KDDL Ltd

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.

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, 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.

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.

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.

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.

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.