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Focus on (efficient) growth and governance 

We like the developments on improving governance and RoCE (1) commitment on the franchisee business, (2) improving capital and investment discipline including divestment of non-core assets (including corporate aircraft) and (3) plans to accelerate capital deployment outside south India – in our recent update (link), we note that apart from Titan, Kalyan is the key potential national player.

It reported a good performance in 2Q with 20% (consol) revenue growth. Gross margin of India business expanded (only marginally) to 15.2%. While Titan had a one-off benefit of custom-duty change, we believe Kalyan had passed-on the benefit (no one-off gain in P&L). We note (1) higher share of non-south revenues and (2) increased studded sales 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 (+35% in 2Q).

Retain BUY; TP Rs150 (was Rs140). Our forecast does not include the benefits from franchising yet.

* Good performance on an overall basis. Kalyan reported revenue of Rs34.7bn, up 20% YoY. India revenue growth came in at 13% YoY while Middle East business recovered well with 67% YoY growth. India gross margins expanded 17bps YoY to 15.2%. Kalyan’s expansion in the non-south markets and higher studded share (discussed below) helped. (Consol) EBITDA margin were down ~24bps YoY and ~27bps QoQ to 7.7%. Staff costs and other opex were up 18% and 22% on YoY basis, respectively. Management highlighted that other opex was higher due to a (1) higher A&P spends (on a low base) and (2) a provision. Finance costs continued to come down (12% YoY). Reported PAT came in Rs1.1bn.

It highlighted that (1) new consumer recruits continued to be healthy and (2) South business contributed 67% to overall sales from 71% (YoY). Studded share improved to 26% vs 23% in the base period. Lastly, e-commerce division, Candere, recorded revenue of Rs370mn vs Rs320mn in the previous year.

* Middle East operations. In the Middle East, total revenue from operations rose to Rs6bn from Rs3.6bn in 2QFY22. EBITDA margin for the Middle East business also expanded.

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