Ignore the noise. Business momentum is sustaining
Highlights from our interaction with management of Kalyan Jewellers (Kalyan) include: 1) Despite an increase in the gold price (up 15% QoQ) and higher competitive intensity, growth momentum remains strong in Q4 driven by a robust wedding season and consumer engagement. 2) Capital efficient / asset-light store addition pipeline remains strong for next two years with a target to add ~90 stores p.a. 3) Expect step-up in network expansion of Candere to cater to increasing demand for fast fashion jewellery among youth and jewellery gifting. The potential for Candere is huge with its small format store; it can be a major growth lever for Kalyan over long term. 4) As per management, the recent increase in GML interest rate is unsustainable and should normalise. 5) It aims to reduce debt by INR 4bn in FY26. Maintain ADD with a DCF-based revised TP of INR 520.
Growth momentum remains strong in Q4 despite surge in gold price
Current gold price is up 15% vs Q3 and this is the sixth consecutive quarter of gold price continuing to rise. Gold price is up 55% over the last two years. Such a steep increase in gold price is unprecedented; however, demand for gold jewellery remains strong driven by strong wedding-led demand. The company is confident of delivering strong SSSG in Q4. In 9MFY25, Kalyan outperformed industry by delivering 35% YoY revenue growth vs 20% for Titan. The growth momentum is also expected to remain strong in the Middle East, in our view. Going ahead, despite volatility in gold prices, we are confident of Kalyan delivering strong longterm performance on the back of aggressive store expansion, superior brand equity and execution (efficient supply chain).
Aggressive store addition momentum to sustain
A large part of Kalyan’s growth is led by aggressive store addition with capital efficient / asset light – franchisee model. Based on our interactions with industry players, despite the change in franchisee agreement (working capital + capex investment by franchisee), demand for franchisee remains strong for next two years due to Kalyan’s pan-India brand equity. Also, Kalyan is not a leading player (by number of stores) in any state, which provides headroom to expand store network over medium-to-long term. Kalyan added 24 new showrooms (+30% YoY) in Q3FY25 and 49 stores in 9MFY25 (net) in India. It plans to open 30 new showrooms of Kalyan in India and 15 new showrooms of Candere in Q4FY25. Overall, it plans to open ~80 new showrooms of Kalyan (implying retail expansion of ~40% in Kalyan in FY25, similar to FY24). Further, management plans to open 90 new stores of Kalyan (implied growth of 32%) (FOCO: 75 stores in non-South India and 15 stores across South India and international markets) and 80 Candere stores in India.
Expansion of Candere to add to growth levers
To cater increasing demand for daily wear – fast fashion jewellery among youth, Kalyan plans to step up store additions for Candere brand. Candere has opportunity for expansion with small format store and could become customer acquisition platform for Kalyan brand. Over the long term, Kalyan sees growth potential in four subsegments of jewellery – wedding wear/ traditional (Kalyan brand), fast fashion/ small jewellery gifting (Candere brand), traditional staples and luxury jewellery.
Impact of increase in interest rates for GML
Interest rate on GML (gold metal loan) has increased driven by tightening global gold supply, increased demand in the US, and geopolitical uncertainties, which have led to a shift in gold flows and increased costs for jewellers. That said, this increase in interest rates is expected to be short term (a few months), as per management. Interest rate on GML has increased from 3.25% to 5% for Kalyan Jewellers effective Mar’25 (no impact before Mar’25) which will translate into increased interest cost of ~INR 15- 20mn per month.
On track to strengthen its balance sheet
Kalyan is on track to reduce its debt by ~INR 4bn in FY26. It has debt of ~INR 32bn (including GML). Further, it is on track to lien release for its non-core assets over the next couple of years which management plans to sell to further strengthen its balance sheet. Strengthening of balance sheet will likely provide flexibility to the company and drive expansion across COCO and FOCO models.
Valuation and risks
Our earnings estimates remain unchanged, modelling revenue / EBITDA / PAT CAGR of 28% / 25% / 39% over FY24-27E. We maintain ADD with DCF-based revised target price of INR 520. At our TP, the stock will trade at a multiple of 33x FY27E EPS. Key risks: Delay in showroom expansion and potentially higher competitive intensity in core South Indian markets.
Leave a Reply