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Strengthening retail presence with trust

* P N Gadgil Jewellers (PNG) is the second-largest jewelry retail chain in Maharashtra, with a total store count of over 48 stores as of now (12 additions in FY25YTD). The company reported INR61b revenue in FY24, with a total store count of 36 (including two stores in Goa and one in the US). Based in Pune, PNG has a rich brand legacy that dates back to 1832 and maintains a presence in numerous cities (21) across Maharashtra. The company, during the last few years, has been focusing more on enhancing unit economics, increasing its mix of maketo-order offerings, and improving its product mix. However, following a consistent shift toward the formalized market, the company is now aiming to expand its store network, starting in Maharashtra before venturing into other states such as Madhya Pradesh, Chhattisgarh, Bihar, et al. We model 44 new store additions during the next three years, bringing the total to 80 stores by FY27 vs. 36 in FY24. PNG has already opened 12 stores and plans to open an additional 8 stores in the remaining FY25.

* PNG aims to become the leading jewelry retailer in Maharashtra within a few years (Tanishq leads in the store count at present). The company is focused on enhancing its product mix by increasing the proportion of studded jewelry. Over the last three years, the studded jewelry ratio has improved 250bp to 7%, and PNG aims to take this ratio into double digits in the coming year. The company is anticipated to deliver 23%/31%/36% revenue/EBITDA/PAT CAGR during FY24-27 fueled by: 1) a robust 30% store CAGR, 2) a favorable market presence in Maharashtra, characterized by a strong trend toward formalization and a high proportion of studded jewelry, and 3) an improving product mix, enhanced sourcing strategies, and debt reduction, which are likely to expand the PBT margin to 4.6% in FY27E from 3.4% in FY24.

* We initiate coverage on the stock with a BUY rating and a TP of INR950 (based on 35x Dec’26E P/E). The successful execution of store rollouts, gold hedging policy, and an improvement in operating margin will be the key catalysts for re-rating of the stock.

Further expanding the network in home territory

* In FY24, PNG operated 36 stores, which included 24 company-owned & company-operated (COCO) stores, 11 franchise-owned & company-operated (FOCO) stores, and one store in the US. PNG plans to add 18 and 9 COCO stores in FY25 and FY26, while FOCO stores will be 2-3 stores yearly.

* The company aims to leverage its strong brand recall in Maharashtra by rapidly expanding its store presence (it plans to double its store network) in Maharashtra over the next two to three years. Besides, PNG also intends to enter other states by strategically selecting key cities in those markets.

* PNG has already opened 12 stores in YTD-FY25, of which nine were opened during each of the nine days of Navratri. The successful store rollouts during Navratri, shortly after the IPO, reflect management's exceptional execution skills and provide better visibility for upcoming expansion.

* The IPO proceeds of INR8.5b will be used for debt reduction (INR2.5-3.0b), new store openings (INR4.0b) and balance on other corporate expenses.

Focusing on increasing footfalls and average transaction value

* PNG reported a 27% CAGR in footfalls between FY21 and FY24. During the same period, the average transaction value clocked 10% CAGR in gold jewelry, 16% CAGR in diamond jewelry, and 8% CAGR in silver jewelry.

* The company further plans to improve the frequency of customer visits, acquisition of new customers, and average transaction value by focusing on new product launches, higher marketing spending, and various incentive models.

Maintains long-term relationship with customers; well-established in its core market

* With a strong legacy in the core market, PNG has established long-term relationships with its customers. The multi-generational customer base has significantly contributed to the company's success. Despite expanding its store network in the core market, the company has experienced healthy growth in its existing stores.

* PNG has also strengthened its customer relationships by focusing more on make-to-order services (customization) over the past 3-4 years. This strategy has contributed to increased customer retention and the acquisition of new clients.

* PNG experienced a robust 27% CAGR in footfalls across its stores over FY21-24. This growth demonstrates its ability to attract and retain customers through its strong brand presence and customer engagement initiatives.

* According to the management, customer conversion at the store has notably improved over the last 3-4 years and currently hovers around 90%.

Growing in Maharashtra; more headroom for market share gains

* The size of India’s jewelry retail market was USD80b in FY24, with organized retail contributing about 37%, which includes both national and regional players. The market is likely to surge, reaching USD145b by FY28.

* The western region accounts for 25% of India's jewelry market, with states like Maharashtra, Madhya Pradesh, Gujarat, and Goa serving as the four primary contributors. Among these states, Maharashtra commands a dominant 46% share of the western market, making it one of the largest jewelry markets in India. Maharashtra alone represents 17% of the country’s total jewelry outlets, boasting over 25,000 registered stores, which positions it as the largest market for BIS-registered outlets in India.

* PNG is the second-largest organized jewelry player in Maharashtra based on the number of stores. PNG is still underpenetrated, with only ~8% market share in Maharashtra. Hence, there remains significant headroom for growth. We believe that PNG can increase its market share through effective brand building, diverse product design offerings, and strategic store expansion.

Superior operating metrics relative to peers

* PNG delivered a 20% revenue CAGR during FY19-24, with a store CAGR of only 4%. In comparison, Titan clocked revenue/store CAGR of 20%/19%, Kalyan 14%/13%, Senco 16%/10%, and Thangamayil 22%/13%. PNG has been more focused on scaling revenue/store metrics. Hence, revenue CAGR for a significant part of the last five years has been driven by strong SSSG.

* PNG demonstrated efficient inventory management, achieving an impressive average inventory turns of 5x between FY19 and FY24, outperforming large peers, which are close to 2.5-3.0x. Higher make-to-order mix (25-30% revenue mix) and lower studded mix provide the company with superior inventory turns.

* Thus, PNG enjoyed 34% RoE and 24% RoIC in FY24, much better than its larger peers, who were in the range of 20% RoE and 15% RoIC.

Enhanced digital presence to improve customer base and sales

* With the growing internet usage and rising adoption of online marketplaces in India, PNG sees significant potential to expand its customer base and increase sales through digital channels with minimal investment.

* In addition to increasing brand visibility among internet users, a strong digital presence helps PNG cater to a wider range of consumer segments. The company has launched its online platform, www.pngjewellers.com, where customers can browse and purchase a variety of jewelry products.

* PNG also retails through various online marketplaces and introduced its own mobile application, "PNG Jewellers," in Mar’22.

*  The digital platform enables PNG to keep customers informed about new designs and collections, enhancing their overall shopping experience, both online and in-store.

Set to post a strong earnings growth – Initiate coverage with a BUY rating

* PNG is among the few jewelry companies that are rapidly expanding their store presence. We model 30% store growth over FY24-27E. With a conservative growth assumption for bullion, the overall revenue CAGR assumption in our model stands at 23% (ex-bullion revenue CAGR at 30%).

* PNG is also enhancing its studded mix (up 250bp in the last three years) and is actively seeking to further improve this mix in the coming years. Maharashtra is already a favorable market for studded products (~20% studded mix market); therefore, there is significant potential for further improvement in this mix.

* With a more favorable product mix, operating leverage (as initial expansion is in its core markets, PNG will not need more corporate overhead costs, etc.), and better sourcing, the company is likely to improve its operating margin. We model an EBITDA margin expansion of 100bp over the next three years to 5.4% in FY27.

* With the IPO proceeding, the company also plans to reduce its debt repayment by more than INR2b. PNG is looking to add gold metal loans, which are likely to enhance its gold hedging strategy. We model >INR3-4b loan in FY26-FY27. Gold metal loans typically carry low interest rates (~3-4%), implying that the interest costs will not experience a spike, remaining lower than the anticipated revenue growth. This strategy is likely to contribute to an expansion of the PBT margin to 4.6% by FY27, compared to 3.4% in FY24.

* We initiate coverage on the stock with a BUY rating and a TP of INR950 (based on 35x Dec’26E P/E). The successful execution of store rollouts, gold hedging policy, and an improvement in operating margin will be the key catalysts for re-rating of the stock.

* Key downside risks: a) volatility in gold prices, as the company has not fully hedged; b) the operating performance of new stores; and c) intensified competition that will hurt margins.

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