Kalyan Jewellers IPO opens Tuesday: A good long-term bet, say analysts

The company's performance was impacted significantly during fiscal 2018-19 and in the nine months of the current fiscal (9MFY21) due to natural calamities in the South India and Covid-19 pandemic

The Rs 1,175-crore initial public offering (IPO) of Kalyan Jewellers India (KJIL) opens today (March 16) with a price band of Rs 86-87 per share. The IPO comprises of issuance of fresh equity up to Rs 800 crore and an offer for sale (OFS) worth Rs 375 crore.

One of India’s largest jewellery retailers, Kalyan’s key businesses include design, manufacture, and sale of a variety of gold, studded and other jewellery products for various occasions, including weddings and daily wear.

The company’s performance was impacted significantly during financial year 2018-19 (FY19) due to natural calamities in South India. Nine months of the current fiscal (9MFY21) were also impacted by the Covid-19 pandemic’s outbreak, leading to losses of Rs 80 crore. However, most analysts believe that brand recall and a strong pan-India presence makes Kalyan Jewellers a long-term bet, with profitability and balance sheet projected to improve.

Here’s what leading brokerages say about the issue.

Angel Broking: Subscribe

In terms of valuations, the pre-issue trailing 12-month enterprise value (TTM EV)/sales works out to 1.4 times (at the upper end of the issue price band), which is low compared to Titan Company (trading at 7.7 times). However, Titan has a better track record than Kalyan. We believe Kalyan Jewellers would perform better on the back of a strong brand and number of stores in India and internationally, analysts at Angel Broking said. Thus, we recommend a subscribe rating on the issue, they add.

Reliance Securities: Subscribe

It is India’s second largest organised jewellery player with a market share of 5.9 per cent. Analysts at the brokerage said they believe organised players will get healthy traction in the coming years due to increased preference for branded jewellery. Further, the firm’s focus on increasing revenue contribution from high-margin studded jewellery is expected to improve its overall margin. This, along with continued addition of new showrooms is expected to ensure a sustainable growth in the long run. 

The company also sells jewellery through its online platform (candere.com). It generates a significant portion of revenue (75 per cent) from gold jewellery, followed by studded jewellery (22 per cent). South India and foreign markets accounted for half and 14 per cent of its total revenue, respectively, in 9MFY21. The IPO is valued at 58.4x of FY20 earnings per share (EPS), which looks reasonably priced, they added.

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The firm enjoys pan-India presence with 107 showrooms located across 21 states and Union territories and has 30 showrooms located in West Asia as on December 31, 2020. A hyperlocal strategy enables it to cater to a wide range of geographies and customer segments, analysts at the brokerage said. The company is led by a management team with extensive experience in the jewellery and retail industry, and has the backing of private equity player Warburg Pincus. At Rs 87, the pricing is on the higher side, but on a long-term basis, it is available at FY23 estimated price-to-earnings (P/E) of 25x. Given the forecasted improvement in profitability and balance sheet, India’s appetite for gold, strong presence, brand recall and diversified product offering, we assign a “subscribe” rating on a long-term basis, the analysts said.

ICICI Securities: Unrated

The company has witnessed an improvement in gross margins from 16 per cent in FY18 to 18 per cent in the nine months ending December 2020 owing to enhanced share of studded jewellery. The company has faced headwinds in the past couple of years, analysts at the brokerage said. In FY20, it reported revenue and net profit of Rs 10,101 crore and Rs 142 crore, respectively. At Rs 87, the stock is available at 0.9x FY20 market cap/sales and 63x FY20 EPS, they added.