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Renaissance Global Ltd
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Ladies and gentlemen, good day, and welcome to Renaissance Global Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, Mr. Poojari.
Thank you. Good afternoon, everyone, and thank you for joining us on Renaissance Global's Q4 and FY '22 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'll 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 would now like to invite Sumit to make his opening remarks.
Thank you. Good day, everyone. On behalf of Renaissance Global, I extend a warm welcome and thank you for -- thank you all for joining us on the earnings conference call for the quarter and year ended 31st March 2022. I'll initiate the call by taking you through a brief overview of the company's operational and business highlights for the period under review. Post that, Hitesh will take you through the financial performance, and we will open the forum for question and answer session.
We're glad to report that we have delivered a robust performance during the year. Total income for the year FY '22 was up 8% year-over-year to INR 2,209 crores. On a like-for-like basis, our total income for the year was higher by 32% year-over-year, and the profit after tax expanded by 130% year-over-year. The growth was primarily driven by strong contribution from our high end -- from our high-margin branded jewelry segment, along with robust growth in our direct-to-consumer segment.
On the raw material front, as indicated last quarter, we did see certain inflationary pressures in our key input cost, such as diamonds. This had a slight bearing on our profitability performance during the quarter. However, we expect this impact to be transient in nature as we pass on some of these cost increases to our customers. Overall, our EBITDA margins during the quarter stood at 9.1%.
On the working capital front, I'm pleased to share that on a like-to-like basis, net working capital days decreased from 239 days to 189 days as a result of strict management of working capital. This was primarily driven by efficient use of inventory, which grew only 11% compared to a like-for-like growth of almost 33%.
Our branded jewelry segment is a key growth lever for us. Our revenues in this segment marked a notable increase of 37% in financial year '22, driven by healthy uptick in retail consumption and improved demand environment in global markets. We have undertaken several initiatives to further expand and strengthen this segment.
We're also making a noteworthy progress in the design and conceptualization of the NFL jewelry collection that we had announced last quarter. This collection is scheduled to be premiered this holiday season at multiple retail locations across the U.S. In order to appropriately leverage this opportunity, we have been in advanced discussions to replicate our successful licensing model by adding additional globally renowned brands, which should supplement the growth of our existing brands to create a strong branded jewelry business. Our strategic endeavor is to achieve over 50% sales from the branded jewelry segment over the next 3 to 4 years.
Within the branded jewelry segment, our direct-to-consumer business is experiencing improved traction, new customer engagements as well as seeing increased repeat customer wins across the 6 websites. For the period financial year '22, our direct-to-consumer business reported revenues of INR 123.8 crores compared to INR 64 crores in financial year '21, growing by 91% year-over-year. The contribution from repeat customers came in at 17% in Q4 FY '22. In the coming months, we will be expanding our direct-to-consumer portfolio with the launch of new websites, including the NFL website.
I'm also happy to share that during the quarter, our company acquired the assets of 4 Mine Inc. 4 Mine Inc specializes in the sale of branded lab-grown engagement rings and this transaction will give us a further strong foothold in this space, while also improving the operating margin through supply chain efficiencies. We're increasing the use of lab-grown diamonds for our jewelry products as it allows our customer a choice of selection and allows us to offer more sustainable options in our product assortment.
Overall, we've delivered a robust business and financial performance during the year. Our partnership with globally renowned brands, our extensive experience in product conceptualization, design capabilities and a well-entrenched distribution network position us to leverage on the many growth opportunities in the global branded jewelry industry. In a normalized environment, we look forward to delivering a much stronger performance going forward.
On that note, I'd like to hand over the call to Mr. Hitesh Shah to discuss our financial performance during the quarter. Over to you, Hitesh.
Thank you, Sumit. Good afternoon, everyone. We are glad to report that the year has concluded on a positive note. As a result of healthy demand in our branded jewelry segment as well as strong contribution from our direct-to-consumer business, the company delivered a resilient performance during the period. In Q4 FY '22, our total income stood at INR 536 crores compared to INR 419 crores on a like-to-like basis in Q4 of FY '21, registering a growth of 28%. While for the full year, total income grew by 32% to INR 2,209 crores compared to INR 1,666 crores on a like-to-like basis.
Our branded jewelry sales in Q4 grew by 33% year-over-year, of which our B2B segment presented an encouraging growth of 33%, whereas our D2C business posted revenues of INR 29.5 crores in Q4 of FY '22 as compared to INR 22.6 crores in Q4 of FY '21, growing by 31% year-over-year. In FY '22, our branded jewelry segment grew by 37%. B2B contributed 25% and D2C grew by a healthy 91%.
During the period under review, growth in the branded jewelry category was supported by a healthy increase in retail consumption, causing improved demand in our key regions. During the fiscal, revenue share of studded jewelry stood at 93%, the rest being contributed by the plain gold business. Of the total studded jewelry revenue, branded jewelry business contributed 25% in Q4 of FY '22. Of the branded jewelry sales, B2B segment contributed [ 25% ], whereas direct-to-consumer businesses contributed to 25%. The plain gold business grew in volume terms by 120% year-over-year and is witnessing encouraging demand and profitability.
On the profitability front, EBITDA stood at INR 37 crores in Q4 of FY '22. And for the full year, it stood at INR 200 crores, translating into EBITDA margin of 7% and 9%, respectively. Improved contribution from our high-margin areas of branded jewelry and direct-to-consumer businesses continue to support our profits. For FY '22, branded jewelry business reported a 15% EBITDA, recording a year-over-year growth of 233 bps and our direct-to-consumer business registered a 19% EBITDA, which is lower by around 117 bps on a year-to-year basis. Our direct-to-consumer businesses continue to be a high EBITDA margin business with margins ranging from 20% to 22%. We expect our EBITDA margins to improve in the future, owing to the increased share of direct-to-consumer revenues and overall revenues.
During the quarter, profit after tax after discontinued operations improved to INR 21.3 crores versus INR 15.7 crores in the corresponding period last year. In FY '22, profit after tax after discontinued operations came in at INR 106.5 crores against INR 42.3 crores in FY '21, registering a growth of 152%.
Lastly, in terms of our balance sheet, our net debt to equity ratio stands at a healthy 0.30 as of March '22. Our total net debt stands at INR 280 crores and our cash and bank balances and current investments are INR 282 crores. Free cash flow during the year stood at a healthy INR 66 crores.
To conclude, we registered an encouraging all around performance during the quarter and full year ended 31st March '22. Our financial and balance sheet profile remains solid, and we look forward to delivering a robust performance in a normalized environment.
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 Instructions] And the first question is from the line of Hitesh Chauhan from H2 INVESTMENT ADVISORS.
Now I want to know the -- what about our China operation? Please elaborate.
Yes, thank you. So we tested the Enchanted Disney Fine jewelry program with a key retailer in China as per our last announcement. However, the product has not performed as to the expectations of the retailer as well as our expectations. So as of right now, because of the lockdown in China, it's not moving forward. And we hope to know a little bit more, but we're not very optimistic about the opportunity set in China because the program did not perform as well as expectations.
So we want to discontinue it?
As of right now, it's in a wait-and-watch mode. We don't have any further information from the retailer because it has not performed as per expectations. So we'll have to make a decision in the next 6 months whether we're moving forward or not moving forward.
[Operator Instructions] The next question is from the line of Bhavya Jain from Sarath Capital Management.
Congrats on a great set of numbers. Sir, I was reading in your release that you are setting up a large headquarter and fulfillment center in New York. So could you please elaborate on that? And what is the thinking behind this?
Sure, sure, Bhavya. So currently, our offices and fulfillment center are actually in Manhattan, which is relatively expensive to be doing significant e-commerce fulfillment. So we're in the process of moving our sales office and distribution centers to Long Island City. Currently, our operations are housed in 20,000 square feet in Manhattan. We're moving to around 50,000 or 55,000 square foot facility, which should allow us to increase our e-commerce fulfillment capabilities. However, our rental expenses will remain the same since we are moving our infrastructure outside of New York City. It's going to be significantly more economical for us to manage. This will allow us to grow our fulfillment capabilities, especially for e-commerce in a very meaningful way and prepare us for the growth for the next 10 to 15 years.
Great. Great, sir. And sir, I just wanted to also ask about the progress on the branded jewelry side and the D2C segment within that.
Yes. So overall, for the current year, obviously, our business has shown healthy momentum, and we're very excited about the launch of the NFL in Q4 of this calendar year or Q3 of the financial year. And so far, during this -- during the past quarter, we did see some softness in March and April because of prior period end stimulus that was given out by the U.S. government 1 year ago. We are seeing signs of normalization in May, and we're looking forward to our 3-year goal of making our branded business 50% of our overall business. So working hard towards growing the newer businesses, the newer licenses and increasing distribution for the current brands.
[Operator Instructions] The next question is from the line of Aakash Javeri from Perpetual Investment Advisors.
Congratulations on a good set of numbers. My first question would be that, what are your margins in the lab-grown diamond jewelry segment?
Gross margins, operating margins, what are you...
I'm talking about operating EBITDA margins.
Sir, it's a very small business for us now since we've just acquired the business and the business is kind of relatively new. When we acquired -- our lab-grown diamond business is primarily driven through 4 Mine Inc. When we acquired the business, the business had gross margins of -- in the mid-30s, and we've, since acquisition, been able to bring the gross margins to the mid-40s now. Our goal, long term, would be to have the gross margins close to 50% in terms of gross margin and operating margins in probably the 15% kind of range.
Okay. And so in this, do we grow our own diamonds or do we not grow our diamonds ourselves?
No, we are not currently growing diamonds ourselves because our current sales of lab-grown diamonds is not significant enough to grow the diamonds. We will evaluate at a future date whether it makes economic sense to grow it because our sense is that, that segment of the market is probably likely to get commoditized at some point or the other. Our focus really would be on creating differentiation through branding and create exciting products that consumers will love. We'll have to make an evaluation on backward integration into growing the diamonds depending on the economics of that once the business is meaningful.
Okay. Got it. My second question would be, in our B2C business, who would be our main competitors? And what does it take to scale our DTC business? What would be our USPs and, yes, if you could throw some light on that?
Yes. So I think in the direct-to-consumer space, the large players in the U.S. would be pure play direct-to-consumer retailers such as Blue Nile, which is probably close to $1 billion in sales. There's also Brilliant Earth and James Allen, which -- who are in the $400 million to $500 million range. And in addition to that, every brick-and-mortar retailer also obviously has an online business, which would be quite meaningful. So largely all of the brick-and-mortar retailers and a slew of online-only companies, all ranging from $100 million to $1 billion in revenue.
Got it. And to scale out this DTC business, what would you say is our USP and what can we do to scale our business and compete against these players?
So I think our single biggest USP is obviously access to brands that are loved by consumers. Because of our omnichannel approach, customers are aware of what our products are and by being able to sell the products both through physical retail as well as online, consumers know the products, consumers know the brands, and we are leveraging the brand power of the licenses in order to grow it. Our integrated manufacturing to consumer approach is also a big differentiator because we're able to deliver custom products to consumers in the U.S. within 10 to 12 days of taking orders from customers. So I think competitive pricing due to integrated manufacturing and brands that are known worldwide and loved by consumers would be kind of the 2 key strategic advantages that we would have and allow us to scale the business going forward.
[Operator Instructions] The next question is from the line of Kruttika Mishra from Sharekhan by BNP Paribas.
Congratulations on the good set of numbers. I had a few questions. Firstly, on the margin front. In Q4, our margin is flat at 5.6% around. So -- however, the gross margin has expanded quite a lot. So what is the reason? And secondly, what is your outlook for the EBITDA margin for H2? So do we target around 10% for FY...
Participant, sorry to interrupt you, but your voice is breaking, I request you to come in a better reception area, please.
Okay. Is it better now?
Yes, much better.
Yes. So the EBITDA margin, I wanted your outlook for the EBITDA margin, sir.
Sure. I request Hitesh to take this question.
Yes. So I think as we had earlier indicated, there's a lot of input cost pressure with diamond prices rising and then there was a slight decrease in EBITDA margin for the quarter. However, I mean, going forward, as we are able to pass on the increased costs to the consumer -- to the customer, we expect the EBITDA margins to return back to the 9% to 10% range. And as the product -- sorry, the divisional mix changes more towards the direct-to-consumer and the branded jewelry segment, it should, in the next 3 to 4 years, be in the early double-digits.
Okay, sir. Okay, sir. Secondly, category-wise, as in for the studded jewelry and for the D2C and branded jewelry, what is the category-wise outlook for each of the categories? Can you highlight something more?
I think, as we had earlier indicated, we expect D2C businesses eventually to stabilize around 20%, 22% EBITDA and branded jewelry tends to be in the like 13% to 15% range. And the customer brand definitely are on the lower side between 7 to 9 kind of percent margins.
Sir, about the revenue outlook, if you can highlight something about that? You have mentioned that branded jewelry, you are targeting 50% contribution. But what about D2C business?
Sumit, you want to take that?
Yes, yes. So our goal really would be for -- in a 3- to 4-year time frame for our overall business, to be split 50-50 between customer brands and branded jewelry. And even within branded jewelry, our goal would be to be sort of a 50-50 split between B2B and D2C, so through wholesale and retail channels.
Okay. Okay, fine sir. Sir, just one last question regarding the CapEx. What is your plan for FY '23? Do you have any majority of CapEx play?
Yes. So currently, there is a significant amount of capital expenditure that is currently ongoing for the setup of our fulfillment center and sales office in New York. Other than that, there may be some minor capital expenditure to upgrade our manufacturing facility, but we don't expect anything other than the New York fulfillment center. That would be a total capital expenditure of around INR 30 crores.
And sir, for FY '23?
That would be for FY '23.
Okay. Okay, sir. And if I may ask one last question, sir, if you can give us the demand outlook? Currently, how is it in the U.S. and other major regions in which we are currently present?
Yes. So we saw some softness in March and April in retail sales, comparing, obviously, on a year-over-year basis because last year, in March, U.S. government sent out stimulus checks, which resulted in significant increases in sales. However, as we look at the year-over-year comparisons in May, they have started to look a little bit better year-over-year. So there has been a little bit of an impact due to inflation as well as a difficult year-over-year comparisons. We are seeing that inventory is very, very lean across all of our retail customers. And despite sales being a little bit weaker at the retail level, we are seeing healthy demand from our customers for our products because inventories are extremely light and extremely lean at the customer level. So I think it's a tale of multiple sort of moving parts where there is slight weakness in demand. However, inventory is a little bit light. And obviously, it remains to be seen how long the inflation impact lasts in the U.S. and when demand does stabilize. So there was a few months of impact where retail sales were a little bit lower than expected.
[Operator Instructions] The next question is from the line of [ Kalpesh Parekh from JMS Advisory Service ].
Congratulations on good set of numbers despite lot of odds as such. But sir, I have a couple of questions. You have acquired this company 4 Mine Inc in this branded lab-grown diamond space which we discussed last quarter also. How big is the opportunity in this space on the lab-grown diamond space because we are hearing that new generation -- a lot of new generation people are preferring this diamond. So is this a very big opportunity for us?
Yes, yes. So thank you for that question. I think that you're absolutely right. Lab-grown diamonds have really grown in acceptability with the millennial and the younger customers, especially in the U.S. We are seeing exponential growth within this segment, and we think that the opportunity set for lab-grown diamonds is significant. What we are also seeing is that customers are upgrading and still spending similar amounts of money to buy lab-grown diamonds. So instead of getting a 1 carat diamond for their engagement, consumers are buying a 2.5 or a 3 carat diamond. So while there is a cost saving in absolute average selling price terms, people are buying higher carats. And we think that the opportunity for lab-grown diamonds is significant, especially in the engagement ring space, where there is significant savings for customers. So we're very focused on growing the 4 Mine Inc business and making that a much bigger part of our overall pie.
So should we expect a higher contribution like nearly about 20%, 25% of your business coming in from this space in next 2, 3 years or 4, 5 years type of time, sir?
Yes. So our expectation would be that lab-grown diamonds would be double-digit percentage of sales. It remains to be seen whether it's 15% or 25%. But currently, we are in low single-digits. And I think that this contribution will increase meaningfully in the years to come.
Right. Sir, secondly was, I was just seeing that you have -- you are trying to explore on NFL franchisee front, which earlier we had explored or probably explored on Disney brand and all that thing. So based on your experience with Disney and Star Wars collection and other things, do you think this agreement with NFL thing will also be -- is on the same grounds or probably we have done a lot of work, and we have found out that there is a lot of opportunity in this space?
Yes. So I think that the NFL, obviously, is one of the most popular games -- sports in the U.S. And I think there's a huge fan following for the teams, the players in the U.S. We think that the opportunity set here is pretty large, and we're very excited to sort of launch this collection in Q4 of the current calendar year. I think once it launches, obviously, we'll get a better sense for the product. I mean we've done some consumer testing and current initial reaction feels like the opportunity is large. Obviously, the proof is going to be on the delivery of the numbers and seeing what -- when the consumers work with their wallets. So we'll have to see how it goes, but we are excited about the opportunities that NFL presents.
Sure. So the income or revenues, what we generate, will classify in a B2C or it will come under branded space?
So it comes in both, right, if it's sold through a retail -- through a retailer, it would get split depending on whether it's sold on our website or it's sold through a retail partner.
Okay. Fair enough. So I think there, probably -- margins probably should be handsome. Going by the logic of, if it is a branded or higher-end B2C also, the margin...
So they'll be similar to Disney and Hallmark margins, which we are currently experiencing, right? So about 13% to 14% on the B2B side and 18% to 20% on the direct-to-consumer side. So we expect margins on the NFL front to be similar to our current branded jewelry segment.
Sure, sir. Sir, you were mentioning on like 50-50 between B2C and branded. So can we -- as a shareholder, we should expect that, probably, the free cash flow generation in the next 2, 3 years because you have a limited CapEx? So the FCF will be very, very strong in the coming years?
Yes. So I think that we've obviously been -- for the jewelry business, in general, working capital is a much bigger component of free cash flow conversions. And we've -- cumulatively over the last 3 years, we've had INR 190 crores, INR 113 crores and INR 66 crores of free cash flow. We expect this trend to continue. We are definitely going to grow inventory significantly slower than the rate of sale, which will mean that we should have a strong free cash flow conversion. However, in the current year, as mentioned, we have about INR 30 crores of capital expenditure towards our fulfillment center and head office in New York as well as some payments related to the acquisition of 4 Mine Inc as well as some residual payments for the Jay Gems acquisition, the last payments for those. So once these are done in financial year '23, I think there should be significant amount of free cash flow generation after these 2 or 3 items that we've previously noted.
Sure. My last question will be on your working capital front. Basically, we have already contained our working capital on a like-to-like basis and I'm seeing it is from 239 to 189. So it's like 6 months type of time frame, what we are there. But given the backdrop what you mentioned that the demand scenario is very soft and the inventory is also very lean in U.S. market, so going forward, your inventory is expected to move up. So how you will manage this working capital cycle or how you will be able to -- or can we expect further containment of your working capital below 189 days as well?
Yes. Our expectation would be to go below 189 days going forward because the growing businesses definitely require less than 5 months of inventory. I mean, the major component of working capital clearly is inventory and at INR 940 crores, our expectation would be that it will grow slower than sales. So I think that clearly 189 days over a 3-year time frame will go down.
Understood. I think that would be a good thing because that will unlock a lot of our return on capital employed because our ROCE can improve only when you contain your working capital beyond certain base as such. But I think you people have done a good job. Heartiest congratulation and wish you all the best, sir.
Thank you.
[Operator Instructions] The next question is from the line of Hiten from Joindre Capital.
Sir, my question is on the debt reduction. Are we planning -- do you have any plans on reducing our debt as we have started a positive free cash flow generation from this year? I know you have given already some color as how we are going to spend in New York and all. Any particular plan on debt reduction?
So I think we will see a reduction in net debt meaningfully over the next 2, 3 years. I think for the current year, as outlined, there's a significant amount of capital expenditure and payments towards the acquisitions, which will mean that our net debt number in absolute terms may not go down. However, net debt as a percentage of equity will go down. And I think that from FY '24 onwards, there will be a reduction in the absolute debt number as well.
Okay. Okay. Sir, one more question on New York. We are spending the CapEx of INR 30 crores on -- in New York site, right? So what kind of -- like what is the rationale behind it? Are we going to save anything after spending this? What kind of savings we are expecting from this?
Yes. So I think the question is not really for savings but the ability to grow our e-commerce business. Currently, our offices in the U.S. were not set up for distribution of e-commerce and shipping 1 unit at a time for 2 consumers. So being able to actually grow our direct-to-consumer business from INR 120 crores to our expectation of making it 25% of our overall business, it's actually investing in fulfillment capabilities in order to meet the sales targets. It doesn't monetarily save us money, but we're getting more space for an equal amount of rental paid and increases our fulfillment capabilities so that we are able to manage the growth that we plan and expect in -- specifically in our direct-to-consumer business.
Okay. Okay. Understood. Understood, sir. And sir, one last question. Would you like to give any revenue guidance for FY '23?
Yes. So as of right now, we've not guided for FY '23 in terms of revenue because I think there is a little bit of sort of uncertainty in terms of sales and commodity prices. I think that we should have much better visibility at the end of Q1. So we would definitely give some guidance on revenues and profitability for FY '23 at the end of Q1.
Okay. Okay. And sir, a small question on this tax rate. What will be our tax rate in current year?
Yes. Hitesh, you want to take that?
So is that question on a consolidated basis or like on a standalone India basis?
On consol basis.
We expect it to be around 15% to 17% on a consol basis.
15% to 17%.
Yes.
[Operator Instructions] The next question is from the line of Sunil, an individual investor.
Congratulations on a good set of numbers. I just wanted to ask the brand which we are developing in India, IRASVA, at retail stores. Just wanted to understand how is the performance at the stores. Are we able to -- have we done breakeven or when we are able to break even? And what -- more number of stores we are opening in future or not?
Yes. Thank you for your question. So I think IRASVA had sort of a difficult January due to COVID and omicron variant. However, February, March and April had been good months. We currently have 3 and 2 of the 3 stores are profitable at store level. We are looking at relocating one of the stores, which is not profitable. And we're looking at possibly opening 2 more stores in the current financial year. So we're encouraged by the performance of IRASVA. We continue to monitor it closely. And we're slowly planning on increasing the store count and ensuring that we do it in a profitable way.
[Operator Instructions] As there are no further questions, I'll now hand the conference over to the management for closing comments.
Thank you, everyone, for joining us today on the financial year '22 conference call. We look forward to welcoming you back for our Q1 conference call. Thank you.
Thank you very much. On behalf of Renaissance Global Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.