Q1 Review: Kalyan Jewellers' Net Profit Jumps 33% Year-on-Year
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00:00 Hello, welcome to BQ Prime.
00:01 You're watching Q1 with BQ.
00:03 And my company in focus today is Kalyan Jewelers.
00:07 It's a South-based jewelry company
00:09 with the Pan India presence.
00:11 And joining me is Ramesh Kalyanaraman.
00:13 He's the executive director at the company.
00:15 Ramesh, thank you very much for joining us on BQ Prime.
00:20 To begin with, Ramesh, how has the first quarter revenues?
00:26 Yes, Q1 was extremely good.
00:28 The revenue grew by 34% in India.
00:31 On a console, it grew by around 31%.
00:34 Strong momentum across all geographies,
00:36 including India, Middle East.
00:39 It was continuing throughout the quarter,
00:41 right from April 1st week, Akshathriya and way forward.
00:45 The patch has grown more than the revenue.
00:49 The revenue growth was around 31% console,
00:51 and the patch grew more than 33%.
00:53 So doing the expansion plan is also on track,
00:57 and all doing well.
00:58 I understand that Q1 was positively impacted
01:04 by the Eid being there, and that would
01:08 have bumped up the revenues.
01:10 But do you see the similar kind of revenue growth
01:12 coming into Q2?
01:15 Yes, Eid, the revenue which would have returned in Q1
01:19 is majorly Middle East, because Middle East Eid is one week,
01:22 almost a week of holiday.
01:25 And that got absorbed in Q1.
01:27 But India, the momentum was strong even without the Eid.
01:33 The Eid is not the major factor why the India revenue grew.
01:36 OK.
01:37 What about the expansion strategy?
01:38 Because you've taken an aggressive expansion strategy
01:43 as far as franchise opening is concerned.
01:46 Can you take us through that strategy for us?
01:49 So this year, we had announced 52 new showrooms,
01:52 and all in the non-South markets.
01:55 And now as we speak, we have already opened 14 showrooms
02:01 now, and we will be opening 10 more showrooms
02:04 in the month of August.
02:06 We will be opening most of the 52 before Diwali.
02:09 That's our plan, because we get two major seasons after that.
02:12 And this is only Kalyan Jewelers India,
02:15 and we have expansion plan for Candier, our digital platform.
02:19 Now we have only two physical stores,
02:21 but we want to end at least 30 showrooms
02:23 before the end of the financial year.
02:25 The expansion will start from the month of August on Candier.
02:29 Middle East, we are opening our first franchise
02:32 showroom in this quarter.
02:35 And once that settles down, we will come back to you
02:38 with a Middle East expansion start.
02:42 So franchise model work in terms of bringing
02:45 in margins and revenue?
02:46 You mean the existing franchisees?
02:51 Existing and new franchises, how does it work?
02:53 What is the business model there for you?
02:55 What kind of margins that you get compared
02:57 to your own store margins?
02:59 Yeah, so it's a FOCO model, wherein
03:02 we share a part of gross margins with them.
03:05 The gross margins, of course, will have lesser gross margin
03:09 when compared to our own store, because we share
03:11 a good percentage of gross margin
03:13 with the franchisee partner.
03:15 Franchisee invests on inventory, and the ROCE
03:19 for all additional new showrooms are in the range of 75% plus.
03:24 So there will be growth in PBT as a percentage.
03:29 There will be substantial growth in ROCE.
03:32 But there will be a degrowth in the gross margin
03:34 as well as EBITDA margins, because there
03:36 is a gross margin share, which we do with the franchisee part.
03:40 What is going to be the mix of own stores and franchisee
03:44 stores going forward?
03:44 And what could be the stabilizing gross margins
03:48 that you will be working on?
03:49 Because as franchisee increases, your gross margins
03:53 will come down.
03:54 So what is the level of gross margins
03:56 that you will be more comfortable with
03:58 and the mix of franchisee and the own stores?
04:03 Yeah, so this year, all the stores' opening plan
04:06 is with the franchisee.
04:08 And so there will be pressure on the gross margin.
04:11 So we should estimate a 1/2% gross margin
04:14 degrowth every quarter going forward,
04:16 because all the expansion planned is based on FOCO model.
04:21 And this year and the next year also,
04:23 we plan for FOCO model franchise.
04:25 And our focus is on PAT and ROCE and not
04:30 gross margin and EBITDA, because that's anyway
04:32 going to degrow because of the franchisee model coming.
04:35 So what will be the level of gross margins?
04:37 Because you had a gross margin of 15.1%.
04:41 And your own store gross margin was around 16% or so.
04:45 So what is the level at which the gross margin
04:48 will stabilize?
04:50 Because franchisee gross margin is in the range of 8.5%.
04:55 And our own store gross margin is at 16% as we speak.
04:59 So when the franchisee store's number go up,
05:04 the gross margin as a percentage will surely come down.
05:07 So we estimate that at least a 1/2% gross margin
05:10 degrowth in every quarter going forward,
05:13 because franchisee stores increase that way.
05:17 Give me a sense of what's happening
05:19 in the non-stock market.
05:21 And also, we understand that this year,
05:24 the plain gold jewelry--
05:27 this quarter, plain gold jewelry growth
05:29 was much more than studded.
05:33 So that would have also contributed
05:35 to some kind of pressure on the margins, right?
05:38 No, no, no.
05:39 Studded growth was much higher than the gold.
05:41 And there is no pressure on gross margin
05:43 at all on a retail level.
05:44 The pressure which you see on the gross margin
05:46 is only because of the franchisee revenue coming.
05:49 And of course, yes, gold had better demand in the Middle
05:54 East because of the Eid one-week sale.
05:56 That week, gold demand was higher.
05:59 And that is why there is a degrowth in margin
06:01 in Middle East.
06:02 But India, we don't have any pressure in margin.
06:05 And we have only improved YOY in our retail stores.
06:10 The margin degrowth which you see
06:12 is only because of the franchise revenue coming.
06:15 How do you see same-store sales growth
06:17 going into FY24?
06:20 Will it be as good as what you saw in the first quarter?
06:24 Or are you going to be some muted coming in?
06:27 No, Q1, the SSG was very strong.
06:30 It was a range of 15%.
06:32 But always, we should estimate a 5% to 7% SSG.
06:35 That's the way we should look at it.
06:37 But whatever comes beyond that is good for the brand
06:41 and good for everyone.
06:43 How are you looking at the GML limit increase?
06:46 Because gold loan or what you call GML
06:52 has been an issue with REIT.
06:54 The limit has not been able to go up.
06:56 So how are we looking at that?
06:59 For the gold loan, we are at the 1,800, 1,850 range.
07:04 Our objective for this year and the next year
07:08 is not to increase the gold loan portion,
07:11 but to reduce the CC limit so that the percentage of gold
07:15 loan over the total exposure goes up.
07:18 Because we go with the FOCOM model expansion,
07:21 and there are going to be a lot of cash in the book
07:23 because our expansion is completely
07:25 taken care of by franchise.
07:27 And we will reduce at least 15% of our gross debt.
07:33 That would be--
07:34 How much actually?
07:35 15%?
07:35 It will be in the range of 400, 300 crore.
07:38 OK.
07:39 And what will that lead to in the cash credit limit
07:42 that you are looking to increase?
07:45 No, cash credit we don't increase, we reduce.
07:48 So gold loan as a percentage of the total exposure goes up.
07:52 Goes up.
07:53 OK.
07:53 So how does it work out for you?
07:57 I mean, if it goes out, will you be
07:59 able to push more products out or take more imports in?
08:07 How is it actually?
08:09 You mean, we do not--
08:12 what do you call--
08:13 you're talking about export?
08:15 What did you--
08:15 I'm talking about if GML limit goes up
08:19 because you're going to reduce your cash credit,
08:22 how will it impact your business?
08:25 Nothing gets impacted.
08:26 [INTERPOSING VOICES]
08:28 How does it-- what kind of reflection
08:31 that will be there in the operations?
08:33 The interest cost comes down because we
08:35 are reducing the exposure of CC, which
08:39 is at a higher interest rate than the gold loan.
08:42 So interest cost comes down, and again, ratings go up.
08:46 And we can take out certain non-core assets, which
08:50 is there, which has been mortgaged with banks because
08:53 of the CC limit that comes out, which can be, again,
08:56 liquidated and brought into the system, which, again,
09:00 lightens our balance sheet.
09:01 So that is the way we should look forward.
09:03 It's a two to three year mission where
09:05 we will lighten our balance sheet because of all
09:08 these actions which we take.
09:10 What is the kind of free cash flow
09:11 that you will be able to generate during that period?
09:15 As you move away from your own stores to franchise model,
09:21 there will be additional free cash flows that will come in.
09:24 What kind of free cash flows can we see coming in every year?
09:29 So it should be in the range of 400 core plus.
09:32 And that would be the one which--
09:35 how will you use that cash flow, whether for more
09:38 aggressive expansions or CAPEX, or is it
09:41 going to be to deliver your balance sheet more?
09:45 So yeah, so as I told you before, most of that
09:51 will be for repayment of debt.
09:53 But again, we have to increase our inventory levels
09:57 because we have to keep 10 to 15 days of inventory
10:00 for our franchise operations as well.
10:03 There will be some investment onto the CAPEX
10:05 because we take the CAPEX for the franchisees' stores.
10:08 So total cash generation, around, what, 40%
10:13 we will use for debt reduction.
10:15 So total cash generation will be in the range of 300 core,
10:18 out of which maybe 300 core will go on to reduction of debts.
10:22 And you know that we have declared dividend as well.
10:24 So a portion of money has to go in for repaying our--
10:28 paying back our investors as well.
10:29 OK.
10:30 Give me a sense of expansion in Candia
10:33 because you're talking about some 30-odd stores,
10:36 if I'm not wrong, expansion.
10:39 But Candia is also losing money in terms of--
10:43 it's a loss-making.
10:44 So how do you plan to ramp up Candia as well as bringing
10:47 profitability there?
10:50 Yes, so Candia, as you have seen,
10:52 we acquired Candia in the year 2017.
10:55 OK, right from that time, it has been an average CAGR growth
10:59 of around 60% on revenue.
11:01 It became profitable.
11:03 And then now it's taking a next transition phase,
11:07 wherein we have to add physical stores.
11:09 We have to, again, invest on technology.
11:13 And this transition phase, I think,
11:15 will get settled down by the end of this financial year.
11:17 And from next year, you should see surplus in Candia again.
11:22 So it should turn profitable next year almost?
11:25 That's what you're saying?
11:26 Yeah, yes.
11:27 OK.
11:28 Give me a sense--
11:29 my understanding is that you're also
11:31 looking at importing gold under the SIPA agreement.
11:35 What's happening there?
11:36 And by when will you be able to do that?
11:40 We are also working on SIPA.
11:43 I think maybe by Q3, we'll be able to take
11:47 the first lot of SIPA.
11:48 That's what we are targeting for.
11:51 We have the location in place.
11:53 And everything in place-- so how does--
11:56 will that benefit you in any way?
11:59 How does it benefit you--
12:00 the benefits flowing for you, actually,
12:03 when you go through SIPA?
12:06 The 1% import duty exemption is there for SIPA gold.
12:10 That is our major benefit.
12:11 OK.
12:14 Ramesh, my final sense is that your entire expansion strategy
12:18 is based on franchisee now.
12:22 Have you abandoned own store growth as well?
12:26 Or how is it, actually?
12:30 Like I told you before, we have a two- to three-year mission
12:33 where we want to lighten our balance sheet a bit.
12:35 OK?
12:35 And that is why we are not allocating our cash
12:39 into expansion.
12:40 We don't want to sacrifice growth.
12:43 And growth will come up through franchisee partners.
12:46 And the free cash flow will go on to reduction of debt,
12:51 which will take out our non-core assets from the book.
12:54 We can liquidate it and bring it back
12:57 to the system, which will again lighten our balance sheet.
13:00 So that is a two- to three-year mission.
13:02 Post that, of course, we have to open our own stores as well,
13:05 because again, the balance sheet will be heavier if we don't
13:08 allocate that cash in.
13:10 OK.
13:10 So for the next two years, at least
13:12 you are going for a franchisee model.
13:13 And then you may re-look at the store strategy going forward.
13:18 Yes.
13:19 Yeah.
13:20 Ramesh, it was a pleasure talking to you today.
13:21 Thank you very much for joining us on B2B.
13:23 Thank you.
13:24 Thank you.
13:24 Thank you, Edmund.
13:25 Bye.
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