KDDL Ltd — Q2 FY22 earnings call

Call held 1 Dec 2021

Management summary

KDDL Limited reported a strong recovery in Q2 FY22, driven by robust demand across both its manufacturing and retail (Ethos) businesses as the economy rebounded. The company achieved significant Y-o-Y growth in consolidated revenue, EBITDA, and PAT. Strategic initiatives include expanding its luxury brand portfolio and entering the luxury luggage segment with Rimowa, while also focusing on digital capabilities and improving inventory management. The long-awaited demerger of Ethos remains under discussion, with SAIF Partners' shareholding identified as a key hurdle.

Highlights

  • Consolidated revenue increased by 39% Y-o-Y to Rs.193 Crores.

  • Consolidated EBITDA grew by 33% Y-o-Y to Rs.23.2 Crores.

  • Consolidated PAT surged by 76% Y-o-Y to Rs.6.6 Crores.

  • Manufacturing business revenue rose 53% Y-o-Y to Rs.53 Crores, with PAT increasing almost seven times to Rs.4 Crores.

  • Ethos (retail) total income grew 27% Y-o-Y to Rs.137 Crores, and was up 28% compared to pre-COVID Q2 FY20.

  • Ethos online billings contributed Rs.52.9 Crores, representing 34% of total billings in Q2 FY22.

  • KDDL signed new luxury watch brands (Bovet, Czapek, Armin) and entered luxury luggage with Rimowa franchise.

  • Ethos aims for a sustainable EBITDA margin of 10-11% in about two years and a long-term turnover of Rs.1000 Crores with 10% EBITDA in 4-5 years.

Concerns

  • SAIF Partners' shareholding as a significant hurdle for Ethos demerger/listing.

Key financials

  1. Consolidated Revenue ₹193 Cr +39%YoY
  2. Consolidated EBITDA ₹23.2 Cr +33%YoY
  3. Consolidated PAT ₹6.6 Cr +76%YoY

What they filed

Q1 FY27: revenue up 40.0%, net profit up 66.7% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue92 97 99 110 123 +34%116 +20%147 +48%154 +40%
EBITDA21 22 16 21 25 +19%23 +5%39 +144%35 +67%
Net profit15 16 8 12 14 −7%30 +88%20 +150%20 +67%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of EBITDA
₹25 Cr Total
  • Ethos (Retail Business) ₹15.3 Cr 61.2%
  • Manufacturing Business ₹9.7 Cr 38.8%

Guidance & targets

Profitability

  • Sustainable EBITDA Margin Profitability · about two years · Medium confidence 10-11%
    Our goal is to get to an EBITDA of about 10% we believe in EBITDA of 10% to 11% is the sustainable margin in the ethos it will take some time to reach 10% about two years or so because we are still the operating leverages are now starting to kick in and the gross margin growth which comes from a greater share of exclusive high margin brands that is still playing out and over the next two years then we will reach this table.

    — Yashovardhan Saboo, Chairman and Managing Director - KDDL Limited

Revenue

  • Turnover and EBITDA Revenue · 4-5 years (adjusted for COVID) · Medium confidence 1000 Crores turnover and 10% EBITDA
    three years ago we have said that in four years we will four to five years we will hit our target is 1000 Crores turnover and 10% EBITDA, this was something that we spoke of about I think it/ was three-and-a-half years ago if you take away the two years gap years of COVID I think we are on that track and two years from now we should be close to those kind of targets but that is not the goal that is only a stepping stone.

    — Yashovardhan Saboo, Chairman and Managing Director - KDDL Limited

Capex

  • Bovet Boutique Investment Capex · remaining part of this financial year · High confidence 3-4 Crores (max Rs.5 Crores)
    The Bovet Boutique is already under fit out I expect the capex is not going to be very high in this financial year in the remaining part of this financial year probably of the order of about three to four Crores maybe a little bit more big max Rs.5 Crores.

    — Yashovardhan Saboo, Chairman and Managing Director - KDDL Limited

New Store Launch

  • Bovet Boutique Opening New Store Launch · first quarter of next calendar year · High confidence First boutique
    The first boutique with Bovet will hopefully open in the first quarter of next calendar year.

    — Yashovardhan Saboo, Chairman and Managing Director - KDDL Limited

Segment Growth

  • Precision Engineering Growth Momentum Segment Growth · after two to three quarters · Medium confidence Great momentum
    I think you will start to see a great momentum after two to three quarters in the precision engineering.

    — Yashovardhan Saboo, Chairman and Managing Director - KDDL Limited

  • Luxury Luggage Segment Growth Segment Growth · few to five years timeframe · Bullish confidence Healthy double digit growth
    I believe Indian GDP growth will meet with high targets of 8% or around that over the next few years. There will be a rapid growth in wealth especially in the higher segments and therefore there is reason to believe that in the luxury segment there will be strong growth definitely double digit growth probably more than just simple double digit growth it could be a healthy double digit so we have a very positive outlook on a few to five years timeframe.

    — Yashovardhan Saboo, Chairman and Managing Director - KDDL Limited

Segment Profitability

  • Estima Turnaround to Profitability Segment Profitability · coming quarters · Medium confidence Profitability
    We remain confident that in the coming quarters with normalization and improvement of market conditions we will see healthy growth of revenue and turn around to profitability in this business.

    — Yashovardhan Saboo, Chairman and Managing Director - KDDL Limited

Risks & concerns

  • SAIF Partners' shareholding as a significant hurdle for Ethos demerger/listing.

    high

    Management explicitly stated that SAIF's shareholding is the 'most important hurdle' and that the demerger cannot proceed until it is resolved.

    Both acknowledged

  • Reduced rental waivers impacting Ethos profitability.

    medium

    H1 FY22 rental waiver was ~Rs.2.6 Crores, significantly lower than ~Rs.5 Crores in H1 FY21, contributing to higher fixed expenses for Ethos.

    Management acknowledged

  • Gestation period and slowdown in precision engineering (aerospace & defense) due to COVID.

    medium

    Management noted a slowdown in aerospace and defense but expects a rapid pick-up and 'great momentum' after two to three quarters.

    Management acknowledged

  • Balancing optimal inventory levels with customer expectations for wide product range in luxury retail.

    medium

    While aiming for lower inventory carrying months (7.3 months), management acknowledges the need to maintain a wide range to match global luxury retail standards and customer expectations.

    Management acknowledged

  • Controlling pricing and maintaining brand credibility on third-party e-commerce platforms.

    low

    KDDL strategically withdrew some exclusive brands from third-party websites to better control pricing and prevent discounting that could impact brand credibility.

    Management acknowledged

Areas of evasion (3)

  • Specific timeline for Ethos demerger/IPO
  • Exact market size for the luxury luggage segment in India
  • Full details on Rimowa master franchise rights (e.g., pan-India exclusivity)

Q&A highlights

2 direct
New luxury luggage brand (Rimowa) tie-up: unit economics, market size, and franchise contract details. Partial
The business I am not really going to be able to give you forward-looking figures on projection of sales but you asked whether the basic economics are very different from the watch business no they are not. They are not except one significant point is that the amount of inventory in terms of months of stock that we have to hold is probably going to be lesser because the range of stock is also lesser than so in a typical watch store we would hold at least 300 to 400 SKU that might not be the case in that case of luggage but otherwise the economics are not very different, whether when you talk in terms of margins or whatever I believe this has a very strong potential given the fact that in India we are just at the cusp of international business, business travel and so on.

Provides initial insights into the new luxury luggage segment, its operational similarities/differences to the watch business, and management's cautious stance on market size projections.

Asked by Rahul Agarwal

Ethos fixed expenses increase, capex plans for new stores, and timeline for demerger/IPO. Direct
This is under active discussion. we have been in touch with some advisors and we have been advised that we should be cognizant of the current healthy situation in the capital markets so this is under discussion and as soon as we have a final decision on this of course we are going to come back to you pretty soon.

Addresses concerns about rising operating costs impacting Ethos profitability due to normalization and provides an update on the long-awaited demerger/IPO, indicating it's still in progress but without a firm timeline.

Asked by Deepan S Narayanan

Ethos valuation post rights issue, SAIF Partners' role as a demerger hurdle, and value derived from Patrick Hoffman's board appointment. Direct
As far as SAIF is concerned I think the shareholding of SAIF is obviously the most important hurdle and frankly I have come to a point where I am saying here unless that is resolved there is no point in discussing all the various scenarios. There are various scenarios are possible but until the SAIF divests completely that from KDDL or there is a change of law, there is nothing to be done so let us come we will cross that bridge when we come to the point.

Directly addresses the significant hurdle of SAIF Partners' shareholding for the Ethos demerger, providing crucial clarity on a key investor concern for value unlocking and future corporate structure.

Asked by Lalaram Singh

3 min read 7 chapters

Detailed narrative

Q2 FY22 Consolidated Performance Overview

KDDL Limited demonstrated a strong financial rebound in Q2 FY22, with consolidated revenue increasing by 39% Y-o-Y to Rs.193 Crores. This robust growth translated into a 33% Y-o-Y rise in consolidated EBITDA, reaching Rs.23.2 Crores. The company's profitability saw an even sharper increase, with consolidated PAT surging by 76% Y-o-Y to Rs.6.6 Crores, reflecting a broad-based recovery across its business segments post-COVID-19's second wave.

Manufacturing Business Sees Strong Rebound and Strategic Shift

The manufacturing division, encompassing watch components and precision engineering, reported a 53% Y-o-Y and 15% Q-o-Q revenue growth, reaching Rs.53 Crores. Watch components revenue specifically grew by 53% Y-o-Y to Rs.38.4 Crores, while precision engineering revenue increased by 33% Y-o-Y to Rs.12.5 Crores. This strong performance led to an 84% Y-o-Y increase in EBITDA to Rs.9.7 Crores and a nearly seven-fold rise in PAT to Rs.4 Crores. Management is strategically shifting precision engineering focus towards higher-value segments like aerospace and defense, expecting 'great momentum' after two to three quarters.

Ethos Retail Business Recovery and Digital Acceleration

Ethos, the luxury watch retail arm, posted a strong recovery with consolidated total income growing 27% Y-o-Y to Rs.137 Crores in Q2 FY22. Notably, its Q2 FY22 revenue was 28% higher than pre-COVID Q2 FY20, and H1 revenue was up 8% compared to pre-COVID levels. Digital channels played a crucial role, with online billings contributing Rs.52.9 Crores, or 34% of total billings, in the quarter. Despite a 9% Y-o-Y decline in EBITDA to Rs.15.3 Crores and a 20% Y-o-Y PAT decline to Rs.2.6 Crores due to normalized operating expenses and reduced rental waivers, Ethos improved its stock carrying months from 7.9 to 7.3.

Strategic Expansion into New Luxury Brands and Segments

KDDL is actively expanding its luxury portfolio, having signed agreements with ultra-high-end watch brands like Bovet, Czapek, and Armin. Bovet watches, starting around Rs.15 lakh, will be exclusively retailed by Ethos, with the first boutique expected to open in Q1 next calendar year with a capex of Rs.3-5 Crores. A significant new venture is the franchisee contract with Rimowa, a luxury luggage brand from the LVMH group, marking KDDL's first foray into luxury goods beyond watches. This diversification aligns with the strategy to cater to the growing premium and luxury consumption in India.

Ethos Valuation, Profitability Targets, and Long-term Outlook

The board has approved a rights issue for Ethos of up to Rs.25.5 Crores at a premium of Rs.540 per share, implying a valuation of approximately Rs.1000 Crores. Management targets a sustainable EBITDA margin of 10-11% for Ethos within about two years, driven by operating leverage and a greater share of high-margin exclusive brands. The long-term vision includes achieving Rs.1000 Crores in turnover with 10% EBITDA in 4-5 years, reflecting strong confidence in India's luxury consumption boom and double-digit growth in segments like luxury luggage.

Working Capital and Inventory Management

KDDL is focused on optimizing its working capital, having reduced inventory carrying months from nine (four to five years ago) to about seven months at cost currently. Paid inventory stands at four to five months due to credit periods from brands. While global luxury watch benchmarks are higher (10-12 months), management aims to operate 25-35% below these, balancing efficient inventory management with the need to offer a wide product range to meet discerning Indian customer expectations for a premium in-store experience comparable to international markets.

Demerger Status and SAIF Partners' Hurdle

The potential demerger or IPO of Ethos is currently 'under active discussion,' with KDDL consulting advisors and considering prevailing capital market conditions. However, management explicitly identified SAIF Partners' shareholding as the 'most important hurdle' for this process. They stated that until SAIF divests completely or a change in law occurs, progress on the demerger will be challenging, indicating a significant impediment to a key strategic initiative for value unlocking.

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