Kalyan Jewellers India Stock Research Report

Revenue outperformance with sustained profitability…..

Q2FY25 continues to enhance confidence in Kalyan’s business model (FOCO) as it continues to outperform competition by gaining market shares (23% SSSG YoY). Positively, SSSG of 20% YoY in festive period (comparable 30 days prior to Diwali) despite higher gold prices is remarkable while it has got seasonality benefits (Shradh – inauspicious days). All other key metrics – new customer recruitment, average ticket size, retail expansion (added 48 stores till date vs guidance of 80 stores in FY25), store level gross margin and profit margin (adjusted for customs duty cut) – are at healthy levels. It maintains previous guidance on retail expansion in India; at 130 (80 Kalyan and 50 Candere). Highvalue studded didn’t witness any headwinds (relatively lower presence), per management. Elevated valuations (read low margin of safety and/or high stock volatility) is the only concern. ADD.

Revenue outperformance led by healthy SSSG

Kalyan reported revenue of INR 60.7bn, up 37% YoY. India revenue growth came in at 39% YoY, driven by acceleration in store expansion (+34% YoY) in non-south markets (~49% contribution) and SSSG of 23% YoY (25% SSSG in South India, 21% in non-south). Revenue from the Middle East business grew 27% YoY led by ~9% SSSG. Management highlighted that the custom duty cut (from 15% to 6%) has helped in driving higher customer footfalls. However, the duty cut does have ~INR 1.2bn (INR 690mn in Q2FY25) impact on inventory.

It highlighted that (1) new consumer recruits continued to be healthy (share of new customers at ~36%) and (2) south business contribution declined to 51% to overall sales from 54% (YoY). Studded share improved to 29.7% (vs 28.5%in Q2FY24).

Margins impacted by inventory loss on custom duty reduction

India gross and EBITDA margins were down ~199bps and ~209bps YoY, respectively, due to accelerated store expansion through franchisees (~20% of revenues) which comes at lower margins vs COCO stores. Store-level gross margin remains largely stable, as per management. Consequently, (consol.) EBITDA margin was also down ~172bps YoY to 5.4%. PBT margin of India business was down ~128bps YoY to 3.2% (normalised PBT – adjusted for customs duty cut was flat at 4.5%). Recurring PAT declined by 4% YoY to INR 1.2bn.

Store expansion on track; guidance retained

Kalyan added 14 stores (EOP: 231 stores) in Q2FY25 and has added ~21 stores in Q3FY25 (as on date). It further converted one more (total four stores) owned showroom in Non-South India to FOCO model and expects more such (FOCO led) roll-outs in South going forward. In FY25, it maintains its earlier guidance to add 130 stores in India (80 Kalyan Jewellers and 50 Candere showrooms).

Improvement in return ratios with clear strategy to improve it further

RoCE and RoE improved to 19.8% and 15.2%, respectively in TTM led by 1) expansion through capital light FOCO model, and 2) repayment of borrowing (excluding GML) by ~INR 4bn (overall working capital loans reduced by INR 2.6bn) in FY24 and addition INR ~1.4bn non-GML loan in 1HFY25. The non-GML loan (India) is at INR ~7.5bn as of Sep’24. It further negotiated increase in GML limit by INR 1.7bn It plans to further reduce non-GML borrowing by ~INR 3bn and INR 3.5-4bn led by FCF generation in FY25 and FY26, respectively.
It has concluded the divestiture of identified movable non-core assets for INR 1,354 mn and the sale process of immovable non-core assets to begin by end of FY25 which can further improve return ratios. Capex is also expected to reduce to INR 2.5bn in FY25 (INR ~1bn in capex of ~30 stores in old FOCO model and INR ~1-1.5bn maintenance capex) and INR ~1-1.5bn in FY26.

Valuation and risks

We cut our EPS estimates by ~13%/4% for FY25E/26E adjusting for impact from custom duty reduction, modelling revenue / EBITDA / PAT CAGRs of 30% / 27% / 43% over FY24-FY26E. We maintain ADD with a DCF-based unchanged target price of INR 740. At our TP, the stock will trade at a multiple of 63x FY26E EPS. Key risks: delay in showroom expansion and potentially higher competitive intensity in core south India markets