

My questions are more of a directional in nature. So my -- so if you can throw some perspective, for example, in this post-COVID scenario, how do you see any structural shift in your business in particular? Because we may see pressure on retail sales and the retail formats. You may have some advantage because with respect to new stores, you may negotiate the new leases at the lower levels or possibly also renegotiate your earlier leases also. So it may also be the advantage. So any structural shift you see in totality that -- on the front end of your business and also on the -- from the cost perspective?

Yes. So we see the business shifting online dramatically. We've seen that during COVID, clearly as consumers were unable to go to physical stores. The share of sales coming from digital means has definitely increased. And we feel that this is a trend that is here to stay. Consumers have now got the confidence to buy online and have definitely increased their share of purchases online. In terms of new store openings, clearly, there may be some opportunity for our India business to negotiate lower rentals going forward. However, in the international markets, we don't own retail stores. We sell our products through retailers, specialty retailers, department stores, discounters and television channels. So from that perspective, our interactions with our retail partners as well as with the consumers directly will shift to a more digital means. We don't see any other structural change going forward for our international business.

Okay. And see, regarding the financials, so what I was looking at the presentation. In the last couple of years, especially starting from FY '16, so our sales have doubled almost, something -- from INR 1,300-odd crores to almost INR 2,500 crores, [ INR 2,530 ] crores this year. But my -- our trajectory in terms of EBITDA margins is almost flattish. Means, actually '16 numbers, they have 6.3% to around 6.7%, 6.8% now in FY '20, we have seen the up and downs. Similarly, with respect to PAT margins also, around 3.5% odd. Now when I see ROE improvement, then I -- you can rectify me if I'm wrong, it seems that it is more of a function of your asset turn because your sales have moved up. So how you see the quality of your return ratios, especially ROE improving? What would be the levers you people are focusing on? Because right now, what we are seeing is that we have been able to scale up our business, definitely. But on the margin front, we still have a lot of things to do.

Yes. So sir, the business in FY '16 to now is slightly different because we were making 6.5% EBITDA margins then on -- only on our studded jewelry business. We made an acquisition then of gold business in the Middle East, which actually lowered our EBITDA margins. So on a blended basis, we've managed to improve the EBITDA margins of the studded jewelry over the last few years because the 6.8% that we see is a blended average of gold jewelry as well as the studded jewelry segment. However, in FY '16, our numbers had only our studded jewelry business. So as a weighted average, there has definitely been an increase in the EBITDA margins. This is masked by the fact that the business mix today is different from what it was 3 or 4 years ago.

Okay. Yes, please continue.

Yes. So the reason the EBITDA margins have increased on the studded jewelry segment, which would be closer to, I would say, 9% is because of the branded sales, and we feel that there is a lot of -- lot more headroom for growth for the EBITDA margins. Current financial year, obviously, will be extremely difficult. FY '21, we are not going to see sales or margins anywhere close to what they were in FY '20. Essentially, the first half of the year has been lost. But long term, we feel good about our ability to increase EBITDA margins on a weighted average basis.

Okay. And my last question. So regarding your Chinese JV or your foray, so how you see the current relationship between the 2 countries and whether it can jeopardize your kind of plans going forward? Or is it a bit too early or preemptive to say on that? So how are you all looking at the thing? Or any sense you are getting from your kind of the partners over there?

Yes. So I think the agreement with the Chinese retailer is really for an American brand. So I think the Chinese retail partners are keen to test the program and sort of grow the business going forward. I'm not too sure what kind of a view they would take about the current situation between India and China, and again, too early to say. But my sense is that it's more a function of the brand, which is a U.S. brand that is going to be distributed in China, and we'll have to see if there is an impact due to the current situation.

The next question is from the line of [ Ninad Sabnis ] from Sabnis Financials.

Hope you are safe and all your families are also safe. I would like to ask what is the impact on the U.S. retailers and since we have a chunk of sales coming from U.S.? We've seen many of the big box -- big retailers filed for bankruptcies in recent months. And so what is your outlook on the business in that geography? When do you expect it to normalize? And I know this is a bit far-fetched, but when can we see growth contribute -- growth contributing from that business? That's the first question.

Yes. So retail is definitely challenged given the fact that customers are unable to access retail stores. Most of our retail partners are also pivoting their sales to more digital means. I think that what the long-term impact is on the retailers due to the current situation is again hard to say. However, we are working closely with our retailers, and early signs are encouraging that consumers are returning back to buying jewelry. There is also the added factor that our customers are telling us that due to the inability of people to spend on certain categories as of their share of wallet, consumers are able to buy products, and there may be some shift in consumption patterns of customers because jewelry as a category really competes with travel, experiences and a lot of other categories, which may not be valid anymore.

Correct. So are we indulging in any discounting to incentivize customers to buy our products?

Not at the moment because I don't think that, that would really help increase sales. Some of our retail partners due to their cash flow needs may be doing some discounting. But at our end, there has not been any discounting in order to increase sales.

Okay. Okay. So I have another question. So do you think coupled with gold prices, which are on quite an upswing right now, will there be increasing demand or rise in market share for lab-grown diamonds, which we are doing?

So currently, the penetration of lab-grown diamonds is low. It's in low single digits. I think that the millennial customer in international markets definitely has an appreciation for lab-grown diamonds. However, the shift to lab-grown diamonds is going to be slow and gradual. We don't see significant gains in market share for lab-grown diamonds in the short term. However, over a 5-year period, lab-grown diamonds will be a meaningful part of our business. What the number is, is again a little difficult to say. But we are focused on building a brand around lab-grown diamonds and using that as one of our raw materials to create jewelry as well.

Sir, right now, what would be the size or contribution from lab-grown diamonds as a percentage of the top line?

It's low single digits.

Okay. But we can expect this segment to grow faster compared to others?