Kalyan Jewelers IPO opens today, but all that glitters is not gold

Historically, jewelry stores, apart from a few, have not made money for investors in India, ”says Arun Kejriwal, founder of Kejriwal Research and Investment Services Pvt. Ltd.

In this regard, it is interesting to see the experience of Warburg Pincus, which made substantial investments in Kalyan Jewelers India Ltd. In October 2014, it invested ??1,200 crore in the company at a price per share of about ??59.6. It is now selling part of its stake in the Indian jeweler’s initial public offering (IPO), at a price of ??86-87 per share.

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Not glittering

The average compound yield is only 6.1%. The private equity firm lowered its average purchase price by investing another ??500 crore in mid 2017 at a lower price. Overall, however, her yields have been low so far. At the time of Warburg’s first investment in fiscal 2015, news reports indicated that Kalyan was aiming to achieve revenue worth ??10,000 crore that year and increase his income to ??25,000 crore over the next three years.

However, progress has been painfully slow. In fiscal year 2020, consolidated sales were ??10,100 crores. While the IPO market is hot right now and all issues fly, some analysts have lamented Kalyan Jeweler’s lack of revenue growth. During FY18-FY20, the company’s revenue decreased by 2% per year. The company attributes this to a weak 2019 fiscal year, when financial performance was affected due to flooding in southern India.

“Kalyan’s revenue performance is disappointing to say the least. Additionally, gold prices have increased significantly over time and this is not reflected in income at all. Additionally, it should be noted that jewelry retailer Titan Co. Ltd increased its revenue during this period, ”Kejriwal said. ??17 300 crore in FY20 from ??13,250 crores in FY18.

In addition, Kalyan Jewelers’ margins are much lower than those of its peers like Titan. Profit margin before interest and taxes (EBIT) was less than 6% in FY20. In comparison, Titan’s margin was around 11% in FY20.

Some analysts are also concerned about the company’s bottom line. “Contrary to the trend in the jewelry company industry to take out gold metal loans (rental gold), given their low cost and natural hedging, Kalyan is doing the opposite. We note that gold metal lending decreased by ??1,950 crore in fiscal year 18 to ??800 crore in 9MFY21. Net debt rose from ??1,100 crores to ??2,300 crore, while gross borrowings, including gold metal loans, are ??3,670 crores as in December 2020. Resorting to higher cost borrowing at interest rates of 3.5-11.8% shows weak balance sheet to provide collateral and deposits for metal loans- gold, ”Prabhudas Lilladher analysts said.

A thin silver lining is relatively lower ratings. While Titan is trading at 88 times FY20 earnings, Kalyan’s IPO is valued at 58 times FY20 earnings.

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