Kalyan Jewellers India Ltd
NSE:KALYANKJIL
Earnings Call Analysis
Q3-2024 Analysis
Kalyan Jewellers India Ltd
The company experienced a robust quarter with a consolidated revenue increase of 34.5% year-over-year to INR 5,223 crores. India led the way with a 40% revenue jump, contributing INR 4,512 crores and an approximate 26% rise in profit after tax (PAT) to INR 168 crores. The Middle East also saw growth, albeit more modest at around 6.5%, with PAT at INR 14 crores, slightly down from the previous year's INR 17 crores. Such financial health was buoyed by the significant expansion of 22 new Kalyan Jewellers showrooms in India and a broader roll-out of 8 Candere physical showrooms with plans to open 12 more in the ongoing quarter.
The company has embarked on a strategic debt reduction journey, notably within the Indian and Middle Eastern markets. Proceeds from the sale of noncore assets and the conversion of owned showrooms to franchise outlets are being used to meet these objectives. For instance, the conversion of 7 owned showrooms to franchise ones is projected to facilitate non-GML working capital loan repayment in India.
To support franchise expansion, the company has engaged in issuing corporate guarantees to financial partners on behalf of its franchisees, particularly in the Middle East. Although there's an additional guarantee burden, it's counterbalanced by the release of certain guarantees and characterized by the company as a broadly neutral transaction.
The company noted increased competitive intensity, driven by rising gold prices, which prompted it to boost promotional efforts to maintain market share. While the studded ratio—a measure of higher-margin jewelry sales—is at 30% in non-South markets, the overall ratio remains lower. This discrepancy primarily arises from the introduction of hyper-local gold jewelry that caters to the specific tastes of new market entrants, which initially drives down the studded ratio when franchisee stores first open.
Some challenges reflected in the conversation include concerns over the choppy bond market, which affects external fundraising plans, and a slight PAT decline in the Middle East due to increased financing costs and lower gross margins from franchisee showrooms. However, active expansion plans are set to unfold with 12 new Candere stores and at least 15 Kalyan showrooms expected to open in Q4, contributing to the overall strategy to increase market reach. Next year's projections include 80 new Kalyan showrooms in India and an international growth plan encompassing 4 to 5 new locations, which may include expansion into the U.S. market with 2 pilot, company-owned showrooms.
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Ladies and gentlemen, good day, and welcome to Q3 FY'24 Earnings Conference Call of Kalyan Jewellers India Limited. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectation of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Agarwal. Thank you. And over to you, sir.
Thank you. Good afternoon, everyone, and thank you for joining us on Kalyan Jewellers India Limited Q3 and 9 Months FY'24 Earnings Conference Call. We have with us Mr. Ramesh Kalyanaraman, Executive Director; Mr. Sanjay Raghuraman, CEO; Mr. V. Swaminathan, CFO; Mr. Sanjay Mehrottra, Head of Strategy and Corporate Affairs; and Mr. Abraham George, Head of Investor Relations and Treasury. I hope everyone got an opportunity to go through our financial results and investor presentation uploaded on the company's website and stock exchanges. We will begin the call with opening remarks from management, following which we will have the forum open for a question-and-answer session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Mr. Ramesh Kalyanaraman, Executive Director of Kalyan Jewellers India Limited to give his opening remarks. Thank you, and over to you, sir.
Thank you. Good afternoon, and let me welcome everyone to the call. It has been a fantastic year so far. All the quarters have been excellent. For the most recently concluded quarter, we recorded a consolidated revenue of growth of around 34%; India revenue growth of 40%; consolidated revenue growth for the first 9 months of the current financial year is around 31%; and revenue growth in India was at approximately 36%. During the recently concluded quarter, we continued our strong expansion momentum, opened 22 new Kalyan Jewellers showrooms in India. While 7 of these were owned showrooms, we expect to convert those to FOCO showrooms during the ongoing quarter, and the proceeds will be utilized to repay the non-GML working capital loan in India. With respect to the divestment of noncore assets, we have secured the bank NOC for the sale and have completed the documentation with the buyer. In addition to the advance received earlier, we have received one more tranche of funds and expect to conclude the sale soon. Proceeds from this sale can also be utilized to repay the debt in India. We are well on track to achieve the debt reduction target set for the current financial year.
We are embarking on a debt reduction journey in the Middle East as well. As I mentioned in our earlier interactions, in addition to new FOCO showrooms, we will also be converting a few of our existing owned too into franchise showroom and shall be utilizing the proceeds from the conversions to repay the working capital debt in that region. I would also like to spend some time on our digital-first platform Candere network expansion plan. As we speak, Candere has 8 physical showrooms, and plans to add another 12 during the ongoing quarter.
Aggressive network expansion plan has been drawn up for the platform during the next financial year with 50 LOIs already signed and showroom locations beginning to be tied up. Let me give you an update about our international markets outside the Middle East. U.S. market for Indian jewelry has evolved over the years and holds significant promise. Even though we have been receiving significant number of inbound franchise inquiry for U.S. market, we have decided to launch the first set of 2 pilot showrooms as company-owned ones. Post the pilot phase, all additional showrooms in the region shall be through franchisee model. We are upbeat about the upcoming new showroom launches and have launched first collections and campaigns for the ongoing wedding season across the country. Now I will invite Sanjay to take you through the financial highlights of the quarter. Sanjay?
Thank you, Ramesh. Good afternoon, everybody. We just completed a good quarter, and I shall give you some details about the numbers in this last just concluded quarter. We reported a consolidated revenue of INR 5,223 crores, growth of 34.5% over the same period in the previous year. Consolidated profit after tax was INR 180 crores versus INR 148 crores in the same quarter of the previous year. Now to just break this up between India and the Middle East, I'll start with the India numbers. India revenue came in at INR 4,512 crores, a 40% growth when compared to the corresponding quarter in the previous year. India profit after tax came in at INR 168 crores compared to INR 133 crores in the same quarter of the previous year at 26% growth. Moving now to the Middle East. Revenue for the quarter in the Middle East was about INR 683 crores, a 6% growth compared to the same quarter in the previous year. And the Middle East business posted a profit of INR 14 crores for the quarter compared to a profit of INR 17 crores in the corresponding quarter of the previous year. During this quarter just concluded, we opened 26 showrooms in India across the Kalyan and Candere formats. With this, I'm done with the summary of the financials, and we now open the floor for questions. Thank you.
[Operator Instructions] The first question is from the line of Shirish Pardeshi from Centrum Broking.
Congratulations for a good set of numbers. Starting with the revenue growth momentum in the Middle East and there is a loss -- I mean there is a PAT which has declined. So if you could give a little more color how you look at the next 2 to 3 quarters for the Middle East business?
Middle East, yes, so the revenue has grown by around 6.5%, and SSGs have been in the range of 4% -- 5%. And the PAT degrowth, which you see is predominantly because of the interest rate hike, which has been there over the past 2, 3 quarters now. And there is at least a 2% interest rate hike, which has been there when you compare to Q3 of last year. And one more reason is that franchisee share comes with a lesser gross margin. So these are the major 2 reasons why you see a degrowth impact even after a 5%, 6% revenue growth. But way forward, I think it should be good because market is still vibrant and store expansion is also there and franchise LOI's have also been signed for expansion there.
So a follow-up here. What is this 50 million corporate guarantee we have given? I mean what is it is going to do to the impact on the Middle East business?
So the guarantee which you see is you know that India, we had -- the franchisee was very successful because predominantly the major reason being we have tie-up's with banks and NBFCs here in India who fund our franchisee partners in their own terms. There, we do not have such kind of a tie-up there. And the partners whom we were looking for also could not arrange any funding in that region. So now we successfully have tied up with financing houses, where they will fund our franchisee partners.
The only difference being we will have to issue a corporate guarantee on their behalf. So that is what you see as the additional corporate guarantee, which is given. But the advantage there, what we have got is that since we are in talks with the banks there because they also know the rest next 2, 3 years, what is our plan in Middle East because franchisee is coming in and more liquidity is coming in and over the past 2 years also Middle East has been behaving good, okay?
And we could actually release corporate guarantees from certain banks. So the additional corporate guarantee is not very high. So it is almost a neutral transaction. But the guarantee which you see now in the update is that guarantee is going to -- on behalf of franchise partners, but we have released certain corporate guarantee also. So it's almost a neutral transaction which you see.
I understand. But sorry, I'm a little harping more. About 15 months before, we were also planning to fund raise in the international market. Now is those plans are live?
Bond you mean?
Yes.
So we are not sure about the bond market still because it's a bit choppy, but it's not a no. But as we speak, we don't see anything coming up very shortly.
Okay. My second question is on India business. I think the revenue momentum is stronger. But when I see the showroom contribution from the franchise-owned is rising, but it is not directly reflecting into the studded share. Studded share is still hovering between 27%, 28% and 29%. So what is the problem here? I mean I do understand you have been taking a lot of efforts to develop these stores and franchise. But I think I was expecting that we should be neck-to-neck with the competition, maybe about 30% plus.
So for 2 reasons, one being at the store level, especially in the non-South markets, the studded ratio is still in the range of 30%. But what you see here is majorly because the first time revenue which we get when we open a franchisee store, that studded revenue might not be at 30% because it depends upon market to market. Now for certain markets, we'll have to keep some hyper local gold jewelry, where in the studded composition which we sell in that initial bulk revenue might not be the biggest.
Okay. Got it. And the last, I think we see the festive season has seen a lot of discounting. So could you paint some picture how the competition behaved this time because everybody is trying to look at the same pie and the discretionary spend. So is the competitive intensity is now normalized? Or you think even quarter 4, you will see the similar intensity?
Competition is part, now you have seen it. every quarter competition is there, every market competition is there, it's how you handle your competition during various times, right? So during the period immediately after Diwali yes, you are right, we saw some heightened level of intensity in competition because the gold price suddenly started going up, where the local players in many markets, we started seeing more competition. Otherwise, it's very flattish. So we also spend more on promotions and campaigns in those regions where we saw this level of competition intensity to match in our - match in competition with them.
Okay. And just one last question for Sanjay. You have signed 50 LOI for Candere. At what stage do you think the store expansion will take a speed?
Sorry, your voice faded. At what stage did you say?
The presentation says that we have signed 50 LOI for Candere business, right? So at what stage we see the speed which will pick up? Is it going to bunch up in quarter 1 next year, quarter 2 or it will be evenly spread out? Or we have plans to open few in quarter 4 also this year?
We will open, I think, about a dozen in this quarter. The bulk of this 50 will kind of get spread out over next year. There's probably some upside on that number, but we'll talk of that later. This is the way I think it will build over the next years.
Yes. The reason why I'm asking is the off-line is going to really solve the problem for Candere's sales decline? That's the whole question, because the last 2, 3 quarters, we have been seeing there is a consistent decline.
I think the first point we want to communicate is that this is an omnichannel business, and we believe the online business is going to be complemented. And as the off-line store network rolls out, we'll have a good network effect, which will allow sales to come back. We are already seeing that in the 7, 8 outlets that we are operating now. And I think we are headed in the right direction on that. We are not doing anything new. We're just seeing what is already playing out in the market with other brands.
[Operator Instructions] Next question is from the line of Gaurav Jogani from Axis Capital.
Sir, first question is with regards to Q4, how are you seeing the trends emerging in Q4, the first month is completed. So one on that? And second, on the store expansion plans for Q4 specifically. I mean what kind of show expansion plans do you have for Q4 and the year end?
Yes. So momentum in Jan, it's continuing like Q3, the SSGs have been very similar to what we have seen in Q3. Momentum is strong. And store expansion for Q4, we will be opening at least 15 Kalyan showrooms. And again, 12 Candere stores, Middle East can be one. And next year, we will be opening 80 Kalyan showrooms in India. We will -- we will be -- international will be in the range of 4 to 5. And Candere is minimum of 50, because 50 we are talking about is only franchise. Candere expansion will be a mix of franchise and owned. So we are already signed 50 and we are still signing and we are looking out for locations. So Candere expansion it should not be 50, should be a minimum of 50.
Sure, sir. Got that. And sir, you also mentioned that you're planning to open 2 showrooms in the U.S. market. So that will be inclusive of the 4, 5 guidance that you gave for the international market?
Yes, that will include -- 5 will be including the 2.
Okay. And sir, my question also again is with regards to that guarantee part, the guarantee thing if you can explain it a bit better, there was -- it was a bit confusing, it wasn't very clear.
So I will do a detailed explanation. Okay. So as you are aware, we launched our first franchisee showroom in the region recently. And we have signed 5 LOI for the current financial year. One of the key factors for the success of franchisee rollout in India has been because we have ties with banks and NBFCs who will fund to our franchisee partners in their own terms.
But unlike in India, the only difference in Middle East is that we will have to provide a corporate guarantee for these facilities, which they provide to our franchise partners. The corporate guarantee that you are referring to is for this purpose only, okay? The additional corporate guarantee given is only, say, what USD 10 million or USD 11 million. That will also come out because we are reducing debt in the Middle East because we are converting 3 showrooms there into franchisee from owned. And this corporate guarantee of additionally USD 10 million or USD 11 million, which is given now will also come out in the next 3 or 4 months.
So it will be a neutral transaction. The only difference being as of now all the corporate guarantee given for Kalyan Jewelers loan. But the corporate guarantee, which we are issuing now is not for Kalyan Jewelers loan. It is for the loan taken by the franchisee partners, and we give the corporate guarantee on their behalf.
Okay. So in effect, I mean, while the total corporate guarantee will remain the same. Now it will not be for Kalyan Jewellers stores, but it will be for the franchise thing.
Exactly.
Okay. Okay. And sir, like you mentioned that even in India, there are banks and NBFCs who gave the franchisees funding because of us. But is there any recourse, I mean, in case of any as in called by the franchise partner in payments? Will there be any recourse to Kalyan Jewellers in that case or not?
No, no, no, nothing, nothing. Nothing at all.
Okay. And sir, my last bit is on the interest part, the interest expense part. I mean if we see a quarter-on-quarter basis also, the interest expenses largely remained flattish. And even on the 9-month basis, the interest expense is a bit higher. So if you can help us out, I mean, where can we expect this interest expense reduction going ahead.
So interest, because we have hardly reduced what INR 150 crore of debt now. So interest reduction will be seen for the next financial year because even as we speak in Jan, we have not reduced the debt because aircraft money is yet to come, only INR 33 crores has come in total. And the store conversion money has also not come. All this will be coming in maybe by March. So March might be the month where we save interest for the rest of the debt which we are planning to reduce. And next year, of course, the full INR 300 crores, INR 350 crores, which we reduced this year, you should see interest again. Plus what we are...
Yes. So next year, what would be the guidance for the debt reduction?
So debt reduction for the next year, what we can estimate is INR 350 crores, which we -- INR 300 crore to INR 350 crores, which we reduced this year will be there for the full year. Next year, debt reduction will be in the range of INR 400 crores to INR 450 crores, out of which you keep an average of, say, INR 200 crores for the full year. So that will be the net debt reduction if you are trying to calculate the interest savings.
Sure. Okay. And the last bit is on the other income part, I mean because you are also receiving some other income money because of the CapEx that you are incurring for the franchise partners. And typically, that is kind of INR 4 lakh a month number in that sense. And with the franchisee numbers increasing, what kind of other income can be expected in the times ahead?
So we can't -- I mean, in terms of line items, this is going to be the only thing. There is going to be the rent that we claw back on the franchise, the infrastructure usage fee. That's all, no other line items.
No. So my question was like this year, by the end of this year, we'll probably have 80 franchisee showrooms that we will be closing this year. And probably, we'll be adding another 80 showrooms next year. So in effect if I take an average, there will be around 120 franchise showrooms say for the next year. And on that, should I take a INR 50 lakh fee for the entire year. So that will be a right type of assumption?
Yes, yes, yes.
[indiscernible].
So I think what you -- I mean, in terms of accounting for it, what you're saying is right. But this is not just fee income for us. There is a line item on the other side, which is an expense, so I'm sure you got it in mind.
Yes. So we'll increase the other expenses because depreciation amount is also coming in that line item, but accordingly, the other income is also coming.
Yes. So I mean, it's going to be P&L neutral. That's the basic point that you should keep in mind.
[Operator Instructions] Next question is from the line of Ashish Kanodia from Citibank.
So the first question is, of the 18 new franchisees stores which you're planning in FY'25, how many of them will be under the revised terms where the CapEx will be borne by the franchisee partners and then there will be some margin benefit as well?
So maybe the first 30 to 35 showrooms will come with an older model, where the CapEx is put by Kalyan and rest 55 to 60 will be -- sorry, 45 to 50 will be in the range of the new model, around 45 to 50.
Sure. And from -- while CapEx, I understand, on the margin front, what kind of an incremental gross margin will you get for these 45, 50 stores?
0.25 to 0.5, it depends because it's not a plain vanilla model. It's what you call performance-oriented model, which we have worked on this additional margin. So I think it should be budgeted in the range of 0.25 to 0.5.
Sure, sure. And secondly, I think on the debt reduction, just wanted to understand if I understand it correctly, you were saying current financial year, which is FY'24, there will be a total INR 350 crores worth of debt reduction. And then in FY'25, what is the incremental number? Is it going to be INR 200 crores? Or is it going to be INR 450 crores -- I mean incremental, what will be the '25 debt reduction?
Incrementals should be in the range of INR 400 crores to INR 450 crores, but it will be done over the year, so for him to look at the interest saving, I told okay, keep INR 200 crores as an average for the full year.
Sure, sure. And so just wanted to kind of -- more from a debt reduction, not from an interest perspective. So out of this INR 300 crores, INR 350 crores, almost INR 130 crores will come through the sale of non-core assets and the balance, you will be basically utilizing the free cash flow generation and just the conversion of stores, right?
Yes. So INR 100 crores will come from the noncore because even though it's INR 135 crores net of tax, it's only INR 100 crores. And the rest is, we'll convert the 7 showrooms which we opened in Q3, so that you -- meaning that comes in the range of INR 150 crores to INR 175 crore. So majorly done plus some cash generated. So it's almost done in the way we wanted.
Sure. That's helpful. And on the store part, you said you are planning to open 15 Kalyan showrooms in 4Q and 12 Candere. Now this 15 stores, does it also includes your -- the 5 Middle East stores?
No, no, it's only India.
Okay. And so in 4Q, we expect to add 5 Middle East, right?
So out of the 5 meaning it might be in Q4 or partially in Q1. It includes 2 new showrooms and 3 conversions, all 5 are not new.
Okay. Sure. Got it. And just lastly, in terms of the plan to kind of enter into U.S. So firstly, what kind of like capital you're planning to deploy in U.S.? And the 2 stores which you are planning, have you already identified the location, et cetera, and when the stores will most likely be kind of open?
So yes, location have been identified. And again, we will be opening in the first half of the next financial year.
And what kind of overall capital deployment you kind of -- you're expecting to deploy for these 2 stores?
Too sensitive info.
[Operator Instructions] The next question is from the line of Pulkit Singhal from Dalmus Capital Management.
This is the first quarter where we have very high revenue growth, which did not translate to an equivalent PBT growth. In fact, there's a substantial difference in your PBT growth and revenue growth. I'm just trying to -- yes in Q3. So 40% is translating only to 26% PBT growth.
Now I understand that we are in a major revenue expansion by store expansion drive. And also there's a business model change, right, which we are going for franchisees. Now in the process of doing so, are you seeing that this will be margin dilutive because you're going into areas which may require -- which may not be as comforting on margins as you might have initially thought it to be. I mean, your thoughts on the same.
So we still stand by what we have stated earlier that the PBT growth would be higher than the revenue growth for the full year. And if you look at the 9 months, the PBT margins have been similar Y-o-Y, even after absorbing maybe 0.2% to 0.3% of preoperative employee expenses in Q1 and Q2. The impact of the preoperative employee expense is coming down and will fade further going forward, okay. And however, if you look at only Q3 in isolation, yes, you are right, there has been a degrowth in PBT as a percentage Y-o-Y.
And for this also, there is primarily because of two reasons: a, baseline PBT for comparison itself should be 5.4 and not 5.6 of last year because we had very few franchisee shops operational last year and bulk of the revenue was from KJ-owned shops. This year, a significant share of revenue is coming from franchisee stores where the PBT margins is 5%, as I have previously told you.
We -- there has been an increase of around 0.3% in advertisement, which was at a lower base in the last year, since Diwali last year was in October. So otherwise, we still stand by what we said. We don't see any pressure in margins going forward and for the full year.
But when we look at it 2, 3 years out, this phenomena of higher revenue share of franchisee will always take place because you're incrementally always opening new franchisee stores. So therefore, to that extent, this pressure should continue, right?
Only in Q3, usually, our PBT margins are only in the range of 4.7%, 4.8%, okay? 9-month PBT is 4.8% last year and almost in that range before -- meaning this year also. So 4.8% this year meaning 4.9% last year, okay? So it is in the range, below 5%. All the PBT -- all the franchisee stores come with 5% PBT, okay? That is why we told you that revenue -- the PBT margin growth should be higher than our revenue growth.
Q3 was an exception where the PBT margins were 5.6% last year. That is predominantly because of advertisement expense at a lower base, okay? So that is why we think that we still can stand by what we have said. And it will be done in such a way that our PBT margin growth will be higher than our revenue growth. And again, one more thing what we have to keep in mind is that the franchisee stores also might come up with 5.25% to 5.5% PBT because we are working on a new model.
Right. So the new model comes into play and that helps the margin.
Not only that, but again, I told you, usual PBT margins are only 4.8%. So Q3 was exceptionally high at 5.6%.
Understood. So I'm not thinking 1 or 2 years out. I mean, as I said, increases. So you have higher mix of higher PBT margin new franchisees coming up.
Yes, that is fine. Even if it is at 5% also, then it should go up because now you know that it's at 4.8%, 4.9%, no, existing last year's PBT.
And also the deleveraging part, that should also kind of -- I mean, in some ways help because the PBT margin is with certain assumption of your expense right?
I'm talking about without that. Even without the interest savings, we should be at a higher PBT margin than what you call the PBT growth should be higher than revenue growth.
Understood. And on A&P spend because this is something which is evolving. And maybe our current calculations, I don't know how much they are factoring in. But is this a one-off? Or do you see an elevated A&P spend scenario going ahead?
So again, last, if you look at Q2, the A&P was only at 1.4%, which is 2.3% for Q3. If you look at 9 months, A&P is at 2%. So we should always -- but this is at 2%. Diwali moving from Q2 to Q3 because last time October second week was Diwali. So we've started the campaign by September. This year, Diwali was only November. So we campaigned, this started only by October. That is why the shift in expenses within the quarters, but within the year, it should be at 2%.
Okay. Okay. Just last question on the studded share. As the first set of franchisee stores come in the base, their recurring revenue should have higher studded share, right?
Yes, of course, correct.
And so that will play out hopefully next year. Although the initial -- I mean, the new set of stores will again have the same problem possibly.
Yes. So even if recurring studded share goes up because we are opening 80 showrooms. That comes up with a lower studded, because in tier 3 showrooms we cannot keep a 30%, maybe it might be 25%, maybe it may be 26%, it depends upon that market. So that studded bulk revenue -- in that bulk revenue studded ratio might be lesser.
Understood.
But again, margin, meaning the studded ratio, even if it grows, the margin is not going to be impacted because even otherwise franchise revenue comes up with only, say, 5% margin. Only one time we are talking about. Otherwise, in the recurring stores studded ratios are strong.
Right. Right. So recurring stores don't have a higher PBT margin than 5%. Is what you're saying even when the studded normalizes?
Meaning very partially, but it negates to 5%.
Next question is from the line of Manish Poddar from Invesco Asset Management.
So just one question on the cash flow. So can you call out what is the cash flow done in this, let's say, quarter?
So the -- for the quarter, we had INR 328 crores operating profit before working capital change. And we invested around INR 114 crores into CapEx and additional investment into inventory was INR 200 crores, which is mostly for fair-end owned showrooms we opened. Total cash balance in India has gone up by INR 120 crores.
So just to understand this absolute inventory number now is about roughly INR 7,500-odd crores. Do you see as a number of days this getting optimized? Or how should one think about it?
Yes, Manish, Abraham here. So for this quarter, we have opened 7 showrooms with our own capital. So to that extent, the inventory turn will not improve there because it's our own showroom. But those showrooms are getting converted in this current quarter. And where you are right, going forward, the inventory turn will improve because the inventory will not sit in our books it will be in the franchisee books.
Okay. So this should happen -- in my understanding, this should have happened this year, right? So it's...
It's already -- if you refer to the September balance sheet also, you will see that improvement in inventory turn and you will see the same by the end of the year as well, even better inventory terms, so let's say [indiscernible].
Okay, I will take this offline.
Next question is from the line of Prathamesh Dhiwar from Tiger Assets.
Yes. I just wanted to know any revenue guidance you can give for coming year.
Meaning for the next future years you mean?
For FY'25, FY'26.
So we are opening 80 showrooms. And again, we have opened already, we will be opening 65 showrooms in the financial year. That revenue will fully come in the next year. SSGs are strong, but meaning keep a 67 SSG. So revenue growth should be strong enough, right? Very inappropriate to give a number now.
And sir, the major growth will be driven by like both SSG and the new store additions or the major will come from the new stores?
So 3 factors. One is SSG; two is 80-plus new showrooms in the next year; three is the full revenue for the 65 showrooms which we opened this year.
Okay. Okay, sir. Got it. Got it. And sir, like you said the PBT growth should be more than the revenue on the consolidated basis?
Yes.
Next question is from the line of Anurag Dayal from HSBC.
Basically, on the franchisee showrooms several showrooms have completed 1 year. So can you throw some light on how these showrooms have done compared to your initial expectation in terms of same-store sales growth or inventory turns? Are they trending similar to your own showrooms or slightly different since most of these showrooms are opening in Tier 3 towns. Some light on that will really help.
Yes. So for stores more than 6 months old, we have around 30-odd showrooms in operation now, okay? It's FOCO model. We have done the review for performance. Majority of the stores are performing as per expectations. However, there are around 4 stores where the inventory turn is still not up to the mark. We have offered the franchise to reduce inventory. And -- but most of the franchise have decided to continue with the existing inventory in the store. There are 2 or 3 stores where we had to increase inventory because the stock turns were more than forecasted and franchise have been given time till -- meaning they have a 1-month notice, which we have already given. So overall, a majority of the stores are performing as per our expectation.
And this inventory turns is like 2.5x or something different what you are...
Yes, 2.5% for the first year.
Okay. Great. And sir can you broadly tell us -- I mean, if we were like to see the retail sales numbers, you start providing at some point of time since share of franchise revenue is increasing to better appreciate these numbers.
We will surely at the appropriate time.
Yes, but the share is going up. And another is regarding noncore assets. So I think aircraft is already done and we have to receive rest of the balance amount by end of this year. So do you have any plan for the aircraft as well which is on the book -- helicopter, sorry, not the aircraft.
No, no. Let us first -- this transaction itself got meaning -- not completed, let us do this first and then we shall -- helicopter is a very small asset again, it is only worth -- it's only INR 20-odd crores in the book, helicopter.
So what other noncore assets in INR 100 crores you are targeting this year, from noncore asset sales, so...
No, sir, noncore asset is majorly these aircraft and helicopter. But again, for the future years, what we see as a noncore asset is, there are real estate, which is noncore for the business. Once we repay the debt we can get this out from the system and which is, again, we can liquidate it. So maybe if we repay around INR 350 crore repayment of debt, INR 100 crore worth of collateral come out and that can be liquidated. So that is again a noncore.
Okay. Okay. okay. And one last bit is on metal gold loan. So in the domestic market, as I understand that it was reaching the ceiling and you were in negotiation with the banks to increase that. Is there any development there?
Now our primary focus is to reduce the non-GML part, okay? So then we are in a debt reduction plan. We are in a plan where we negotiated with the banks to take out the asset. So that is our primary focus area rather than increasing the gold loan quotient. So focus is anyway for the next 2, 3 years on a very conservative basis, there will be only gold loan in the book because we have plans to almost voice out all the non-GML loans in the book, worst case scenario.
Next question is from the line of Pallavi Deshpande from Sameeksha Capital.
So just two questions. One would be, what would be the amount of -- for the front ending of the employee expenses, which you spoke about. So the absolute amount in Q2 was INR 5.5 crores, similar for 3Q what would that be? And second question would be regarding these new store openings, is there an amount, I missed the beginning part of the call, is there an amount you quantified for the extra expense that may have gone into the OpEx.
So majorly salary, so it should be in the range of INR 5 crores, INR 6 crores every quarter this year. And now for future years, why we told that this is substantially going to come down is because the base is also higher. So even if it is -- meaning we will not -- even if it is INR 5 crores to INR 6 crores on a percentage note, the base is higher. So the impact is going to reduce. Otherwise, there is no prepaid expenses other than salary cost because that is the only cost which we bear on behalf of the franchisee. And in Q3 also, if you look at the impact has reduced as the base is increasing. So Q1 and Q2, there was 0.2% to 0.3%. But Q3, the base is -- meaning because the impact has reduced because the base is increasing.
Right, right. And the lease expense also we take on ours and then it gets reimbursed from them to the other income, is that right?
Yes. We lease the promises in Kalyan and then sublease it to the franchise owner.
Right. And that shows up in the other income. So how much was that amount for this -- in the other income, how much is that?
Yes. Just give me some time. I'll just check that. You can move on to the next one, I will give you...
Right, yes. So the other part was what would be the share of franchisee contribution to our revenues for the India revenues contribution. Last quarter, it was around 20%.
It should be, meaning in the range of what, 21%, 22%.
Next question is from the line of Pratik from Motilal Oswal.
Can you hear me?
Yes, loud and clear.
A few questions, one, thoughts on overseas expansion and, let's say, opening stores in the geographies that you are not present before, one. Two, in terms of jewelry, do you wish to continue to do only gold and diamond? Or do you want to increase the assortments, Emeralds, Rubies, et cetera, and maybe even synthetic diamonds. So those are -- and lastly, your working capital. How much it got released, how is the return on capital employed shaping up?
Yes. So one by one. One is the U.S. market, yes, the market, as we mentioned, the market is becoming very mature. There are a good set of competition there. The market is also expanding, so we wanted to enter that space. And again, we are opening only two owned stores there. And even though we have inquiries from franchisees, we would like -- we would like to do 2 owned stores as a pilot. And then we might convert even the store into franchise in the future stage. So the intention is to go and establish the brand there and again, expand through the franchisee model if the market is vibrant enough. So that is about the U.S.
So targeting Indian population there? Or you are...
Only Indian population. And second, you were asking about other than gold and diamond. We already have focus on Polki, Ruby, Emerald, uncut diamonds, et cetera. So that is a focus area for us already. And synthetic diamond, we are not at present, the inquiry level at the store is almost negligible or even 0. So once we see that demand is getting accumulated, then we will surely look in that. But as we speak, we don't see any demand in that space. So we are not into that space as we speak.
Got it. And third was on return on capital employed, how much working capital reduction has happened because of your FOCO model, something on that?
Abraham here. So because of the FOCO model, not strictly because of the FOCO model, we are reducing the capital employed. Capital employed reduction is happening because of our debt repayment because the FOCO model is enabling us to generate more free cash. And this free cash, we are using to repay debt.
Then through the debt payment, we are releasing the collateral. Those collateral is what is coming out and going to reduce the capital employed. That is the way the capital employed is getting reduced. But the return on the capital employed is getting improved because of FOCO model because incrementally, we are not investing into the new showrooms except for the fit out expenses this year.
So that I understand, how is it moving quarter-on-quarter, if you can give some number that would be helpful.
As we speak, without considering gold metal loan as our capital employed, we are already at close to 19% ROCE, with considering gold metal loan we are closer to 15% ROCE. And this is a...
How was this number a quarter back and a year back?
So almost a year back, we were closer to about 13.5%, 14%. Now we are crossing 15% this year. And we should be able to comfortably go closer 20% and even cross 20% over the next 2 to 3 years' time. The ROCE -- even with considering gold metal loan, yes.
Oh, even with gold metal loan, okay.
Yes. Otherwise, we are already at 19%. We're already at 19% without gold metal loan.
Out of gold metal loan what?
Gold metal loan in the industry, there are 2 sets of way the gold metal loan is viewed by the market. One set of analysts and investors view it as payable, so they don't consider it as part of capital employed. But in our conservative calculations, we consider it as normal debt in our conservative calculations. That is why I said if I take it into consideration and consider it as debt, then our ROCEs are closer to 15%, so it is gold taken on lease from banks and it's a 180-day contract. So in -- some investors and analysts consider as payable and not necessarily consider it as capital employed.
Next question is from the line of Ashish Kanodia from Citibank.
Just 2 follow-up questions. One is, you talked about improvement in gross margins at a showroom level on a Y-o-Y basis. So if you can provide any color, both for India as well as for Middle East, what is driving this improvement? And any ballpark number you can share, what kind of an improvement we have seen on a Y-o-Y basis?
Gross margin improvement has been fair, but very marginal on Y-o-Y KJ showrooms. And the major component, you know, studded ratio again, but we have competition on the plain gold. So it gets negated because of the studded ratio improvement. And gross margin improvement for the next -- because market share is increasing and focus might not be fully on improving the gross margin, but will be to improve the market share because market is wide open and a lot of shift is coming from the unorganized to organized. So margin improvement will be very minimal. But revenue momentum is very high.
Sure. That's helpful. And secondly, on the demand side, as you talked about similar same-store sales growth in Jan as well compared to, say, what we have seen in 3Q. So I just wanted to get more sense in terms of when you look at 3Q and maybe January as well, have you seen any difference in demand trend across, say, a metro city versus nonmetro city or even within your -- within metro and nonmetro, is there any difference in the growth trajectory for say, higher-priced product versus lower-priced product, any difference you have seen across -- in terms of any of these parameters?
So more than metro, nonmetro, there has been differences in the revenue growth. In certain markets, we have seen more revenue growth, okay? Performance has been much better than the rest of the markets, like Tamil Nadu, for example, the revenue growth has been -- the performance has been much better than the rest of South India. So there have been markets like that, but it cannot be only metro, nonmetro, that's what I'm trying to say.
Sure. And maybe have you seen any difference in the growth in terms of maybe between, say, a high ticket versus low ticket site? Have you seen any difference in those as well? Or they are also broadly similar?
So in certain seasons, we have seen that high-ticket product as such the demand has improved over the year. For the past 2, 3 quarters, we see the trend where high-ticket products demand is higher than the rest of the products, especially when it comes to diamond and polki, et cetera.
Next question is from the line of Pallavi Deshpande from Sameeksha Capital.
I just wanted to understand in terms of this expansion of 80 stores, how much would be South and non-South next year?
Yes. So Abraham, you want to answer the other -- yes.
So Pallavi, to your earlier question, the rent income and the other income is about INR 6 crores for the quarter. In addition, the right use assets, it has come down by approximately about INR 11 crores in Q3, the reduction in depreciation. So this is...
Right, okay. Yes, got it.
And your question for 80 showrooms, you should budget 70 non-South and 10 South India.
Next question is from the line of Alisha Mahawla from Envision Capital.
Sir, clarification, these 80 stores, are all the LOI signed at this time?
Yes, all have been signed.
And the 50 Candere stores, what is the kind of unit economics there? What is the inventory and the asset owned for Candere store?
So at a high level, this is going to be very similar to the model that you already have in place on the Kalyan Jewellers side. The stock turns of the margin share will be different. We do have a working model already in place. In this immediate first year, next year that we will increase the network, we will be quite conservative in stock turn because we're going to start building the brand only towards the second half of the year. So I think -- I don't want to give out specific numbers now, but I've given you an indication on how it can look like.
So at least the inventory should be in line with what probably Kalyan stores are and the asset owned could be slightly lower.
Did you say inventory, no. Inventory turn, yes, yes.
Inventory turn would be lower on that side, what is the kind of inventory that...
The inventory turn and the margins, both are going to be different, okay? In the very first year, which is next year, the inventory turn will be a little lower muted because we're only going to start building the brand in the second half of the year. Margins are likely to be better only because share of studded jewelry will be higher.
Okay. And the 80 stores for Kalyan Jewellers, there is no company -- FOCO stores that we're planning to add, right, apart from some Candere stores in FY'25, are there than any company-owned stores that you're planning to add?
Yes, all 80 will be FOCO franchisee for Kalyan. Candere will have a few owned stores.
Okay. And Middle East or the international apart from the 2 in U.S. there's nothing else that would be FOCO.
Yes. So there'll be no own stores in the overseas except the two in the U.S. Of course, as you know that even this year, by the end of March, we would have opened only FOCO model stores, right? But there are quarters where we open, own and then convert because the season we don't want to lose and stuff. Otherwise, the intention even for this running year, was only to do FOCO model only.
As there are no further questions from the participants, I now hand the conference over to Mr. Ramesh Kalyanaraman, for closing comments.
Yes. Thank you very much, and we look forward for a great quarter, and see you soon. Thank you very much.
On behalf of Kalyan Jewellers India Limited, that concludes this conference call. Thank you for joining us.