IGI Logo

Perfecting towards stable performance; strong Buy

We recently interacted with various business teams of Kalyan Jewellers to assess fundamental drivers for growth. We reckon, Kalyan has inherent advantage to its business model - hyperlocal strategy, generating strong enquiries given its solid understanding on local taste and demand for designs. Further our interaction with teams running, hallmarking center, wholesale manufacturer and ‘My Kalyan’ displayed confidence on generating strong consumer demand working closely with wedding eco-system (~20% of revenues). Management alluded resilient business momentum and improving SSSG driven by footfalls across geographies, yet it remains upbeat on doubling store count in three years in nonsouth markets driven by own stores and FOCO (50-60) improving its studded jewelry ratio. We tweak our earnings and maintain BUY, with a revised DCF-based TP Rs121 (implying 27.5x FY24E EPS)

Strong connect with stakeholders in wedding eco-system - My-Kalyan driving store footfalls

Our interaction with teams running ‘My-Kalyan’, wholesale manufacturer, hallmarking center and flagship store gave us confidence on steady performance for the company. Interestingly, strong connect with wedding eco-system, driving each My-Kalyan associate visiting 15-20 houses everyday generating strong footfalls for its stores, resulting in ~20% of revenue contribution. Management said, though it appears it’s a cost centre, it generates good profits. BIS Hallmarking centre head confirmed better-quality infrastructure has driven increased certification for jewelry - 3500 pcs per month. Though current rejection rate is ~5%, the efforts are made to minimise losses post stripping of gold from each jewelry pc. The wholesale manufacturing unit (largely catering to demand from Kalyan) process ~200-250kg per month and works with ~4-5% margin. Our interaction with flagship store manager indicated, (1) increased consumer awareness for gold purity, (2) ~32% share for studded jewelry, (3) making charges - basic gold jewelry ~3-5%, while hand crafted designs (heavy gold) command ~25- 30%, (4) store inventory of 100kg it generates ~2.5-2.7x turnover per anum, and (5) each store staff is incentivised and ~95% of them achieve resulting in bill cuts ~100-135 per day

Management confirmed strong business momentum to continue

Management said its performance to be driven by: (1) doubling stores in three years - 60% under FOCO model, (2) 6 pilot FOCO stores by Oct’22, (3) strong enrolment under DhanVarsha advance purchase scheme, (4) My-Kalyan model has been able to showcase designs and upsell to the consumer, (5) increased studded ratio to drive gross margins, and (6) gold exchange to remain ~30%, yet increased gold mental loans (Rs18bn) could cut interest burden. The management said A&P spend to remain at ~1.8% of sales yet expects FY23 could witness strong revenue momentum and improved profitability led by pent up demand.

Valuation driven by potential earnings upside

We reckon Kalyan’s strategy revolved around adding new stores in non-south markets and calibrated expansion in Middle East region. Further management appears to be confidant on its strategy of non-South markets to improve studded ratio, serving millennials meeting their aspirational demand by introducing new designs. We increase our earnings for FY23E/24E by 27.8%/26.7% and retain BUY, with a DCF-based revised TP of Rs121 (implying 27.5x FY24E EPS). Risks: irrational competition; prolonged recovery in the economy, leading to lower demand for jewelry; rising gold prices.

Valuations

We reckon Kalyan’s strategy revolved around adding new stores in non-south markets and calibrated expansion in Middle East region. Further management appears to be confidant on its strategy of non-South markets to improve studded ratio, serving millennials meeting their aspirational demand by introducing new designs. We increase our earnings for FY23E/24E by 29.6%/25.7% and retain BUY, with a DCF-based revised TP of Rs121 (implying 27.5x FY24E EPS). Risks: irrational competition; prolonged recovery in the economy, leading to lower demand for jewelry; rising gold prices

To Read Complete Report & Disclaimer Click Here

For More Centrum Broking Disclaimer https://www.centrumbroking.com/disclaimer/

SEBI Registration No.:- INZ000205331

Above views are of the author and not of the website kindly read disclaimer