Ladies and gentlemen, good day, and welcome to Kalyan Jewellers Q4 FY22 earnings conference call hosted by ICICI Securities Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Aniket Sethi from ICICI Securities. Thank you and over to you, sir.
Thanks, Nirav. Hi, good afternoon, everyone. Thank you for joining. At ICICI, it's our absolute pleasure to host the Q4 FY 2022 and full year earnings call for Kalyan Jewellers India Limited. From the management we have with us Mr. Ramesh Kalyanaraman, Executive Director, Mr. Sanjay Raghuraman, CEO, Mr. V. Swaminathan, CFO, Mr. Sanjay Mehrotra, Head Strategy and Corporate Affairs, and Mr. Abraham George, Head Treasury and Investor Relations. With that, I will hand it over to Mr. Ramesh for the opening comments, after which we will open the floor for the question and answer. Thank you, and over to you, Ramesh, sir.
Hi, good evening, everyone. Thank you. FY 2022 was an excellent year with revenue growth of 26% over FY 2021, recording the highest revenue in the history of the company so far. This is despite disruptions to business due to COVID second and third waves during Q1 and Q4. We ended the year with a PAT of INR 224 crore. However, if you look at the PAT for the last three quarters, our PAT was at INR 275 crore. Now, let me give you an overview of the recently concluded quarter and some important decisions taken during the quarter. We announced the board approval for the appointment of Mr. Vinod Rai as the Chairman and Independent Non-Executive Director on the board of the company. This appointment underpins our continued focus on not only strengthening the board but also our emphasis on corporate governance.
Q4 FY 2022, as you are aware, we started with a very high base. We faced disruptions to showroom operations during the first half of the quarter due to Omicron. The quarter also saw extreme volatility in gold prices driven by the geopolitical situation in Ukraine and its related impact on demand. We ended the quarter with a marginal degrowth, but if you ask me as a team, we are extremely satisfied with the outcome. 2023 financial year Akshaya Tritiya was excellent with significant traction across all regions, including the non-South markets. We witnessed significant growth, not just in terms of value, but also footfalls. April and first week of May have been very encouraging both in India as well as Middle East, and it is in line with our plan for the current year.
For the current financial year in India, we target to open 12-15 new showrooms. Over and above that, the franchisee-owned showrooms which we plan to open during the year will also be there. We have made significant progress on our franchisee plans with six signed LOIs in place already. We'll be opening our first franchise store during the first quarter. Now, an update on our Middle East business. We were cautiously optimistic on the region since resumption of business post-COVID, and after seeing the region witness good traction over the last three consecutive quarters, we now plan to restart our calibrated expansion there. The expansion will be fully funded by the internal accruals from the region. Further, like in India, we have already received inquiries from potential franchisee partners for the Middle East as well.
We plan to launch franchise operations in the region after successful launch of the first set of pilot showrooms in India. Our online platform, Candere, has drawn up plans for its next phase of growth on the back of stellar performance over the last three years. As a part of the plan, Candere will open its first showroom during the first half of the financial year. Last financial year saw a significant improvement in the share of new customers, driven largely by the shift from the unorganized sector. While we expect this share to grow organically, we are also planning to widen our customer base through the introduction of innovative new product segments, brands and collections. Another area of focus for the current financial year is to further improve the share of gold on lease.
Gold on lease, as you are aware, helps us not only save interest, but has a natural hedge embedded in it. We could improve the share of gold on lease to some extent during the last financial year. Given the current level of operations, there is limited scope for further improvements. We have now drawn up plans to convert a portion of exchanged gold that we receive from customers also into gold on lease, thereby providing further headroom. To sum up, with the continued momentum across all markets, with India-owned store footprint growing by approximately 10%, franchisee model taking good shape, Middle East showing positive signs, and Candere moving into the next phase of growth, we as a team are very excited about the current financial year.
I think I now hand over to Sanjay to take you through the financial highlights for the quarter as well as for the financial year. Over to you, Sanjay.
Thank you, Ramesh. Good afternoon, everybody. I'm really happy to be talking to you all after a great financial year performance. I shall share some details now, starting with the just concluded quarter. In Q4 of FY 2022, the just concluded financial year, our company reported a consolidated revenue of INR 2,857 crores, a marginal degrowth of over 6% compared to the corresponding quarter of the previous year. Consolidated EBITDA came in at INR 218 crores versus INR 228 crores in the corresponding quarter of the previous year. Consolidated profit after tax, PAT, came in at INR 72 crores versus INR 74 crores in the corresponding quarter of the previous year. I shall now give you a breakup of the Q4 performance, starting with India numbers.
For the just concluded quarter, our India revenue was INR 2,399 crores versus INR 2,615 crores when compared with the corresponding quarter of the previous year. Our India Q4 EBITDA came in at INR 188 crores versus INR 194 crores when compared with the corresponding quarter of the previous year. Profit after tax in India for the quarter came in at INR 70 crores compared to INR 66 crores in the corresponding quarter of the previous year. During the quarter, we had no wholesale bullion sale, and our gold coin sale to retail and corporate customers was about INR 59 crores, approximately 2.5% of total revenue. Moving on now to talk about our Middle East business.
Revenue came in the Middle East at INR 425 crore, quite similar to the level in the corresponding quarter of the previous year. EBITDA in the Middle East came in at INR 33 crore versus INR 30 crore in the same period of the previous year. Profit came in at INR 4.3 crore versus INR 7 crore in the same period of the previous year. Moving on now to talk about our e-commerce business. Candere posted revenue of INR 39 crore in the quarter versus INR 22 crore in the corresponding quarter of the previous year. The business recorded a loss of INR 2.7 crore in the quarter versus a profit of INR 53 lakh in the corresponding quarter of the previous year. Moving now to talk about our full year performance for the financial year 2021-22.
At a consolidated level, the company revenue came in at INR 10,818 crore, a growth of 26% over the previous financial year. Consolidated EBITDA came in at INR 815 crore versus INR 594 crore in the corresponding financial year. Consolidated profit after tax for the year came in at INR 224 crore versus a loss of INR 6 crore in the previous financial year. With this, we are now done with the summary of the financials and we can take questions. Thank you.
Thank you. We now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment as the question queue assembles. Participants, you may press star and one to ask a question. The first question is from the line of Gaurav from Axis Capital. Please go ahead.
Yeah, thank you for the opportunity, sir. My first question is with regards to the store expansion plans that you have laid out for FY 2023. If you can just repeat that again. If I heard it right, it's 12-15 showrooms in India that you will be opening by your own. In addition to that, there will be six stores that will be opened on a franchisee basis. Is that right?
Yes. 12-15 showrooms is what we want to open with our own internal approvals. Six LOIs we have already done. Minimum franchisee store which will come into this year will be six.
Sure. If you can highlight some, you know, what are the terms of this franchisee? How will this be on a FOCO model, COFO model? If you can give some details here.
Yeah. Sanjay, you want to?
This model is a franchisee-owned company-operated model, as in F-O-C-O, FoCo.
The intent of the way the model is going to work is we will be selling inventory to the franchisee at a suitable trade discount.
Mm-hmm.
The franchisee will invest in the inventory as well as the fixed assets in the showroom and will be responsible for all the operating costs. Our staff will be manning the showroom, so that's the company operator side of it.
Sure. Sir, one clarification here. I mean, so the inventory will be given by the company that will be directly selling to the franchisee. The staff expenses will be in our books, right? On Kalyan Jewellers' books.
Yes. We've set up the model such that this should deliver to us a PBT very similar levels to what we're already delivering now in the comparable non-soft markets, about 4.75%.
Okay. Sir, in terms of the store size, if you can give any color on how much the store size will be and what will be the minimum inventory that these will be initially sold to these franchisees?
You're asking how much inventory will be held there?
Yes, exactly. I mean, the first lot, you know, that will be given to these franchisees, the initial part.
This is mainly going to be in tier three, tier four, and maybe some tier two markets. In the region of about INR 20 crore-INR 25 crore is how we are thinking about it.
Would that understanding be right? I mean, the booking for you, the sales would be ex of the franchisee discount. I mean, whatever the sales you have done, how will the accounting for this would happen in P&L? I mean, we'll book the sales and the cost, commensurate cost will be taken ex of the franchisee margin.
Like I said, we will sell this at a trade discount to the price at which the consumer buys. We will book revenue when we sell to the franchisee, all of it on cash and carry basis.
Okay. Sure. Just one last question from my end is in terms of the good traction that you mentioned about the April and the May month. If you can highlight how the performance is if you compare this to the pre-COVID normalized quarter, if you can give some color to vis-à-vis that.
If you look at the traction, it has been very good because Akshaya Tritiya, as you know, it is coming after two years, okay?
Mm-hmm.
I cannot give any figures because you know, unfortunately, we will not be able to. We see a very substantial growth, when you even compare with the pre-COVID levels. If you look at the first 40 days, there is a good growth which we see.
Sir, is this only a phenomenon for the organized player that you see? Or, you know, what is leading to this strong growth? I mean, is it again that market share gain or it's just the general demand momentum is strong from the consumer end?
One thing is very sure, there has been a good shift of unorganized to organized in the last couple of years, okay? We have already built a good customer base. A lot of fresh customers we have gained over the past many quarters. These people have also started coming in again for their second time purchase. The stickiness in our trade is very high. Over and above that, this momentum is still high, especially for organized players, because organized players have gained a good traction over the past two years when it comes to the new customer gain, which we have got in the past couple of years. Of course, Akshaya Tritiya, people have not seen for two years now. That also has contributed to this momentum.
Sure. Sir, one last set of questions from my end. If you can just, you know, briefly highlight the expansion plans for the Middle East and Candere, that would be great from me.
Yeah. Middle East, because if you see, notice, last three quarters, Middle East have been consistently performing. It has been in the range of 85% of the pre-COVID levels. You all know that we had reduced our footprint in the range of 10%-15% in that area during the first COVID wave a couple of years before. It is almost SSG level pre-COVID levels now or more than pre-COVID levels in Middle East.
Mm-hmm.
For the past three quarters, we were continuously monitoring that Middle East market. Now we decided that we will slowly start our expansion. We will open a couple of showrooms in Middle East with our own internal accruals, and it will be fully funded by Middle East itself from the internal accruals which that market makes. Over and above that, franchisee, we are already starting to get some inquiries there without even you know that we have not advertised, we have not done anything in markets for franchise. It's all word of mouth publicity between them. But we are waiting. We will not launch a franchisee store in Middle East unless and until the pilot in India is completely over and we are satisfied.
Sure. Candere also we're planning to open showrooms, right, sir, this year, for Candere?
Yeah. For Candere, if you have seen, we have a very good revenue growth in Candere. Just if you notice, all the revenue growth is from online space itself for us because we have not opened any physical store till today.
Mm-hmm.
Now, because we want to go to the next phase of expansion in Candere, we are slowly starting to expand in physical space also because it gives better conversion to the online space, et cetera, if we have a physical store. The first store we want to open before the end of the Q2 this year. We have already identified the space, and the interior fit-out, et cetera, have begun.
Sure, sir. Thanks. Thank you, sir. Thank you. The next question is from Aniket. Please go ahead.
Hi, Ramesh. On the quarter, on a YOY basis, the non-South revenues has grown while South had a degrowth. Why the divergent trends for this quarter?
Okay. If you remember, you know, last year, Q4, our South revenue growth was higher than the non-South. South had grown by 70% in Q4 last year, and non-South had grown in the range of 40% in the last year. Okay? Because I had told you the reason where we saw a lot of migration happening, people from the non-South markets also, they started migrating to their own hometown, and we got that revenue in South. The base was already high at, pan-India level, but South where the base was extremely high. That is why the revenue has a degrowth in South India more than in, non-South this time.
Understood. Second, on the asset side, in the standalone balance sheet, there is INR 1,013 crores of loans and advances, which was not there last year. What does this really pertain to?
Swaminathan, you want to take it?
Yes.
Call it during this call. Hello?
Sorry?
Yeah. We'll come back to you during this call.
Okay. Sure. The next is studded has seen a good increase, 200 basis points, but you have also kind of articulated that some of it is coming from the low-value studded. If you could just split and how much is the margin differential in low-value studded versus the actual studded business which you do?
The low value and the usual studded, there's a difference of 10% in the gross margin there.
This 200 basis points increase, how much would be on back of the low-value studded?
That particular percentage of low-value studded, it is a very competitive information. I think
Okay.
Yeah.
Okay. Lastly, Ramesh, I just wanted to hear your thoughts that given, you know, gold price is seeing some decline in the last two, three months, so how's the consumer behavior during this time?
More than down, the volatility has reduced a bit over the past 30, 40 days. When there is extreme volatility in gold prices, people just take a pause for it to settle down at some levels. That was the major issue rather than the gold price going up steeply. Okay? There was a hesitation when the price was very volatile. That hesitation has almost settled down, at least for the past 30, 40 days. Of course, if the geopolitical issue again worsens and if the price gets more volatile, then it's a different issue. As we speak today, it has settled down.
Got it. I have a couple of questions. I'll come back in the queue, sir.
Yeah, sure.
Thank you. The next question is from Deepak Poddar from Sapphire Capital. Please go ahead.
Yeah. Thank you very much, sir, for the opportunity. Now, sir, I just was trying to understand now you spoke about the store expansion as well as the franchisee route store. That effectively means about 18-20 stores we are looking to open in this particular financial year. Now, which effectively means about 12-13, 12-14% increase in our total retail footprint as we see now, right?
Yes.
Overall, that's the trend that we are looking to continue over the next two to three years, little on the medium-term basis, about 12%-15% kind of a store growth.
Okay. There are two things here. Okay? One is, yes, as you rightly said, 12-15 new showrooms we will put in our own internal accruals in India.
Mm-hmm.
Six LOIs franchise we have already signed. That is the minimum number of franchise store which we will do this year. Okay? The pilot will be for threee franchise, and if the pilot works out very well, it might go beyond six also. Okay?
Correct.
If there is a correction needed, then we will limit it at six. That's the plan for this year. Next few years, the franchise model, one thing what I want to tell you is, of course, all the stores cannot be compared with the existing stores today because franchise comes with a lesser bucket. Lesser bucket means lesser revenue. Okay. If the footprint expands by 12%-15%, it does not mean that revenue will increase by 12%-15%. Okay. That of course I know that you guys know that, but I just wanted to highlight that point. Over the next few years, the franchise plan, if it is laid well, the number of stores which we might open will be, it can go beyond what 18 stores.
Correct. Yeah, fair enough. That's okay. In the past as well, we have spoken about doubling our revenue to INR 20,000 crore maybe in three years by 2025, right? That's the vision we have given out earlier. That factors in this, the franchise plan as well. To what extent?
The franchise actually has helped us to accelerate the plan. Okay?
Mm-hmm.
Otherwise, we would have opened only 12-15 showrooms every year because that was our plan.
Right.
Now franchise can help us to achieve it more faster. The number of franchisee stores can again be more than what it is for this year. Okay?
Correct.
Our objective is to reach that benchmark.
Okay. To achieve that, you need at least 20% CAGR revenue, right, over the next three years. That's what we are kind of looking at?
Yeah.
Okay. In terms of margins, I think we have spoken earlier as well, steady improvement in margins, right? Currently, I think we are at about 8.5%, right? About next two, three years, how the margin trajectory will look like? If you can provide comment on that would be very helpful.
The first thing is that, predominantly all the new showrooms, the 12-15 showrooms which we mentioned will be in non-south markets.
Mm-hmm.
All franchisee stores will be in non-south markets. Okay?
Right.
This will surely help us to improve our margins, because as you all know, we have a 10% margin difference between south and non-south.
Mm-hmm.
If the number of stores outside South India goes up, and if the revenue outside South India share improves, it is going to improve our margins. That is our primary intention. 2% margin growth improvement over the next three years is what we are looking for.
2% margin, like to about 10%-11% from currently. If I see second half, first half was kind of impacted due to Omicron. Second half
You are talking about EBITDA?
Yes, EBITDA.
EBITDA, I will tell you, when franchise comes in that EBITDA numbers may change. That's why I'm not talking about EBITDA margin levels, but I am on, talking about the gross margin. Gross profit margin level, it will be, what? Increasing by 2%.
2% improvement over next three years.
It's what we target for the next three years.
Okay.
One more thing I have to highlight here is that gross margin also when you check franchisee, you know that we are going to sell at a trade discount. Okay?
Mm-hmm.
Margins will not be like a retail, right? For all of you to understand better, we will give you numbers in detail so that you exactly know what is happening.
Yeah, but our investment in franchisee route will be much lesser, right?
Investment is zero.
The return on capital.
Return ratios will be very high. Meaning improvement will be, what do you call, very much better because we don't invest anything there but revenue comes in at a PBT level of what it is, in Q3, Q4.
Yeah. Yeah, I understand. Yeah. That's about it from my side. Yeah. All the very best. Thank you.
Yeah.
Thank you. Question is from the line of Shirish Pardeshi from Centrum Capital. Please go ahead.
Yeah. Hi, Ramesh sir. Sanjay sir. Good evening. Thanks for the.
Hi. Hi. Hi.
Three questions. I'm referring to slide 31. In that slide, way forward FY 25, you have mentioned that we will reach to 10% EBITDA margin. My question is on EBITDA margin. You touched upon gross margin. The larger question is that how would you plan to achieve? Of course, gold metal loan is one of the thing which is there. What are the low-hanging fruits if you can fast track the margin growth?
Yeah. First of all, the EBITDA growth will be actually done in two ways. One is that the gross margins itself will improve because the South, non-South revenue mix is going to change. Studded ratio is going to improve. Over and above that, there will be an organic growth in studded ratio, which will help us to improve our gross margin. That is one lever to improve our EBITDA margin.
Sure.
The second lever to improve our EBITDA margin will be the operating leverage, because all the extra revenue which comes in, it comes at a lower cost because the corporate expenses are already taken care by my existing showrooms. Both this applied together, our intention is to move the needle up by 2%. We are approximately at 8% now, which we want to move it up by 2%.
Operationally, I mean, what I think, there you will definitely have the inventory gains on the standard portion.
Standard, if you see, we as a player, we have competition with unorganized as well as regional players. Okay? We have only a few markets where we compete only with the listed players. Where... If you are referring to the INR 190 crore, which, what do you call, the inventory gain, which I heard in a recent call. For us, we have actually not increased our diamond rates in almost any markets except for a very few markets where we compete only with the listed players.
Okay. Okay.
In short, we don't have an inventory gain.
Okay.
As of now.
Okay. My second question is that, on the Candere business, that business, I mean, pure play online business showing a very good traction. Now you've mentioned, I heard that you are doing one pilot, for opening up a physical store. Now, two questions there. Is it going to be a pilot like a franchise or we are putting our own? What is the thought process? I mean, where do we want to grow this business? I mean, in a medium to long term, maybe another year or so. What kind of network you are trying to build?
Yeah. Here, first of all, it is not a franchise. It is our own store, which we are going to do, because you know that the CapEx for online showroom is in the range of only INR 2 crore-INR 2.5 crore. And it is, for ourselves, it is a pilot wherein we really want to look at the math, how the showroom operates, how the conversion rates are, what the stock rotation, stock turn, et cetera, are. Yes, there is a possibility of franchise in the future. But as we speak, at least for the next, what you call, first set of showrooms, we would not look at a franchise on a physical store for Candere. Okay? And that is how we are looking for Candere.
If you look at the growth, we have been growing at a very good pace for the past three years. Okay? It will continue what we feel with the physical stores also. Coming in, I think the conversion rates are also going to be better and, Candere is going to see the next phase of expansion is what we feel.
What I understand, you're essentially talking about is omni-channel attempt.
Yeah. Omni-channel works in two ways. Okay? Omni-channel works for Kalyan Jewellers, wherein lot of people do online research on the products which they want, okay, and they end up shopping offline. Okay? That happens in Kalyan Jewellers even now.
Okay.
Candere offline stores, actually more than the omni-channel, it gives a better conversion rate. Okay? Wherein many people want to have a physical touch and feel of the product, where this so-called Candere store will enable them to have the touch and feel of the product, even though some inventory is not the pure gold. It is only a dummy product which they can see physically. It will look very similar to gold, but they will be able to see the exact feel of the product and order it for us. So that is how Candere physical store helps more than the omni-channel network.
Ramesh, let me dwell a little more on this.
Yeah.
Can we essentially say that this will be and a physical store will be much smaller size?
Yes.
in terms of its specs?
Correct.
That will more of a lead generation than selling a physical item or no?
Yes. It will be more of a conversion rate increase rather than selling it physically.
Okay. Your inventory or your merchandise, which you are going to sell through Candere store, which will be completely different, and it will complement your online Candere channel.
Correct. Because the products which are showcased in that Candere store is what is already displayed in Candere. The digital catalog, which is already there in the Candere platform, that same catalog is going to be there in the physical store, as well as original products and dummy products will be displayed in the Candere physical store, which will improve the conversion rate.
Okay. You just mentioned that you need about INR 2.5 crore CapEx.
Yeah.
Essentially it would be roughly about 3,000-4,000 sq ft?
No, no.
Less.
Not about the square feet. It's only 1,000 sq ft showroom, but you will have to give a lot of, what you call, experience in that store. Where again, the digital catalog itself will be displayed there, where they can see products online there. They'll be able to, what do you call, see that same product at a physical space there. More than the square feet, the ambience, the product placements, the digital experience which we will give, everything will count. That is how we are looking.
Okay. My next question is on the pilot, what you are saying. You essentially said that you are looking for non-South for franchisee, franchise or company-operated store. Will you be able to share what kind of size you want to experiment, or you will still go with the current size of your stores of 46,000 sq ft?
Yeah. The size will be, if you look at Kalyan Jewellers now, we have showrooms which are of a bigger size in Tier I markets. Tier II markets come with a smaller size. Tier III markets we already have, that comes with a lesser size. Okay? Even showrooms which we opened recently, for example, we opened in Bombay itself, in Matunga, that comes with an average of 4,000-5,000 sq ft. So that is the space which we are looking for on the non-South markets where we are going to bring in franchise.
Okay. One related question. If franchise will be in the Tier I existing store, location or you are trying to look at the new, different geography?
No. It will be in non-South markets, and it will be in towns where we don't have showrooms, and it will be basically in Tier 3 and Tier 4 cities, basically, and a few Tier 2 cities.
Okay. My last question on the FY 22, what is the studded component? If you can help me, where do you want to settle now in next two years? Because things are normalizing very quickly.
Studded is already at 24%+ now, on an India basis. On a consol, it is at a range of 22% now.
Okay.
It is almost in a pre-COVID level today in India. Of course, with the additional, meaning the new set of studded is also inside this 24. Way forward also, if the SSG is going to be 6%-7%, which usually used to be pre-COVID, the conversion rates might be better for customers. Upselling might happen properly, and there will be an organic growth for studded jewelry. Over and above that, the major driver for improvement in studded jewelry is going to be our expansion in non-South markets.
Essentially you're saying that you see that expansion will take you to 25% plus?
Yes. You are talking about console or India?
India.
It's already at 24.8.
Okay.
24.6% or 24.8% is what Q4 recorded.
Ah, so that's a-
Yeah. My question.
My question was, 20, which is shown on slide 35.
Okay.
You said that pre-COVID.
It should be upside of 25%. Year-over-year it will keep on increasing. In the next three years, I think it should be near what you call 28%-30% because our non-South expansion is going to be very rapid.
No, I'm only referring because in some previous call you said that once studded reaches 30%, definitely we will go beyond 10% EBITDA margin. I think I'm just trying to correlate that.
It is in the similar line. You said it right.
Yeah.
Yeah.
Okay, sir. Thank you and all the best to you. I have one question. I'll come back again.
Yeah, yeah. Sure. Sure.
Thank you. Next question is from the line of Gautami Desai from Chanakya Capital. Please go ahead.
Yeah. So my questions are, what was your gross margin this quarter on studded and gold? That's my first question. Second question is, for this quarter, what was your gold-only percentage and exchange percentage? Third is, would you like to comment on your inventory days this quarter? I mean, was it what you expected? Going forward, what is it that you are expecting?
Okay. First thing, gold versus studded margins, we usually don't give because it's very competitive information. That, I'm very sorry.
Okay. No problem.
If you look at exchange has come up by 3% quarter-over-quarter and year-over-year. Okay? Exchange of gold.
How much? What did you say, sir?
3% growth. 3% more exchange.
Okay.
Okay?
That makes it how much, sir, total?
It is 30-odd%, 30.5% was the exchange old gold in Q4.
Oh.
It is 3% more than Q3 and 3% more than last Q4.
Okay. How about gold on lease, sir?
The gold on lease is approximately 1,500 kilos versus 1,400 kilos.
Crores.
INR 1,400 crores-INR 1,500 crores versus INR 1,400 crores in the last quarter. Exact number is INR 1,496 crore now versus INR 1,418 crore last quarter.
Okay. How about inventory, sir? You said, like, you were operating at two, like your whole year wasn't looking 2.4, 2.5 times. But, so you said your current inventory turn when we spoke last time was that much. Are you in line and, I mean, would you like to talk something about your inventory days?
If you look at inventory turn, first of all, we would like to take it maximum to three times plus because then only you will be able to substantiate your margins, et cetera. You will not be only a player who look at stock turn, meaning then it will be a local kind of player. Okay?
Mm-hmm.
Stock turn, we will be looking to be in the range of three. Stock turn will also improve year-on-year because now if you look at Kalyan Jewellers showroom, there are showrooms which have lesser stock turn than, especially in the flagship stores which we have, because we don't go only by stock turn in those showrooms because that's the flagship store of that particular state or region. If you look at the small showrooms which we are opening and opened in the last financial year, the stock turn will be more than what it is on an annualized basis for the existing showrooms averaged out. Our intention is to take the stock turn to 3+, not more than that. If you look at annualized, our stock turn today is at 2.3 even after Q1 getting affected.
Annualized is 2.3.
Annualized is 2.3%. Annualized numbers can be misleading for you because Q1 was not there, no? Almost.
Yeah.
Yeah.
Right. Sir, would you like to say something on the current going rate of your. Because let me assure you, the day you reach this 3x+ inventory turn, your valuations will be at a different level.
No, we don't go on valuations but on a performance, no. On a performance, we surely go with you. Meaning that this is a cycle which every brand will go. Okay, it's a natural progress.
Right.
Your stock turn should be or will be lower in the flagship stores because you will need to invite customers, people have to see the experience, and we will have some buffer stock because we might go wrong when we go to newer markets.
Right.
Post that, when you come to tier two, your stock turn will be better, tier three stock turn will be better, new showroom stock turn will be better. That is a natural progression which every retailer will have, and that is where we also go.
Your current run rate would be like, say, 2.4 or 2.5?
Current run rate, if you look at the last three quarters, yes, it should be. It should be.
Okay. Fine, sir. Thank you, sir.
Thank you. Participants, you may press star and one to ask a question. The next question is from the line of Aejas Lakhani from Unifi Capital. Please go ahead.
Yeah. Hi. Thanks, team, for the opportunity, and congratulations on a good set of numbers. A couple of questions. The first being that your Middle East business as you know-
AJ, sorry to interrupt you. Your voice is not very clear. May I request you to speak through the handset?
Yes, sir. Is this better?
Much better.
Yeah, thanks. My first question is that, you know, in the Middle East, you've now sort of stated that it will be a calibrated expansion, that too with the capital that is generated from the Middle East operations. The first, again, query on that is that business employs, give or take INR 1,800-2,000 crore of capital and does not sort of generate significant return ratios for us, and that drags down the entire company-level return ratio. Could you speak a little bit more about your optimism for the Middle East business?
Yeah. Middle East, you have to, first of all, see that market. We have created a base in that market. We are the number 3 player in terms of market share in that market. If you look at Middle East, now the extra revenue which we make from that market will surely help us to improve our margins, EBITDA margins, everything. Okay? We are almost in that area where we have at least stabilized in that big market in the universe. Okay? If you look at now, people are starting to expand in that region, where we have already completed our expansion in the four big countries in Middle East, and we have a good market share in those areas.
If you look at the EBITDA margins for the past couple of quarters, it has been in the range of very similar to India now. All additional new showrooms which we are going to put there and all additional revenue which is going to come from that market will surely improve our ratios. We'll have to have some patience there. Imagine a situation where we get franchisee options also there, bringing additional revenue on the top level. It is completely going to change the color of that business, which I think we have to wait and watch for the next couple of years.
Got it. Sir, given that, you know, that, you know, the Middle East has their own, you know, cycles because it's linked to oil and crude. If you see the cycle playing out for the next couple of years, where there is entire stability in that region, or do you see any further volatility in that region?
If you look at the market now for the past three quarters, okay, that is why we were cautiously waiting for that market. Okay. If you look at three quarters, it has been consistently performing. The gross margin has organically improved because of the consolidation of the market. OpEx is under total control. EBITDA margins are at the range of India. Now if you see, the market is very stable, okay, according to us. That is why we have decided to expand a couple of showrooms there. We will also try out franchisee options after the India pilot is over. If both applies properly, wherein the franchisee also starts in Middle East, that is going to see a totally different color, for which I think will take a couple of years.
As we speak, we don't have any, what do you call, ambiguity in that market, and we are very positive now. Because no other player has built a platform like we have did. That is our major advantage.
Got it. That's helpful. Sir, you know, if you look at the average revenue that in the... I'm talking about the domestic business here, the average revenue that we earn from our stores is give or take INR 70 crore. I just want to understand that, as you are opening these 12-15 showrooms, which are, as I understand, likely to be smaller and the franchisees are also gonna be in tier 2, tier three towns, what do you think will be the revenues from these slightly more compressed showrooms?
Participants, please stay connected in line for the management call. Ladies and
You got disconnected. Yeah. Could you hear my question?
Yes.
I get you. The average revenue per store is in the INR 70 crore level.
Right.
Even after the affected Q1. Okay?
Right.
On an annualized basis, I think it will be more than, what, INR 85-INR 90 crore. I'm talking about the existing showroom levels. Okay?
Okay.
For the new stores.
The per store revenue might be lesser than that because all stores are not into what you call in the bigger towns. So I think for the new showrooms, we should keep a level of what? INR 70 crore.
Okay. Did I get it right when you said that the existing more matured stores have now reached the run rate of INR 80-85 crores on a store level?
Yeah, INR 85 crore-INR 90 crore is the level for all the stores put together. If you look at an annualized, normalized basis, because now it is at INR 73 crore because Q1 there was no revenue.
Sir, just could you speak a brief about the OpEx? Because, you know, you would have had some rental savings for the year as well. So going forward, you know, will the OpEx be in this current range and will the advertising spends also be in the current range, or we should expect some higher numbers here?
Perfect control. OpEx should be in the similar lines how it is as of now. If you look at Q2, Q3, Q4, we have not got any savings from COVID, no? It is going to be under the same level.
Got it. I'll extrapolate the 3Q, 4Q numbers. Got it. Sir, lastly, you mentioned at the start about how the exchange that you get, which you said is give or take 30.5%, you mentioned about that you're going to move to the gold lease. I've not understood how that benefits us, if you could expand on that a little bit.
Yeah. Abraham, you want to take it?
Hi.
Hi.
This is something which we are exploring right now. The way we can do it is by saving our old gold, which comes into our system, through a bullion sale and then convert that money into gold metal loan. We are still looking at that option. We are evaluating all the plus and minus of that because of course it has the advantage of taking our gold on lease percentage up, but we are looking at all options. We have instruments in MCX where we can sell these metal through MCX. Even some of the industry leaders have also started doing this practice. We are also evaluating that.
Okay. Could you quantify how this can help us in terms of how will this benefit us? I mean, I know of course that gold loan is in terms of the rates are lower, but what is the
No. With this option, we are not aiming at increasing or reducing the interest rate. In fact, with this option we are trying to. Gold loan has two advantages. One.
Mm-hmm.
It reduces the interest rate. Secondly, it also acts as a hedging instrument. With this we are trying to increase the gold on lease, which would help us with the hedging percentage. We don't need to create additional contracts for it for hedging.
Okay. I probably
Yeah. The details of this, we can take it offline.
Yeah, sure. Thanks.
Effectively, in a nutshell, the old gold that comes into our system, we will have to find a way to sell that and create cash. Using that cash, we'll have to create gold metal loan.
Got it. Sir, could you also just speak about the competitive intensity you face in the non-South market? You know, I mean, is it more regional? I understand a lot of the gold players are still more South-centric. Who's the main competition you face in the non-South market, except for the first listed leader?
The competition actually comes, Ramesh Kalyanaraman here. Competition comes from regional players, unorganized segment. There'll be players in that particular market. Each micro market we will have competitors. That is how we see competition and not with only one player or two players, because we are a very hyperlocal player, as you know, and we don't only compete with national players. Last three months, the competition intensity, of course, have been there in many pockets, even within organized space.
Okay. Just one thing is that are you in the non-south markets where you're expanding the 12-15 stores, is it that the plan is that you know where you already have a presence in a particular city, you're adding a store there or adding a new geography in terms of a new city in that state?
No. Let me tell you, in almost all the states in this country, except for the small states in the northeastern part, we have stores and we have good market share in almost all the states. The showrooms which we are opening is not new geographies, but of course new towns in states we are already present.
Got it.
Again, there will be some showrooms which is adding stores in some metros, a few metro markets where we are already there, like in Mumbai, Delhi, Kolkata.
Got it. Thanks, Ratan. All the best.
V. Swaminathan, I think, should we answer the question which V. Swaminathan wanted to come back so that it does not misses out?
Advance.
That advance or something. One second.
Hello. This is V. Swaminathan. The question regarding advance, it's majority due to reclassification. Last year it was in current, and this has moved to non-current. The remaining amount of about INR 30 crores is a loan to Candere.
Shall we move to the next question?
Aniket, I think you had that question. No, hope so I never answer you.
Yes. Yes, Ramesh.
Sure.
Thanks.
Thank you. The next question is from the line of Shirish Pardeshi from Centrum Capital. Please go ahead.
Yeah. Hi, Ramesh.
Hi.
Thank you for the opportunity. I have two questions. While looking at the standalone for FY 2022, I think, since the time the IPO happened, the ad spend is one of the key criteria for you. I see that we have spent almost INR 193 crore. As a percentage of sales, it's about 2%. In the next 2-3 years when your store expansion is going to be very strong, what kind of ad spend? I mean, if you can give me an absolute number or maybe as a percentage of sales, that would be very helpful to model.
If you look at this financial year also, we actually opened 18 showrooms. Okay? This ad spend of around 2% is coming even after the expansion. Why while we are expanding into markets, the ad expenses is not going up steeply is because we are not going out of our core markets. We are there. We are expanding only in the markets where we are already having showrooms because we already have showrooms in almost all the states in this country. The ad phase where we had to invest a lot of money on advertisements have actually gone. On a medium-term, I think the ad spend will come down to the range of 1.8%. That is our target, what you call, a medium-term target.
Okay. If I may ask, I mean, just it's a curiosity having worked in the industry. Who's your creative agency? The reason why I'm saying this because I recently came across the Marathi version for enticing the consumer, and it was very impressive. That's why, out of curiosity, I'm asking who's your creative agency you follow?
Yeah. Thank you for the compliment. What we usually do is that we work with multiple creative agencies from every region because this hyperlocal flavor never comes from one particular, what you call, creative agency. Okay? We have tie-ups with lot of hyperlocal creative agencies across India, and we utilize them to create ads for that region so that it has a Pakka local flavor.
No, I really compliment because the flavor and the taste and people who have seen has really impressed.
Thank you.
Getting that local flavor, I was pretty excited.
Thank you.
My last question is on the BIS hallmarking. I mean, since the time we have been interacting, we have been talking about formalization. Do you really see on ground things are changing quicker, faster? Maybe you can give me some example which markets, whether it is seriously seen because South was, I would say that it was more formalized, while North and Central was, little there is a lot of scope. Do you tangibly see these things are taking shape and size?
If you look at the Q4, we have seen markets where the inspection from those departments have started. The intensity, of course, the expectations from each person is different. The intensity has been mild, but inspection, etcetera, has been started. We think that it will surely improve over time, I mean, the intensity, because it is the government's vision to bring in 100% hallmarking and also the HUID code. Their objective is very clear. We still have scope for the shift from unorganized to organized, post the implementation of hallmarking and the strictness which the government departments will bring in.
Formalization, when do you think will have some role to play in full speed in FY 23 second half?
Yeah. Very hard for us to comment on the actions which a department has to do. Technically speaking, yes.
Okay. All right. Thank you, and all the best to you and the team.
Thank you. Thank you.
Thank you. The next question from the line of Nillai Shah from Moon Capital Management. Please go ahead.
Thank you. Ramesh, my question is on the metal gold loans. You mentioned it's gone to INR 1,500 crores now. In the past on the calls you had mentioned there's a scope to take it up to about INR 1,800+ crores. What's stopping us from getting to that number?
Yeah. INR 1,800 crore is what we target. Actually, it had to be happening in Q4 itself, but we had a technical issue with a certain bank where Abraham, you want to? Yeah.
Nillai, hi.
Hi.
As of now for the quarter we have increased it by approximately INR 80 crore from Q3.
Mm-hmm.
Like Ramesh was mentioning, there was a technical issue with one of the banks with the gold metal loan limit. That has been sorted and we are just starting to pick up gold metal loan from the beginning of next week. We can take it up to approximately 1,800. We stand by the 1,800. This bank limit will take it.
Abraham, 1,800 is excluding the, you know, what you're trying to do now with the exchange gold, right?
No, yeah.
1800 was supposed to be on an as is basis.
Yeah, yeah. This 1,800, like I was mentioning to AJ a little earlier, this 1,800 will be a gold metal loan without the new model that we are trying to explore. The new model.
Correct.
Will not give us any interest rate benefit. That will only be to create a hedging instrument.
That was the second question. Why is that the case? The way I see this is that, basically even Titan is doing it now every quarter wherein they're reporting-
Exactly.
Bullion sales, right? You'll be doing it the same way. You'll be reporting bullion sales.
Yeah.
whatever you have as your metal gold loan.
Right.
That substitutes the interest, you know, your term loans, basically. I'm assuming your term loan is kind of about maybe 10% and metal gold loan is at about 4-5%. There's a clear five percentage point sort of interest saving, if I can put it that way, which accrues to your bottom line. Why did you say that there's no interest benefit out here?
No, but this old gold, the metal we have to fund it somewhere, right? Because that's the metal that we've already purchased. That purchase happens with our own cash.
Yes, you are doing a back-to-back transaction to sell it the same day, I'm assuming, right?
No. This gold metal loan will be a cash-funded gold metal loan because we'll be keeping cash to that extent, and then taking gold metal loan. This is not out of the bank-funded line of credit.
Oh, okay.
Because the first we have to fund the purchase of this metal from customer. We are trying to replace that old gold into gold metal loan. When we take that gold metal loan after that, it will have to be funded with cash.
Last bit out here, the customer has actually paid cash for his old gold? Or is it that he gets to pay lesser amount?
He gets to-
to exchange his old gold.
If it is an exchange, he'll have to pay less for his purchase. Our own customers, we give a premium for customers to come and sell gold also to us in those extreme cases.
Okay. Of this 30% which is exchange, gold exchange.
Yeah.
for sales, how much of that is, you know, customer just coming and giving back their old gold without taking anything else, and how much of it is actual exchange?
Very insignificant portion that the customer will give us for cash.
Right. It should be an interest benefit, right, Abraham? If you, I mean, if I'm not clear, then I'll probably take this offline.
Yeah.
I'm just not clear as to how this is not going to be interest accretive or PBT accretive.
Yeah, we can take this offline because we will have.
Okay, I'll do that.
Bank limits as well, which will be vitiated when we go this path.
Okay.
We'll take it offline.
Okay, I'll take it offline with you, Abraham. Thanks so much. Bye.
Thank you. Participants, you may press star and one to ask a question. A reminder to all the participants, you may press star and one to ask a question. As there are no further questions, I'll now hand the conference over to the management for closing comments.
Thank you very much for the patience. I think this quarter is also going to be very good and the financial year also we are looking forward. Any questions over and above this, please reach out to our IR team. Thank you.
Thank you very much. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.