Why Kalyan is being seen as a gold mine

The sharp jump in shares of Kalyan Jewellers (Kalyan) has surprised many on the Street; however, analysts believe more steam could be left in the stock as the Thrissur-based gold retailer pivots to a new asset-light network expansion model.

Kalyan’s stock has surged 62 per cent in the past month, even as the S&P BSE SmallCap Index has gained just 5 per cent.

In its latest business update, the company said its consolidated sales grew more than consensus expectations at 31 per cent year-on-year, led by strong domestic sales regardless of the volatility in gold prices.

Further, the company demonstrated rapid network expansion by opening 12 new showrooms during the quarter, taking the store count to 159.

The Warburg Pincus-backed firm plans to add another 20 stores before Diwali.

The network expansion has made analysts believe the jeweller is on a structural growth path.

“Kalyan’s share price has risen 56 per cent over the past three months, led by consistent growth in revenue and network roll-out, including very strong first-quarter revenue growth, improved liquidity, positive market sentiment, and prospects of continued growth momentum.

"The stock is currently trading at 26.7x consensus forward price-to-earnings; however, this rerating could continue as growth accelerates and return on equity (RoE) continues to improve, led by the rising scale on asset-light expansion,” said HSBC in a note.

The brokerage has raised the price target for the stock from Rs 150 to Rs 200.

This implies close to a 10 per cent upside from the current levels of Rs 182.

The company has taken the franchisee route for expansion in the high-margin non-Southern market.

HSBC analysts believe the firm can deliver strong double-digit growth in the coming quarters and also improve its RoE to mid-teens, helping drive further rerating for its stock.

In April, the stock traded at 18x its estimated 12-month forward earnings.

The sharp upmove has led to a significant rerating in the stock.

However, the current valuation multiple of nearly 27x is still lower than consumer stocks such as Titan Company, DMart, Berger Paints, and Godrej Consumer Products, according to the HSBC report.

The rerating of the stock is based on the optimism that the new franchisee model will be a success and the company will deliver high growth.