Renaissance Global Ltd

NSE:RGL

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to Renaissance Global Limited Earnings Conference Call. [Operator Instructions] Please note that this conference has been recorded.

I now hand the conference over to Ms. Jenny Rose from CDR India. Thank you, and over to you.

[Jenny Rose Kunnappally]

Good evening, everyone, and thank you for joining us on Renaissance Global's Q2 and H1 FY '24 Earnings Conference Call. We have with us today Mr. Sumit Shah, Chairman and Global CEO; and Mr. Hitesh Shah, Managing Director of the company.

We would like to begin the call with brief opening remarks from the management, following which we will have the forum open for an interactive 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 results presentation shared with you earlier.

I'd now like to invite Mr. Sumit to make his opening remarks. Over to you, Sumit.

[Sumit Shah, executive]

Thank you. Good afternoon, everyone. Thank you all for joining us on our earnings conference call for Q2 and H1 '24. I'd like to begin the call by providing you with a quick overview of the company's operational and business highlights for the period under review. After that, Hitesh will take you through the financial performance, following which we'll open the forum for question-and-answer session.

Our financial performance this quarter reflects the persistent challenges caused by the external demand landscape. However, within this tough environment, we have witnessed healthy growth in our Direct-to-Consumer business, which further cements the company's -- cements the role as a central driver of our company's progress.

Our primary strategic focus remains on our branded business, where we have engaged in strategic partnerships with renowned global brands through a licensing model. We have an expansive portfolio of both owned and licensed brands in this vertical that we are growing through our B2B and Direct-to-Consumer channels. The contribution from our branded business has made remarkable strides surging from a modest 2% in FY '18 to an impressive 26% in H1 '24.

Looking ahead, our ambitious long-term objective is to expand our branded jewelry business by more than threefold within the next 3 to 4 years. Within our branded offerings, we are particularly excited about our Direct-to-Consumer segment. This vertical delivered a healthy 23% year-over-year growth in Q2 and an impressive 29% year-over-year growth in H1 '24. Our estimates indicate that we are on our way to achieving an annual revenue run rate of approximately INR 312 crores in FY '24.

As we are on the verge of transforming from a generic business to a house of brands, the margins in the Direct-to-Consumer and overall branded business are poised to improve in the coming quarters on the back of internal efficiencies and the improvement in Irasva store level profitability.

Talking about Irasva fine jewelry, we are delighted to announce its increased off-line footprint with a new store in Borivali, Mumbai, building on the accomplishments of its Mumbai, Hyderabad and Ahmedabad locations. This luxury and lifestyle store, the second of its kind in Mumbai, is meticulously designed to cater to the discerning needs of the city shoppers. It exudes a warm and sophisticated ambience providing a distinctive customer-centric shopping experience that encourages interaction and familiarity. With the festive season on the horizon, we anticipate a strong start to the store. Irasva's enduring vision encompasses an expansive nationwide brand presence through a comprehensive omnichannel strategy, offering a diverse array of fine jewelry from everyday pieces to stand-out accessories for special occasions.

In conclusion, while we recognize the near-term challenges, we remain extremely bullish on the long-term potential of our branded business. Our collaborations with iconic global brands alongside the cultivation of our own distinguished brands focused on lab-grown diamonds highlight our team's ability to connect with the next generation of jewelry enthusiasts and build a sustainable business model.

Overall, our strong relationships, our strong partnerships with the renowned brands, extensive product innovation expertise, exceptional design talent and a robust distribution network will remain the driving force behind our growth journey.

I'd now like to hand over the call to Mr. Hitesh to discuss our financial performance during the quarter. Over to you, Hitesh.

[Hitesh Shah, executive]

Thank you, Sumit. Good afternoon, everyone. Renaissance delivered a stable performance driven by steady demand in our branded jewelry segment and an encouraging contribution from our Direct-to-Consumer business during the first half of this year.

While our total income during the quarter stood at INR 443 crores compared to INR 442 crores in Q2 of FY '23. And for H1 of FY '24, our total income came in at INR 919 crores as compared to INR 1,016 crores in H1 of FY '23. On the profitability front, EBITDA came in at INR 32 crores in Q2 of FY '24. And for H1 of FY '24, it stood at INR 68 crores, translating into EBITDA margins of 7.2% and 7.4%, respectively.

The branded jewelry business reported an EBITDA margin of 11.2% and the D2C business registered a 12.1% EBITDA margins in Q2 of FY '24. In Q2 of FY '24, our profit after tax stood at INR 10.5 crores versus INR 15.5 crores in the corresponding period last year. While for H1 of FY '24, the PAT is INR 24.7 crores against INR 39.8 crores in H1 of FY '23.

Our direct-to-consumer business is a high EBITDA margin business, typically in the range of 18% to 20%, with a growing share of direct-to-consumer revenues to total revenues and increased store level profitability in Irasva. Renaissance is confident of its EBITDA margins showing an improving trend going forward.

Moving on to our segmental performance. In Q2 and H1 of FY '24, the revenue of studded jewelry stood at 86% of total sales. Of the total studded jewelry revenues in Q2 of FY '24, branded jewelry business contributed 29% and the contribution for H1 of FY '24 of branded jewelry was 31%. In Q2 of FY '24, the B2B segment contributed 51% to studded branded jewelry, while the Direct-to-Consumer segment contributed a healthy 49%.

During Q2 of FY '24, the D2C business posted revenues of INR 53.8 crores compared to INR 43.9 crores in Q2 of FY '23, which is a growth of 23%. For H1 of FY '24, the D2C business revenue was up by 29% to INR 109.1 crores. Further, based on our projection of a quarter's contribution to annual sales, the annual revenue rate of the D2C business is at INR 311.8 crores in FY '24 versus the actual FY '23 revenues of INR 239 crores.

Lastly, in terms of our balance sheet, our net debt-to-equity ratio stood at a healthy 0.29 as on September '23 as against 0.41 in September '22. Our net debt stands at INR 317 crores as on 30 September '23 as compared to INR 381 crores in the same period last year. We have a healthy cash position with our cash and bank balances and current investments standing at INR 205 crores. Overall, we are one of the leading industry players with a solid balance sheet profile.

On that note, I would now request the moderator to open the forum for any questions or suggestions that you may have. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Amit Lala from IAlpha Investments.

[Amit Lala, analyst]

As you mentioned in your remarks that the business is in a transformation space from generic to a kind of branded portfolio. In the short-term, kind of the returns have not been very clear. Can you maybe paint us a picture from, let's say, a 5-year perspective on how this branded business can look and what kind of return profile we can expect?

[Sumit Shah, executive]

Sure. Sure. Thank you for your question, Amit. So as we've been indicating over the past couple of years, we're in this transition phase of transforming our company from a generic supplier to a branded player with a Direct-to-Consumer as well as business-to-business distribution. And currently, there is two businesses within our branded space With Clarity as well Irasva, which are -- Irasva is not yet profitable at company level and With Clarity has lower margins because we only acquired it a year ago.

Historically, we had 15% margins for this segment, 15% to 18% margins for the branded segment, and our goal would be to grow margins again back to those levels as well as increase our business substantially. I think that we fully expect a large majority of our business to be the branded business in a 3- to 4-year time frame. So I think very optimistic that there will be a significant margin expansion on the branded side as well as significant revenue growth.

[Operator]

[Operator Instructions] The next question is from the line of Jagdish from -- an Individual Investor.

[Unknown Attendee]

I had a question regarding us versus competition. How do we differentiate ourselves from the peer group who are also selling to the U.S. retailers and the jewelry stores?

[Sumit Shah, executive]

Yes. Thank you. So I think the fundamental difference is that I think a lot of our peers are not attempting to build a branded offering and build their own brands. I think that the competition is really focused on selling generic product to large retailers. I think that building a brand does require some initial investments due to which our margins currently are on the lower side, but we strongly believe that this is the right strategy long term to really build value for our shareholders over time.

[Operator]

[Operator Instructions] The next question is from the line of Drasti Shah from Blue Lotus Capital Advisors LLP.

[Drasti Shah, analyst]

Sumit, I wanted to know, you have added a new slide which shows the mix of lab-grown diamonds and natural diamonds and the mix has been like 50% for B2C and it has been increasing compared to H2 -- I mean, Q2. So can you just give some idea about how this mix -- I mean, you are forecasting and the margins improvement, which can be -- I mean, we can receive from this lab-grown increment and your revenue mix.

[Sumit Shah, executive]

Sure. Sure. So I think as you see, I think we -- even in Q2 versus Q1, the contribution from lab-grown diamonds has increased meaningfully, and we believe that this number will continue to go up. It's very hard to project where this number will stabilize. So I think that we clearly remain focused on developing both natural as well as lab-grown diamonds, I think, depending on the brand and what the customer segment requires. But I think over time, lab diamonds will become a much bigger percentage of our overall business as compared to the 13% that we are at today.

[Drasti Shah, analyst]

Okay. Can you say any kind of margin difference, like there has been a lot of volatility in the lab-grown diamond prices also. So I mean what kind of volatility and the price pressure you're facing in this lab-grown diamond...

[Sumit Shah, executive]

So on a large part of our lab business is on the Direct-to-Consumer side, where we follow a zero-inventory model. We run a marketplace where producers of lab-grown diamonds list their inventory. And then once the customer places an order, we actually end up buying the store and supplying it. So we're not taking any inventory position or very minimal inventory position on the Direct-to-Consumer side, which is a large majority of our lab-grown business. On the B2B side, it's about 5% or so. So I would say that we're trying to sort of be cautious because there has been significant declines in the valuation in value of lab-grown diamonds and we've sort of been immune to it because we've not taken a significant inventory position in lab-grown diamonds.

I mean in general, the gross margins are higher, but it obviously does come with a downside risk of lower inventory prices as well. So we've tried to stay cautious on the lab-grown diamond space in terms of holding inventory, so that our balance sheet is not impacted by any depreciation in the prices of lab-grown diamonds.

[Drasti Shah, analyst]

So does that mean there is a lot of changes in your cost per ticket size, I mean since 50% in B2C comes from the lab-grown diamond inventory? So post to the changes in the prices of lab-grown diamonds, has there been a huge change in your -- I mean, per unit cost to customer, I mean, has been...

[Sumit Shah, executive]

No. What we've noticed is generally the consumers of engagement rings, which is primarily where lab-grown diamonds are used, generally come with a budget in mind. And over the last 18 months or so that we've been operating this D2C platform, we've seen stability in the average order value. The customer usually will upgrade and buy a better diamond instead of spending less money. So we've seen that our average order value has stayed constant at about $2,500 to $2,600. However, the customer is getting more value for money as they are -- as the prices of lab-grown diamonds have gone down and people are upgrading to a 1.5 carat stone or a 2-carat stone instead of a 1-carat stone that they were earlier buying.

[Drasti Shah, analyst]

Okay. And lastly, I just wanted to know about the new Irasva store opening, can give some idea about the new store, like what plans with respect to Irasva post the new Borivali launch and about Borivali store, you can just share some detail.

[Sumit Shah, executive]

So we have plans to -- in the next 3 months or so to open one more store in Bombay, in Bandra. Currently, the store is in the fit-out phase. I think post that, we are kind of formulating our plans for the next financial year, but we are very encouraged with the store level unit economics of Irasva and we feel that it's the right decision to continue to build on it. I mean we were initially quite cautious, but I think that the unit level economics now are at a point where it makes sense to grow the brand meaningfully. We'll sort of come back with more concrete plans probably on the next earnings call, but we're definitely encouraged now to grow it.

Having said that, Irasva, as it becomes a larger part of our Direct-to-Consumer business, is a drag currently on margins. Because while the store level economics are positive, at company level, it's still a minor loss. So as it becomes a bigger number, the margins will look a little bit lower, but I think it's the right decision for the long term to grow it because India has a potential market, and we feel like we've created a differentiated offering that the consumer has loved and we're very encouraged with the sales trends at Irasva.

[Operator]

[Operator Instructions] The next question is from the line of Pavan Kumar from RatnaTraya Capital.

[Pavan Kumar, analyst]

Sir, can you please highlight what is the impact of U.S. rate hikes on your present demand dynamic?

[Sumit Shah, executive]

Sure. So I think that there is -- I think more than the rate hikes, I think since it's a U.S. consumer who's buying, I think they've been impacted more by the higher inflation trends. I think that usually in a high inflation environment, discretionary spends are what are cut. So if you look -- if one looks at sort of spends in various discretionary categories, I think that most of them are down. So while the U.S. consumer is relatively healthy and still spending more money compared to last year, a lot of that money is going towards essential. So our view is that demand has definitely got impacted a bit due to inflation. While inflation has moderated, we've seen normalization in sales trends. So I think a lot of the impact has happened over the last 12 months. And we're seeing now after 3 quarters, our revenues have kind of become flat year-over-year, and we fully expect these to turn positive in the next 2 quarters. So I think a lot of the impact that we felt due to inflation is now behind us, and we expect to see a positive revenue momentum going forward.

[Pavan Kumar, analyst]

So we are saying this peak December quarter might not be that great, but maybe in FY '25, we can expect some pickup?

[Sumit Shah, executive]

So I think that as we stated in -- at the end of Q1, we would -- we should see normalization in Q2, which we've seen in terms of revenue trends. I think that Q3 should be flat to mildly positive and Q4 should definitely be significantly positive. So I would say that the revenue trends should become progressively better every quarter going forward.

[Pavan Kumar, analyst]

Okay. Okay. And about your new brand additions, you had done a few new brands in jewelry...

[Operator]

Sorry to interrupt, Mr. Kumar, your sounding too feeble. We can't hear you clearly.

[Pavan Kumar, analyst]

On the branded jewelry -- yes, can you hear me now?

[Sumit Shah, executive]

Yes, it's a little unclear. If you could speak a little louder, that would be great.

[Pavan Kumar, analyst]

Okay. On the branded jewelry side, we got a few new brands like Netflix last year. Can you share some update on this?

[Sumit Shah, executive]

Yes. So I think that we're gradually sort of monetizing various brands, which are at different states of development. So we recently launched Marvel, Star Wars and Disney Jewels under a consolidated brand called Wonder Fine Jewelry at JCPenney and the feedback has been incredibly positive. We also expanded NFL at other retailers, and we're very encouraged with the sales trends at -- with NFL as well.

So I think that among the stronger brands, I would say that the Disney portfolio of brands, the Princess brands, the iconic Disney characters, Star Wars, Marvel, all continue to do really well. Hallmark does exceedingly well and so is NFL showing encouraging signs. I think that Netflix did not quite work out as we had planned, and it's kind of not turned into a meaningful business, but the newer brands that have done well have been Marvel, Star Wars and the NFL. And I think that these new brands should sort of contribute to the revenue growth going forward.

[Pavan Kumar, analyst]

Okay. Okay. And on the Irasva side...

[Operator]

I'm sorry, Mr. Kumar, we can't hear you.

[Pavan Kumar, analyst]

On Irasva side, can we -- can you just let us know if we have any plans of opening another store on the Irasva side? How -- what is the kind of growth that we can expect on that side?

[Sumit Shah, executive]

Yes. So I think that we are currently at 4 stores. We plan to open a fourth -- fifth store in Q4 of the current financial year. And we are currently finalizing sort of capital allocation and budgeting for the next financial year. We will definitely continue to open Irasva stores going forward since we're very happy with the unit level economics for Irasva. We have not finalized how many more stores we will be opening in the next financial year, but there is one more location which has been signed up in Mumbai, which we'll open in Q4 of the current financial year.

[Operator]

[Operator Instructions] The next question is from the line of [ Gaurav Jaggi from Sandler Cheese Private Limited ].

[Unknown Shareholder]

I'm a shareholder in your company. Just one basic question. Your stock basically seems to be very undervalued compared to a lot of its peers. And of course, today, the consolidated numbers took a toll on the stock. I just wanted to know one thing, any plans of a buyback?

[Sumit Shah, executive]

We will have to probably discuss it in the next Board meeting, but I think that currently, we have not discussed a buyback at all given the fact that interest rates are significantly higher, and we still have about INR 300 crores of net debt. I think the first goal would be to kind of, one, reduce net debt and also put in plans for capital allocation towards growth of Irasva as well as our Direct-to-Consumer business in the U.S.

So I would say that for the next 12 months or so, it's obviously up to the Board to decide, but I think that the priorities for capital allocation, while you're seeing that we've been generating consistently over INR 100 crores of free cash flow over the last 4 years or so. So FY '20 to 2023, I think over the last 4 years, we've generated over INR 500 crores of free cash flow, which we've used to do some acquisitions and pay down debt by a significant quantum. I think that the plan of reducing debt further and also allocating some capital towards growth probably would be higher uses of capital.

[Operator]

[Operator Instructions] The next question is from the line of Ashish Shah. We've lost the line for Mr. Shah. [Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for closing comments.

[Sumit Shah, executive]

Thank you, everyone, for participating in our conference call today. We look forward to talking to you next quarter. Thank you.

[Hitesh Shah, executive]

Thank you.

[Operator]

Thank you. On behalf of Renaissance Global Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.