Kalyan Jewellers IPO Analysis!

Kalyan Jewellers is set to raise up to Rs 1,175 crore via IPO which opened on 16th March, Tuesday. Here are the details:

About Kalyan Jewellers

• Kalyan Jewellers is one of the largest jewellery companies in India. The company was established by their founder and one of their Promoters, T.S. Kalyanaraman.  
• Kalyan Jewellers has 107 showrooms located across 21 states and union territories in India, and also has an international presence with 30 showrooms located in the Middle East as of December 31, 2020. They also sell jewellery through their online platform at www.candere.com. 
• Gold jewellery contributes more than 70% of the total sales and remaining comes from studded and other jewellery products.
• Indian jewellery business contributed 78.19% to the company's revenues in FY20, and exports accounted for 21.8%. For the nine months ended December 2020, contribution of domestic business to revenue stood at 86.21% and exports at 13.79%.

Competition

• Kalyan Jewellers face competition from both organised and unorganised players. However, the market share of unorganised players is expected to continue to decline going forward.
• Tanishq, a key brand of Titan Company, is the leader in the Indian Jewellery market with 3.9% share of the overall jewellery market and 12.5% share of the organized jewellery market, based on Fiscal 2019. 
• For the same period, Kalyan Jewellers, also one of the largest jewellery companies in India based on revenues, had 1.8% share of the overall jewellery market and 5.9% share of the organized jewellery market.
• The table below compares key financial metrics for Kalyan and Titan.
• Titan’s margins as well as return ratios are much superior to Kalyan Jewellers.

Financials

• During FY18-20, the company has reported a 2.1% CAGR decline in consolidated topline in FY20. The key driver for lower business growth was disruptions in the domestic operations (contributing around 78 percent to the total revenue), which declined by 2.5 percent CAGR. Middle East operations also declined by 0.7 percent CAGR.
• Average RoIC and RoE stood at 8.8 percent and 4.6 percent for FY18-20 period.
• The total operating expenditure declined by 2.4% CAGR (relatively higher than the topline), leading to a 1.9% CAGR rise in consolidated EBITDA in FY20. The margin expansion in EBITDA is also due to a better revenue mix. High margin studded jewellery now contributes to 23.36% of the revenue, up from 21.72% at the end of FY20. 
• Covid-19 has impacted the company’s performance in the Apr-Dec 20 period. The topline declined by 30% YoY. The company reported a loss at Rs 79.95 crore compared to a profit of Rs 94.32 crore in the same period in 2020.
• The company has paid dividends consistently in the last three years, and is confident of maintaining a prudent dividend policy going forward.
• More than 51% of Kalyan's FY20 revenue came from outside of tier-I cities. That rose to 53.08% in Apr-Dec 20. Operations outside South India contributed 57.69% of its gross profit and 47.81% of its revenue in the financial year ended March 2020.
• The company has a Debt /Equity ratio of 2.1 (in FY20), which is likely to see a decline going forward due to the fresh issue of shares.

About the issue

Issue open: 16th March- 18th March 2021

Price band: Rs 86- Rs 87 per share

Issue Size: Rs 1,175 crore (Gross)

Issue Size: The issue is a combination of fresh issue and offer for sale. Kalyan Jewellers will issue 9.19 crore shares worth Rs 800 crore. Promoters TS Kalyanaraman and Highdell Investments Ltd., an investment arm of Warburg Pincus, will sell 4.31 crore shares amounting to Rs 375 crore.

Reservation for QIB: 50% , Retail - 35%, Non institutional Investors -15%. The company has reserved 2 crore shares for employees. Employees are eligible for a discount of Rs 8 per share.

Bid lot: 172 shares, and in multiples of 172 shares

INDmoney Recommendation

At the higher end of the price band, Kalyan Jewellers is aggressively priced at a P/E ratio of about ~63 times FY20 consolidated EPS (on fully-diluted basis). As the company has reported losses in the Apr-Dec 20 period, it cannot be valued using annualised 9MFY21 price-earnings ratio. The valuation is expensive, considering the company muted financial performance over the last few years.

The nearest comparable listed peer Titan Company Ltd has much superior margins and return ratios as compared to Kalyan Jewellers. Given muted topline and bottomline growth, low margins and return ratios and expensive valuations, we remain ‘Neutral’ on the prospects of the issue.