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Progress on most business parameters. Appoints Mr Vinod Rai (ex-CAG) as Chairman of Board

We believe Kalyan is delivering well on its key markers of (1) improving incremental return ratios and (2) expansion outside its core market of south India. We like the (1) commitment on the franchisee business, (2) improving capital and investment discipline and (3) potential outside south India – in our recent update (link), we note that apart from Titan, Kalyan is the key potential national player.

Kalyan reported a good operating performance in 1Q. India B2C 3-year revenue CAGR is 10%. Gross margin of India business expanded 110bps YoY to 15.5% on the back of (1) higher share of non-south business (35% vs 30% in 1QFY22), (2) increased studded sales (24% vs 20% in 1QFY22). We note that these are natural tailwinds for Kalyan’s margin profile and the benefit should continue to accrue for next few years. We like the focus on recruiting new customers and on low-value studded to up trade them.

We believe Jewellery Hallmarking will likely create a level-playing field, driving further formalisation. The compliance is getting better but will still take some time based on what the top players are suggesting. Maintain BUY; TP Rs100.

* Good performance on an overall basis. Kalyan reported revenue of Rs33.3bn, up 104% YoY. Gross margins expanded 23bps YoY to 15.5%. Kalyan’s expansion in the non-south markets and higher studded share (discussed below) aided better GM (higher for India operations). EBITDA margin expanded 372bps YoY and 28bps QoQ to 7.9%. Staff costs and other opex were up 5% and 16% on QoQ basis, respectively. Finance costs continued to come down (12% YoY and 6% QoQ). Reported PAT came in Rs1.1 bn.

3-year India B2C jewellery CAGR is 10% (overall 7% given the B2B order in the base). It highlighted that (1) new consumer recruits continued to be healthy and (2) South business contributed 65% to overall sales from 70% YoY. Gross margin expansion was healthy in the India operations – up 110bps YoY to 15.5%. Studded share improved to 24% vs 20% in the base period (broadly similar on QoQ basis). EBITDA margin for the India business was 8.0% (7.8% in 4QFY22). Lastly, ecommerce division, Candere, recorded revenue of Rs440mn vs Rs240mn in the previous year.

* Middle East operations. In the Middle East, total revenue from operations rose to Rs5.74bn from Rs3.4bn in the previous year. EBITDA margin for the Middle East business expanded to 8.2% (vs 5.2% in 1QFY22). We note that GM expansion in Middle East was limited given higher share of revenue from tourists.

* Store expansion to continue. We like Kalyan’s thrust on store expansion. It added four new showrooms (three in non-south) and one in Middle East. Total network across India and Middle East was 158 (31 in Middle East). It has launched its first franchise store in Aurangabad.

* Valuation and risks: Our earnings estimate are largely unchanged. We model revenue and EBITDA CAGRs of 16% and 23% over FY22-FY24E. Maintain BUY with a DCF-based unchanged target price of Rs100. Key risks: delay in showroom expansion and potentially higher competitive intensity in core south India markets.

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