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Store expansion is the key; initiate with BUY

Kalyan Jewellers India (Kalyan) is a pan-India jeweller with focus on the strengths of: 1) store expansion, 2) consistent investment in brand, 3) hyperlocal strategy, and 4) My Kalyan network differentiation (in our view). Accelerated industry formalisation and new store addition of 15-20 per annum are medium-term revenue growth drivers. We forecast 20% and 36% CAGR in revenues and EBIDTA respectively, over FY21E-FY23E. We initiate coverage with a BUY rating and DCFbased target price of Rs95 per share. Key risks are (1) potentially higher competitive intensity in core South India markets, (2) execution risks in expansion, and (3) delayed economic recovery in Middle East.

Focus on expanding showroom network:

Between 1 st Apr’15 and 30th Jun’20, Kalyan Jewellers (Kalyan) opened 60 new showrooms (net) at an average rate of ~12 showrooms per year across multiple regions. We believe the company will continue to drive showroom expansion to capture the opportunity to gain market shares from unorganised players. The scope for nationwide expansion is seen from the fact that Titan has as many as 353 stores (vs Kalyan’s 107) across India as at FY21-end.

Creation of competitive advantages:

Kalyan’s competitive advantages are: 1) strong brand {Kalyan Jewellers}, 2) pan-India retail presence with 107 showrooms across India, 3) hyperlocal strategy to cater to a wide range of geographies and customer segments, and 3) unique My Kalyan centre to drive footfalls.

Growth strategies:

Key revenue growth strategies: 1) expansion of showroom network, and 2) expansion of My Kalyan network to gain market shares from unorganised players. Organised jewellery industry has increased its share from 6% of the market in 2007 to ~30% in 2020 and will continue to garner further gains from unorganised players on the back of tough regulatory and operating (access to credit) environments. We forecast EBITDA margin to expand to 8.7% in FY23E from 7.5% in FY20 driven by: 1) improvement in studded ratio, 2) operating leverage in adspends and other overheads.

Initiate with BUY:

We model revenue and EBITDA CAGRs of 20% and 36% over FY21E-FY23E. We initiate coverage on the stock with a BUY rating and DCF-based target price of Rs95. Key risks: delay in showroom expansion and potentially higher competitive intensity in core South India markets.

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