Kerala-based jewellery company Kalyan Jewellers India opens its maiden public offer for bidding on March 16, with a price band of Rs 86-87 per share. Majority of experts advised subscribing to the IPO given the brand value with a strong distribution network, diversified product offering and hope of better performance going ahead, but some feels it is a bet for risky investors given the high pricing, competition in jewellery business and volatility in gold prices.
The company is planning to raise Rs 1,175 crore through its public issue that will close on March 18, and of which Rs 352 crore already raised through anchor investors on March 15.
The IPO comprises a fresh issue of Rs 800 crore and an offer for sale of Rs 375 crore by existing shareholders. The net fresh issue proceeds are going to be utilised for working capital requirements.
"At the upper price band of Rs 87, the pricing is on the higher side, but on a long term basis, Kalyan jewellers are available at 1 year forward estimated P/E of 25x (on FY23 basis). Given forecasted improvement in profitability & balance sheet, India's appetite for gold, strong pan India presence, brand recall and diversified product offering, we assign a 'subscribe' rating on a long-term basis," Geojit Financial Services.
Marwadi Shares and Finance also recommend to 'subscribe' this issue as the company has established brand value with a strong distribution network and pan India presence with a wide range of product offerings for a diverse set of customers.
The IPO is reasonably priced as compared to the peers and long-term prospects of the company looks promising, the brokerage feels.
Incorporated in 1993 by founder T S Kalyanaraman, Kalyan Jewellers India designs, manufactures and sells a wide range of gold, studded and other jewellery products across various price points ranging from jewellery for special occasions, such as weddings (the highest-selling product category) to daily-wear jewellery.
It is one of the largest jewellery companies in India based on revenue in FY20 with 5.9 percent share in organised market. Its shareholders include Highdell Investment (Mauritius based private equity funds), belonging to the Warburg Pincus group.
Also read - Kalyan Jewellers IPO: 10 key things you should know
Kalyan Jewellers enjoys pan India presence with 107 showrooms located across 21 states and union territories in India and also has an international presence with 30 showrooms located in Middle East as of December 2020.
Last few years Kalyan Jewellers has aggressively expanded its store. Going ahead, Geojit expects revenue and profitability to pick-up led by high contribution from new stores.
Its current debt-equity ratio (D/E) is 2.1. After the IPO, D/E will be led by fresh issue, better internal accruals supported by new revenue generation from capex undertaken and new expansions to be funded by IPO proceeds, said Geojit.
Going forward, Angel Broking believes that Kalyan Jewellers would perform better on the back of a strong brand and number of stores in India & internationally. Thus, it recommended a subscribe rating on the issue.
But Mehta Equities feels the issue is for risky investors, whereas conservative investors can give a pass to the IPO.
"Risk concerns weigh more over rationales to invest in this IPO, hence we recommend risky investors can 'subscribe with caution'. We see high competition from both organised and unorganised players in the Indian jewellery industry as the majority of the jewellery industry consists of unorganised players who have historically dominated a large part of the market, although their share of the market has been falling and is expected to continue to decline," the brokerage reasoned.
The brokerage also believes the jewellery business remained quite risky & volatile gold prices.
"On valuations parsed at upper price band (Rs 87), the issue is asking for a market cap of Rs 8,961 crore, due to incurred losses in FY19. Even for a period of nine months ending December 2020, we cannot annualise last 9 months EPS to valuate on annualised price-earnings ratio. And we believe the ask valuations indicate this IPO offer is fully priced on industry average, so conservative investors can give a miss on this offer," said Mehta Equities.
During FY18-20, the company reported a 2.1 percent CAGR decline in consolidated topline in FY20. The key driver for lower business growth was 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.
The total operating expenditure declined by 2.4 percent CAGR (relatively higher than the topline), leading to a 1.9 percent CAGR rise in consolidated EBITDA in FY20. EBITDA margin expanded to 7.5 percent in FY20 as compared to 6.9 percent in FY18. One of the key reasons for margin expansion was the better business contribution from the high margin studded jewellery, Choice Broking feels.
The reported PAT was flat during FY18-20 in FY20. Kalyan Jewellers reported a positive cash flow from operating activities during FY18-20, with an average operating cash flow of around Rs 583.8 crore. Average RoIC and RoE stood at 8.8 percent and 4.6 percent, respectively.
The reported short financial performance of Kalyan Jewellers is not encouraging and is characterized by a de-growth in topline, but with stable profitability margins, said Choice Broking which assigned an avoid rating for the issue as the company at higher price band, is demanding a TTM P/S valuation of 1.2x, which is at a significant premium to the peer average of 0.4x (excluding Titan Company).
For the nine months period ended December 2020, consolidated revenue fell by 30.7 percent YoY as domestic business declined 24 percent and Middle East business declined 55.3 percent YoY, mainly due the pandemic related lockdown. EBITDA declined by 36.9 percent YoY with 65bps contraction in margin to 7.1 percent. The company reported a loss at Rs 80.49 crore compared to a profit of Rs 94.89 crore in the same period in 2020.
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