Block deal steals the shine off Kalyan Jewellers, but analysts see glitters

Kalyan Jewellers shares fell over 8 percent on March 28 after a block of 2.7 percent stake in the company changed hands. While buyers and sellers were not known yet, it was reported earlier that Warburg Pincus’ Highdell Investments was looking to sell some of its holding.

The development comes exactly a week after the US-based private equity firm sold 2.5 percent stake in multiplex operator PVR.

At 9:45am, the stock was quoting at Rs 109 on the NSE, lower by 7 percent from the previous close. Trading volumes at 36 million shares were significantly higher than 20-day average of 29,520 shares.

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Sources had told CNBC-TV18 that the floor price of the deal was Rs 110, a 7 percent discount to the last closing price, and the deal value was Rs 288 crore. Shareholding of Warburg Pincus would now come down to 23.8 percent from 26.36 percent as of December 2022.

Warburg Pincus had acquired the shares at Rs 50 apiece in one tranche and Rs 56 apiece in another, indicating nearly 100 percent return, according to the company’s DRHP.

Ever since its listing in 2021, the stock has gained over 50 percent and much of the rally has come after June 2022, when it hit an all-time low of Rs 55.

The company’s quarterly topline and bottomline doubled in the past two years partly on rising gold prices. Operating margins improved from 4 to 8 percent but its return on equity at 16 percent stayed much lower than that of Titan’s 26 percent. Titan is the biggest player in the jewellery segment.

Growth plans

Kalyan Jewellers plans to open 52 showrooms in the non-South markets this year, which means almost one store every week, at an investment of Rs 1,300 crore that will largely be borne by the franchisee. Non-South markets contribute to 35 percent of the company’s India business and Kalyan aims to take it to 50 percent by 2025. The company is working with the Franchise Owned Company Operated (FOCO) model.

When analysts at the Q3 earnings concall pointed out that its margins have not improved and remained constant for the past few quarters, executive director Ramesh Kalyanaraman said that the franchisee revenue had started coming in. “The franchisee revenue, you know, it comes with a lesser gross margin.”

Analyst recommendations

As per Bloomberg, the company has six ‘buy’ calls, zero ‘hold’ and zero ‘sell’ calls. The 12-month consensus target price on the stock is Rs 156.50, which indicates a 47 percent upside.

“Kalyan is likely to have a minimum revenue growth of 15 percent in FY24 as it is expanding through franchising route,” noted ICICI Securities. It has a target price of Rs 160 on the stock.

Analysts at Centrum Broking are positive on the calibrated expansion in the Middle East and introduction of new designs for serving millennials.

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