Kalyan Jewellers is shining, but the valuation is pricey

Shares of Kalyan Jewellers India Ltd are down 5% since its September quarter (Q2FY25) results were out on Wednesday during market hours. Sure, a cut in customs duty on gold imports to 6% from 15% pushed customer footfalls higher, boosting sales during the quarter. But the duty reduction also meant an inventory loss of ₹69 crore, leading to a 1.5% year-on-year drop in reported Ebitda of the India business to ₹263 crore. Ebitda is short for earnings before interest, tax, depreciation and amortization.

Adjusting for the customs duty impact, India business Ebitda rose by 24%, although gross margin and Ebitda margin have contracted. The drop in margins is on expected lines, given the rising share of franchised showrooms with relatively lower margins.

However, it should be noted that Kalyan’s rapid retail expansion through a franchise-owned company-operated (FOCO) model, which is capital-light, has helped it beat Titan Co. Ltd on revenue growth.

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Expansion fuels growth

In Q2 and H1FY25, Kalyan’s India business revenue growth stood at 39% and 34% on-year, respectively, vis-à-vis Titan’s standalone revenue growth of 25% and 17%. Kalyan had 231 stores in the country at September-end, out of which 105 were FOCO. The company has launched 49 Kalyan stores in FY25 so far and is on track to achieve its guidance of 80 new stores for the full year. It plans to open 50 new stores in its digital-first platform Candere in FY25 (36 stores at September-end).

Overall, Kalyan’s India business same-store sales growth (SSSG) stood at a robust 23% last quarter. SSSG measures comparable sales over a period of time. Further, Kalyan has recorded 20% plus SSSG for the 30-day period leading up to Diwali compared to the same period last year. It is optimistic about the ongoing wedding season and hopes to end 2024 on a strong note.

Besides, Kalyan remains committed to lowering its debt by ₹300 crore in FY25. It intends to use 40% to 50% of the profits generated to pay down debt and reward shareholders. In H1FY25, it has repaid nearly ₹143 crore of non-GML (gold metal loan) in the India business, which stands at ₹746 crore as of 30 September.

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The company has concluded the divestiture of identified movable non-core assets, and the sale process of immovable non-core assets will begin in FY25, which should have a positive impact on return ratios.

To be sure, investors have given a thumbs up, with Kalyan’s shares appreciating as much as 85% so far in 2024 versus the 13% drop seen in Titan’s shares.

“Titan’s jewellery business is likely to continue to witness medium-term headwinds of a) category formalization gains accruing more to competition given increased competitive intensity (access to growth capital) from national (Kalyan Jewellers, Malabar Jewellers, etc.) and regional players, b) limited scope of new city driven expansion for Tanishq, and c) pressure on margins due to increased competitive intensity,” said ICICI Securities Ltd’s analysts in a report last month.

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The sharp rally has meant Kalyan’s valuations are now pricey at 57 times FY26 estimated earnings, showed Bloomberg data. With industry-leading growth, analysts from Motilal Oswal Financial Services expect Kalyan’s rich valuation to sustain. The brokerage has modelled revenue and Ebitda CAGR of 29% and 23%, respectively, during FY24-FY27.