Verdict: Lacks the sparkle

IPO Snapshot

Kalyan Jewellers is launching a Rs. 1,175 crore IPO, between Tue 16^th Mar to Thu 18^th Mar 2021, in the price band of Rs. 86- Rs.87 per share, comprising Rs. 800 cr fresh issue and Rs. 375 cr offer for sale (OFS) by PE investor Warburg Pincus and promoter in the 2:1 ratio. Issue represents 13% of post-issue capital, with listing on 26^th Mar.

Gold Jewellery Retailer with 137 Showrooms

Kalyan clocks Rs. 10,000 cr annual revenue, split 60:25:15 between South India, North India and Middle East. Fresh issue will fund Rs. 600 cr working cap needs for India, as Middle East business has not yet returned to pre-covid levels and markets like Kuwait continue to be challenging, posting losses for past 3 successive years. Post IPO, promoter holding will contract from 68% to 61%, while PE Warburg Pincus, garnering just 6.3% CAGR return on its 2014 investment, will hold 26% from present 32%.

Negative Revenue Growth coupled with Slim Margins

Between FY18-20, revenue contracted 4% due to floods in South India and a change in internal strategy, wondering how well positioned the company is to capitalize on industry trend of unorganised to organized conversion. FY20 PAT margin stood at 1.4% over 7.1% for Titan and 2.7% for even smaller retailer Thangamayil. EPS was Rs. 1.5 on a large equity base of Rs. 938 cr, which will expand to Rs. 1,030 cr post IPO. For reference, Titan’s equity is barely Rs. 89 cr. 9MFY21 revenue declined 31% YoY to Rs. 5,517 cr (Titan slipped 13%, Thangamayil 19%) with EPS turning negative on net loss of Rs. 80 cr, due to Rs. 100 cr write off in Middle East.

Weaker than Titan, despite pan-India presence

• In terms of revenue, Kalyan is half of Titan. Its 17% gross margins trail the leader’s 28%, as share of studded jewellery (comprising diamond and precious stone) is lower than Titan 29%, given higher revenue share of 60% from predominantly gold-consuming Southern markets.
• EBITDA margins in FY20 were lower at 7.5% over 12.4% for Titan. For 9MFY21 too, Kalyan’s 6.6% EBITDA margin fell short of not just biggie Titan (7.3%) but also other smaller peers Tribhovandas (9.0%), Thangamayil (10.6%), PC Jewellers (14.2%).
• Kalyan also carry very high inventory of over 5 months of sales, leading to Rs. 3,670 cr debt, serviced by an annual interest outgo of approximately Rs. 400 cr. Debt equity ratio of 1x, even post IPO, indicates high leverage. In contrast, Titan is cash rich.  

Exorbitant Valuation:

At Rs. 87, company’s market cap will be Rs. 8,960 cr and enterprise value (EV) Rs. 12,100 cr. Realistically, FY22 EPS will only match FY20, which leads to a PE multiple of 58x, vs 18-20x for smaller peers like Tribhovandas and Thangamayil, which have been profitable in 9MFY21, as against Rs. 80 cr loss for Kalyan. Comparison with Titan’s FY20 PE multiple of 88x is futile, as Kalyan barely matches any financial parameter – revenue, gross or EBITDA margin, debt, inventory management, equity base. A more realistic multiple would be half of Titan or double the smaller peers. Anyways, we have never found justification for Titan’s premium valuation, and in that light, Kalyan stands no chance, with its patchy track record.

Conclusion:

Company has a lot of financial ground to cover to come close to Titan. Thus, on weaker fundamentals and aggressive pricing, we assign an ‘avoid’ to the IPO.

Grey Market Premium (GMP) of Kalyan Jewellers: Grey Market Premium of Kalyan Jewellers is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.

Disclosure: No Interest.