Renaissance Global Limited (RGL.NS) Earnings Call Transcript & Summary

Yes, I think absolutely. I think it's -- September is usually peak inventory. I mean if you see year-over-year, we've now managed to reduce inventory by about INR 100 crores. And we will see positive cash flow from operations for this year. I think that March is probably a good time to evaluate once a lot of the payments have been received from the season. So I think that April to September is kind of peak buildup of inventory and shipping for the holiday season and which we're in the process of doing now. And a lot of that working capital gets released during the course of the year. So H1 is really not a good way to look at the cash generated from operations.

Yes. Okay. And sir, last question on debt side. I see your interest costs have come down for the quarter. So what was the reason for this? And any plan of reducing the debt for this year?

Yes. I think the effort sort of is ongoing. I think that as we move towards direct-to-consumer and more working capital-efficient businesses, I think that the money required for growth is far lower. And I think there's definitely going to be a meaningful effort to reduce debt. If you see in this quarter, we've been sort of buying in much shorter duration. So our trade payables are lower by about INR 80 crores. So we've made a meaningful effort to -- because when you pay faster, the cost savings on paying your payables faster is much higher savings than the cost of debt as well. So we've sort of made a conscious decision to actually pay our trade payables much faster, thus trying to improve our profitability. But I think that our current sort of working capital levels are kind of peak levels, and we will see interest costs continue to reduce. I mean, they are currently lower because our utilization is -- has been lower during the quarter. I think the year-end number is -- the quarter end number is a little bit elevated because of needs -- October needs. We've had a very high sales number in -- usually in October, November, December. So I think the utilization of funds is represented by lower interest costs during the course of the quarter and the year.

And sir, last question, if I may. Any plan of expanding on Indian front because I think that business has degrown in the quarter. So what are your long-term plans here?

Yes. So Palash, the thing is that we are currently seeing a far greater return on investment in opening the physical footprint in the U.S. Our Jean Dousset store requires an investment of about INR 6 crores and does sales of around INR 25 crores with a gross margin delivered of 70%. So we are talking in excess of INR 17 crores, INR 18 crores of gross margin. Operating costs are INR 5 crores. So the expected profitability from each store is anywhere from INR 5 crores to INR 10 crores. So the return on investment, we are not seeing that kind of return on investment in selling diamond jewelry in India. The return metrics are 14%, 15% at best. I mean we've seen competitors who are doing INR 10 lakh per month per store averaging INR 1 crores to INR 2 crores a year to INR 5 crores a year. I mean, here, we are talking about a INR 25 crore store with a INR 5 crore investment. So for us, the risk reward is far better in the U.S., opening INR 25 crores stores with a INR 5 crore investment rather than an INR 8 crores to INR 9 crore investment and delivering a 10% to 15% return on capital employed on the India front. I think the metrics change dramatically when retailers in India sell gold jewelry. We are not in that business. So obviously, the business models of large retailers in India are very good. But retailers who sell diamond jewelry or lab diamond jewelry, I think will -- at least in our view and whatever we've seen of the landscape will fail to deliver anything in excess of 10% to 15% return on capital employed.

[Operator Instructions] Our next question comes from the line of Shriikant Parakh from Prudent Investments.

First of all, heartly congratulations for a great set of numbers. I have just one simple query. Like do we -- there is a substantial increase in the sales. So there is a prebooking of quarter 3 in this quarter? Have you realized some of the revenue into this quarter?

So I think as I mentioned earlier, I think that we've got to exclude about INR 75 crores of sales from our top line due to the changes in the current quarter as tariffs were introduced on India in August. We have purchased some bullion and sold to a subcontractor and then bought castings from them because we are currently operating as country of origin UAE. So there is some subcontracting of product being done in UAE. And thus, because of this, the sales numbers are higher by INR 75 crores as compared to what the numbers should be.

Okay. And I think so that the sale of the gold itself is the reason of the compression in the gross margin.

That's right. That's right.

Our next question comes from the line of Jigar Shah, an individual investor.

I just want to ask that as I got to know that the INR 75 crores of the sale of the last quarter, we have to deduct in these results. So just I want to ask that in this current quarter, what is the growth -- expectation of the company's growth prospects? Because on paper the last year -- last quarter result looks very good. But just I want to ask. And about the debt, what is the future company's plan for reduction of the debt?

Yes. So as I mentioned earlier, I think that we are seeing healthy momentum across the business, and we expect to continue 40% to 60% growth in our direct-to-consumer business. The licensed brands and customer business will be sort of low double-digit kind of growth. So we expect to see reasonable growth in the coming quarters. And in terms of our debt to equity, we are kind of comfortable with a net debt of around INR 200 crores odd that we are at as of today. As the business continues to generate cash, the gross debt number will continue to go down. We managed to -- plan to manage debt prudently, keeping it currently at 0.25 debt to equity, which we feel is a healthy number. And as we sort of continue to generate cash, growth is obviously priority one. Number two would be debt reduction. So we plan to use our balance sheet judiciously and balance growth along with debt management.

[Operator Instructions] Our next question comes from the line of Rupesh Tatiya from Long Equity Partners, a follow-up question.

A few clarifications. So sir, this INR 75 crores bullion sale, this -- I mean, will we see this every quarter?

I think there will be sale in the current quarter as well. Our own manufacturing facility is expected to come on stream sometime around the 10th of December. So we will see some amount of sale in the current quarter. And from quarter 4 of the current year, it will discontinue because those sales would get knocked off in consolidation since it will be a subsidiary of ours in the Middle East. So to answer your question, there will be one more quarter of sales of bullion in the current quarter as well.

So now you are showing INR 75 crores sales to a UAE subcontractor, then you get the castings, then you make the final product and then that INR 75 crores becomes, I don't know, INR 120 crores, INR 130 crores is what you recognized in the...

We sell gold worth INR 75 crores, and we buy castings worth INR 75 crores plus the conversion cost, right, from them. So INR 75 crores plus conversion is what we buy, and then we sort of do the value addition in India, set the diamonds, finish, polish and then ship to our various customers. So it's a subcontractor who was sold some raw material and then we purchased converted castings from that subcontractor.

Okay. Okay. Understood. And sir, the licensed brand, I think there was a degrowth in this quarter. I don't remember how it was in the Q1, but you are saying we can expect low double-digit growth for the full year basis.

Yes. So I think other than the D2C, I think the combined 2 other businesses should see low double-digit growth. And it's, I think, part intentional because those businesses are working capital intensive. And really, our goal would be to really accelerate the direct-to-consumer business while keeping the growth on the other 2 businesses, licensed brands and customer brands controlled to kind of low double digits so that the working capital remains manageable. Because our working capital cycle is quite long, and we don't want to end up in a position where the debt number goes up. So really, working capital efficiency-wise, the direct-to-consumer business is very, very efficient. And really, the idea would be to grow the direct-to-consumer business exponentially while keeping the growth of the other business in low double digits.

Okay. Okay. In customer brands business, sir, is all of this business just pure gold jewelry, no lab-grown diamond or there is some portion there as well of lab-grown diamond?

No, there is no gold jewelry. It's only natural and lab-grown diamond jewelry. Currently, about 1/3 of the business there would be lab-grown diamond and 2/3 would be natural diamond jewelry, but it's all studded jewelry. It's not pain gold jewelry.

In customer brands?

Yes, yes. Across our entire business. We are not in the gold jewelry business.

Okay. And I mean, sir, lab-grown in U.S., if one reads newspaper, media reports and all, it seems that business is growing very fast, 30%, 40% CAGR kind of growth. But you -- what you are saying is that you -- either you are not seeing that kind of growth in the customer brands or you're not looking at it as a very lucrative opportunity?

Yes. I think that we are not looking at it as a very lucrative opportunity. We don't believe that the margins fundamentally are different when selling to large retailers, whether it is natural diamond jewelry or lab diamond jewelry, right? I mean, the large retailers know the prices of natural diamonds as well as lab diamonds, right? I mean if, in fact, lab diamonds are far more transparent than natural diamonds because there are fewer qualities. So logically speaking, there is no reason why one should make better margins on lab-grown diamonds when selling to large retailers. We believe that, that category will remain margin constraint when selling -- when we are selling in the customer brand segment to large U.S. retailers. So our belief is that, yes, while there is a transition, there is also a cannibalization of natural diamonds that's happening, which is why our lab diamond share in the customer brand segment has gone from 3% to 30%. However, there has been some cannibalization of the natural diamond business as well. So I think when we look at that segment, customer brands, there is an effect of growth happening in lab diamonds, whereas there is a degrowth happening in natural diamonds.

Interesting. Okay. And sir, final question is, I mean, any operating efficiencies we are looking in our operations which can take this 8.2% margin in customer brands to 10%, 11% in next 1 or 2 years? Anything obvious that we can...

Yes. Yes. So I think that current quarter adjusted for the bullion, we're at about 9% margins. I think that as the share of direct-to-consumer increases, we are at about 13% margin. Our long-term guidance is that we believe that we can make 18% to 20% operating margins on the direct-to-consumer front and mix change there will skew the margin upwards. And on the customer brand side, we've last year embarked on a cost reduction program where we've saved around INR 11 crores this quarter. So the run rate is INR 44 crores at the moment. and we expect that run rate to accelerate in Q4 to about INR 60 crores annually. So there's a further INR 15 crores of annual cost reduction that will happen between Q3 and Q4. So between cost savings and mix change, our margins should inch up to double-digit numbers, as you indicated.

Okay. And to this, I mean, cost efficiency program, can you give some qualitative color, what kind of things we are doing to take out this cost?

So I think that I've elaborated on calls earlier as well. We reduced our manufacturing footprint because we are actually manufacturing higher average order value pieces due to lab grown rather than natural diamonds. And so we've optimized our factory footprint, reduced headcount. We've moved a lot of jobs from the U.S. to India and sort of managing efficiency there. So we've looked at sort of all cost items across our organization. And as I mentioned earlier, we've reduced around INR 45 crores of annual cost savings. In the last quarter, we took a INR 12 crores charge-off for the shutdown of the Bhavnagar manufacturing facility. So we've -- now for the past 12 months, been looking at various areas of the business and been reducing our cost footprint across the entire company.

And in our manufacturing, sir, the wastage percentage would be at par with industry or better than industry?

I think at par or better. I mean usually, a lot of that data would be confidential, but we believe that we are at par.

[Operator Instructions] Our next question comes from the line of from Vidhi from [indiscernible] Capital.

Sir, I wanted to understand from you what kind of exit growth rate are you looking at for FY '26 to registered in FY '26 and FY '27, considering the dynamics of the business, the tariff situation and everything?

So I think that we are largely mitigated most of the tariff impacts. Currently, as I mentioned earlier, our country of origin from a manufacturing perspective is now UAE for all of our U.S. businesses. I think as you are seeing, we've seen healthy growth in H1. We continue to expect healthy growth, obviously, now. The most important part of the year is coming up in the next 45 days. But I wouldn't want to comment on a specific number, but we are seeing the demand environment in general across the geographies in which we operate to be relatively healthy. And especially our direct-to-consumer business, which remains a focus, has grown at 60% for the quarter, and we expect that to continue for the coming quarters.

Great, sir. Great. And sir, for India, how do you plan to scale up? I'm sorry, I missed the earlier commentary since my call got disconnected.

Currently, there is no immediate plans to scale up in India. I think that for now, we are trying to figure out the unit economics of our India business, And currently, there is no concrete plans to scale up in India. Currently, the plans are to scale up our direct-to-consumer businesses in the U.S., and there's a wait-and-watch approach towards our India footprint.

[Operator Instructions] Ladies and gentlemen, as there are no further questions from the participants, I now would like to hand the conference over to Mr. Sumit Shah for the closing comments. Thank you, and over to you, sir.

Yes. Thank you, everyone. I hope we've been able to answer all your questions. Should you need any further clarifications, please feel free to contact our Investor Relations team. Thank you very much, and look forward to seeing everyone on the next quarterly call. Thank you.

Thank you, sir. On behalf of Renaissance Global Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.