Kalyan Jewellers India Limited (KALYANKJIL) Q4 2021 Earnings Call Transcript

Kalyan Jewellers India Limited (NSE : KALYANKJIL) Q4 2021 earnings call dated May. 28, 2021

Corporate Participants:

Anand Shah — Investor Relations

Ramesh Kalyanaraman — Executive Director

Sanjay Raghuraman — Chief Executive Officer

V. Swaminathan — Chief Financial Officer

Sanjay Mehrottra — Head of Strategy and Corporate Affairs

Abraham George — Head of Treasury and Investor Relations

Analysts:

Aditya Mathur — Citigroup — Analyst

Shirish Pardeshi — Centrum Capital — Analyst

Nihal Jham — Edelweiss — Analyst

Deepak Poddar — Sapphire Capital — Analyst

Abul Fateh — Baroda Mutual Fund — Analyst

Mustafa Khedwala — Cube Investments — Analyst

Deepak Mittal — Edelweiss — Analyst

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Manoj Menon — ICICI Securities — Analyst

Vinod Malviya — Union Mutual Fund — Analyst

Abneesh Roy — Edelweiss — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Kalyan Jewellers Q4 FY ’21 Results Conference Call, hosted by Axis Capital Limited. [Operator Instructions] And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]

I now hand the conference over to Mr. Anand Shah from Axis Capital Limited. Thank you, and over to you, sir.

Anand Shah — Investor Relations

Yes. Thank you, Fazan. On behalf of Axis Capital, I welcome you all to the Kalyan Jewellers Q4 FY ’21 and FY ’21 earnings call. It is absolute pleasure to host the first earnings call, post their listing. We have with us the senior management of the company, represented by Mr. Ramesh Kalyanaraman, who is Executive Director and the Whole Time Director; Mr. Sanjay Raghuraman, CEO; Mr. V. Swaminathan, CFO; Mr. Sanjay Mehrottra, Head Strategy and Corporate Affairs; and Mr. Abraham George, Head Treasury and Investor Relations.

So while we started the conversation with Mr. Ramesh, you know, we’re giving the opening remarks and then the followed by Sanjay sharing the take on the results. So I’ll hand it over to Ramesh for the opening remarks. Thanks, and over to you.

Ramesh Kalyanaraman — Executive Director

Thank you. Good afternoon, everyone. I hope and pray that all of you and your families are safe and secure. I’m extremely happy to present to you ourselves on this made in earnings call. I would start by thanking all our investors who have showed faith in us.

Let me begin by giving a brief overview of Kalyan Jewellers for the benefit of those who are not a part of the IPO roadshow meetings. Kalyan Jewellers was started in the year 1993 in Thrissur our hometown in Kerala. My father, my brother and myself are in this business, since inception. When we started the jewelry industry was majorly unorganized. We have been pioneers in introducing a lot of fair and transparent trade practices, beat hallmarked gold, rate tag, which show some making charge of the product, karatmeters inside the stores, transfer entry in terms of old gold exchange etc.

The taste and preferences for jewelry in India is different in each micro market. Our brand has been behaving very hyper local, right since inception. Hyper local meaning the product, the communication by way of marketing, the staff at the store, everything will be aligned to the local taste and preferences. This has helped us to be perceived as the son of the foil brand and enabling us to compete with local, regional and unorganized players, thereby capturing a larger market share.

Another strength, which is unique to Kalyan Jewellers is the My Kalyan network, which we have built over the past many years. My Kalyan is a marketing office, which is setup in catchment areas around Kalyan Jewellers showroom, it operates in hub-and-spoke model with marketing stuff and zero inventory. We have 760 plus My Kalyan centers, spread across India with over 2,500 field stuff. Today, if you look at Kalyan Jewellers, we are not only one of the largest jewelry brand in the country, we are one of the most trusted jeweler, extremely hyper local in nature and we have also created the My Kalyan network, which has enabled us to reach customers at the grass root level.

I would now like to provide some perspective on how financial year 2021 has been. It has been a very unprecedented year for all of us. We started the financial year in the midst of COVID lockdown, wherein in all our showrooms were closed. During the lockdown our priority was to ensure safety of our staff, customers and all stakeholders. We were closely monitoring the situation on the ground and would resume and could resume operations without any delay once the local authorities gave permission. Thanks to the decentralized empowered mid-level management.

Q3 was the first fully operational quarter in the financial year 2021, wherein all our stores were open. We saw a very healthy growth in revenue, this was primarily because of wedding and wedding related demand. The growth, which we saw in Q3 accelerated further in Q4. We saw a steep shift from the unorganized segment to the organized segment and the demand for wedding jewelry continued to show good traction. This led to a robust revenue growth of 61% in India and 43% on a consol level.

On the back of this revenue growth in India and a strong recovery in the Middle East operations, our Q4 PAT grew by 54% year-on-year. We had a one-time forex gain in Q4 in the last financial year. And if we normalize for the same our Q4 PAT grew by 71%. We successfully come our IPO in March and started the financial year by opening nine new showrooms. We continued to see the same momentum, which we saw in Q4 in terms of footfalls and demand. By mid-April certain states started announcing lockdowns and we saw customer sentiments also dampening. As we speak more than 80% of our showrooms are closed. However, we are better equipped, better prepared and are hopeful that we will come back stronger post this lockdown.

Now let me hand over to our CEO Sanjay, who will take you through the performance highlights. Once again, thank you for joining us on this call. Stay safe and hope to meet you all soon in person. Over to you, Sanjay.

Sanjay Raghuraman — Chief Executive Officer

Thank you, Ramesh. Good afternoon, everybody. Hope and pray all of you and your families are safe and well. I shall start with the highlights of our performance during the quarter ending March 21. Kalyan Jewellers posted a strong performance in Q4 of FY ’21 with robust revenue growth in India and a strong recovery in our Middle East operations. Total revenue for the quarter came in at INR3,057 crores, compared to INR2,141 crores for the corresponding quarter of the previous year.

The growth in India Standalone revenues was 61% and at a consolidated level was 43%. Profit after tax for the quarter was INR74 crores, which is a 54% growth, when compared to the corresponding quarter of the previous year. And to just look back at H2 numbers for the second half of the year, PAT came in at INR207 crores, a 72% growth over the corresponding period in the previous year. And in fact 45% higher than the full-year PAT of FY ’20, a strong performance given the circumstances. Major reasons for the Q4 revenue growth in India were: first, the accelerated shift from the unorganized sector to the organized sector; and second the resilient wedding and wedding-related demand for jewelry.

In Q4 FY ’21 gold jewelry revenue grew by 70% in standalone India, and standard jewelry revenue grew by 37% in standalone India. This relative outperformance in gold jewelry revenues resulted in a decline in the studded ratio, as well as the gross margins in Q4 FY ’21. For Q4 FY ’21, the company recorded a profit before tax of INR98 crores, compared to INR67 crores in the corresponding quarter of the previous year, a 47% growth. EBIT for the quarter came in at INR173 crores, compared to INR119 crores in the corresponding quarter of the previous year, a 45% growth.

Moving now to H2 numbers, the profit before tax came in at INR263 crores, when compared to INR174 crores in the corresponding H2 of the previous year, a 51% growth. And EBIT for H2 FY ’21 was INR429 crores, compared to INR306 crores in the corresponding H2 of the previous year, a 40% growth.

Moving to numbers for the full-year. For the financial year ending March ’21, total revenues came in at INR8,573 crores, against INR10,101 crores in the previous year, a 15% decline. The decline in India revenues, however, is only 6.6% for the full-year. For the full-year ending March ’21, the company posted a loss of INR6 crores, primarily because of a one-time write-off in the Middle East business of approximately INR100 crores, and due to the revenue loss in Q1 FY ’21, because of the COVID lockdown. The India business, however posted a full-year profit before tax of INR187 crores, compared to INR235 crores from the previous year.

I will now share some information about our Middle East business. The Middle East operations contributed 14% to our consolidated revenues during Q4 FY ’21. We posted revenue of INR425 crores during the quarter versus INR502 crores in the corresponding quarter of the previous year. And profit after tax for the quarter ending March ’21 was INR7 crores versus a loss of INR9 crores for the corresponding quarter in the previous year. The revenue degrowth of 15%, which you see is mainly due to the closing down of seven outlets during June 2020 in the Middle East We successfully restructured our Middle East business and have been able to post a profit after tax of INR18 crores in H2 FY ’21 versus profit after tax of INR5 crores in the corresponding period of the previous year. Even with only 70% of previous year H2 revenues.

Moving now to our e-commerce business. [Indecipherable] posted a revenue of INR22 crores during Q4 FY ’21 versus INR13 crores in the corresponding quarter of the previous year. PAT came in at INR53 lakhs versus a loss of INR37 lakhs for the corresponding quarter in the previous year. Full-year FY ’21 revenues given at INR82 crores versus INR56 crores in the previous year and the business turned profitable for the first time since our acquisition in 2017. We’re seeing a INR3 crore PAT versus a INR2 crore loss in the previous year.

With this, I’m concluding my comments on the financials. Before I open the floor for questions, I would start by just saying going forward we expect the performance will be even better, because of the operating leverage that will further kick in as our expansion will be in states, where we’re already present, which will improve our bottom line and the return profile. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] First question is from the line of Aditya Mathur from Citigroup. Please go ahead.

Aditya Mathur — Citigroup — Analyst

Yes. Thank you and good afternoon. Could you share a little bit about the My Kalyan initiative? And what’s the contribution of this — to the business over the past year? And I think a follow-up to that, how should one think of the expansion in this network as you’re kind of growing towards over the next couple of years, I think some light on that would be great?

And the second question I had was on the jewelry advance purchase scheme, I mean, how relevant is it? What is the current salience and if you could just talk a little bit about how [Technical Issues] over the past one year? And could you face a few challenges [Technical Issues] some given that the enrollment would have been slower same time last year?

Ramesh Kalyanaraman — Executive Director

Yes [Technical Issues] about My Kalyan. My Kalyan as I told you it’s a hub-and-spoke model where we have six to seven My Kalyan centers across or near the proximity of Kalyan Jewellers main showroom. So they meet the customers at the doorstep and they divert them to the main Kalyan Jewellers showroom. It can’t the — that reference sale from My Kalyan it is almost 20% of our total revenue. And the gold saving scheme enrollment also 35% is contributed through My Kalyan. So the — My Kalyan going forward again when we open more stores My Kalyan will also be opened near that new stores, because every store has a six to seven My Kalyan centers in and around it. Hope I answered the My Kalyan…

Aditya Mathur — Citigroup — Analyst

If I can just ask a couple of things on that, Ramesh sir — you said 35% of the gold sales enrollment. So how much would that be in an overall context, so if I were to add both the referrals, as well as the gold sales what would be [Technical Issues] last year? And I just also wanted to just clarify on the expansion rate that you spoke about. Could you just share a little bit about how [Technical Issues] both would be very useful [Speech Overlap]

Ramesh Kalyanaraman — Executive Director

The last bit could not hear. I think your line got cut off, the last bit.

Aditya Mathur — Citigroup — Analyst

Sorry, the last bit was if you could tell us a little bit about this South and non-South split for My Kalyan, I think, that would help us sort of understand the plan?

Ramesh Kalyanaraman — Executive Director

Yes, so first thing is that you — 20% is the direct revenue, which comes from My Kalyan.

Aditya Mathur — Citigroup — Analyst

Right.

Ramesh Kalyanaraman — Executive Director

35% is the scheme enrollment, so usually the scheme revenues around 23% of the total revenue. So 23% is the total scheme revenue which comes out of which 35% is from My Kalyan. So if you add that it will be in the range of what 26%, 27% of the total revenue.

Aditya Mathur — Citigroup — Analyst

Understood.

Ramesh Kalyanaraman — Executive Director

Yes. And regarding the next one is the South, non-South, right?

Aditya Mathur — Citigroup — Analyst

Yes.

Ramesh Kalyanaraman — Executive Director

It is almost similar, so we have showrooms, which has six or seven My Kalyan in and around the main Kalyan Jewellers in South India also the same format followed outside South as well.

Aditya Mathur — Citigroup — Analyst

Got it. Could you also talk about the jewelry advance purchase scheme that few regional [Phonetic] question on that contribution. How much — I think you have already spoken about the 23%. Has that changed over the last few years and give me…

Ramesh Kalyanaraman — Executive Director

Q4, you know, that by March actually the old savings scheme contribution came down only in the month of March, it was only 12% to 13%, because the COVID lockdown of previous year usually customer limit for 11 months and shop at the end of the 12th month. So when the lockdown started in March last year, our enrollment would have been, kind of, dampened at that time. And that is way the Q4 scheme revenue is only 12% to 13%. But however, the scheme enrollment in the Q4, we had a growth of 27%.

Aditya Mathur — Citigroup — Analyst

Understood. I mean, thank you.

Ramesh Kalyanaraman — Executive Director

Thank you.

Operator

Thank you. The next question is from the line of Shirish Pardeshi from Centrum Capital. Please go ahead.

Shirish Pardeshi — Centrum Capital — Analyst

Yes. Hi, Ramesh, good afternoon and thanks for the opportunity to the team. I have two questions, now the IPO is to happen. Could you talk, something about what is the current debt level, may be, as of 31st March and maybe as of now?

And my second question is that could you talk about the consumer behavior. Of course, most of the India, it is under lockdown. But I’m sure My Kalyan is still operational. So any kind of leads, which we have seen in terms of the resilience in the month of April and May? I’m not looking for a number perspective guidance, I’m looking how the operation is looking out?

Ramesh Kalyanaraman — Executive Director

Yes, so Q4 actually we saw very good growth, we grew by around 60% in India in terms of revenue, especially if you look at Jan, Feb in that Q4, our growth was in the range of 35% in India. When we opened up in April, the financial year actually the momentum was very similar to that we saw in Q4. But of course after two weeks we started seeing certain states the lockdown was announced and the customer sentiments also dampened. And if you look at us today more than 80% of the showrooms are closed.

So we saw good momentum in the month of April when we started. Also, we opened nine new showrooms as well in April, of course, that is also closed as of today, but we opened the nine new showrooms. That is the consumer — what you call demand pattern, which I would like to highlight in the month of April. So now if you look at very few stores are opened and even the stores which are open, we have limited working hours three hours, four hours a day. So it is very hard for us to give a view of the financial year at this point in time. I think by June end when the stores start opening we will be able to give a clean overview or a road map for this year.

Shirish Pardeshi — Centrum Capital — Analyst

Thank you, Ramesh. The follow-up, which I was asking is that whether this My Kalyan operation is on or that is also cancelled now?

Ramesh Kalyanaraman — Executive Director

So everything is closed, even the showroom is closed. It is a state lockdown, no. So what happens is that movements completely getting restricted, staff cannot move, etc. So when a state is under lockdown Kalyan Jewellers is also closed and My Kalyan is also closed.

Shirish Pardeshi — Centrum Capital — Analyst

Okay. And my second question was on that is…

Ramesh Kalyanaraman — Executive Director

Yes, I will just hand over it to my CFO.

V. Swaminathan — Chief Financial Officer

Yes, the consolidated level our debt is INR3,378 crores as of 31st March ’21.

Shirish Pardeshi — Centrum Capital — Analyst

And any thoughts how this is going to pan out over next, one, one and half year?

V. Swaminathan — Chief Financial Officer

As we’ve told earlier that we are not planning to increase the debt levels, and as and when the internal accruals start coming in progressively, the debt will reduce.

Shirish Pardeshi — Centrum Capital — Analyst

Okay, thank you. I have more questions, I’ll come back.

Operator

[Operator Instructions] The next question is from the line of Nihal Jham from Edelweiss. Please go ahead.

Nihal Jham — Edelweiss — Analyst

Yes. Thank you so much and congratulations. Sir, two questions from my side: first on Kalyan — on the My Kalyan network, just to understand [Technical Issues] that ideally do we open these stores — sorry the My Kalyan network around the main stores in rural areas only or it is something that we look at opening even in the cities? And do even some of our competitors in Southern India have a similar concept or this is unique to Kalyan results?

Ramesh Kalyanaraman — Executive Director

Yes. So My Kalyan of course, we have a very good presence in the rural India, the main intention is to bring in the unorganized segment to Kalyan Jewellers. But in the metros also we have My Kalyan centers around each showroom. For example, we have My Kalyan stores even around in showrooms in Bombay. For example in Borivali we have My Kalyan center in Virar, Vasai, etc. So that is a micro market for us, which pushes customers to the Borivali store.

Nihal Jham — Edelweiss — Analyst

Sure, that’s helpful. And if I recollect right, as a part of our Analyst Meet we had also mentioned that we had tried soften [Phonetic] Jewelry as a part of for the My Kalyan network, which is a pilot, which we had planned. But I just wanted to check that. Is it something that we still plan to continue in the future or that’s an initiative that we’ll be doing in the pursue?

Ramesh Kalyanaraman — Executive Director

So, actually in 2019 we tried out to make My Kalyan also a revenue center by itself and not only driving sales to Kalyan Jewellers. But that strategy did not work properly in 2019. And the My Kalyan actually could not do either of them properly, they could not sell the inventory in My Kalyan and they could not drive the customer to Kalyan Jewellers as well. So we changed the strategy and came back to our old mode and again if you look at now the sale contribution from My Kalyan is back to normal. So we would like to continue the way what we are doing now and we don’t intend to change any strategy in the immediate short-term.

Nihal Jham — Edelweiss — Analyst

Last question from my side. This is specifically to our core market of Tamil Nadu one of our national competitors also mentioned that they are trying to increase the [Technical Issues]. While you do mention that there is a strong shift from unorganized to organized happening and I’m sure that is benefitting all the player. But just in terms of the competitive intensity among the organized players specifically in our main market, how is that shaping out? And would you have any sense if you’ve gained share among that pure set also.

Ramesh Kalyanaraman — Executive Director

Yes. So if you look at our growth, we grew more in South India than in non-South. So South India growth was around 70% and non-South India growth was around 47%. So we had growth in Tamil Nadu in the same range of 70%. Tamil Nadu is already, we have huge market share in Tamil Nadu. We could again grab more market share in that state. We saw lot of unorganized shift from unorganized to organized and we saw a lot of demand for marriage and marriage related revenue even in Tamil Nadu.

Nihal Jham — Edelweiss — Analyst

That’s helpful. I’ll come back in the queue for further questions. Thanks.

Ramesh Kalyanaraman — Executive Director

Sure.

Operator

Thank you. [Operator Instructions] The next question is from the line of Deepak Poddar from Sapphire Capital. Please go ahead.

Deepak Poddar — Sapphire Capital — Analyst

Yes. Thank you very much, sir. Sir, just wanted to understand, you replied to the last participant about reduction in debt. So any kind of debt reduction plan we have for next two years? So any thought process on that?

Ramesh Kalyanaraman — Executive Director

I’ll just hand over it to my CFO.

V. Swaminathan — Chief Financial Officer

Yes, see our current debt equity ratio at consol level is 1.12. So over next couple of years, we target to reach to around 1.75.

Deepak Poddar — Sapphire Capital — Analyst

1.75 over next two years. Hello?

Ramesh Kalyanaraman — Executive Director

Yes, 0.75 over the next three or four years, we intend to bring it down to 0.75. It was earlier at 1.7 before the IPO. Now it is at 1.1. Further, we will bring it down 0.75, but it is not by reducing our debt. It is by adding our equity by way of region is…

Deepak Poddar — Sapphire Capital — Analyst

Okay. So, at the absolute level, our debt level can be at the same range right?

Ramesh Kalyanaraman — Executive Director

It is in the same range, yes.

Deepak Poddar — Sapphire Capital — Analyst

That’s what on maybe next two to three years.

Ramesh Kalyanaraman — Executive Director

Yes. We intend to maintain the same range in terms of amount, but the debt-equity ratio will be improved over the years, because our earnings will also come in.

Deepak Poddar — Sapphire Capital — Analyst

Understood, understood. Understood this point. And over the next one to two years, any kind of outlook you can share on the revenue side or the margin side, so that would be quite helpful.

Ramesh Kalyanaraman — Executive Director

Okay. So revenue this financial year, as I told you, we started in April, it was good, but then stores started closing down. And now we are not in a situation to talk about revenue, because, first of all, most of the stores are closed down. Second of all, the sentiments of people has to be kind of respected. But what we saw last year was that post-lockdown the demand started coming in. It started coming in Q2 then Q3 momentum was better, Q4 it was extremely good. So that is what we expect that this year will also be like, but however by the end of June when all the stores start opening, we will be able to give a more better view.

And regarding the gross margin, which you asked, there are majorly two drivers for increasing our gross margin. One is that increasing our non-South revenue by adding more showrooms in the non-South markets where the margins are usually better than South India. Now we have 65% of the revenue coming from South, which we wanted to bring it down to 50%, meaning 50% of the revenue we want to do from outside South markets by adding showrooms there in the next five years, that is our vision. Wherein, the gross margin will improve automatically, because the gross margins are higher outside South India usually.

Second thing is that our studded ratio usually we do lot of innovative things. We do — our incentive systems are also aligned to improve our studded ratio. Our campaigns are also aligned to do — improve our studded ratio. That will also improve our gross margins. However, in Q4 there was a disproportionate increase in the gold revenue. The gold revenue grew by 70% and the studded revenue grew by 37%. That was one disproportion, which happened. The second thing is that South India, the revenue grew by 65%, 70% and non-South India revenue grew by 48%. So these two together plus the import duty, the customs duty impact the reduction actually reduced our gross margin in Q4.

Deepak Poddar — Sapphire Capital — Analyst

All right, sir, I understood that point. So basically, what you’re saying is that non-South we are planning to increase 35% to 50% over next four to five years, right?

Ramesh Kalyanaraman — Executive Director

Yes.

Deepak Poddar — Sapphire Capital — Analyst

Okay. Sir, can you highlight what is the difference in the gross margin, so that we’ll have some idea.

Ramesh Kalyanaraman — Executive Director

Yes. So, usually the gross margin outside South India is in the range of what 24% to 25% and in South India it is in the range of 14% to 15%.

Deepak Poddar — Sapphire Capital — Analyst

14% to 15% in South. So it’s a big difference.

Ramesh Kalyanaraman — Executive Director

Yes, it’s a big difference.

Deepak Poddar — Sapphire Capital — Analyst

So what is the reason of that?

Ramesh Kalyanaraman — Executive Director

There are — first of all, outside South India the studded ratio is 30%, in South India is in the range of 21% to 22%. I’m talking about the usual scenario. This quarter has been behaving a bit differently, because the gold revenue has been too high. I’m talking about a normal SSD growth of 6% to 7% when it comes, I’m talking about that kind of quarter or that kind of financial year. Usually the studded revenue — studded ratio outside South India is 30% and in South India is in the range of 21% to 22%. That is one major reason for the margins to be better outside South India.

Deepak Poddar — Sapphire Capital — Analyst

Okay, okay, understood. Yes, that’s it from my side. Thank you very much.

Operator

Thank you. The next question is from the line of Abul Fateh from Baroda Mutual Fund. Please go ahead.

Abul Fateh — Baroda Mutual Fund — Analyst

Good afternoon, sir. I just wanted to know, assuming the things normalized by say June. So what is the plans, how many stores do you want to open across the country and the mix between South and non-South and also the money that will be spending on capex, including differentiating between working capital and [Indecipherable]. Thank you.

Ramesh Kalyanaraman — Executive Director

Yes, so this financial year. The plan is to open 21 new showrooms, out of which nine has already been opened in the month of April, five were ready to open that was in Maharashtra and Delhi, unfortunately the COVID lockdown in those states were announced and we could not open it. Once the lockdown is lifted, we will assess the market and launch the same, so out of the 21, nine is done, five will be done very sharply and the rest will be done in the financial year that is the plan.

And when it comes to investment the usual investment plus showroom is INR30 crore for inventory and INR5 crore capex, that is the usual standard investment for showroom — for a 5,000 square feet showroom.

Abul Fateh — Baroda Mutual Fund — Analyst

Okay and out of this nine that you have opened. What is the mix between South and non-South?

Ramesh Kalyanaraman — Executive Director

Yes. Out of the nine, eight were in South India and one was in Gujarat.

Abul Fateh — Baroda Mutual Fund — Analyst

Okay. And these five that are ready to open are in Maharashtra and Delhi.

Ramesh Kalyanaraman — Executive Director

Yes, three Maharashtra and two in Delhi.

Abul Fateh — Baroda Mutual Fund — Analyst

Okay. Thank you so much sir.

Ramesh Kalyanaraman — Executive Director

Thank you.

Operator

Thank you. The next question is from the line of Mustafa Khedwala [Phonetic] from Cube Investments. Please go ahead.

Mustafa Khedwala — Cube Investments — Analyst

Good afternoon, sir. Sir, the metal loan of our company has gone up substantially, whilst while the banks were reluctant to give out metal loans. So, have we seen any improvement there, can you shed some light? That’s my first question.

Ramesh Kalyanaraman — Executive Director

Yes. So should I answer that or wait for your second question?

Mustafa Khedwala — Cube Investments — Analyst

No sir, you can go ahead sir.

Ramesh Kalyanaraman — Executive Director

Yes, one second.

V. Swaminathan — Chief Financial Officer

Yes, Mustafa we have increased our gold metal loan substantially from last year to this year. Unlike in the past, there is no restriction as of now from the banks in wrapping up our metal loan. So our target is to further improve it. We have scope to increase it by another INR800 crores to INR1,000 crores.

Mustafa Khedwala — Cube Investments — Analyst

Interesting. And sir you have also mentioned that there has been a large shift from the unorganized to the organized segment. So, sir can you shed from some light as to how much of the market in South especially is organized versus unorganized and how much market share have we actually gained?

Ramesh Kalyanaraman — Executive Director

Yes. So if you look at the new customer footfalls, it has been in the range of 50% plus, which means that the market share in the markets have improved. That has been constant in South, as well as non-South.

Mustafa Khedwala — Cube Investments — Analyst

Okay sir. Thank you.

Operator

Thank you.

Ramesh Kalyanaraman — Executive Director

Thank you.

Operator

The next question is from the line of Deepak Mittal from Edelweiss. Please go ahead.

Deepak Mittal — Edelweiss — Analyst

Yes. Hi, Ramesh. How are you?

Ramesh Kalyanaraman — Executive Director

Hi, how are you?

Deepak Mittal — Edelweiss — Analyst

Good, good. So, congratulations again for the IPO and for the first earnings call. My question is with respective to the gross margin, there has been a very significant decline if you look at the gross margin as a percentage of revenues.

Ramesh Kalyanaraman — Executive Director

Yes.

Deepak Mittal — Edelweiss — Analyst

So last year, last quarter it was 21%-plus and this year, last quarter is less than 15%. So again just trying to understand what really happened? Is it that we took certain inventory risk, but the pricings are…

Ramesh Kalyanaraman — Executive Director

In the last quarter — last Q4, there were one-timers, which have made it 21%. Usual gross margin is in the range of 17%. That 17% versus 14.6% to be precise in India, that gap has been majorly, because of — only because of three factors. One, the South Indian revenue grew more than non-South revenue where I told you that South India gross margins are lesser than non-South markets. That is a bit of a disproportion. The second is that the growth in plain gold jewelry was at 70% and the studded jewelry growth was at 37%. That was the second disproportion. The third one is that even in the plain gold, we saw the unorganized segment asking for the staple low-margin products, which was in high demand.

Because usually the unorganized segment first shop those, kind of, products, wherein they see — they would have saw that with their neighbor or their friend, and they come for the same kind of product, which because Kalyan Jewellers is a hyper local brand and we stock the local inventory, we could cater them. However, the gross margins in those staple products will be lower than the plain gold jewelry, which we sell otherwise. So these three things, plus the customs duty cut actually brought down from that 17%, the normal 17% to 14.5% — 14.6%.

Deepak Mittal — Edelweiss — Analyst

And any guidance you would like to give on gross margins as we model this business for next two, three years?

Ramesh Kalyanaraman — Executive Director

Yes. So I would — because we have seen a huge momentum in revenue growth. If this is the kind of growth which is going to be there in the future, which we don’t know, whether this momentum of 50%, 60% are going to continue or not. If that is the case, the gross margins will be in this range or bit better than this range, because you see lot of plain gold coming in. But if you look at a normal year where your studded ratios in the range of 23%, 24%, the South non-South mix is 35%, 65%, it should be in the range of 17%. That is a normal kind of gross margin, which we should have done. But once it is actually growing in a disproportion like this, your gross margins will again get in this level 14.5% to 15%.

But two things which I had to highlight there is that: one, the customer who’s coming now on a staple product, the customer is going to stay with us. And this same customer is going to give us a higher margin revenue in the future, because the stickiness in our industry is extremely high. There is very rare chance that a customer goes out from a brand, especially in our sector.

The second thing is that the five year vision, which I told wherein more number of stores outside South India where the margins are higher will take your gross margins on a higher note. So these are the two things, which I — just I wanted to highlight. But if you look at the gross profit on a volume, it was very high in Q4. So, that’s what I want to just highlight.

Deepak Mittal — Edelweiss — Analyst

And what is the — thank you so much for that. What is the sort of current situation of 170 stores, how many stores are currently operating assuming that — is that — what has been the kind of traction in the last two months after the April and May in these two months, given that there has been a lockdown situation on and off in many states in the country.

Ramesh Kalyanaraman — Executive Director

Yes, Sanjay, you want to…

Sanjay Mehrottra — Head of Strategy and Corporate Affairs

Hi. Sanjay, here. So as we speak now, about 75% to 80% of our outlets are closed. I think it’s closer to 80% today as we speak. And that’s been the trend over the last 45 days. Having said that, gradually we are seeing relaxations coming through in various states as things are getting better to some extent, relatively speaking and it’s difficult to put out a number, saying how soon or a date how soon we can get back to normal. But we hope by June we can have — the ulta of what I’m saying, which is 75% shops are operational as against 75% closed now.

Deepak Mittal — Edelweiss — Analyst

Yes. And is the Middle East all stores — the 30 stores in Middle East, are they operational right now or there also — there are issues with restricted lockdown and COVID?

Ramesh Kalyanaraman — Executive Director

Yes, for Middle East, all the showrooms are open. Middle East, there is no lockdown. However, in — from the second week of April where the air connectivity, etc was stopped from Middle East to India and from India to Middle East, the revenue is a bit softened there. Akshaya Tritiya was good, but otherwise the momentum has been a bit softened when you compare with your Q4 momentum.

Deepak Mittal — Edelweiss — Analyst

I’ll come back in the queue. Thank you so much.

Operator

Thank you. [Operator Instructions] The next question is from the line of Amnish Aggarwal from Prabhudas Lilladher. Please go ahead.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Yes. I just had a couple of questions. One being that what is the proportion of gold, which is taken on gold metal loan and how much is funded from — of that? And secondly, we are giving guidance of production in…

Operator

Sorry to interrupt. Yes, ladies and gentlemen, the line for the management has got disconnected. Please hold while we reconnect them. Thank you. [Technical Issues] Ladies and gentlemen, thank you for patiently waiting. The line for the management is reconnected. Thank you, and over to you, sir.

Ramesh Kalyanaraman — Executive Director

Sorry, we are back.

Operator

Mr. Aggarwal, please repeat your question.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Yes. So, my question was that what is the absolute amount, the funding now which is the company — which the company is taking from gold metal loan. And how much of the gold buying is funded through that? And when we are giving the guidance of say 0.75 times debt to equity in the next three, four years and currently it is 1.1. In absolute amount, what sort of debt reduction you are looking for in the next three, four years?

And my second question is what is the quantum of inventory gains due to — you can say increase in the gold prices in the first half of last year, because I presume that Kalyan was having most of the gold which is owned by them, which was taken by — taking that from the centered banks. So these are the two questions from my side.

Abraham George — Head of Treasury and Investor Relations

Yes. Hi, this is Abraham here. So on your first question on the total debt. So we have total debt of INR3,378 crores, out of which INR1,418 crores is by way of gold metal loan, and the remaining is largely OCC just about INR50 crores to INR60 crores is term loan. But the remaining entire portion is OCC.

The second question was on the debt reduction. The point I just want to clarify here is, our intention is not to reduce the absolute amount of debt. The absolute amount of debt will remain more or less the same at INR3,300 crores levels. But what we were trying to say is that with more internal accruals coming in, the debt-equity ratio will gradually come down. And our target is to take it to something like 0.75. That was the point that we were trying to make.

The third question I think from your side was on the metal profit. Yes, we did have some material profits in the first half and that was in Q1 which was closer to INR40 crores.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Okay. So beyond the INR40 crores, there is no other quantum of gains from the — you can say inventories.

Abraham George — Head of Treasury and Investor Relations

No, not after that.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Okay. And sir, now as your balance sheet has improved, so why do we want to keep debt at say INR3,300 crores levels. Is the cost of our debt more than taking the gold metal loan?

Abraham George — Head of Treasury and Investor Relations

No, in fact the cost of gold — your question is not clear. If you could just clarify the question.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Yes. You see, gold metal loan, we plan to increase, but you are saying that our debt will remain more or less at the same level. So my question is that, is the — our cost of taking that loan, then if we take gold under gold metal loan, because the gold metal loan is cheaper then we better take more gold metal loan and reduce debt further?

Abraham George — Head of Treasury and Investor Relations

No, I got your question. So the INR3,300 crore debt is including the gold metal loan of INR1,400 crore. And our cost of taking gold metal loan is actually cheaper than our OCC. Gold metal loan cost typically is in the region of 3.75% to 4%, compared to the OCC costs, which is in the region of 10.5% to 11%. And our target is to increase our gold metal loan component from the existing INR1,400 crore gradually up, that’s a target. And this will reduce our overall interest cost also.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Okay. But the absolute debt amount you are saying will not come down?

Abraham George — Head of Treasury and Investor Relations

Yes, the total of gold metal loan plus the OCC will not come down.

Amnish Aggarwal — Prabhudas Lilladher — Analyst

Okay, understood. Thanks.

Operator

Thank you. [Operator Instructions] The next question is from the line of Shirish Pardeshi from Centrum Capital. Please go ahead.

Shirish Pardeshi — Centrum Capital — Analyst

Yes. Hi, thanks for the opportunity. And the follow-up, which I wanted to ask on the international business. So we have closed seven showrooms as per the slide, which you have quoted. Is there any further room for reduction? And the follow-up what I have is that, what is the plan like you gave the India plan opening on the showroom, if you could share in the Middle East.

And the second question which I have on the profitability. Is this a steady state profitability one can build in, in our model, or is there any further legs to improvement further?

Ramesh Kalyanaraman — Executive Director

So, in terms of the closure of Middle East, seven showrooms which we did, that was predominantly in the tourist areas and the blue collar workers, who are receding in those markets. Wherein, we did not see any visibility for the next two, three years, because of the COVID situation. That is why we closed those showrooms. So we had 30 showrooms. Now we have 30 showrooms, it was 37 in the previous financial year.

If you look at the Q4, we had 85% of the revenue of the previous year even after closing 18% of our showrooms. That is the Middle East status as of Q4. However, there was a lot of consolidation, which has happened in the Middle East market, wherein the organized players are actually taking the market share, which helped us to improve our gross margins, which was usually in the range of 13% to 14% to 16% to 17%, which is today. So there has been an improvement in gross margin as a percentage and the revenue is 85% even after closing down 18% of our showrooms.

Shirish Pardeshi — Centrum Capital — Analyst

I got that Ramesh, what I wanted to understand, if you can share the store opening plan for next two, three years in the Middle East market. And the question which I was asking, is this a steady state margin which can build-in?

Ramesh Kalyanaraman — Executive Director

Yes, it is a steady state margin as of now, because the margins have improved in that market and the small players are vacating — many people have vacated. So this margin is going to stay for Middle East. And in terms of expansion in Middle East, we will be opportunistic in that market over the next 12 to 24 months and then decide on the expansion. The India IPO, the IPO which has been done will be fully for Indian expansion and Middle East expansion will be only with the profits earned there.

Shirish Pardeshi — Centrum Capital — Analyst

Okay. Thank you, Ramesh and all the best to you and the team.

Ramesh Kalyanaraman — Executive Director

Thank you. Thank you.

Operator

Thank you. The next question is from the line of Manoj Menon from ICICI Securities. Please go ahead.

Manoj Menon — ICICI Securities — Analyst

Hi, team good afternoon. Just a couple of questions from my side. One, just wanted some perspectives from you on hallmarking, which is now expected to be implemented from June 15th. The reason I’m asking, because some of the statistics shows — it looks too good, to be true, because maybe there is a 400,000 Jewelers in India less than 10% are BIS registered. So just trying to understand two things from you: one is it realistic to expect implementation of hallmarking in such a short span and that too in times like this? Point number two, how do you look at it as from a realistic benefits assuming it, it actually gets implemented?

Ramesh Kalyanaraman — Executive Director

Yes, Manoj. Hi, Ramesh here.

Manoj Menon — ICICI Securities — Analyst

Hi, sir.

Ramesh Kalyanaraman — Executive Director

So hallmarking first of all, whether it is realistic or not, but it is going to help us big time for organized segment, because now people shopping with the unorganized segment, I would not blame everybody, but certain unorganized players do sell inferior quality, which customers are unaware, customers think that they are selling cheaper and they go to them. That is going to get stopped now, because they will have to sell pure gold. Again, this will drive customers from the unorganized segment to organized players like Kalyan Jewellers. So it is going to help us big time.

And in terms of implementation June 15th, we don’t know whether they are going to implement, because COVID times — we really don’t know. But they have been pushing it for the — for one or two times before. So I think implementation is not going to be extremely tough. Hallmarking centers are there everywhere now, they can do it. And I think, it is a need of the other, like we should make the industry pure, because it is going to help the industry totally, like Dubai, for example, Dubai, anybody can buy and they are sure of the purity. So purity should be assured, which is actually giving a positive momentum for the whole industry. So I don’t know whether June 15th, but it should come very, very, very shortly, so…

Manoj Menon — ICICI Securities — Analyst

Understood. In fact, I was surprised that you postponement by only 15 days, I mean in the proposal from June 1. Understood, understood, sir. Actually that’s very straightforward. The second thing on your performance, it was very pleasing to actually see the significant acceleration in the Southern India markets, 70% growth is like stunning. But at the same time just trying to understand, is it more to do with maybe there are two tailwinds, I could see. One, the weddings etc probably happened as planned. And so, there is probably a market tailwind there.

Point number two. I’m sure that I’ve been some activities, which would have done as well. So just trying to understand does it sustainably of the South outperformance only. It’s not about the numbers as such, but that depends on gold price, the lot of other factors, which may come in. But is it fair to assume that, would you be able to, let’s say, on a same-store level basis somebody on counting the number of new stores, etc to ensure that South continues to outperform or how do I think about this aspect?

Ramesh Kalyanaraman — Executive Director

Yes. So one reason why South is outperforming outside South India for Kalyan Jewellers is that in South India we are there in almost all Tier 1, Tier 2, Tier 3 cities here. Wherein, people who are residing in a metro in South, even if they have migrated to their hometown, we are able to actually cater them, because our stores are there in the rural villages, actual meaning the Tier 2, Tier 3 cities as well. But outside South India, we are there only in Tier 1, Tier 2 cities wherein if a customer is in Bombay now residing at Kolhapur for example, due to COVID, we will not be able to cater them. So that is the major reason what we feel that the revenue growth is more in South than in non-South.

Manoj Menon — ICICI Securities — Analyst

Got it. Is there anything on the competitive activity or intensity part in South, which would have changed or anything which would have done better other than the macro part here?

Ramesh Kalyanaraman — Executive Director

So we are always hyper local player. So when the shift happened from the unorganized segment to the organized segment, we would have benefited us what we feel, and we could cater them. Well, because we already have the staple products. And the second thing is that as I told you, people who are residing in a metro when they come to a Tier 3, Tier 4 city as of now, because they work from home, we have stores there to cater them. These are the two major highlights where the South revenue actually grew is what we feel.

Manoj Menon — ICICI Securities — Analyst

Understood. And lastly on the customs duty production impact, would you be able to give some sort of a color on, let’s say what it is this one-off. Because the reason I’m asking, because this is actually sitting in the margins, and obviously this is a one-off. There’s been a few questions asked earlier about the — why the gross margin had declined etc. Just trying to understand from a forecasting point of view, how much should I take as the one-off and so that we will have a probably better handle on ’21, ’23 estimation?

Abraham George — Head of Treasury and Investor Relations

Manoj, hi. Abraham here. I am not too sure, if I can give you an exact amount here on the impact of custom duty cut. But the reality is about 2.5% duty cut was there. And given our current inventory turn, this should take about five months for the impact to be washed out, out of which two months have been consumed in the last quarter and we will need three full months of operations to, kind of, completely take the impact out. Why I wouldn’t be able to give an exact amount it’s slightly comparatively sensitive this data, the calculations.

Manoj Menon — ICICI Securities — Analyst

Understood. So because I remember compensate with Titan as well. So we don’t really have a number as such from Titan also on this.

Abraham George — Head of Treasury and Investor Relations

I think broadly you can do the back of the envelope calculation, this is like a 2.5% knockdown on the gold inventory.

Manoj Menon — ICICI Securities — Analyst

Understood, understood. Thanks guys. All the best. Stay safe.

Abraham George — Head of Treasury and Investor Relations

Thank you.

Operator

Thank you. The next question is from the line of Vinod Malviya from Union Mutual Fund. Please go ahead.

Vinod Malviya — Union Mutual Fund — Analyst

Yes. Hi, congratulations for a good set of numbers. My question was on gold loan. The total gold loan what you have, how much is it pure through collateral or any form like collateral either bank guarantees or letter of credit and how much is unsecured component?

Ramesh Kalyanaraman — Executive Director

Hello?

Vinod Malviya — Union Mutual Fund — Analyst

Hello.

Ramesh Kalyanaraman — Executive Director

What’s your question? Can you repeat, please?

Vinod Malviya — Union Mutual Fund — Analyst

So I wanted to understand that the gold on loan what to have that is back through, how much of it is back through letter of credit of bank guarantees and how much is unsecured or is it like 100%?

Abraham George — Head of Treasury and Investor Relations

See, the gold loan is part of our consortium banking arrangement. There is no separate collateral etc. It’s part of the overall working capital limits, which has been carved out. It is fungible between GML and CC limits.

Vinod Malviya — Union Mutual Fund — Analyst

Okay. And so when you say that 4% is basically the cost of gold on loan that includes the collateral, which has also been taken for the gold on loans?

Abraham George — Head of Treasury and Investor Relations

No, there is no separate add on towards collateral costs. Collateral is part of the consortium banking arrangement nothing tied up to specific goal metal loans. So there is no additional cost to be added for goal metal loans.

Vinod Malviya — Union Mutual Fund — Analyst

Okay. That’s all from my side. Thank you.

Operator

Thank you. The next question is from the line of Abneesh Roy from Edelweiss. Please go ahead.

Abneesh Roy — Edelweiss — Analyst

Sir, congrats. Just one question in the presentation you had spoken on My Kalyan and hyper-local multiple times. So wanted to understand five years down the line, how much percentage of revenue you expect from this?

And second is in consumption we see any good practice being strictly followed by rest of the players. So what part of the industry also does this kind of the practice?

Ramesh Kalyanaraman — Executive Director

So, My Kalyan is a unique marketing tool which only Kalyan Jewellers has still today. And if you ask the revenue growth from the My Kalyan, we would actually it has been growing about 0.5%, 1%. So we would be in the range of what — now it is in the range of 20% which will actually go to a range of what 22% to 23% over the next couple of years is what we feel.

Abneesh Roy — Edelweiss — Analyst

What is the entry barrier here? Why rest of the players are not doing?

Ramesh Kalyanaraman — Executive Director

So actually, this My Kalyan we have chartered what 10, 12 years before, wherein initially for the first three or four years, you will have to be very patient wherein you will do tie-ups with marriage halls, you will do tie-up with all the marriage and marriage-related vendors like astrologers, caterers etc, event managers. Wherein, you will not see any revenue coming in for the first two or three years, wherein you will be building your team, building your marketing team, building your relationships etc. It is a long-term call, which many players did not take at that time. Many players tried, but on a short-term, they came out. So it is a long-term game where you will need a couple of years to establish a My Kalyan infrastructure is what we feel. Now it is paying off for us because of our patient.

Abneesh Roy — Edelweiss — Analyst

And obviously team’s remuneration will be linked to both expand variable to state right?

Ramesh Kalyanaraman — Executive Director

Yes, it is a — we taken office so office has a rent and we employ staff, staffs has to be paid salary. And we pay a good variable, as well for the revenue development. And all are under our payroll. It is not kind of outsourced mechanism. We have more than 2,800 staffs working in My Kalyan.

Abneesh Roy — Edelweiss — Analyst

And the expansion will be linked to the number of physical stores, so now it’s a stable case?

Ramesh Kalyanaraman — Executive Director

Yes, yes, it is linked to the physical store expansion, because usually six to seven My Kalyan centers are usually a typical model is to open six to seven My Kalyan centers across the main Kalyan Jewellers showroom around the main Kalyan Jewellers showroom.

Abneesh Roy — Edelweiss — Analyst

Okay, that’s all from me. Thanks a lot.

Ramesh Kalyanaraman — Executive Director

Thank you.

Operator

Thank you. The next question is from the line of Abul Fateh from Baroda Mutual Fund. Please go ahead.

Abul Fateh — Baroda Mutual Fund — Analyst

Hello. Yes, sir. I just wanted to know how should we look at your tax rate in the next one or two years which is how do we model it?

V. Swaminathan — Chief Financial Officer

Hello?

Abul Fateh — Baroda Mutual Fund — Analyst

Yes.

V. Swaminathan — Chief Financial Officer

Yes. Your question on the tax rate even currently it is 26%. So by and large, it will be the effective prevailing rate of taxation which is 25.17%.

Abul Fateh — Baroda Mutual Fund — Analyst

Okay. Thank you.

Operator

Thank you. As there are no further questions. I would now like to hand the conference over to the management for closing comments.

Ramesh Kalyanaraman — Executive Director

Yes. Thank you, Ramesh here. So thank you all for joining us on the call. Please stay safe. We will again catch up later in the next quarter. Thank you very much. Thank you.

Operator

[Operator Closing Remarks]