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Miss on profits, but fast track continues

* Kalyan Jewellers (KALYANKJ)’s consolidated revenue grew 37% YoY to INR60.7b (in line). The Indian business delivered 39% YoY revenue growth, driven by store additions (added 14 Kalyan India and 12 Candere) and a 23% SSSG (25% in south, 21% in non-south). Festive demand was strong; the company achieved >20% SSSG for a 30-day period leading up to Diwali compared to last year (comparable period).

* The company’s focus on new customer acquisition (36% share of new customers in 2QFY25) supported growth. Revenue growth in studded (+45%) outpaced gold revenue growth (+38%), leading to an increase in studded share to 30% (28% in 2QFY24). This contrasts with Titan, where the demand pressure was on large solitaires, leading to a decline in the studded share.

* Gross margin for the Indian business contracted 70bp YoY to 13.5% after adjusting for the inventory loss of INR690m. The margin contraction is expected due to the rising mix from franchised stores. Ad spending jumped 89% YoY, as the company stepped up its efforts to boost festive demand. EBITDA margin contracted 80bp YoY to 6.4% (due to the higher franchise mix). There is a big miss on APAT level, which stood INR1.8b vs. our estimate of INR2.1b.

* The Middle East delivered 27% revenue growth with an SSSG of 9%. Studded share also improved to 19% (18% in 2QFY24, 16% in 1QFY25). The company converted its three COCO stores into FOCO stores, and the total count stood at 36 as of Sep’24.

* With the successful scaling up of its new franchise businesses, which contributed one-third of its revenue, and sustained success in nonsouthern markets, the company has established itself as a leading brand in the industry. We model 29%/23%/33% revenue/EBITDA/PAT CAGR during FY24-27E. With industry-leading growth, we expect the expensive valuation to sustain. We reiterate our BUY rating with a TP of INR800 (based on 60x Sep’26 P/E).

Operationally in line; rapid store expansion

India business

* Healthy revenue growth with double-digit SSSG: India revenue grew 39% YoY to INR52.3b. The same-store sales increased 23% YoY in 2QFY25. SSSG of the South region was 25% and non-South regions stood at 21%. Nonsouth markets displayed promising growth, with revenue contribution increasing to 49% from 46% YoY. New customer additions continue to stay healthy; the share of new customers was over 36%.

* Studded ratio further improved: Studded share improved to 30% in 2QFY25 vs. 28% in 2QFY24. This growth was particularly when industry demand was sluggish and studded growth was slower than gold jewelry growth (as per Titan).

* Contraction in margins: Gross margin contracted 70bp YoY to 13.5% after adjusting for the inventory loss of INR690m. Ad spending jumped 89% YoY to INR1.0b on a weak base. As a % of sales, employee costs contracted 60bp YoY to INR1.5b, while ad spending expanded 50bp YoY to 1.9% and other expenses rose 20bp YoY to 2.4%. EBITDA margin contracted 80bp YoY to 6.4%. Operating margin is expected to contract as the company has moved from the companyowned to franchise-led store expansion.

* Operating performance: After adjusting for the inventory loss, EBITDA grew 24% YoY to INR3.3b. PBT grew 40% YoY to INR2.4b and APAT grew 37% YoY to 1.7b. Reported profit declined 4% YoY to INR1.2b. There is a big miss on APAT level, which stood INR1.8b vs. our estimate of INR2.1b.

* Rapid store expansion: The company added 14 Kalyan stores in India, reaching a total of 231 stores. Candere added 12 stores, reaching a total of 36 stores. Total stores in India stood at 267. ‘My Kalyan’ Grassroots Stores reached 1,022 in 2QFY25, contributing ~13% to revenue from operations in India and over 33% to enrolment in advance purchase schemes in India.

The Middle East performance

* Sales grew 27% YoY to INR8.0b. SSSG was 9%.

* Three more COCO showrooms in the region were converted into FOCO during the quarter. The total store count was 36.

* Studded share improved to 19% vs. 18% YoY and 16% QoQ.

* Gross margin contracted marginally by 30bp YoY to 14.5% due to the higher share of revenue from FOCO stores.

* EBITDA grew 26% YoY to INR6.1b. ? APAT grew 16% YoY to INR1.4b.

Consolidated performance

* KALYANKJ’s consolidated revenue grew 37% YoY to INR60.7b (est. INR59.2).

* Gross margin contracted 50bp YoY to 13.8% (est. 14%) after adjusting the inventory loss of INR690m.

* EBITDA margin contracted 60bp YoY to 7.2%. (est. 7.1%).

* Ad spends increased 90% YoY to INR1.2b on a weak base.

* As a % of sales, employee costs contracted 60bp YoY to INR1.7b, while ad spending expanded 60bp YoY to 2% and other expenses rose 10bp YoY to 2.4%.

* After adjusting for the inventory loss, EBITDA grew 26% YoY to INR4.0b. PBT grew 39% YoY to INR2.5b and APAT grew 35% YoY to INR1.8b.

* Reported profit declined 4% YoY to INR1.3b.

* In 1HFY25, net sales, EBITDA, and APAT grew 32%, 21%, and 29%, respectively.

Key takeaways from the management commentary

* Demand was healthy during 2Q and remains strong in the current quarter as well. The company has observed SSSG exceeding 20% for the 30-day period leading up to Diwali compared to the base year.

* The debt reduction plan is progressing well this financial year, with nearly half of the total targeted reduction already achieved. In India, the non-GML working capital loan has been reduced by INR ~1,430m. It has a target to reduce it by INR3,000m.

* Following the reduction in customs duties, there was an overall inventory loss of INR1,200m (INR690m in 2Q), and an additional loss of INR500m is anticipated in 3QFY25.

* The company is on track to meet its FY25 targets of 80 Kalyan and 50 Candere showrooms. Store openings in FY26 are expected to be higher than the current year, with additional stores planned for the South Indian, Middle Eastern, and international markets.

Valuation and view

* We cut our EPS estimates by 4% for FY25 and 5% for FY26.

* The company is further leveraging its brand by extensively expanding across Indian markets, having opened 80 new stores in FY25 through the franchise route. The asset-light expansion will generate the necessary cash flows to repay its debt in India (~INR6.0b) over the next two years. The studded ratio of 28% in FY24 was the best in class and reflected the company’s understanding of evolving consumer trends, such as youth-led and non-traditional preferences. The Middle Eastern business (INR26b; 36 stores) was steady in FY24.

* KALYANKJ aims to reduce its overall debt levels by ~INR7.0b by FY26, which is progressing well. We model 29%/23%/33% revenue/EBITDA/PAT CAGR during FY24-27E.

* With industry-leading growth, we expect rich valuation to sustain. We reiterate a BUY rating with a TP of INR800 (based on 60x Sep’26 P/E).

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