All You Need To Know About Kalyan Jewellers IPO

Yet another IPO is in town.

This time it is rather ostentatious, much like the sparkles in this company’s products! Kalyan Jewellers is looking to launch its initial public offer by raising ₹1,175cr ($161m) starting March 16th and ending March 18th 2021.

Let’s peek into the details of this elaborate public unveiling that has been pending for almost a year now!

All About Kalyan

Kalyan Jewellers is the country’s leading jewellery house which traces its roots from Thrissur, Kerala where its first showroom was opened in 1993. From being a small sole proprietorship, the Jeweller cruised towards a pan-Indian presence beginning with its incorporation in Tamil Nadu in 2009. With an initial investment of $110,000, the founder-cum-promoter of the company, T.S. Kalyanarama was successful in launching a brand new store catering to the high-end ornamental demands in South India.

Soon, it gained foothold over all of the country and became a brand synonymous with its ambassadorial excellence in the jewellery business as a leading designer, manufacturer and seller of products . As of June 2020, the brand has a robust presence with 107 showrooms in India (across 21 states) and 30 showrooms in the Middle East.

In 2014, the New York-based private equity firm, Warburg Pincus invested ₹1,200cr ($165.3m) in Kalyan Jewellers, eventually increasing it to ₹1,700cr ($234.1m) equalling a 24% stake. The impending IPO is expected to materialise an exit opportunity for Warburg Pincus as well which is reportedly planning to unload shares worth ₹250cr ($34.4m).

Minutes of the IPO

The much-anticipated public issue has been impending since August 2020. With a few material changes in the portfolio, the IPO is scheduled next week and a formal listing on the stock exchange is expected by March 26th.

• Offer size = ₹1,175cr (diminished from the previous size of ₹1,700cr).
• Primary issue = ₹800cr ($110.2m) comprising 9.19 crore shares; Offer-for-sale = ₹375cr ($51.6m) comprising 4.32 crore shares (TS Kalyanaraman’s ₹125cr ($17.2) + Warburgs’ 250cr ($34.4m)).
• Face value = ₹10 ($0.13).
• Price per share = ₹86–87 ($1.2).
• Market lot = 172 shares.
• Issue allocation = Retail Investors (35%), QIBs (50%), NIIs (15%).
• Reserved share quota = upto ₹2cr ($275,501) (for eligible employees at a discount of ₹8 ($0.11) per share).

Company Financials

The latest issue measures up to 13.1% of Kalyan Jewellers’ fully diluted equity and presents its post-IPO valuation at ₹8,961.5cr ($1.2bn) at the higher end of the price band. Owing to its diversified presence across the country as well as the Middle Eastern countries, the company has access to deep and embedded customer presence, mostly from Tier-I cities (which contribute 53.08% towards its 9MFY20 revenue).

As per the company’s Draft Red Herring Prospectus (DRHP), its total outstanding debt (including metal and gold loans) stood at ₹36,403.1m ($501.4m)) in March 2020. It is however worthwhile to note that metal gold loans carry significantly lower interest rates compared to fund-based loans which somewhat lowers the cost of debt. On a net debt-to-equity basis, the leverage stands at 0.8 and on a net debt-to-EBITDA basis, it is just under 2.3x which is perhaps generally acceptable.

The major-stated objective behind the IPO was fundraising towards working capital requirements. As per the prospectus, ₹7,500m ($103.3m) is being funnelled into capital needs which appears to be important in financing the inventory.This would mean that about ₹4,250m ($58.5m) will be deployed towards capital expenditure and other general corporate expenses.

More than 21% revenue collection from the Gulf countries (UAE, Oman, Kuwait, Bahrain and Qatar) is another particular feature of the company’s business. Although a promising market for the brand, the viability of business is expected to be questioned if there were further restrictions brought into the shareholder arrangements and changes in foreign ownership structures of businesses in these countries.

The Gold Standards of the Markets

The Indian retail jewellery market was valued at approximately $64bn in FY2020. The long-standing cultural affinity of Indians towards gold and the resulting psychic stimuli to purchase it has led to sprawling growth of jewellery businesses in the country. In fiscal 2020, a lofty 74.77% of Kalyan Jewellers’ overall revenue from operations was from the sale of gold jewellery.

Although Kalyan Jewellers represents a prominent market presence and brand value, the competitive nature of this market calls for periodically-renewed definitions and spruced up marketing campaigns to maintain stronger presence in the industry. One of the key competitive strengths (as identified by management) lies in the “hyperlocal” nature of the operations. Targeting region-specific tastes by engaging local artisans and pin-point marketing strategies have helped curate a localised product mix and in-store experience.

For instance, Kalyan Jewellers has admittedly invested almost 3% of its annual operating revenue on advertising and marketing campaigns over the last three years. This dependence on advertising to further business growth is perhaps quintessential towards the wider hyperlocal strategy, but is perhaps, also indicative of unpredictable returns, especially considering factors like economic downturn, a global pandemic, inflation etc. — the culmination of which factors have become a reality today. All of them lead to reduced retail expenditure on luxury items like jewellery due to overstretched margins on disposable personal incomes.

Although the pandemic had put a damper on the festive season, the pent-up demands in the wedding calendar in the aftermath of the lockdown has boosted jewellery sales since December 2020. Considering the approximately 10 million marriages that occur annually in India which consequently cater to 300–400 tonnes of gold demand will make for consistent business prospects in the markets.

The Crown Jewellers

Tanishq is the market leader in the Jewellery industry. A corporate lineage of Tata stature and national footprint in jewellery retail makes Tanishq the biggest competition to Kalyan Jewellers. Having said that, a strong presence in South Indian markets (which accounts for almost 40% of gold and diamond jewellery demand), customised product offerings and mass to mid-price positioning gives Kalyan Jewellers an edge over the other players.

It is also worth mentioning that the organised retail market is gaining steady momentum across the country with a current market share of 32% that is pegged to increase to 37% in the next five years. This is particularly promising because it promotes quality retail in the ornaments business, given that historically, the margin models supporting unorganised jewellery businesses were built on opaque pricing mechanisms, bullion trading and adulterated content.

The 100% FDI limit in the jewellery sector has called for growth of many new players in the market lately. Shares of Vaibhav Global and PC Jewellers have risen by 29% and 10% respectively in the last one month. Gold prices have fallen from record highs of ₹56,200 ($774) in August 2020 amid an equity rally and temporary market correction. Therefore, the IPO comes at a good time, renewing investment prospects and growth projections in the precious metals segment.

(Originally published March 16th 2021 in transfin.in)