Kalyan Jewellers India Limited (KALYANKJIL) Q3 FY23 Earnings Concall Transcript

Kalyan Jewellers India Limited (NSE: KALYANKJIL) Q3 FY23 Earnings Concall dated Feb. 07, 2023

Corporate Participants:

Rahul Agarwal — Group Account Head

Ramesh Kalyanaraman — Executive Director

Sanjay Raghuraman — Chief Executive Officer

Abraham George — Head of Treasury and Investor Relations

Analysts:

Shirish Pardeshi — Centrum Broking — Analyst

Manoj Menon — ICICI Securities — Analyst

Nihal Mahesh Jham — Nuvama Wealth Management Ltd. — Analyst

Naresh Vaswani — Sameeksha Capital — Analyst

Sameer Dalal — Natverlal and Sons Stock Brokers Private Limited — Analyst

Rajiv Bharati — DAM Capital — Analyst

Sanika Khemani — Middleton Capital Advisors — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q3 FY ’23 Earnings Conference Call of Kalyan Jewellers India Limited.

This conference call may contain forward-looking statements about the Company, which are based on the beliefs, opinions and expectations of the Company as on date of this call. These statements are not the guarantees of future performance and involve risk and uncertainties that are difficult to predict.

As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Rahul Agarwal. Thank you. Over to you.

Rahul Agarwal — Group Account Head

Good afternoon, everyone, and thank you for joining us on the Kalyan Jewellers India Limited Q3 and nine-month FY ’23 earnings conference call.

We have with us Mr. Ramesh Kalyanaraman, Executive Director; Mr. Sanjay Raghuraman, who is the CEO; Mr. Swaminathan, CFO; Mr. Sanjay Mehrottra, Head of Strategy and Corporate Affairs; and Mr. Abraham George, Head of Investor Relations and Treasury.

I hope everyone got an opportunity to go through our financial results and investor presentation uploaded on the Company’s website and stock exchanges. We will begin the call with opening remarks from management, following which we will open the forum for questions and answers 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 disclaimer to this effect has been included in the earnings presentation shared with you earlier.

I would now like to invite Mr. Ramesh Kalyanaraman, Executive Director of Kalyan Jewellers India Limited to give his opening remarks. Thank you, and over to you sir.

Ramesh Kalyanaraman — Executive Director

Thank you. Good afternoon, everyone. The Q3 was excellent. Recently concluded quarter witnessed continued positive momentum in both footfalls and revenues across all the markets in which we operate.

We recorded consolidated revenue growth of approximately 13% in Q3 FY 2023 over the same period in the prior year, and 34% for YTD nine months FY 2023 over the same period in the prior year. Our PAT in Q3 was approximately INR148 crores as compared to INR135 crores for the same period in the prior year a growth of 10%.

Stepping back as we look at our business over the last one year — past year and aggregate the last four quarters, Kalyan has achieved revenue in excess of INR13,500 crore and a PAT of approximately INR434 crore. Within India, we witnessed revenue growth of approximately 12% despite a strong base with Q3 of the prior year being the first normalized quarter post-COVID. Additionally, we know that December, there was some muted demand, three weeks of December, especially because of the postponement of discretionary demand, which has now normalized in January, predominantly because of the gold prices. We continue to see encouraging trends around the share of new customers, which was in excess of 35%. The non-South revenue mix is again improving. It is now at 43% from 37% in the prior year.

As you know, during the recently concluded quarter, we announced our plans to open 52 showrooms during the calendar year 2023. A significant portion of these would be franchise showrooms. As part of the strategy, we have invested a significant amount of time and effort over the past three, four months in building our internal resources. We have hired approximately 900 staff, largely for the 20-plus showrooms we will open before Akshaya Tritiya, highest employee addition in a quarter, in the history of the Company so far.

In the Middle East, we witnessed significant improvement in customer sentiments during the recently concluded quarter, with revenue growth in excess of 24%. We plan to launch the first franchised showroom in the Middle East during the first quarter of the next financial year. While the setting up of the franchise model is taking some time, we would not want to compromise on the growth potential and we’ll be selectively opening additionally owned stores with the internal accruals from the region. As I indicated earlier, our international business will be predominantly franchisee operated in the next three years.

Talking about our online platform, Candere. During the recently concluded quarter, we opened the second physical store. We have put together a store rollout plan for the next financial year and expect to take the share of its offline business to approximately 25% by the end of FY 2024.

If I look at the current quarter’s early performance, we continue to be encouraged by the robust momentum in revenue and footfalls across all our major markets. We continue to remain committed to our recently announced strategy of optimizing our OC profile using profits and free cash flow to repay debt and reward shareholders and lighten our balance sheet via the divestment of certain non-core assets.

Now I think, over to you, Sanjay. You take them in detail about the numbers.

Sanjay Raghuraman — Chief Executive Officer

Thank you, Ramesh, and good afternoon, everybody. I’m really happy to be talking to you all after a great quarterly performance.

For the just concluded quarter, our Company reported consolidated revenue of INR3,884 crores, a growth of 13% over the same period of the previous year. Consolidated EBITDA came in at INR327 crores versus INR299 crores in the same period of the previous year, and consolidated profit after tax came in at INR148 crores versus INR135 crores in the same period of the previous year.

Next, I shall give you the breakup of the financial numbers between India and the Middle East, starting with India. For this just concluded quarter, our India revenue was INR3,219 crores, a 12% growth when compared with the corresponding period in the previous year. And EBITDA for this just concluded quarter came in at INR276 crores for the India business, a growth of 9% when compared with Q3 in the previous year. We recorded a profit after-tax of INR133 crores compared to a PAT of INR118 crores in the corresponding quarter of the previous financial year, a growth of 13%.

Moving on next about our Middle East business. Our revenue for the quarter in the Middle East came in at INR641 crores, a growth of 24% compared to Q3 of the previous year. EBITDA in the Middle East business came in at INR52 crores versus INR46 crores in the same quarter of the previous year. The Middle East business posted a profit of INR17 crores for the quarter compared to a profit of INR16 crores for the corresponding quarter in the previous year.

Moving on next to talk about our e-commerce business. Candere.com posted a revenue of INR44 crores in the quarter versus INR47 crores in the corresponding quarter of the previous year, and this quarter recorded a loss of INR1.7 crores versus a profit of INR26 lakhs for the corresponding quarter of the previous year.

During this quarter, we had no bullion sale, and our gold coin sale to retail and corporate customers was about INR155 crores, approximately 4.8% of total revenue. We increased our retail footprint in India by opening six more outlets in Q3 of FY ’23, including one outlet for candere.com. As of 31st December 2022, our total store count was 169.

With this, I’m done with the summary of the financials and we can now open the floor for questions. Thank you.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.

Shirish Pardeshi — Centrum Broking — Analyst

Hi. Good evening, Ramesh and team. Thanks for the opportunity.

Ramesh Kalyanaraman — Executive Director

Hi.

Shirish Pardeshi — Centrum Broking — Analyst

You started with a very strong festive season, however, the base is also one thing which is there. But I just wanted to check, I think this year, there was lot of competition on ground and everybody is trying to push the wedding jewelry. So in your sense, how the things and demand has had happened per se? Was it more skewed towards the gold exchange and give the benefit of wedding jewelry or things are now normalized and we are going back to the pre-COVID days like the normalized sale? So any comments on that?

Ramesh Kalyanaraman — Executive Director

Yeah. So as you said, festive demand was extremely high, and in November also demand was fairly good. December was a bit of what a flat to negative because of the gold prices especially and that is how it was. So not because of competition and not because of any other factors. January is back on track, everything is normalized and momentum is extremely positive, and that is how it is.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. So one follow-up here that would you be able to quantify saying that what was the SSSG growth in quarter 3?

Ramesh Kalyanaraman — Executive Director

No, I didn’t get you there.

Shirish Pardeshi — Centrum Broking — Analyst

Same-store sales growth.

Ramesh Kalyanaraman — Executive Director

Same-store sales growth was approximately 5%.

Shirish Pardeshi — Centrum Broking — Analyst

Okay.

Ramesh Kalyanaraman — Executive Director

In India.

Shirish Pardeshi — Centrum Broking — Analyst

So if I have to break that 12% India growth, 5% is SSSG, and the balance would be grammage or how?

Ramesh Kalyanaraman — Executive Director

So you are talking about grammage volume versus value?

Shirish Pardeshi — Centrum Broking — Analyst

No. I’m saying India business has grown 12%. So in that, 5% has come from same-store sales growth.

Ramesh Kalyanaraman — Executive Director

Yeah, 7% is from new stores.

Shirish Pardeshi — Centrum Broking — Analyst

7% is new stores.

Ramesh Kalyanaraman — Executive Director

Yeah.

Shirish Pardeshi — Centrum Broking — Analyst

And volume would remain flat.

Ramesh Kalyanaraman — Executive Director

So as I always say, we look at value because people come with the bucket only, you know, because they don’t —

Shirish Pardeshi — Centrum Broking — Analyst

Yeah, okay. My second question is that, in the presentation, you have said that we have executed 35 LOI for FOCO. However, the commentaries revolved around 900 people, 20 stores. So where this 35 and 20? I mean is that the difference between 15 stores is going to come in next year or if you can guide me that when this 20 stores will finally get executed?

Ramesh Kalyanaraman — Executive Director

Okay. So 11 of the 20 showrooms will be in Q4 itself. Out of 35 signed, 11 will be in Q4 itself, and remaining nine will be before Akshaya Tritiya, Akshaya Tritiya is in April, and rest will be after Akshaya Tritiya.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. And this what you have mentioned previously, this is all going to be non-metro, non-Tier 1 towns and non-South markets.

Ramesh Kalyanaraman — Executive Director

It will be non-South, but not necessarily non-metro.

Shirish Pardeshi — Centrum Broking — Analyst

Okay, got it. My second question on the margin front. Maybe if you can give some color on the gold metal loans, how you look at, and basically the interest cost burden what we should factor in. And lastly on the gold prices because the gold has moved significantly higher, so any qualitative comments you can expect because whenever — the history tells that whenever the gold prices run faster, I think people will hold back their purchases.

Ramesh Kalyanaraman — Executive Director

Yeah. So we will come from the last according — regarding the gold prices. When a gold price volatility is very high, there people take some time to adapt to the new price and especially the discretionary demand wherein people don’t have a hurry to buy, they might push their purchase to the next occasion, maybe a birthday or an anniversary or any other function which is happening at home. Wedding demand, they will not be able to push it too much or pre-pone it too much because it has to happen on a particular date. So December, the last three weeks, actually it was — the revenue was not — the momentum was not very high. Demand was muted. It was actually what got — it was same or a negative kind of growth, which we were seeing. But in January, customers are back, revenue was good, demand is very high. Of course, we should give some what we call lever to the low base, which we had in January last year because of the Omicron. But even if you negate that, I think the momentum was extremely strong in Jan. And even wedding season is on and that is what in January it is happening.

Now when you come to the margin, so margin you are talking about the EBITDA margin?

Shirish Pardeshi — Centrum Broking — Analyst

I’m talking about gross.

Ramesh Kalyanaraman — Executive Director

Okay. So gross margin, if you look at it has been in the similar range even with a better standard ratio and even with a better non-South revenue, okay. That is basically because of the pressure from the unorganized segment in the gold pricing itself. The gold rate itself has a pressure and there’s high competition with regard to that, especially from the unorganized segment. Otherwise, the margins should have been improved more because we have a better non-South revenue and a better standard ratio as well. Middle East is stabilizing in the range of 15%, to start back momentum back, so Middle East is stabilizing in the range of 15%.

Shirish Pardeshi — Centrum Broking — Analyst

No. Exactly what you said, and when you look at the store split non-South and the revenue, I’m still saying that gross margin has not improved in tandem. So is there any specific one-off in this? Or maybe the better way to explain that is the exchange was higher and maybe if you can help me with the number, what was the exchange number? Because in the presentation, you have said that the new buyer contribution is at 35%.

Ramesh Kalyanaraman — Executive Director

Yeah. So exchange is very similar to the last quarter and Q3 of last year. It is in the range of 27%, 28% is the metrics change which we have. It is not because of that. Metal price pressure was there in the quarter. It is even now there as we speak in January. The metal price pressure is there from the unorganized segment and from certain organized players as well. That is the major reason for the margin de-growth. We got de-growth in the sense where margin has not what we call improved even after a better standard ratio and a better non-South revenue mix. And of course, all of us should consider that it’s not apple-to-apple comparison with Q3 last year because the franchisee revenue has also started coming in and the franchisee revenue, you know, it comes with a lesser gross margin.

Shirish Pardeshi — Centrum Broking — Analyst

Okay, got it. Ramesh, my last question on the gold metal loan. If any color you can provide where do we stand at the end of quarter three?

Ramesh Kalyanaraman — Executive Director

It is in the range of INR1,850 crores.

Shirish Pardeshi — Centrum Broking — Analyst

INR1,850 crore.

Ramesh Kalyanaraman — Executive Director

Yeah.

Shirish Pardeshi — Centrum Broking — Analyst

Okay, thank you. And all the best to you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Manoj Menon from ICICI Securities. Please go ahead.

Manoj Menon — ICICI Securities — Analyst

Hi team, just to start with a small query on the quarterly cost actually. So there is a comment in the presentation about certain one-off pre-operative cost for franchising, so would you be able to quantify this?

Ramesh Kalyanaraman — Executive Director

Yeah. So you know that there were — the major pre-operative expense was regarding manpower because we had to add approximately 900 employees during the last quarter Q3, which was predominantly because of the store openings which we have lined up before Akshaya Tritiya. And to actually give a number, I mean, it will be, you know, per employee cost is in the range of what INR35,000 to INR40,000 that’s the usual range of an employee cost. So EBITDA may be what 0.2%.

Manoj Menon — ICICI Securities — Analyst

Okay, understood. Thank you. Secondly, you had issued a press release a few weeks back about 52 franchisees to be opened for this calendar year. There’s also a comment in the presentation about some conversions from own to franchising for capital unlocking which you are attempting in South India. Does this 52 includes this, or these are 52 completely new franchisee stores?

Ramesh Kalyanaraman — Executive Director

52 will be store expansion. Over and above that, we will do some store conversion from South to North, meaning the South stores we will convert to franchisee stores wherein the capital will be unlocked.

Manoj Menon — ICICI Securities — Analyst

Understood. Secondly on the franchising bit, right? Typically, if you could help us understand, let’s say, what would be the typical size of the store because given that these are mostly in smaller cities, towns, etc? And also, let’s say, what is the typical starting inventory of your franchising store?

Ramesh Kalyanaraman — Executive Director

So inventory will be in the range of INR20 crore, average I’m telling. So there are stores which is what even INR25 crore or INR28 crore, but there are stores which even INR18 crore. So average you can treat it as INR20 crore, and the first year revenue can be calculated as INR50 crore, 2.5 stock turn on an annual basis [Speech Overlap].

Manoj Menon — ICICI Securities — Analyst

No, exactly. So which essentially, would mean that mid to high teens revenue growth for, let’s say, rolling 12 months is very lightly only from expansion.

Ramesh Kalyanaraman — Executive Director

Yeah. So, Manoj, just to give more clarity. So if you look at our store expansion for the past what two years, usually the footprint growth is around 10%, okay, and SSSG will be about 5%. So now the advantage is that this year if you look at the next financial year, the store expansion will be 30%. So yes, you are right, the revenue growth for the next two, three years will be higher than the usual because the store expansion will be stronger or the higher number of stores will come because the franchisee arm has been activated.

Manoj Menon — ICICI Securities — Analyst

Fair point, Ramesh. So only one finer event which I thought wanted to clarify was let’s say owned store versus the franchising, you could actually book the entire inventory on day one whereas it will take a certain ramp-up in an owned store. So in that sense, rolling 12 months is likely to be higher because you will end up having more primary sales versus secondary.

Ramesh Kalyanaraman — Executive Director

Yes, correct. So because it comes in day one, and that is going to be the scenario for what continuously, you know, now it’s winning. Yeah.

Manoj Menon — ICICI Securities — Analyst

Fair point. Actually, got it. And lastly, any update which you could give us the larger audience in terms of the progress on the non-core assets divestment?

Ramesh Kalyanaraman — Executive Director

Yeah. You mean the aircraft, right?

Manoj Menon — ICICI Securities — Analyst

Yes. It’s still there in the presentation, but just anything more beyond that.

Ramesh Kalyanaraman — Executive Director

Yeah. We told you last time, we have engaged a consultant to explore divesting the aircraft and we continue to engage with them very closely and they are actively exploring options to sell the aircraft, okay? The market conditions you know is not the most ideal, but we remain committed to follow through on our stated intention. And even if we need to take what a modest write-off, we will go with it because the intention is to liquidate the aircraft. And we should expect some potential meaning, maybe a write-off, but that’s what we see from or hear from the market, but very early for us to come out with a number or what — to quantify it now.

Manoj Menon — ICICI Securities — Analyst

Fair enough. And I think even if it’s a small write-off, it’s anyway a non-cash charge, actually, so.

Ramesh Kalyanaraman — Executive Director

It’s a non-cash write-off.

Manoj Menon — ICICI Securities — Analyst

Yeah, absolutely. Sure. Thanks, guys. All the best. Thank you.

Operator

Thank you. Our next question comes from the line of Nihal Mahesh Jham from Nuvama. Please go ahead.

Nihal Mahesh Jham — Nuvama Wealth Management Ltd. — Analyst

Yes. Thank you so much, and good evening to the management. Sir, I had one question, which was on your opening remark about the competitive intensity. So two parts to that. First is, is this specifically in the South part where you’re facing this competition from the unorganized channel or is it pan India? And second, what has led to this kind of increased competitive intensity over the last few months?

Ramesh Kalyanaraman — Executive Director

So it is pan India situation. It’s not only about South India. It is majorly because of the duty hike a couple of times. The difference between the gold which comes through the proper channel and otherwise the parallel market, what we call the percentage is getting higher and higher, so that is the major area, which actually is the reason for the price competition in the market. There is a sizable difference in the duty.

Nihal Mahesh Jham — Nuvama Wealth Management Ltd. — Analyst

Sure. So that is the main aspect, or aspect which has changed which is leading to the increased competitive intensity?

Ramesh Kalyanaraman — Executive Director

That is the main — meaning we compete with mostly unorganized segment and certain regional players, right? That’s a major competition for Kalyan per se. And the major pressure comes from the gold rate itself and the reason for the same if the duty increase and that is where — but one thing what we think is that the government is taking a lot of measures, making hallmarking compulsory. Again, they also realize that there is a kind of situation here in our country. And once it gets stabilized, I think the competition pressure will be coming down and there might be one gold rate across the country in the next one year, at least amongst the organized players. That’s what we think.

Nihal Mahesh Jham — Nuvama Wealth Management Ltd. — Analyst

Appreciate that. Just one more question I had was on the non-core asset. Other than the aircraft, I think there are certain land holdings also. So is there any update on sale of those that you want to just highlight?

Ramesh Kalyanaraman — Executive Director

That we had told you that, that is predominantly you know when there is a lot of free cash and we don’t use that cash for any expansion. So this year if you see, we have had expansion through our owned store also. So predominantly in the next financial year, when there is free cash flow because the expansion is going to be majorly driven by franchisee, that cash will be utilized to repay the bank debts, which in turn might what free some land mortgage in the bank, which will be liquidated. So again, first thing is that the proceeds from the aircraft, of course, will be the first round of repayment of debt and over and above that, the next year, cash flow will also be utilized for the same.

Nihal Mahesh Jham — Nuvama Wealth Management Ltd. — Analyst

Got that. That was it from my side. I wish you all the best. Thanks.

Operator

Thank you. Our next question comes from the line of Naresh Vaswani from Sameeksha Capital. Please go ahead.

Naresh Vaswani — Sameeksha Capital — Analyst

Yeah. Hi, sir. So my first question was on the franchisee model. So in that, what will be the inventory days on our books? And second is, given that majority of the expansion is through this franchisee, on a consol basis, where do you see the inventory turns going ahead in the next three years?

Ramesh Kalyanaraman — Executive Director

Yeah. So can you repeat the question? I missed it out somewhere.

Naresh Vaswani — Sameeksha Capital — Analyst

Yeah. So my question was, for the franchisee business model, what will be the inventory days on our books because you’ll be selling the inventory —

Ramesh Kalyanaraman — Executive Director

That’ll be 10 to 15 days at least. We will have to keep the inventory.

Naresh Vaswani — Sameeksha Capital — Analyst

Okay. 10 to 15 days. And then going ahead, how do you see the inventory going, I mean the inventory turns moving ahead in the next three years? Will it reach 2.8 times to 3 times?

Ramesh Kalyanaraman — Executive Director

Yeah. So of course, it will because now you know the revenue is growing and now we are almost in the range of about 2.3 times plus sharp turn and our target is to take it around 2.5 times and then to 3 times in the next what two, three years. So that’s our target, yes.

Naresh Vaswani — Sameeksha Capital — Analyst

Okay. And how will the gold hedging we’ve done for this franchisee partner?

Ramesh Kalyanaraman — Executive Director

We don’t own the inventory. It is owned by them.

Naresh Vaswani — Sameeksha Capital — Analyst

Correct.

Ramesh Kalyanaraman — Executive Director

Yeah. So we don’t — meaning we don’t take the responsibility of hedging. So it is owned by them. The inventory is owned by them.

Naresh Vaswani — Sameeksha Capital — Analyst

Right. But if they don’t hedge?

Ramesh Kalyanaraman — Executive Director

I hope you understand.

Naresh Vaswani — Sameeksha Capital — Analyst

Right. But if they don’t hedge, then that could be a risk to this business module, right, I mean?

Ramesh Kalyanaraman — Executive Director

Yeah. So we have created a framework wherein what we call the gain which they get in the inventory, they don’t take it as what we call, they will not be able to take it out, okay, because for us, the inventory should be in quantity rather than only the amount. So we decided a certain kilogram of inventory which has to be there and it has to be refilled every day with the customer cash which is coming in, okay? And inventory risk is passed on to them, wherein it is not going to have any liquidity issue there, right? It’s only more of a P&L issue, and even the gains will be used to replenish the inventory only. We fill the inventory only. There is no cash flow risk is what I’m trying to say. They don’t close their book every quarter and the all know, they don’t have that pressure, right? They are individual companies, so that’s how it is.

Naresh Vaswani — Sameeksha Capital — Analyst

Okay. And given that now majority will be franchisee, and will you be sharing this detail separately from the next quarter also, the franchisee framing?

Ramesh Kalyanaraman — Executive Director

Not from the next quarter. Yeah, because now it is a very competitive information because the number of franchisees are very small. When it reaches a critical mass, we will surely start sharing it individually.

Naresh Vaswani — Sameeksha Capital — Analyst

Okay, thank you and all the best.

Ramesh Kalyanaraman — Executive Director

Thank you.

Operator

Thank you. Our next question comes from the line of Sameer Dalal from Natverlal and Sons Stock Brokers Private Limited. Please go ahead.

Sameer Dalal — Natverlal and Sons Stock Brokers Private Limited — Analyst

Hi. Sir, a lot of the questions that I had were answered. There is one thing. In the six franchisee stores that you opened already, if you can give us a brief on how those have been performing, and have we reached breakeven? Exactly what’s happening at the six franchisee stores?

Ramesh Kalyanaraman — Executive Director

Yeah. So I mean, it’s on track. Revenue is on track and because right from day one, it becomes breakeven, right, because you know, store level expenses are very minimal, right? So it’s almost what 6% to 7% is a store-level expense and the margins are 20% plus. So from day one, it becomes breakeven, okay. So the franchisee stores, which we opened, everything is on track. Most of them have gone through the Diwali season. The revenue is going as per the targeted revenue, which we needed, profitability is strong, and there are franchisee from this so-called six itself who have come back to us to take the next set of showrooms. So it is going in the right direction.

Sameer Dalal — Natverlal and Sons Stock Brokers Private Limited — Analyst

Okay. And the second question is just a follow-up. So what the previous speaker was asking, when the franchisee doesn’t hedge and you all have some sort of a profit share with the franchisee, right? So when the franchisee doesn’t hedge and say the gold prices changed drastically and it affects their profitability, wouldn’t it affect your profitability if they haven’t hedged it to some extent?

Ramesh Kalyanaraman — Executive Director

No. So we sell it to them with a gross margin, which we have pre-decided. That is how we sell it to them, okay? That is predominantly in the making charge, wherein for example if my cost is X, we sell it at Y. So that gross margin comes in at whatever gold price it is, okay? And regarding the hedging of gold by the franchisees, you know that how they operated that, whatever cash comes in, they buy the gold on the same day and they refill it. So there is no cash flow risk, except valuation risk when it comes to their gold prices, okay? And they do not close their books every quarter. They are not bothered on the volatility of their gross margin every month or every quarter. So for a traditional jeweler kind of setup, hedging is not actually necessary because it does not affect its cash flow.

Sameer Dalal — Natverlal and Sons Stock Brokers Private Limited — Analyst

Okay. But that will affect its profitability and I believe have some sort of profit share, that’s what I’m trying to address.

Ramesh Kalyanaraman — Executive Director

So our profit share is when we sell. meaning —

Sameer Dalal — Natverlal and Sons Stock Brokers Private Limited — Analyst

So you are taking your profit upfront, you are saying.

Ramesh Kalyanaraman — Executive Director

For example, if the cost of a product is 1%, we sell it at 10%. That 9% is our margin. So for us, gold rate does not even impact us, right?

Sameer Dalal — Natverlal and Sons Stock Brokers Private Limited — Analyst

Okay. And this is you are taking this margin after because you all are working on a FOCO model which is franchisee owned but company-operated. That means the staff that is selling is all that is on your books. So you’re not taking the profit, including the staff costs everything you’re taking that upfront. Is that fair to assume?

Ramesh Kalyanaraman — Executive Director

Correct.

Sameer Dalal — Natverlal and Sons Stock Brokers Private Limited — Analyst

So any risk on anything lies in the franchisee’s book and nothing to you at all?

Ramesh Kalyanaraman — Executive Director

Nothing at all.

Sameer Dalal — Natverlal and Sons Stock Brokers Private Limited — Analyst

Okay, perfect. Thank you.

Operator

Thank you. [Operator Instructions]. Our next question comes from the line of Rajiv from DAM Capital. Please go ahead.

Rajiv Bharati — DAM Capital — Analyst

Yeah. Thanks for the opportunity. Sir, can you throw some light on the Candere degrowth? What exactly is leading to this, and how are you addressing this apart from let’s say the store addition trajectory?

Ramesh Kalyanaraman — Executive Director

Sanjay, you want to take it?

Sanjay Raghuraman — Chief Executive Officer

Thanks so much. So if you look at Candere as a business, this is a business that was 100% online till recently. And if you look at the way the online business has evolved over a period of time, there’s a stage in their life cycle when offline presence is key to grow. So we’re in that phase. We are transitioning to a model where we will be online plus offline. If you look at the competitive landscape, that’s also how businesses have scaled. As of now, we have two offline outlets operational. As Ramesh mentioned in our opening remarks, we have a strong plan in place for the next financial year to ramp-up count on our offline outlet. And as you ramp-up on offline stores, growth will come back and I believe over by the end of next financial year, offline revenues will be at least 25% to 30% of total revenues. So we have a clear pipeline in place for offline stores to come through, as well as visibility on how it will work for us.

Rajiv Bharati — DAM Capital — Analyst

And this 25%, I mean will be contributed by let’s say what is the assumption in terms of store count?

Sanjay Raghuraman — Chief Executive Officer

What I meant to say was offline revenue will be 25% of total revenues in the Candere business.

Rajiv Bharati — DAM Capital — Analyst

No, I got that. But those are two stores as of now, right? So let’s say by FY ’24, where do you want to take these two numbers?

Sanjay Raghuraman — Chief Executive Officer

By the end of next financial year, we should be at about 30 outlets totally.

Rajiv Bharati — DAM Capital — Analyst

Okay, great. And secondly, in terms of the Middle East operations, so there was mid-teen SSSG there. So can you help me there? Is there operating leverage, which can kick-in there and which we haven’t seen this time around?

Sanjay Raghuraman — Chief Executive Officer

Yeah. So Middle East, again, I told you that of course when the revenue growth is there in the range, which we see now, operating leverage should start stepping in. And if you had noticed, the gross margin level has a degrowth wherein in pre-COVID, it was in the range of 16%, 17%, and now it is in the range of 15%, which was of course forecasted because once the revenue momentum starts kicking in, tourists come back and competition starts kicking in. We had expected a 15%, 15.5% gross margin, which is on-track. But when the revenue top line growth, of course, there can be operating leverage should start kicking in. And again we have a franchisee plan also in action there, as I mentioned, and we will be working on it in such a way that in the next two, three years, I think it should be a predominantly franchisee-driven arm for us, Middle East.

Rajiv Bharati — DAM Capital — Analyst

Sure. And in a few opening questions, you talked about 5% SSSG on the overall India business. Can you break that into South and non-South because the South piece hasn’t moved much? So is there SSSG significant — a low single digit in SSSG South piece?

Ramesh Kalyanaraman — Executive Director

Yeah. So South would have grown only what less than 2%. If you look at the total growth itself, non-South would have grown at 28%. I am now talking SSSG, the total revenue growth from non-South market would have been in the range of 28%, and South in the range of 2%, and almost everything as SSSG in South. But that 28% may everything is not SSSG because we have added showrooms only in the non-South — predominantly in the non-South region for the past couple of years now, okay? That is one of the reasons that the non-South revenue growth is much more than the south. But again, one or two areas where the South revenue growth is not as much as non-South, even the SSSG is majorly because the base was higher in the last year because you would remember that there were lot of migrations happening during that time, where people were staying in their hometown in South India during the last year in Q3. And again in December this year, when the gold prices went up, the discretionary demand usually gets impacted in Kerala, Karnataka and Andhra Pradesh because December is a high discretionary demand month for these three markets. So the impact was there in December, which would have again impacted the South revenue.

Rajiv Bharati — DAM Capital — Analyst

Sure. And if you can help me with how does this share of new customers at 35% tie-up with SSSG, and let’s say by market, the 35% is largely non-South, is it safe to assume that?

Ramesh Kalyanaraman — Executive Director

Yeah. So it should be higher than meaning non-South, a new customer growth will be surely higher because the new showrooms, all the customers are new customers, that is how it is. But otherwise, the ratio how we see is that if we have 100 customers coming in or 100 invoices done, 35% of that is from new customers. New customers we see is that if they have not come to us in two years, we treat them as a new customer.

Rajiv Bharati — DAM Capital — Analyst

Sure. But in the South, this number would be — I mean can you give some color there?

Ramesh Kalyanaraman — Executive Director

Yeah. I don’t have a number right now, but there will be healthy new customer addition in the South as well.

Rajiv Bharati — DAM Capital — Analyst

Sure. Thanks a lot. That’s all.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.

Shirish Pardeshi — Centrum Broking — Analyst

Yeah. Thanks for the opportunity and follow-up. Ramesh, I’m slightly confused. You mentioned that we will open 52 franchised stores, correct?

Ramesh Kalyanaraman — Executive Director

Yes.

Shirish Pardeshi — Centrum Broking — Analyst

That will come up in FY ’24.

Ramesh Kalyanaraman — Executive Director

Yes. Calendar year 2023. So that was announcement but you can keep it as 52 showrooms for the next financial year as well. That is almost the same.

Shirish Pardeshi — Centrum Broking — Analyst

So my point here is that today, when we see that, we have existing stores and our store count in India is about — I mean if I exclude Middle East, about 137 stores, so 137 plus 52 franchised. Is that the correct way to look at it?

Ramesh Kalyanaraman — Executive Director

Correct.

Shirish Pardeshi — Centrum Broking — Analyst

And on top of it, my question was, we earlier had said that about 40, 50 stores we will add our own store. Will that take a backseat, or we will still open our stores also?

Ramesh Kalyanaraman — Executive Director

Next year, we will predominantly do only franchised. Our store expansion will not be there. It will be very minimalistic. It will not be in the range of 14%, 15%, because as I mentioned earlier, the next two to three years, our primary focus will be to use the what we call the excess cash flow to repay debts, take out the non-core assets, liquidate it, further lighten the balance sheet, that will be the next two years. And again 52 openings itself need a lot of bandwidth, right? So over and above 52, we would not do the 10 or 15 own stores.

Shirish Pardeshi — Centrum Broking — Analyst

Got it. My second question what Sanjay just mentioned that today we are having Candere two offline stores and we’re going to take it up to 30. So even in Candere also, we are doing FOCO or this will be largely our owned stores? And maybe if you can give some numbers around it, what is the current size? What is the throughput you are expecting, and maybe some gross margin because 30 is a big number which we are talking?

Ramesh Kalyanaraman — Executive Director

Yeah. So initially, there’ll be a lot of owned stores, and of course, where we have franchisee inquiries coming in, but we would not do immediately. We will just wait and watch for our existing owned stores to get settled down and then only do franchisee for Candere.

Shirish Pardeshi — Centrum Broking — Analyst

So you mean to say all 30 will be our owned stores for FY ’24?

Ramesh Kalyanaraman — Executive Director

Need not be, but at least a dozen will be our own.

Shirish Pardeshi — Centrum Broking — Analyst

Okay, got it. So half of that, you are saying that will be our owned store.

Ramesh Kalyanaraman — Executive Director

Yeah.

Shirish Pardeshi — Centrum Broking — Analyst

And in terms of revenue, any number you could provide, what kind of monthly annual revenue we can build in our model.

Ramesh Kalyanaraman — Executive Director

Average inventory levels in these kind of stores are in the range of what INR1.5 crores, and the average stock turn is around 4 to 5.

Shirish Pardeshi — Centrum Broking — Analyst

4 to 5.

Ramesh Kalyanaraman — Executive Director

Yeah.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. And my last question is on slide 35, you have mentioned that South revenue has grown only 2%.

Ramesh Kalyanaraman — Executive Director

Yeah.

Shirish Pardeshi — Centrum Broking — Analyst

Now there is one reference point. The market leader in the organized industry has taken South as a key and they are putting a lot of discounting, they are putting a lot of new designs and they’re trying to target the wedding jewelry. Now is it the fact or outcome or is the result that the competition from the organized players is also heating up and that’s why the South revenue has taken sluggishness or maybe there is genuine demand that people have withhold the purchases?

Ramesh Kalyanaraman — Executive Director

No, not at all, because October and November, the revenue was strong in the South. December usually comes with a lot of discretionary demand in South India, especially in Kerala, Karnataka and Andhra. Kerala comes with Christmas, and Andhra, Karnataka comes with other festivals like Sankranti, etc. And that is the reason for the South being 2% and non-South being 20%. And again one more thing, which has to be highlighted is that Q3 in the last financial year, the base was heavy in South India because there were a lot of people who are working in the metros, who were settled in the South and the base would have been higher in the South. And otherwise, we don’t see any competition from any new or existing organized players in the South because you know that we are one of the leading players in the South India.

Shirish Pardeshi — Centrum Broking — Analyst

Sure. And my last question on ROCE. Right now we are in the range of 16%, 17%, and I think at two, three slides, you have mentioned that the focus is going to improve with the asset-light model and we are going to improve. So is there any meaningful target you have in mind over next two to three years which you can spell it out right now?

Ramesh Kalyanaraman — Executive Director

Abraham, you want to take it?

Abraham George — Head of Treasury and Investor Relations

Shirish, we don’t want to give a number here, but we are looking at meaningful improvement in ROCE profile over the next two to three years time.

Shirish Pardeshi — Centrum Broking — Analyst

Okay, all right. Thanks.

Abraham George — Head of Treasury and Investor Relations

Because these franchise showrooms are coming with no real capital employed, so that will clearly improve the return profile. And also we are trying to reduce the capital employed by divestiture of assets as well as conversion of showrooms.

Shirish Pardeshi — Centrum Broking — Analyst

No, I agree, Abraham what you said that. But say today, we are talking about 52 number over 136, so almost 40% number we’re talking about the franchised stores. So does that mean — I mean arithmetically, are we targeting 35%, 40% to reach to next three years?

Abraham George — Head of Treasury and Investor Relations

So that’s like a big number, but it will be a meaningful improvement from where are now. Yeah.

Shirish Pardeshi — Centrum Broking — Analyst

Okay, no problem. Okay. Thank you. Thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Sanika Khemani from Middleton Capital Advisors. [Phonetic] Please go ahead.

Sanika Khemani — Middleton Capital Advisors — Analyst

Hello.

Ramesh Kalyanaraman — Executive Director

Hi.

Sanika Khemani — Middleton Capital Advisors — Analyst

Hi, sir. First of all, I congratulate you for a very good set of numbers. So my question is that, in the last budget the government has just shown a lot of [Indecipherable] in the lab-grown diamonds. So I want to understand what impact will this have on our business? And my second question is, are we looking to venture out in this segment?

Ramesh Kalyanaraman — Executive Director

Yeah. So we are closely watching the market. As of now, we are getting very limited inquiry for lab-grown diamonds. The supply ecosystem is developing in India. The government is also giving what incentivizing for the same. And as and when the demand grows for that segment, we will be there to meet the demand.

Sanika Khemani — Middleton Capital Advisors — Analyst

Okay. Thank you, sir.

Ramesh Kalyanaraman — Executive Director

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Sri Kumar V from KJ. Please go ahead. Ladies and gentlemen, the line of Sri Kumar has disconnected. [Operator Instructions] As there are no further questions, I now hand over the conference to Mr. Ramesh Kalyanaraman for closing comments.

Ramesh Kalyanaraman — Executive Director

Thank you very much. So looking forward for the next quarter. Thank you.

Operator

[Operator Closing Remarks]