Renaissance Global Limited (532923) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Renaissance Global Limited Q3 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Aakash Mehta from Dickinson IR. Thank you, and over to you, sir.

Yes. Good afternoon, everyone. I welcome you all to the Q3 and 9-month FY '21 earnings call of Renaissance Global Limited. We have with us Mr. Sumit Shah, Vice Chairman; and 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 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 afternoon, everyone. On behalf of Renaissance Global, I extend a warm welcome to everyone on this earnings conference call to discuss our performance during the quarter. I'd like to give a quick overview of the company followed by a review of the financial performance during the quarter and the 9 months ended December 31, 2020. After this, we will take questions from participants. Our strategy is to grow our business through licensed brands and own brands globally. In Q3 FY '21, branded and licensed brands revenues contributed 23% of our total studded jewelry revenues. Our strategy is to continue to grow our share of this business. The company is focused on branded jewelry through our exclusive licensing arrangements for Enchanted Disney Fine Jewelry, Disney Treasures Fine Jewelry, Star Wars, Hallmark and our own brands, Made For You lab-grown diamonds, Jewel Lilly and IRASVA. The much anticipated launch of Enchanted Disney Fine Jewelry in Mainland China through the deal with Lao Feng Xiang, the second largest retail in China has been finalized. We expect to ship our first order in Q1 FY '22. We are also excited about the growth of our direct-to-consumer business. We launched a direct-to-consumer business through our online websites exactly a year ago. Our direct-to-consumer business through the newly launched websites has shown robust growth during the quarter. In Q3, the direct-to-consumer revenues were at INR 27 crores with an EBITDA margin of 16%. Based on our estimates of the quarter's contribution to annual sales, we're at an annual revenue run rate of INR 70 crores for the year. We expect the direct-to-consumer business margins to improve going forward to the 20% to 22% range. During Q3 FY '21, we launched Star Wars Fine Jewelry direct-to-consumer website for customers. We are highly encouraged by the consumer response. Based on January, February month-to-date sales data, the direct-to-consumer business is now trending at an annual run rate of greater than INR 100 crores. Our direct-to-consumer plans also include launch of website for Disney Jewels and Hallmark. The B2C business is a high gross margin business with margins between 55% and 60%. In summary, we had a quarter where sales degrew, but we feel that the normalization of the sales process has now happened, and we expect FY '22 to be a normalized year. I'd like to turn the call over to Mr. Hitesh Shah for a discussion of our financial performance.

Thank you, Sumit. Good afternoon, everyone. The company during the third quarter of FY '21 reported a total income of INR 741 crores against INR 895 crores during the corresponding quarter of the last financial year, a decline of 17% year-over-year. Our Q3 FY '21 EBITDA is at INR 48 crores, while our net income stands at INR 26 crores. For the 9 months ended December '20, our total income is down 29% at INR 1,463 crores versus INR 2,056 crores last year. However, our gross margins have improved 40 bps. 9-month FY '21 EBITDA stands at INR 81 crores versus 9-month FY '20 EBITDA of INR 145 crores, a decline of 44%. Our net income before discontinued operations for 9 months stands at INR 30 crores against INR 83 crores in the same period last year. We expect revenue growth for the Q4 of FY '21 to be in the range of 0 to minus 10% as compared to Q4 FY '20. However, we expect net income to increase meaningfully in Q4 FY '21 as compared to the same quarter of last year due to contribution from licensed brands as well as direct-to-consumer business. Further, we expect net income and earnings per share to grow in double digits in FY '22 as compared to FY '20, implying normalization of business. The company has managed to lower its net debt-to-equity levels to 0.36 in December 2020 against 0.51 in December 2019. Further, company's trailing 12 months return on equity stands at 5.1%, which was at 13.5% for the year ended March 2020. Our long-term goal is return on equity greater than 15%. In terms of geographic bifurcation, U.S.A. contributed around 67% to our overall revenues during Q3 of FY '21, with 25% coming in from the Middle East. For the 9 months ended December '20, the breakup was U.S. 63% and Middle East, 24%. In terms of product category, studded jewelry contributed 79% to the overall revenue during the quarter, with the balance coming from the plain gold jewelry segment. For the 9-month period, studded jewelry contributed 81% to the overall revenues. 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 Shruti Sharma, an individual investor.

Hello?

Yes. Go ahead. Go ahead.

Yes, sir. Sir, I just wanted to understand just a broader view on the market perspective, like how is the market looking? And are we seeing the demand coming back in the market or how the Diwali season has been for us? Was it a pent-up demand or the -- I mean the regular, the normal demand we are seeing, which has come up in the market again?

Sure. So I'll take that question. So I think what we are seeing in the U.S., which is our largest geography, is some normalization of demand, I think that during Q3, we saw gradually sales recover back to pre pandemic levels. And there is still some decrease due to off-line stores, not -- sorry, off-line stores not being at full capacity. So I would say that there is normalization probably in Q4 as per our guidance, we should be between 0% and minus 10%. We don't have too much exposure to India because we have only 3 stores currently operating. So we would not be in a very good position to give an outlook on demand scenario in India, but globally, we are seeing normalization. And due to the vaccine rollout, we are quite optimistic that things should normalize to pre-pandemic levels in FY '22.

Okay, sir. And sir, how is our online business shaping up? What kind of revenue targets do we have for FY '22 and '23 from this particular segment?

Yes. So there are significant tailwinds to the online business. We've seen during the course of the 9 months that we've operated the business, that revenues have grown meaningfully. We launched our business only in February of last year. And business has grown from an annual run rate of INR 25 crores in the first quarter that we started to a INR 70 crore annual run rate. And that has further improved in the current quarter since we have data for January and about 13 days in February, currently, the run rate is well over INR 100 crores. So I think having started the business about a year ago, we are very encouraged by the progress of the direct-to-consumer business, especially the impact that it has on our blended operating margins.

Okay, sir. And sir, I just wanted to understand one more thing on this that if this business is here to stay? And do you think the customers which are coming on are a bit of sticky customer or once the things normalize, they will again move back to our brick-and-mortar model?

So our anticipation, obviously, is that a lot of consumer habits will change. There the tailwinds that we have to the business may normalize, we may not see this kind of exponential growth once things open. But I think that a lot of customer behavior that has changed. Our anticipation is that it is likely to remain going forward. But again, it's something that's to be seen, and we'll have to see how the year plays out.

So sir, that means that we might see some shift in our business model going forward, if we see that the -- this online direct-to-customer is, I mean, getting -- the sales through this channel is higher than brick and mortar. So we would want to curtail that or how things are going to move for us?

So I think we are -- as a company, we're extremely focused on growing both the wholesale as well as the direct-to-consumer part of the license brands because that's where the company makes higher margins. Currently, we are operating 4 websites and the plan is that there is 2 other licensed websites that are to be launched during this calendar year. We have Hallmark Diamonds as well as Disney Jewels. So we anticipate robust growth in this segment during FY '22.

Okay, sir. And sir, on the China front, I mean, I think we have signed agreement with LFX. So what kind of revenue targets are we anticipating from this particular chain?

So I think we are launching our test, which is for the -- for 150 stores in Q1 of '22. I think once the test is successful, only then will we be able to give guidance on what kind of revenues we are anticipating. Because at this moment, is a test with 150 stores. I think we'll be in a better position in -- at the end of Q1 '22 to be able to give some guidance on what kind of revenues we expect from China.

Okay, sir. And sir, I mean, on the India business, I mean how are our brick-and-mortar the 3 stores which we have? How are they performing? And I mean in FY '22, we -- I mean, as you earlier mentioned that we have plans to open new stores. So do we have plan to open any other store in any newer geography in FY '22? I mean are we going to stick to that? Or I mean, we might see some delay in the opening up of the store?

So currently, we are evaluating the demand since the stores, actually -- the new stores have only opened 3 months. Currently, the stores, the 2 new stores that we've opened are slightly below breakeven levels. So we'd expect to see some normalization in sales going forward, after which we'll finalize plans for expansion. So as of right now, there is no further plans of expansion till we see the 3 stores normalize and contribute at a unit economics level.

So sir, by when do you think that the breakeven will be attained in these 3 stores, which have newly opened? Any estimation, if you can give.

We would -- I think we would be able to give you an update next quarter. I think that it's a little early to say.

Next question is from the line of Siddharth Oberoi from Prudent Equity.

So this is regarding the online sales. So did you say it was like INR 70 crores for the year. And now it's INR 100 crores?

Siddharth, we -- I think for the year, the actual sales achieved were INR 5.7 crores in quarter 1, INR 8.9 crores in quarter 2 and INR 27.5 crores in quarter 3. So I think it's about INR 40 crores for the current year. We -- what we've tried to do is, so as to help you understand what the seasonality in the business is. What we are saying is that quarter 1, usually, based on the revenue run rate, was a INR 24 crore annual business. It was a INR 45 crore annual business in Q2, and it was a INR 70 crore annual business based on normalized contribution of Q3 to annual sales. So usually, quarter 3 is 38% of annual sales when we take retail. So even though we did INR 27 crores, it doesn't imply that it's a INR 100 crore run rate business based on Q3. So we tried to sort of put that into the presentation that what the annual run rate is likely to be based on quarter 3.

Okay. So -- but percentage-wise, I think it's still very less compared to the overall revenues?

It is. It is. It is. So I think at INR 100 crore run rate, which we see in January and February, it will contribute between INR 20 crores and INR 22 crores to the operating margin, which, on a margin basis, is relatively significant to our overall business, which is why we thought to highlight it. In terms of revenue share, you are right. It's about 4% of our annual revenue. But it would be a much higher percentage of operating profit because the margins are 3 to 4x of our other businesses.

Okay. And what is the run rate -- what is the growth -- quarterly growth for annual growth run rates that the online is witnessing?

Yes. So as I mentioned, it was -- in first quarter of this financial year, it was a INR 24 crore run rate business. It was a INR 45 crore run rate business in quarter 2 and it was a INR 70 crore run rate business in quarter 3. Currently, January, February, what we know month-to-date is it's currently trending at INR 100 crore plus run rate. And we plan to launch 2 more websites in the current year. So those numbers are not in the current numbers and would add to revenues. So at the current revenue run rate, we are seeing an annualized INR 100 crore business with a 20% to 22% operating margin on the direct-to-consumer side.

All right. Okay. And this is regarding the China tie up, so you said that China initially give a sample, and then this will probably scale up. So have you set up a time line where probably in Q1, you will supply base and then based on the demand they will give you orders? Or is it some set anticipate have to...

Yes. Yes. We've got some set parameters in terms of what is the definition of success. So sell-through percentages in their stores. So I think the test is about 4 months. At the end of 4 months, sort of we'll review the sales numbers? And if the sales numbers are satisfactory, then it goes to an all door rollout. So yes, I think I would say that 4 to 5 months from launch, which is expected to be in April, late April or May is when we'll have a clear indication of if this is moving forward and what the size of the business will be for year one.

Okay. So initially, it is 150 stores. And eventually, what would it be number of stores?

So again, those things will have to be discussed based on the success of the brand. I mean they have from what I understand, 3,000 to 4,000 stores. We'll have to see how many stores it goes into, depending on how well it does.

Okay. And all of their stores are running right now, due to the -- even after the pandemic?

Yes, they are.

All right, sir. Also you've actually set up a ROE of 15% for the long term. So is there a time limit, let's say, you want to achieve this in the next, let's say, 3 years upon the transaction. Initially, you had given that, I think because of the pandemic it may have got postponed?

Our expectation would be that in FY '22, we should be able to hit that target.