Renaissance Global Limited has informed the Exchange regarding Analysts/Institutional Investor Meet/Con. Call UpdatesWith reference to our letter Ref. No RGL/S&L/2020/11 dated February 10, 2020; pleas...
Ref. No.: RGL/S&L/2020/18
February 21, 2020
Bombay Stock Exchange Limited Listing Department Phiroze Jeejeebhoy Towers Dalal Street, Fort, Mumbai – 400 001
National Stock Exchange of India Ltd. Exchange Plaza, Plot no. C/1, G Block, Bandra Kurla Complex, Bandra (East), Mumbai - 400 051
Sub.: Transcripts of the Earnings Call
Ref.: Regulation 30 of SEBI (LODR), Regulations, 2015.
Dear Sir
With reference to our letter Ref. No RGL/S&L/2020/11 dated February 10, 2020; please find enclosed
herewith the transcripts of earnings call on Q3 & 9MFY20 results, held on Wednesday, February 12, 2020.
The aforesaid http://www.renjewellery.com/investor-relations/investor-relations.asp
is also being uploaded on
information
the website of
the Company at
You are requested to take the above on record and disseminate to all concerned.
Thanking you,
Yours faithfully,
For Renaissance Global Limited
G. M. Walavalkar VP – Legal & Company Secretary
Encl.: As Above
Renaissance Global Limited Q3 FY’20 Results Conference Call February 12, 2020
Moderator:
Good evening, ladies and gentlemen. I am Margaret, the moderator for this conference.
Welcome to the Q3 FY’20 Results Conference Call of Renaissance Global Limited, organized
by Dickenson Seagull IR. 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
‘*’ then ‘0’ on your touchtone phone. Please note that this conference is being recorded. I
now hand the conference over to Mr. Aakash Mehta from Dickenson Seagull IR. Thank you
and over to you, Mr. Mehta.
Aakash Mehta:
Good afternoon. I welcome you all to the Q3 & 9M FY20 Earning Call of Renaissance Global
Limited. We have with us Mr. Sumit Shah ‐‐ Vice Chairman. Mr. Hitesh Shah ‐‐ Managing
Director. The discussion today may include some forward‐looking statements and must be
reviewed or considered in conjunction with the risk with industry in general and our business
in particular. Now, I hand over the call to Mr. Sumit Shah. Over to you, sir.
Sumit Shah:
Good afternoon, gentlemen. On behalf of Renaissance Global, I welcome everyone to the
earning conference call to discuss overall performance during the quarter, and for the nine
months ended 31st December 2019.
For the benefit of audiences, who are joining our conference call for the first time, I would
like to give a “Quick Overview of the Company,” followed with a “Review of the Financial
Performance during the Quarter and Nine Months,” after this we shall take “Questions from
the Participants.”
Renaissance is a highly differentiated luxury lifestyle products company and is the largest
manufacturer and distributor of branded jewellery to global retailers. We are known for
designing compelling jewellery lines that allow our global retail clients to stand out and thrive
in a competitive market. The company is focused on the License Jewelry segment through
enchanted Disney Fine Jewellery and Hallmark Jewellery Collections and our own brand,
Irasva, through a joint venture with Times of India.
We have exciting new product launches in FY21 with Disney Treasures and Star Wars Line of
Jewellery.
As known to most of you, we acquired a US‐based company Jay Gems in August 2018, which
has the license for Enchanted Disney Fine Jewelry. Disney Enchanted is one of the premium
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brands with princess brands being a $3 billion‐plus brand. Our other leading brand, Hallmark,
is a consumer brand with global reach in more than 100‐countries.
Going forward, our strategy is to grow our branded jewellery sales in the existing markets,
which is the US, UK, Canada as well as to capture market share for Hallmark and Enchanted
Disney Fine Jewelry in New geographies, such as China, Middle East, India, Singapore,
Malaysia, South Africa, and the Philippines, where we are potentially having discussions with
retailers and currently distributing these products.
We already have a subsidiary set up in China to market the Disney Franchise. Further, in the
current quarter, we have signed an agreement with Lao Feng Xiang, the second‐largest
jewellery retailer in China, for the distribution of Enchanted Disney Fine Jewelry across
Mainland China.
Hallmark Moments has been rolled out to over 2,000 stores now and will continue to
contribute meaningfully to revenue growth this year.
In addition to our branded play, we also intend to expand our gold jewellery products
through further product development, innovation, 3D printing, and wedding bands for
western markets.
The company launched its own in‐house brand Irasva into the Indian market through a joint
venture with Bennett Coleman and Company Limited, which has committed to Rs.350 crores
of advertising in exchange for a 49% share in the domestic joint venture. The Irasva Essentials
line typically starts at Rs.15,000, while the gifting collection is priced at Rs.8,000. We are
happy to announce that customers have shown a positive response to the Irasva store, and at
the store level, we broke even in the third month of operations. Based on the current
performance of the first store, we plan to open three more stores in Q1 FY’21.
I now hand over the call to “Hitesh to Discuss the Financial Performance.”
Hitesh Shah:
Thank you, Sumit. Good afternoon, everyone. Moving towards the financial performance of
the company during the third quarter of FY20, the company reported a total income of Rs.893
crores against Rs.831 crores during the corresponding period last year. This is a growth of 8%
year‐over‐year.
The slowdown in the Dubai gold business due to rising gold prices and the conscious decision
of the company to move away from low margin product categories has contributed to low
revenue growth. Gold business remained flat during the quarter while the Studded Jewelry
business has grown by around 10%.
In line with our vision, our EBITDA witnessed a robust growth of 18% to Rs.69 crores with the
EBITDA margin of 7.8% and a net profit of Rs.44 crores, which is a growth of 17% over last
year.
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Looking at “Nine Months Performance.” Our total income grew by 9% year‐over‐year to
Rs.2,055 crores. Once again, our EBITDA witnessed a robust growth of 26% to Rs.145 crores
with an EBITDA margin of 7.1%. Our net profit increased to Rs.83 crores, registering a growth
of 16% on a year‐over‐year basis. Our net debt‐to‐equity levels were elevated in March ‘19 to
0.92 due to the acquisition of Jay Gems. However, we have been able to bring it down to 0.51
as of December ‘19. Our long term goal is to be at a net debt‐to‐equity ratio of 0.5. Due to
our strong cash flow generation and disciplined working capital management, our
consolidated year‐over‐year net debt has reduced by over Rs.102 crores while our inventory
levels have reduced by Rs.243 crores. Further, our trailing 12‐month return on equity stands
at 13.7%, which was at 12.7% for the year ended March ‘19.
Revenue for the full financial year is expected to be muted against last financial year due to
us exiting the independent division, Simply Diamonds, and also on account of slowdown in
the Dubai gold business, impacted by the rise in gold prices. However, as we increase our
share in the high margin branded jewellery business, we expect EBITDA to grow at 16% to
20% for the year.
In terms of geographic bifurcation, the US contributed around 65% to our overall revenue
during Q3 FY’20, with 24% coming in from the Middle East. In the general product category,
Studded Jewelry contributed 81% to the overall revenue during the same quarter while the
balance was from the plain gold segment.
Thank you very much for your kind attention. Now the floor is open for Q&A.
Moderator:
Thank you very much. We will now begin the question‐and‐answer session. The first question
is from the line of Nimesh Mehta from Oyster Capital Management. Please go ahead.
Nimesh Mehta:
At present, we have one IRASVA store in Mumbai. How many are you planning to target in
India or in a particular region?
Sumit Shah:
Currently, there is one store, and we sell products through our website as well. The current
expansion plan is going to be first focused on Mumbai in order to make operating costs and
advertising efficient. We have currently signed three locations in Mumbai, which are slated to
open in Q1 of FY’21 and the long‐term five‐year plan was to open 25‐stores over a five‐year
period; however, we will be reviewing the plans based on the profitability of the current slate
of four stores and then plan the long‐term expansion strategy. We are quite happy with the
performance of the current store, and in line with the current performance, if the new stores
continue to perform, we may accelerate the expansion for the stores. But currently, we have
no further plans besides three stores in Q1 of FY21.
Nimesh Mehta:
So how much CAPEX are we targeting for the investments?
Sumit Shah:
So, each store involves the capital expenditure of around Rs.50 lakhs and about Rs.20 lakhs or
Rs.25 lakhs for the security deposit. This is just fixed CAPEX, and then there would be working
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capital, which would be in addition to this. So the three stores would involve a capital
expenditure and security deposit of around Rs.2.5 crores.
Nimesh Mehta:
So this will be through our internal accruals or through debt or any kind of structure?
Sumit Shah:
Internal.
Nimesh Mehta:
Sir, there were some allegations on Times of India for having not paid tax of around 28,000
crores. So, such kind of a thing do we have an impact on our store brand or actually is that
the case?
Sumit Shah:
I am not aware of any allegation against our company of any tax. I am not sure what you are
referring to.
Nimesh Mehta:
We have recently had a tie‐up in China and looking at the scenario of the coronavirus, so are
we seeing any order getting canceled or any of that sort?
Sumit Shah:
Our agreement with LFX was signed only recently, and our distribution plans will get delayed
slightly due to the coronavirus. So, we were anticipating rollout in May, June of the calendar
year ’20; however, this may get pushed back by two or three months depending on how the
coronavirus plays out. So currently, we do not have any ongoing orders from China. We just
signed the agreement, and the brand was supposed to launch in the first half of the current
calendar year. This, however, will get delayed due to the coronavirus.
Nimesh Mehta:
Any change in the outlook for this year due to this, or would there be any impact on our
outlook?
Sumit Shah:
Since it was the first year of operations, we had not factored significant revenue in our
outlook. We had kept the very minimal number. So any impact on the numbers will be
minimal or negligible.
Nimesh Mehta:
Something on the working capital situation, as I was going through the presentation, there
was stress looking in FY’19. So how do you see FY’20 to be panning out on the working capital
as well as on the debt side?
Sumit Shah:
So, as we mentioned, we have reduced inventory by Rs.240 crores year‐over‐year, due to
which there has been a significant reduction in debt as well. We continue to foresee
disciplined execution against the working capital and debt. And as we have said, our debt‐
equity was at 0.75, and we have managed to reduce it down to 0.5 debt‐to‐equity, and we
feel comfortable at these numbers, and we will continue to be disciplined with working
capital. It was elevated last year due to the acquisition, and we have managed to liquidate a
lot of the excess inventory that came with the acquisition because of which we feel like
where the inventory and working capital are now in good shape, and the debt numbers are
also extremely manageable.
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Moderator:
Thank you. The next question is from the line of Siddharth Oberoi from Prudent Equity.
Please go ahead.
Siddharth Oberoi:
You mentioned about net debt. So what would be the gross debt?
Hitesh Shah:
Gross debt is around Rs.486 crores and the cash on the books of Rs.93 crores as on that date.
Siddharth Oberoi:
Minus this, you have come to the net debt?
Hitesh Shah:
Yes, and there is around Rs.20 crores of current investment, deducting the two is net debt.
Siddharth Oberoi:
Also, EBIT margins reported this quarter is 7.76%. How sustainable are these? Is this a quarter
effect due to probably the seasonal effect in the US?
Sumit Shah:
Usually, the margins are highest in Q3 due to the Christmas quarter. So I would not annualize
the margins for this quarter for the whole year. But I think that the nine months margin will
give you a more sustainable view of our margins, which are at 7.1% versus 6.1% last year.
Although you do have to remember that there is an element of the mix here against the gold
and studded business as well, the gold business has been muted this year, and the growth
primarily has come from the studded business. So, given the studded jewellery and the gold
jewellery mix and seasonality, we feel that nine months is reflective of what would be
sustainable on an annual basis.
Siddharth Oberoi:
Also, last time, you had mentioned that the company has now ventured into 2,000‐plus
stores in the US. So, what has been the contribution of that in this quarter?
Sumit Shah:
Specifically, Siddharth, the reference to the 2000‐stores, was for the Hallmark brand. The
Enchanted brand is in 3,000‐plus stores. The hallmark brand now has been rolled out to about
2,000 stores; a significant part of the rollout happened in Q3. It is not yet meaningful because
we have not yet received annualized sales. So, it would not be a very meaningful number in
Q3’20, but we foresee that going forward from Q4’20, as well as FY’21, for it to be a
meaningful percentage of revenue.
Siddharth Oberoi:
Also last year in Q4 FY’19 you had a write off because you had taken over Jay Gems, that was
a one‐time write off of inventories. There is some pending write‐off that is there. Do you
think that would probably affect the Q4?
Sumit Shah:
After the acquisition, we mentioned that there would be some inventory reduction and some
write‐downs due to the inventory reduction as there was excess inventory in the acquired
company. We feel like a lot of the inventory cleanup has already been done, 90% of whatever
had to be written off, has been written off and deducted through gross margin and the
inventories in a relatively healthy position. We do not foresee any meaningful write‐offs
going forward due to the acquisitions from any inventory‐related issues other than the
normal course of business.
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Siddharth Oberoi:
Well, in that case, then the margins probably may be sustainable with 7%?
Sumit Shah:
So, 7% is sustainable, 7.8%, which was in Q3, is not sustainable on an annual basis is what I
would say.
Siddharth Oberoi:
Also, you have mentioned three new stores that had to come up in Q1, and you have already
given the CAPEX. So what has been the revenue of the store, the one that is currently that
made you think that it is time to probably expand further?
Sumit Shah:
Currently, at this point, we have not disclosed it; probably next quarter, we will come out
with further disclosure around the revenue and profitability of each of the stores. But
essentially the store that we have discussed is that the store was profitable from the third
month onwards at a store level. So, the unit economics are favorable. And due to the unit
economics being favorable, we feel like expanding the store base would be accretive to
earnings. We are not looking at growing the store base just to add to revenues. We are
extremely clear that if the unit economics make sense, only then will we expand on the store
count of Irasva.
Siddharth Oberoi:
Also, regarding this China situation, there was a notification on the exchange where it is
mentioned that the company has 2000‐stores, etc., So, have you signed any contract with
them beforehand of some kind of an inventory pickup or something?
Sumit Shah:
Yes, there has been a contract, and the contract has a test period, and beyond the test
period, there are some minimum commitments that LFX would have to make. The numbers
obviously are not disclosed yet. But yes, there is an agreement, and we have been negotiating
the agreement over a long period of time. LFX obviously is keen to sell the Disney brand in
China because it is a very popular brand in China, or Disney Shanghai attracts a significant
number of people to the theme park. So it is a big brand in China, and LFX has committed to
minimum quantities and purchases over three years. However, those will kick in after year
one, which is a test period when both us and LFX will invest behind the brand to create
awareness, and if successful, then the minimum commitments would kick in.
Moderator:
Thank you. The next question is from the line of Mihir Desai from Desai Investments. Please
go ahead.
Mihir Desai:
Just I wanted a follow‐up question on our EBITDA margin. I just wanted to gauge an idea of
yours on a bigger margin outlook from three years now, so will it be sustained at this level,
which is 7.5%, 8%, or you look at expanding from these levels?
Sumit Shah:
Our long‐term strategy is to change our business mix towards license brands and our own
brand. Primarily, our business two years ago used to be manufacturing jewellery for retailers
without brands. So, the margin expansion that we see currently is due to the shift to the
license brands and our view is that over a three‐year period, our margins should gradually
expand as a percentage of sales, and we continue to believe that margins will gradually grow,
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they would grow at a faster rate than sales due to our gradual transition towards branded
jewellery.
Mihir Desai:
Basically, what would be our revenue bifurcation between our license on branded products
and the other products currently?
Hitesh Shah:
Around 20% of our studded jewellery sales are branded, and the rest is generic.
Mihir Desai:
Going forward, how do you see this mix changing from say three years from now?
Sumit Shah:
So our view is that over a three year period, we would like the mix between our own brand
and license brands to be 50:50 between branded and generic.
Mihir Desai:
I saw your products on Disney, and I feel it was good. But just wanted to understand, sir, do
we see a slowdown in the economy currently or I would say the slowdown in consumption,
what is your view on‐demand pick up for these products?
Sumit Shah:
Currently, our largest market obviously for the Disney products is in the US, we also sell in
other markets, but the bulk of the Disney products are obviously being sold in the US, and the
US has record low unemployment rates right now, and the consumer market is very strong.
So currently, we see extremely strong traction on the branded jewellery side in the US. And
we do not currently see any significant slowdown on the branded jewellery site. However,
our revenue growth overall does not look extremely strong because of primarily three
reasons ‐‐ One is the Middle East gold business has seen a slowdown due to volatility in gold
prices. In the US, Jay Gems had a business of distribution of jewellery to independent
retailers, which is small retailers with one and two stores across the country. We divested the
business and sold the business during Q2, so because of which, the revenue growth in this
quarter was muted, and we consciously made a decision to walk away from low margin
product categories, which did not make sense from a return on investment. So I think that
while the branded business has been strong, the overall studded jewellery growth is about
9% to 10% because of the fact that there are certain areas of the business which are not
contributing meaningfully to profit which were consciously deciding to walk away in order to
improve cash flow and reduce debt.
Mihir Desai:
Just on the market side, do you see your sales going lucrative towards the eCommerce side or
on the stores business?
Sumit Shah:
For the jewellery category in general, eCommerce is not a very meaningful percentage of
overall revenue. So while our eCommerce revenues are growing, they are not a very
meaningful part of the overall business.
Mihir Desai:
And you do not see this eCommerce market for jewellery going big in the coming years?
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Sumit Shah:
Currently, it is in I would say high single digits. I would think that probably the penetration
over a three, four year period would get to maybe 15% or 20%. But we do not foresee the
majority of the sales coming through eCommerce.
Mihir Desai:
I just wanted to ask you about the ROEs of the company. Basically, I understand that
currently, our ROEs are not that attractive, and that is why I see that even markets are not
living up to the mark. So I just wanted to understand from your end that if you want to see
our return on equity going forward, how we should look at this?
Sumit Shah:
We are aware of the fact that the return on equity has been on the lower side. And if we look
at a three‐year chart, we have improved our return on equity in FY’17 at 9.7% to 13.7% in the
current year on a TTM basis, and we would like to sustain our return on equity over 15%, and
that is something we feel reasonably confident that we should be able to achieve. This has
been our stated goal for the last couple of years to get to 15%. I think once we get to 15%, we
will look at ways to improve it further.
Mihir Desai:
What differentiates Renaissance from other jewellery sector companies?
Sumit Shah:
I would say that broadly, currently, our differentiation is through two broad areas ‐‐ #1 is our
focus on license brands which gives us moat on our overall business. So, it is a very
competitive market out there with large global retailers. We have marquee customers such
as Wal‐Mart, Signet Group, Macy’s that we sell to. Having licensed brands in the mix which
are desirable and required by retailers puts us in a competitive position, which is favorable as
compared to our competitors, and as a company, we have been extremely focused on
working capital management, jewellery is a working capital‐intensive business. And that if a
company does not keep a very keen eye on managing working capital, levels, then growth
becomes extremely challenging. So, I would say that our focus on these two areas we have
clearly demonstrated success with some of the license brands where it has been successful
for retailers. This gives us a little bit of differentiation compared to other competitors in our
industry.
Moderator:
Thank you. The next question is from the line of Pratik Vora, an individual investor. Please go
ahead.
Pratik Vora:
My first question is on how are the Disney brands being distributed in China till now before
our entry?
Sumit Shah:
Currently, Enchanted Disney Fine Jewelry is not distributed in China at all. Disney does have
licenses for costume jewellery in China, but no fine jewellery brand in a diamond‐studded
space. So it will really be the first entry of fine studded jewellery into China.
Pratik Vora:
And what was the reason for no distribution in China till now, like any particular reason,
because China is a big market and Disney is a very strong brand, so a bit surprising it did not
have any presence in China till now?
8
Sumit Shah:
Disney has had licensees in the past to sell fine jewellery, but some of the licensees have not
been able to make the brand successful. This is the first time that fine jewellery has been a
successful category for Disney, and since we are the licensee that has actually made it
successful in the US, Canada, and in the UK, we were given the license to do the distribution
in China as well.
Pratik Vora:
In terms of Jay Gems acquisition, is there any inventory write‐off still due, or is it completed
now?
Sumit Shah:
There may be some inventory write‐downs that are pending, which would happen in the
current quarter, but I would say that 90% of the write‐offs that had to be done due to the
acquisition have been done already.
Pratik Vora:
And on this EBITDA margin you just mentioned, I just wanted to clarify again that you are
saying that on an annual basis, 7% is a sustainable EBITDA margin. Is that correct
understanding?
Sumit Shah:
That is right.
Pratik Vora:
And 7% in FY’20, and you are also seeing a scope of improvement in this as the product mix
changes, so 7% in a way remains lower now?
Sumit Shah:
That would be sort of our goal. Again, with just a single caveat with the current gold and
studded jewellery business, so the current mix is a little bit favorable because the gold
business has not grown, but generally, I would say that 7% would remain sustainable EBITDA
margin going forward.
Pratik Vora:
You also mentioned that because there is the product mix change happening, that is why we
are seeing this EBITDA margin growing up, but it would have an impact on sales, so is it
possible for you to quantify like going forward, how much is growth or degrowth?
Sumit Shah:
We continue to expect sales to meaningfully grow; however, we have not yet come up with
guidance for FY’22; maybe in the next quarter, we will be in a better position to come up with
sales expectations for FY’21. So, in the next conference call, we will be able to have some
guidance around FY’21.
Pratik Vora:
And also I wanted to understand the dividend policy. So, because of the acquisition, the debt
had gone up, and that is why we choose to like go slow on the dividend or the buyback thing?
And we are nearing the end of this financial year, so are we doing anything on that?
Sumit Shah:
The board has decided for the current year not to have a dividend because our primary goal
was obviously to get the debt in line with what our historical numbers have been and get it
under control. So I think that for the next financial year, this is something that we would
consider, but currently, there is nothing planned because our primary focus was working
9
capital management and getting the debt‐equity in line with our historical numbers, which
has been below 0.5. There is obviously a number which is due to the erstwhile owners of Jay
Gems; the number is around Rs.86 crores, which is due to IND AS classification, which has
been classified as other liabilities. That carries no interest cost. Once you add that back in as a
liability for the company, currently the debt‐equity is at 0.64. So, we feel that when the debt‐
equity is below 0.5, that would be a good time for the board to consider a dividend.
Currently, the focus would remain on cash flow generation and improving the debt‐equity
ratio of the company.
Moderator:
Thank you. The next question is from the line of Dhirav Sachdev from Roha Asset Managers.
Please go ahead.
Dhiraj Sachdev:
I just wanted to know what is the operating cash flow after working capital for the nine
months?
Sumit Shah:
I do not have the number here in front of me, but we have meaningfully reduced liabilities by
about Rs.220 crores on a year‐over‐year basis between reduction in trade payables. So there
is Rs.100 crores reduction in debt and trade payables reduced by Rs.120 crores. So, there is
about Rs.220 crores reduction in liabilities. Most of this was paid through operating cash
flows of the company.
Dhiraj Sachdev:
But is that a figure which is positive after working capital change in operating cash flows,
because as I see the last two years and last six months, the cash flows have been negative
after working capital?
Sumit Shah:
That is right, the last two years because of the acquisition, and due to the working capital is
being elevated, there was negative operating working capital, but in the current financial year
operating cash flow is positive, which has resulted in a reduction of net debt.
Dhiraj Sachdev:
And how the receivables and inventory in terms of the number of days reduction?
Sumit Shah:
The overall working capital year‐over‐year is down by 40‐days. So, the receivables are
relatively stable, payable days have gone from 78 to 45, and inventory days have gone from
186 to 112. So, there has been a meaningful improvement in working capital overall with
receivables being relatively stable in terms of a number of days. Receivable one year ago was
80‐days, it is 75 days right now.
Dhiraj Sachdev:
Not much of an improvement, marginal improvements?
Sumit Shah:
Yes, the reduction is in inventory, which has gone from 186‐days to 112‐days.
Dhiraj Sachdev:
But just to understand the business is still highly working capital intensive in nature because
when we look at branded businesses, retail businesses, the character of business has to be
cash‐flow generating and lower working capital cycle. So we have not really achieved that
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part despite being high‐value items and Disney brand, etc., that ultimately the business is not
throwing up cash flows at the operating level meaningfully for us to sustain scalability at a
faster rate?
Sumit Shah:
In the current year, if you look at the trailing 12‐months, we have generated Rs.220 crores of
cash flow, which has been used to repay some of the liabilities. While I understand that over
the last couple of years, the numbers did not look positive due to the acquisition and a lot of
the negative operating cash flow was due to the fact that they were elevated levels of
inventory at the acquired company which after we have brought down have come under
control. And inventory being at 112‐days, to me, would be comparable to most jewellery
retailers. I am not sure what the number would be for our competitors, but I think that at
110, 112‐days, which is under three months of inventory, I do not think we are in a very
inefficient position. So, this is the nature of the jewellery business, and I do not think that we
would be meaningfully below the current number on a sustainable basis going forward. So, as
the share of branded jewellery
increases, probably there may be some room for
improvement, but 112‐days at being under three months of inventory, I think, is a relatively
healthy situation from our standpoint.
Dhiraj Sachdev:
Networking capital, if I add and deduct the payable days, it is about 142 days, which is still
high from a cash flow perspective. On Disney, what is the license fee that we pay to them for
using their Disney logo brand?
Sumit Shah:
This is a number that we have not disclosed for competitive reasons; this is a number that we
have kept confidential. Obviously, it is a meaningful number for Disney to be able to allow us
to use our brands because the performance of Enchanted has been good, they have given us
a license for the iconic characters which is Disney Treasures which includes Mickey and
Minnie, Winnie the Pooh and all of the iconic characters which is a new brand that we are
currently working on as well as Star Wars which is Lucasfilm and we plan to launch these
brands. So, we have not disclosed the royalty rate, but Disney is quite happy with the
performance of our licSense brands and due to which we have been extended licenses for
other Disney properties as well.
Dhiraj Sachdev:
Just one related question on cash flow itself. Assuming you are expanding by 15%, 20%, you
will constantly require 140‐days of net incremental working capital. How will you fund that?
Sumit Shah:
We foresee that we should be able to manage working capital and funded, which, if you look
at our last four or five years growth, we have meaningfully kept our debt‐equity at 0.5 barring
the acquisition. So, through internal accruals as well as managing through borrowing from
banks, we feel that we should be able to continue to grow at a healthy pace while
maintaining our debt‐equity level below 0.5.
Dhiraj Sachdev:
Sorry to just stretch this argument, borrowing from banks, but we cannot have a business
which is debt‐free like many other jewellery retailers in India have been debt‐free in the
balance sheets, which they want to maintain 0.5x, so that means there will be incremental
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borrowings to fund our working capital cycle. So, is this business qualitatively hygienic
enough to warrant being a branded, scalable cash‐flow generating business?
Sumit Shah:
You have to understand that we are in the process of transformation, right. I mean, today,
our branded jewellery business is growing as a percentage of overall revenue, and you are
seeing that reflected in the numbers by the return on equity, return on equity increasing from
9.7% to 13.7%. We feel that as the business mix changes, the working capital days will
improve over time. And you also have to understand that most of our debt is US‐dollar
denominated because there is a natural hedge against the US dollar because most of our
revenue is in that. So our cost of borrowing is 5% or below. So, debt in the context that it is all
US‐dollar borrowing and the cost of which being sub‐5% we feel that currently, 0.5% is the
best number that we can get to and sustain. And as the business becomes healthier and the
EBITDA margins improve, we may look at lowering our targeted number.
Moderator:
Thank you. The next question is from the line of Dhwani Mehta from Mehta Investments.
Please go ahead.
Dhwani Mehta:
So my first question is on the deal signed with LFX. Can you please explain the deal structure?
Sumit Shah:
So we have a deal with LFX to exclusively distribute the Disney brand through their stores for
a three year period, there is a one year test period. If the brand is successful during the one
year test period, it will get rolled out to all of their stores, and during this period, the brand
will be exclusive to LFX in brick‐and‐mortar stores, we have the right to sell the product
online directly on our own, but the distribution for Enchanted will be exclusive through LFX
for a three‐year period.
Dhwani Mehta:
What would be the commercial margins for this?
Sumit Shah:
It would be at similar margins to how we sell to other retailers worldwide.
Dhwani Mehta:
As you mentioned earlier that due to the coronavirus, our targets would be pushed and all.
So, what we will be targeting for FY’21 and ‘22 if you have the numbers?
Sumit Shah:
So, FY’21 and ‘22, the specific revenue and EBITDA numbers we have not yet finalized, and
we will get to those numbers in the Q4 conference call.
Dhwani Mehta:
As you mentioned earlier that we are planning to enter into the new geographies, like
Singapore, the Middle East, and all. I mean any preferences which geography we will be
entering in first and through which mode we will be entering, we will be doing a tie‐up over
there, or we will go for the exclusive stores?
Sumit Shah:
In all of these geographies, it will be through tie‐ups with retailers. Currently, we are in the
process of testing the product in the Middle East with a major retailer there as well as in
South Africa. So there are multiple conversations that we are having with retailers in different
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regions, and we have received positive feedback in the Middle East from the retailers. So, it is
likely to expand into more doors in the Middle East. South Africa is under Test, and the
Philippines is also under test. So during the course of FY’21, we should see some geographic
diversification of Enchanted Disney. However, having said that, our expectation continues to
be that the US and China will, in the long run, be the largest market since they are the largest
consumer markets in the world. Some of the other geographies, although will contribute
positively to revenue growth, will not be extremely meaningful to the overall top line.
Dhwani Mehta:
So what percentage are we targeting from the US and China?
Sumit Shah:
Currently, North America is 75% of sales, and China is obviously in the initial phase. If
successful, it will become a meaningful part of the number, but currently, it is a little bit early
to tell. The US is about 61% on a nine‐month basis and 65% on Q3 basis of our overall
geographic mix.
Dhwani Mehta:
We have a licensing agreement for selling the Enchanted Disney Jewelry. So are we looking
for any more such exclusive tie‐ups?
Sumit Shah:
Yes, currently, we have a master's license for Disney and for Hallmark. We are in
conversations for more license brands that we are talking to. Nothing to announce at this
point, but we are definitely looking at other licenses that, if meaningful that could add to our
retailer's line of brands. We are having those conversations, but nothing has been finalized
yet.
Moderator:
Thank you. The next question is from the line of Karunakar Gokhale; he is an individual
investor.
Karunakar Gokhale:
My question is related to this geographical distribution. So, when we see the rest of the world
sales distribution, we are at about 11%. So, of the 11%, how much will be India’s share of the
sales?
Sumit Shah:
India is not a meaningful number right now because we currently have only one store in
India, which is our joint venture with Times of India. So, currently, India is not a meaningful
number to our overall revenue.
Karunakar Gokhale:
Irasva is the cornerstone for branded sales in India. That is my understanding. Is that correct?
Sumit Shah:
Yes.
Karunakar Gokhale:
So, our one store was launched, and it had a sales ratio of about 30,000 sq.ft. So, has it
crossed 50,000 as we had anticipated it would in six to nine months' time?
Sumit Shah:
Because sales per square foot have been favorable and at a profitable level, which is why we
are looking at expanding new stores.
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Karunakar Gokhale:
So, our partnership with Bennett Coleman and their commitment of Rs.350 crores is also
something which is going to be the fuel for expansion of Irasva. So, considering that we may
be going for three more stores in the first Q1 of next financial year, what is the commitment
because the store expansion is directly proportional to advertising expenses when it comes to
retailing, so have they spent anything till now out of the commitment and what is the plan for
expansion related to the advertising expense?
Sumit Shah:
We have already started drawing on this, I mean, we have been advertising regularly in
Mumbai because that is where the current store is. So we have already started utilizing the
advertising as part of the joint venture agreement with Times of India. And that based on the
performance of the new stores, we will take a call to expand the store base faster than our
original plan. Our original plan was to open 25‐stores during the joint venture period. Since it
is early days and we have only eight, nine months of data, currently, since the store is
profitable, we plan to expand three more stores. But we have not made any concrete plans
for the long term growth of the business because we want to keep the option to evaluate and
make sure that we do it in a profitable manner. The growth of the Irasva brand is something
that we will discuss further during the course of FY21.
Karunakar Gokhale:
Since we have this expansion of Irasva, what kind of steps have you taken or were taken to
get the stores sales up in the one store that we have, which can be perhaps replicated in the
other stores whenever the expansion happens in the three more stores?
Sumit Shah:
Obviously, there is creating brand awareness, so I mean, it is a 360 deg. approach to growing
the brand and growing awareness. Between print advertising between digital efforts, having a
digital team to increase digital awareness of the brand as well as try at home service to the
customers, we have engaged in multiple manners to create brand awareness and we are
happy with the results of the brand awareness that we have done so far because of which the
store has been performing well.
Moderator:
Thank you. As there are no further questions from the participants, I now hand the
conference over to Mr. Sumit Shah for closing comments.
Sumit Shah:
Thank you, everyone, for participating in the call this afternoon. I appreciate your interest in
Renaissance Global. Thank you.
Moderator:
Thank you. On behalf of Dickenson Seagull IR, that concludes this conference. Thank you for
joining us, and you may now disconnect your lines.
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