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Hardwork (smart/execution) + industry tailwinds

Kalyan reported a good operating performance despite some restrictions in Kerala. The share of gold jewelry remained high with continued new customer recruits from the unorganized segment – we like the increased focus on low value studded to up-trade these consumers. The renewed thrust on store expansion is a major positive. Its other key strengths are (1) hyperlocal model, (2) a network of 800+ My Kalyan centres to drive footfalls and (3) consistent brand investments. Going forward, margin expansion is likely 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. BUY; TP Rs100 (prior: Rs95).

We believe mandatory hallmarking will create a level playing field in the Indian Jewellery market, driving further formalisation. It will lead to (1) likely traceability of raw material (gold) leading to potentially higher imports through formal route, (2) material business disruption for informal players in converting their inventory to hallmarked standards (necessity to melt and recreate ornaments), (3) opportunity for design-oriented brands to realise higher brand premium (versus commodity++), (4) higher industry-wide efforts to drive premiumisation (higher share of studded), and (5) consumers may choose to convert ‘old jewellery’ to hallmark-compliant ornament in FY21-23E.

* India business grows 61% YoY. Revenue (India business) grew by 61% YoY to Rs25bn; SSSG: 52% (40% SSSG over Q2FY20). On regional performance, SSSG in non-south markets was 72% versus 44% in south (overall 52%). We note that (1) last year non-south was more impacted due to Covid-led restrictions (hence, better comps optically) and (2) in 2QFY22, there were operating restrictions in Kerala (until August). Kalyan’s performance, though optically lagged Titan (78% growth), needs to be seen in the context of (1) different base (as explained above) and (2) lower store expansion benefit (Kalyan did not expand (store count) much during FY19-21), whereas Titan added 66 stores during the same period. It did highlight that (1) growth has been higher in plain gold (similar commentary by Titan), (2) south revenue share increased (QoQ) from 69.7% to 70.7% (more south expansion in 1H).

Gross margin (standalone) improved 70bps (QoQ) to 15.0%. It has enhanced focus on low value studded to drive up-trade the new consumer recruits (coming from unorganised segment). EBITDA margin came in at 8.0%, good recovery on QoQ basis but down 140bps YoY (higher gross margins in 2QFY21). EoP store count stood at 117 and 4 new stores have been added more till now.

* Middle East operations also recovers. Revenue grew by 61% YoY to Rs3.6bn driven by improved consumer sentiment led by various international events. The business was break-even at PAT level with EBITDA of Rs260mn and store count of 30 (flat YoY).

* Store expansion to resume. We like Kalyan’s thrust on store expansion. During FY15-20, the company added 65+ new stores. After some lull, it is expected to launch 20+ stores in FY22 and 15 stores in FY23. It has already opened 14 stores this year.

* Valuation and risks: We increase our earnings estimate by 1-4% for FY22- FY23E. We model revenue and EBITDA CAGRs of 27% and 42% over FY21- FY23E. Maintain BUY with a DCF-based revised target price of Rs100 (prior: Rs95). Key risks: delay in showroom expansion and potentially higher competitive intensity in core South India markets.

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