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Richly priced IPO, supported by long term gains to the branded jewellery

Kalyan Jewellers India Ltd (KJIL), incorporated in 1993 by founder Mr. T.S. Kalyanaraman, is one of the largest jewellery company in India based on revenue in FY20 (source: Technopak Report) with 5.9% share in organised market. The company designs, manufactures and sells a wide range of gold, studded and other jewellery products across various price points ranging from jewellery for special occasions, such as weddings (the highest-selling product category) to daily-wear jewellery. The company is led by a management team with extensive experience in the jewellery and retail industry. Furthermore, their shareholders include Highdell Investment Ltd (Mauritius based private equity funds), belonging to the Warburg Pincus group.

* KJIL enjoys pan India presence with 107 showrooms located across 21 states and union territories in India and also have an international presence with 30 showrooms located in Middle East as on December 31, 2020.

* A hyperlocal strategy enables them to cater to a wide range of geographies and customer segments.

* KJIL has a strong brand value with backing of angel investor like Warburg Pincus and pan India presence.

* High Gold inventory of Rs 5,168cr as on Dec 2020, with average annual turnover of 208 days during FY18 to FY20, adds support to valuations.

* Last few years KJIL has aggressively expanded store, going ahead we expect revenue and profitability to pick-up led by high contribution from new stores.

* Current Debt -Equity ratio (D/E) is 2.1, post IPO D/E will reduce led by fresh issue, better internal accruals supported by new revenue generation from capex undertaken and new expansions to be funded by IPO proceeds.

* At the upper price band of Rs.87, the pricing is on the higher side, but on a longterm basis, Kalyan jewellers is available at 1 year forward estimated P/E of 25x (on FY23E basis). Given forecasted improvement in profitability & balance sheet, India’s appetite for gold, strong pan India presence, brand recall and diversified product offering, we assign a “Subscribe” rating on a long-term basis

Purpose of IPO

The offer comprises of the Fresh Issue and Offer for Sale. The proceeds from the offer for sale will go to the selling shareholders, while the amount received from the sale of fresh issue will be utilized for funding working capital requirements of the company and general corporate purposes.

Key Risks

* Rich valuation versus peers may bear on short term performance.

* Volatility in gold prices, seasonality of business and impact of government policies.

* High competition from both organized and unorganized players.

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