Kalyan Jewellers IPO - A Simplified Analysis

What cheers up moms and aunties the most? Umm.. saris, oh okay. But what’s next? Jewelleries, obviously. Cheers to them, the next IPO on the cards is a place they’d love to drop in - Kalyan Jewellers. For the uninitiated, Kalyan Jewellers India Ltd.’s IPO opens for subscription on March 16, 2021.

So, read on as we analyze whether Kalyan Jewellers’ IPO is a good bargain for you or not. At the outset, let’s begin with a background of the company.

Kalyan Jewellers India Ltd. – Company Info

Kalyan Jewellers is the second mega player in the retail jewellery showrooms business. If you connect the dots back to its formation in 1993, you’ll realize that it’s quite a story to tell. Under the experienced leadership of the founder Mr T. S. Kalyanaraman, it gradually expanded its business from a single showroom in a small town of Kerala to over 107 showrooms in 21 States and UTs of India, and then went on to establish 30 showrooms in the Middle East. By the way, it got incorporated as a private company in 2009 and then went public in 2016.

Kalyan Jewellers designs, manufacture and sells a wide range of gold, studded diamond and other jewellery products across various price points. Its offerings range from jewellery for special occasions to daily-wear jewellery.

However, given the craze for gold ornaments in Indian weddings, bridal jewellery has been the highest-selling product category for Kalyan. No wonder why in FY20, gold jewellery accounted for about three-fourths of its total revenue.

It operates both offline stores (no franchise models) as well as an online platform- www.candere.com.

Promoters: Mr. T.S. Kalyanaraman, Mr. T. K. Seetharam and Mr. T. K. Ramesh (pre-IPO promoters’ holding ~ 68%)

Existing investor: Warburg Pincus had bought a 24% stake in Kalyan Jeweller in tranches in 2014 and 2017 through its affiliate Highdell Investment.

Financials of Kalyan Jewellers India Ltd.

Now that you have a brief idea about the company and its financials let’s see the details of the IPO.

Key details of Kalyan Jewellers’ IPO

The IPO will remain live for subscription from March 16 to March 18, 2021. The shares will list in the stock exchanges, most probably, on March 26, 2021.

Application range details

Objects of the issue

This IPO of Rs. 1,175 Crores is actually a mix of Fresh Issue and Offer For Sale (OFS). The bifurcation is as follows -

1. Fresh Issue: Fresh Issue is, basically, the issuance of new equity shares that brings in fresh money into the company. Simply put, the company receives the proceeds only from Fresh Issue and not from OFS. This IPO will have a fresh issue of Rs. 800 Crores, which shall be utilized for the following objectives:

• Rs. 600 Crores for funding Working Capital requirements of FY22.
• Rs. 200 Crores for general corporate expenses.

2. Offer For Sale (OFS): OFS is simply an exit route for existing promoters/investors. The company does not receive this amount. This IPO will have an OFS of Rs. 375 Crores and the following stakes will be sold:

• Promoter: T.S. Kalyanaraman will sell Rs. 125 Crores of his stake.
• Investor: Highdell Investment will sell Rs. 250 Crores of its stake.

Now, let’s talk business. Should you subscribe for Kalyan Jewellers’ Initial Public Offering or not?

Factors that favour this IPO

India is one of the top 3 markets for gold jewellery. You see, we have 10 million weddings annually, and it’s not hard to imagine why every year, over 400 tonnes of gold is consumed in marriages only. What’s more, is that jewellery ranks third in terms of our highest expenditure in the retail category, and it is expected that by 2025, it can even overtake the apparel and accessories category to stand second in the list.

Well, we didn’t mean to throw numbers at you, but it’s just to let you know that it’s an ever-growing industry. You see, in our country, gold has a symbolic significance and also is an investment proposition, which is why there’s no reason to think that Indians would ever unlove gold. And thus, there are good growth prospects for the industry leaders.

Now, let’s see what makes Kalyan Jewellers stand out of its peers:

• Kalyan Jewellers follows a hyperlocal jewellery business model, whereby it employs local artisans to customize its products as per the client’s preference (e.g., studded jewelleries in north India whereas gold jewelleries in south India).
• Gold purchases by customers are influenced by brand loyalty. Kalyan has built a brand value for its products on the pillars of trust and transparency. For instance, it is one of the first Indian jewellery companies to voluntarily get all of its products BIS-hallmarked.
• Rural India accounts for 60% of the jewellery demand in the Indian market. With its operations spread across urban, semi-urban as well as rural areas (unlike its peers), Kalyan has better opportunities to scale.
• It thrives to become the ‘neighbourhood jeweller’ using its customer outreach and service centre program ‘My Kalyan’. My Kalyan has tie-ups with marriage halls, astrologers, caterers, event managers and other wedding planners who identify potential jewellery customers. This program brings in more than 10 Mn customers each year and accounts for over 17% of revenue from operations (FY20).
• It leverages its IT infrastructure to allow online shopping as well as ‘near me’ search for My Kalyan centres.

However, you have to take it with a pinch of salt.

Risk factors in this IPO

Jewellery is very sensitive to consumer spending. Someday, a pandemic breaks out, families are running short of money, and the first thing they can delay is the purchase of jewellery. Moreover, the Indian jewellery market is dominated by unorganized players (70% market share) like local companies and artisans. This poses a threat to big players like Kalyan.

• Based on FY20 earnings and fully diluted post-issue equity, the P/E is about 58x. If you consider 9M-FY21 earnings, P/E will come out to be negative. Thus, the price range of Rs. 86-87 seems to be over-priced.
• Refer to the financials above, and you’ll know that the company’s revenues have been static in recent years. Cash flows, too, have turned negative in the period. In spite of that, it has incurred expenditures that may prove to be wasteful.
• It has a concentrated geographical presence, with South India accounting to over half of its revenue in FY20. Thus, it’s exposed to local discrepancies like natural calamities, changing trends, downturns, etc.
• Its operations in the Middle East are subjected to trade barriers and foreign currency risk.
• It has taken loans with promoters’ guarantee, and its subsidiaries have taken unsecured loans payable on demand (Rs. 61.6 crores). Revocation of the former or urgent call for the later could lead to a sudden outflow of funds.
• It has contingent liabilities worth Rs. 1,209 Crores and other pending legal procedures against itself, its subsidiaries, promoters and directors. This may dent its cash flows and its reputation as well.

Conclusion

Kalyan has been a victim of the pandemic-induced business halt. You see, Indian jewellery markets lost 37% of the gold demand due to Covid. And Kalyan was no escape. Its showrooms were shut for over two months; people weren’t buying jewelries either due to the absence of income or low-scale weddings. This impacted its bottom line. Moreover, its operations in 2019 were impacted by natural calamities in south India, its highest revenue-generating region. Simply put, it has been in nature’s mercy in recent years. However, as we saw, it’s not the vulnerability alone that’s holding back its business.

You could say that its business model and brand value beg brownie points, but there are a number of issues boggling its operations. And thus, it could be a risky bet. Also, the IPO itself appears to be over-priced. Anyway, now that you have all the relevant information curated, and explained to you, use your own intellect and rationale to decide whether, for you, it’s an attempt or a pass.

So, is this IPO really a golden opportunity? Or all that glitters is not gold?

What do you think? Write to us in the comments below.

Stay informed & invest wisely