KDDL Ltd — Q2 FY25 earnings call

Call held 19 Nov 2024

Management summary

KDDL Ltd reported a mixed Q2 FY25, with strong performance in its Precision Engineering (Eigen) segment, which saw 46% revenue growth in H1 FY25. However, the core watch component business faced significant global headwinds, including a sharp decline in Swiss watch exports to key markets like China and Hong Kong, leading to reduced order inflows. The company is strategically expanding its new bracelet and packaging divisions, and remains optimistic about the long-term potential of its Favre Leuba brand and Eigen's growth in new segments like energy storage systems, despite the current challenging environment.

Highlights

  • Consolidated Revenue for Q2 FY25 stood at INR 410 crores, with H1 FY25 at INR 780 crores.

  • Consolidated EBITDA for Q2 FY25 was INR 76.8 crores, achieving a margin of 19.4%.

  • Consolidated PAT for Q2 FY25 was INR 35.6 crores, and H1 FY25 PAT was INR 63.6 crores.

  • Precision Engineering (Eigen) revenue grew 46% to INR 66 crores in H1 FY25, driven by robust export demand.

  • The watch component segment faced significant headwinds, with Swiss watch exports to China down 49% and Hong Kong down over 30% YoY.

  • New bracelet manufacturing unit commenced commercial production in October 2024 with INR 44 crores investment and 75,000 units/annum capacity, expecting 100% utilization next fiscal.

  • Packaging business also started commercial production in October 2024 with INR 5 crores investment and 100,000 boxes/month capacity.

  • Standalone capex for H1 FY25 was ~INR 11 crores, with ~INR 15 crores expected in H2 FY25.

Concerns

  • Global Economic Slowdown & Geopolitical Uncertainty

  • Decline in Luxury Goods Sector & Swiss Watch Exports

Key financials

  1. Consolidated Revenue ₹410 Cr
  2. Consolidated EBITDA ₹76.8 Cr
  3. Consolidated EBITDA Margin 19.4%
  4. Consolidated PAT ₹35.6 Cr
  5. Standalone Total Income ₹97.4 Cr
  6. Standalone EBITDA Margin 28.3%

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

  • Precision Engineering (Eigen)
    ₹66 Cr H1 FY25 Revenue46% H1 FY25 YoY Growth

Guidance & targets

Capacity

  • Bracelet Division Capacity Utilization Capacity · next fiscal · High confidence close to 100%
    We should be getting to close to 100% capacity utilization in the next fiscal

    — Yashovardhan Saboo, Chairman and Managing Director

  • Bracelet Division Capacity Expansion Capacity · next 2 to 3 years · Medium confidence at least 30% or 40%
    I believe it is possible to expand the capacity by at least 30% or 40% with some balancing equipments. We are working on that project, but I believe there will be a continuous expansion in the bracelet production over the next 2 to 3 years at least.

    — Yashovardhan Saboo, Chairman and Managing Director

  • Packaging Boxes Capacity Capacity · Ongoing · High confidence 100,000 packaging boxes per month
    This facility has been set up with an investment of INR5 crores and has a capacity of 100,000 packaging boxes per month

    — Yashovardhan Saboo, Chairman and Managing Director

Revenue

  • Bracelet Division Revenue Potential Revenue · next 3 to 5 years · Medium confidence INR 80 crores to INR 100 crores
    I mean we can look at business of INR80 crores to INR100 crores coming from the bracelet manufacturing after it has done the expansion over several rounds, INR80 crores to INR100 crores over the next 3 to 5 years.

    — Yashovardhan Saboo, Chairman and Managing Director

Growth

  • Precision Engineering (Eigen) Growth Rate Growth · this year · High confidence 20% to 25%
    Sir, so in the last con call, you had said that the precision engineering business will grow by 20% to 25% in this year. So are you still holding that guidance? Yes.

    — Yashovardhan Saboo, Chairman and Managing Director

  • Watch Component Business Growth Growth · this year · High confidence No growth
    I don't think we will see growth in the watch component business this year.

    — Yashovardhan Saboo, Chairman and Managing Director

Market Share

  • Precision Engineering (Eigen) Share of KDDL Manufacturing Revenue Market Share · over the years · Medium confidence 40%, 50%
    I would not be surprised if the precision engineering business actually became the largest part of KDDL's manufacturing business. So if it becomes the largest, and we are talking about 3 businesses right now, we'll probably be in the range of 40%, 50%.

    — Yashovardhan Saboo, Chairman and Managing Director

  • Favre Leuba Swiss Brand Ranking Market Share · next 5 to 10 years · Medium confidence top 20 Swiss brands
    And our vision and the vision of the Favre Leuba team in Switzerland has really to see this as a mainstream brand, developing over the next 5 to 10 years into one of the top 20 Swiss brands in the world.

    — Yashovardhan Saboo, Chairman and Managing Director

Volume

  • Favre Leuba Units Sold Volume · medium to long term · Medium confidence 100,000 units
    But a number of 100,000 units is some kind of a number, which is an exciting target to go after, right? And I believe that medium to long term, Favre Leuba is a brand that has the potential to do those numbers globally.

    — Yashovardhan Saboo, Chairman and Managing Director

Capex

  • Standalone Capex Capex · H2 FY25 · High confidence around INR 15 crores
    And during the second half, we expect to do further capex of around INR15 crores.

    — Sanjeev Masown, CFO and Executive Director

Profitability

  • Estima Turnaround to Profit Profitability · from next year onwards · High confidence Turnaround
    I am still very, very, very optimistic that from next year onwards, we'll start to see the turnaround.

    — Yashovardhan Saboo, Chairman and Managing Director

Risks & concerns

  • Global Economic Slowdown & Geopolitical Uncertainty

    high

    Persistent inflation, sticky interest rates, weakened consumer demand, wars in Ukraine and Middle East, and a lacklustre China economy are contributing to a challenging backdrop.

    Management acknowledged

  • Decline in Luxury Goods Sector & Swiss Watch Exports

    high

    Consumer spending in major markets (China, Hong Kong, Europe) has declined, leading to a 49% fall in Swiss watch exports to China and over 30% to Hong Kong, impacting KDDL's watch component business.

    Management acknowledged

  • Supply Chain Disruptions & Cost Inflation

    medium

    Shortages and rising costs of materials like steel and precious metals, along with currency exchange rate fluctuations, are putting pressure on margins and increasing component costs.

    Management acknowledged

  • Estima's Continued Losses

    medium

    The Swiss subsidiary, Estima, continues to incur losses due to the market slowdown and delayed new product launches by Swiss brands, making it difficult for a new supplier like Estima to gain traction.

    Management acknowledged

  • Increased Receivables

    low

    Standalone debtors have increased due to the growing share of the precision engineering business, which involves longer credit cycles (material transit time plus 90 days credit), but management states the quality of debtors is good.

    Analyst acknowledged, explained

Areas of evasion (2)

  • Exact revenue breakup for watch components (dials, indexes, bracelets)
  • Full clarity on the status of the INR 26 crores advance

Q&A highlights

3 direct
Watch Component Business Outlook & Inventory Correction Direct
It's not that the orders are fulfilled in advance. I think, in general, there is a trend that a lot of the deliveries are asked in the first half for us, it is the first half, April to September because globally, the watches are prepared and then pushed into the markets for the Christmas sale. And therefore, quarter 3 is anyway that Christmas holidays everywhere, so the production and purchasing and all that is a little bit low.

Clarifies the impact of global seasonal demand and inventory correction on KDDL's order inflow for the second half of the fiscal year, indicating continued headwinds.

Asked by Ajay Kumar Surya, Niveshaay Investment Advisory

Estima's Continued Losses and Turnaround Strategy Direct
So it's a difficult time for Estima. We are responding with, of course, a cutback in expenses there, but we are also using this opportunity to actually beef up the technology and the specialization of certain technologies in Estima... I am still very, very, very optimistic that from next year onwards, we'll start to see the turnaround.

Addresses a key concern about a loss-making subsidiary, outlining both the challenges and the strategic initiatives being taken for its future profitability, with a clear timeline for turnaround.

Asked by Rishikesh, Individual Investor

Precision Engineering (Eigen) Expansion Strategy and Growth Drivers Direct
So right now, the bottleneck in Eigen to grow, based on the opportunities we are seeing, is the bottleneck of, factory space... Leased 30,000 sq ft facility... to start serving the new demand from early part of next calendar year... EV is a robust and hot growing segment. There is another segment... which is energy storage systems... probably the fastest-growing segment in Eigen right now.

Explains the rationale behind the dual-pronged expansion strategy for Eigen (leased facility for immediate growth, own factory for long-term) and identifies key high-growth segments like EV and energy storage systems driving demand.

Asked by Pranjal Mukhija, GrowthSphere Ventures LLP

3 min read 7 chapters

Detailed narrative

Global Headwinds Impact Watch Component Business

The company's core watch component segment faced severe challenges in Q2 FY25 and H1 FY25, with management expecting these to continue through H2 FY25. This was primarily due to a global slowdown, persistent inflation, and geopolitical uncertainties. Swiss watch exports to China plummeted by an unprecedented 49% year-on-year, and to Hong Kong by over 30%, contributing to an overall 10% decline in Swiss watch export volumes from January to September 2024. Consequently, KDDL anticipates no growth in its watch component business for the current fiscal year.

Precision Engineering (Eigen) Drives Growth

In contrast to the watch component segment, the Precision Engineering division, Eigen, demonstrated strong momentum. It reported a robust 46% increase in revenue, reaching INR 66 crores in H1 FY25. This growth was fueled by healthy order inflows and rapid execution rates, with management reaffirming a 20-25% growth target for Eigen this fiscal year. The company expects Eigen's share to grow significantly, potentially becoming 40-50% of KDDL's total manufacturing revenue over the years, driven by demand from EV and energy storage systems.

Strategic Expansion in Bracelet Manufacturing

KDDL commenced commercial production at its new bracelet manufacturing unit in October 2024, following an investment of INR 44 crores. This unit has a capacity of 75,000 bracelets per annum, primarily for export to Swiss brands. Management is highly optimistic, projecting close to 100% capacity utilization by the next fiscal year (FY26) and planning further expansions of 30-40% capacity. Over the next 3-5 years, after several expansion rounds, this division is expected to generate INR 80-100 crores in revenue.

Dual-Pronged Expansion for Eigen Capacity

To support Eigen's rapid growth and address factory space bottlenecks, KDDL is implementing a dual-pronged expansion strategy. A new 30,000 sq ft production facility has been secured on lease in Bangalore, expected to be operational by early next calendar year (FY26) to meet immediate demand. Concurrently, the company plans to construct a new factory building on its existing land for a third round of expansion by FY27, ensuring sustained long-term growth.

Favre Leuba Revival and Packaging Business Launch

The Favre Leuba brand, acquired by Silvercity Brands (a KDDL subsidiary), had a positive global media launch in August 2024, with new collections available internationally from January 2025. KDDL aims for Favre Leuba to become one of the top 20 Swiss brands within 5-10 years, targeting 100,000 units globally in the medium to long term. Additionally, the new packaging unit in Panchkula, established with an INR 5 crores investment, also began commercial production in October 2024, with a capacity of 100,000 boxes per month for premium products.

Estima's Turnaround Efforts Amidst Losses

The Swiss subsidiary, Estima, continues to incur losses, attributed to the market slowdown and delayed product launches by Swiss brands. Despite the challenges, management remains optimistic, outlining a systematic plan to achieve profitability from FY26 onwards. This involves cutting expenses and enhancing technology and specialization in areas like lasers, solid gold hands, and diamond cutting, positioning Estima as a gateway to high-end Swiss markets.

Financial Performance and Capex

KDDL reported consolidated revenue of INR 410 crores for Q2 FY25 and INR 780 crores for H1 FY25. Consolidated EBITDA stood at INR 76.8 crores (19.4% margin) for Q2 FY25 and INR 141.9 crores (18.8% margin) for H1 FY25. PAT for Q2 FY25 was INR 35.6 crores. Standalone capex for H1 FY25 was approximately INR 11 crores, with an additional INR 15 crores expected in H2 FY25, excluding investments in Ethos.

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