This Jewellery Retail Stock Grew 56% In 3 Months, Buy For 37% Potential Upside, Says ICICI Securities

Kalyan Jewellers continues to benefit from a robust demand environment (even vs pre-covid) - early signs of festive demand are also encouraging and continuous thrust on store expansion (higher salience of non-south franchise stores). Kalyan Jewellers is a small-cap Jewellery store chain stock having a market capitalisation of Rs 10,521.99 crore.

Leading brokerage firm ICICI Securities in its recent report has given a buy call to Kalyan Jewellers India Limited for a target price of Rs 140 apiece.

Stock Outlook, Returns & potential gains

Kalyan Jewellers' Current Market Price (CMP) is Rs. 104.85 per share on NSE, 1.65% up from its previous close. According to the brokerage's given target price, the stock can surge 37% in 12 months from its current level.

The stock has given 1.57% positive return in the past 1 week, whereas, in the past 1 month, it has given 9.6% positive return. In the past 3 and 6 months, it has given 56% and 58.54%, respectively. Over the past 1 year, the stock has given 31.15% positive return. The stock was listed in March 2021, and since then it has given 38.03% positive return to shareholders.

Demand momentum continues to be robust

Kalyan continued to see robust growth momentum in Q2FY23 with revenue from India operations growing at a 3- year CAGR of ~20%. Our channel checks suggest footfalls continue to be good ahead of the key festive season. It has also highlighted in the investor communication that pre-booking for Dhanteras has been strong. That said, we note it will now start lapping relatively stiffer growth comps. While gains for the organised segment continue to be good, there is some increase in competition from other organised players.

Store expansion has accelerated

After adding 17 stores in FY22, Kalyan may add 18 stores in FY23E. It has already added 9 in H1FY23. In Q2, it added five new showrooms in India (all non-south). It has also opened two showrooms in the first week of October. We like Kalyan's thrust on store expansion. Prior to covid, the company added 60 new stores in the preceding five years. Its other key strengths are: (1) Hyperlocal model, (2) a network of 750+ My Kalyan centres to drive footfalls and (3) consistent brand investments.

Accelerated franchising to drive gradual improvement in return ratios

Kalyan has opened five franchise stores this year - Aurangabad (Maharashtra), Brahmapur (Odisha), Delhi, Bilaspur (Chhattisgarh) and Varanasi (Uttar Pradesh). With claims of stability in the operating model for the franchised showrooms in India, Kalyan has started preparing for the launch of pilot franchised showrooms in the Middle East as well (target is to launch first franchised showroom in FY23).

"We note Kalyan adopts FOCO (Franchisee Owned and Company Operated) model for its franchise stores. The franchisee invests in store inventory and the build-out (capex). We believe accelerated roll-out of franchise store can drive expansion in return ratios," the brokerage has said.

Non-south expansion augurs well for margins

According to the brokerage, Kalyan is keenly focusing on the recent (store) expansion in the non-south markets. It is attempting to have south and non-south store share of 50-50 over 12-18 months (57-43 at the end of FY22). "We believe on a steady-state basis, gross margin differential between the south and non-south markets is ~8-10ppts," it said.

It added, "Going forward, margin expansion is likely to be driven by (1) expansion in non-south markets; to drive gross margin expansion given higher studded share in these markets and (2) operating leverage benefit. Besides, it is also looking to (1) increase studded share and (2) roll-out more exclusive offerings. We note (post covid) it has seen good increase in the number of customers for plain gold segment, which are being upgraded to low-value studded."

Candere (online platform) goes omni-channel

Kalyan launched its first physical showroom of Candere in Q2FY23. "We note that in the past the company has stated that it could even look at raising funds at Candere level to drive accelerated physical store roll-outs to tap the attractive growth momentum in the category," the brokerage said.

Valuation and risks

"We broadly maintain our earnings estimate for FY23EFY24E. We model revenue and EBITDA CAGRs of 16% and 23% over FY22- FY24E. Maintain BUY with a DCF-based revised target price of Rs 140. Key risk: Delay in showroom expansion," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.