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India operations recover well

Kalyan reported an in-line operating performance with consolidated revenues up 43% yoy [India: +61%; Middle East (15%)]. Share of gold jewelry increased as growth in south India was better than north due to lower operating restrictions. Even as store operations are currently impacted due to fresh restrictions, we expect Kalyan to focus on store expansion in FY22 - it has opened nine stores in April 2021. Likely implementation of hallmarking effective June 15 may potentially accelerate industry formalisation and we expect brands like Kalyan to benefit. BUY; TP Rs95.

India business grows 61% with strong growth in south.

Revenue grew by 61% to Rs26bn; SSSG: 61%; South India grew by 67% while north grew by 48%; studded share declined to 22% from 26%. Growth was strong even in Jan and Feb (unaffected by Covid last year) at 35% (some benefit of pent up demand). Management highlighted accelerated industry formalisation and good wedding demand. Gross margin declined by 680bps and 240bps QoQ to 14.6% due to higher south revenue, lower studded ratio, one-time loss due to customs duty cut (we reckon its >Rs20 crores). Gross margin weakness weighed on EBITDA margins, down 250bps to 7.4%. PBT grew by 17% while PAT was up 16%. Total number of stores stood at 107 stores. Kalyan’s e-commerce segment, Candere, also reported good performance for the year – revenue up 47% to Rs821mn and has also now turned profitable.

Middle east operations hurt by store closures.

Revenue declined by 15% to Rs4.3bn (closed 7 stores in 1Q). Gross margin expanded by 430bps to 17.3% due to market consolidation. EBITDA margin expanded by 310bps to 7%. EBITDA grew by 53% to Rs298mn.

Store expansion to resume

We like Kalyan’s thrust on store expansion. Prior to Covid, the company added 60 new stores in the preceding five years. The company is expected to launch 20+ stores in FY22 and 15 stores in FY23. It has already opened nine stores in April 2021. Its other key strengths are (1) hyperlocal model, (2) a network of 750+ My Kalyan centres to drive footfalls and (3) consistent brand investments. Going forward, margin expansion to be driven by (1) expansion in nonsouth markets to drive gross margin expansion given higher studded share in these markets and (2) operating leverage benefit.

Valuation and risks:

We broadly maintain our earnings estimate for FY21-FY23E. We model revenue and EBITDA CAGRs of 20% and 35% over FY21E-FY23E. Maintain BUY with an unchanged target price of Rs95. Key risks: delay in showroom expansion and potentially higher competitive intensity in core South India markets.

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