With Pincus support, Kalyan aims to be profitable again

KALYAN Jewellers Limited is tapping the capital markets with its fresh issue of Rs 800 crore and an offer for sale of 375 crore. The price band is Rs 86-87. The issue opens on Tuesday the 16th March and closes on Thursday the 18th March. The offer for sale consists of two parts where the promoter is selling shares worth Rs 125 crore and the PE investor is selling shares worth Rs 250 crore. Kalyan Jewellers is a pan-India company selling gold and studded jewellery, which reported revenues of just over Rs 10,000 crore for the year ended March 2020. The only company that Kalyan considers as its peer is Titan, which reported revenues of double that amount. Over 83 per cent of Titan's revenues came from the jewellery business and balance from segments like watches, wearables and others. Titan reported net profit of Rs 1,258 crore while Kalyan reported a net profit of Rs 142 crore.

The EPS for Kalyan on a fully diluted basis based on March 2020 results was Rs 1.49. Based on this EPS, the PE ratio is 57.72-58.29 times. The NAV of the company post the conversion of CCPS into shares as of 31st December 2020 is Rs 21.94. Broadly speaking this means that the shares are being offered at four times the book value. The nine-month numbers for December 2020 have not been considered as they were not comparable due to Covid-19 situation. Jewellery companies barring a couple have not made money for investors in India.

Kalyan Jewellers relies heavily on its brand ambassadors for creating brand awareness and recall. It has film stars from Bollywood and local cinema for regional advertising. Whether it is Tamil, Kannada, Bengali, Gujrati or Malayali cinema they have leading lights from each of these areas to act as brand ambassadors.

Further in its quest to become local and compete with the local jewellers, it has launched a program called 'My Kalyan' which is a local store operating like a hub and spoke model. The company has 766 such service centres across urban, semi-urban and rural areas of the country. About a fifth of the total revenue comes from these service centres. It is also interesting to note the price of gold and how it has moved. In India the price of standard gold was Rs 27,000 in 2014 which moved to Rs 30,000 in 2018, Rs 32,500 in 2019, sharp movement to Rs 39,000 in December 2019, followed by an even sharper movement to Rs 53,000 in July 2020 and then cooling off to Rs 44,500 currently. Even though gold prices have almost doubled for a brief period of time, and on an average been more than 50 per cent higher, it has not affected the overall sales of Kalyan positively. Contrarily one could broadly say that sales on gold basis by weight may have actually contracted. Titan saw its revenues move up from Rs 11,264 crore in 2015-16 to 15,655 crore in 2017-18 and to Rs 20,009 crore in 2019-20, clearly doubling over a span of less than five years. Data for Kalyan shows that they have stagnated between 2017-18 to 2019-20 in a range of Rs 10,580 crore to 9,814 crore to Rs 10,181 crore. Clearly growth seems to be eluding Kalyan.

Warburg Pincus invested in Kalyan Jewellers in 2014 and made an investment of Rs 1,200 crore. Post that deal, TS Kalyanaraman, the Chairman and MD of the company was quoted as having said "We are expecting to clock Rs 10,000 crore in revenues this fiscal and Rs 25,000 crore in the next three years. This investment of Rs 1,200 crore along with internal accruals and a bit of borrowings from banks would be sufficient to fund growth for the next couple of years". At that time Kalyan Jewellers had 61 exclusive stores which included 6 in UAE and they planned to open 28 new stores in the next 6 months. Currently the company as per its document has 137 stores, which includes 30 in the UAE and this in six years after the infusion of capital by Warburg Pincus. Their revenues should have been Rs 10,000 crore in 2014-15 and Rs 25,000 crore in 2017-18. They were Rs 10,000 crore in 2019-2020. They reached this with another round of funding of Rs 500 crore from Warburg Pincus in 2017. Warburg on an investment of Rs 1,700 crore owns 30 crore shares. The current valuation means that he is making a return without factoring in rupee depreciation of roughly a high single digit over the weighted average investment. Robinhood investors would say a return of 50-100 per cent per annum is the order of the day. Prospective investors, take your call on this company.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)