Up 900% in three years, will Diwali hoist this jewellery stock to new heights?

The Indian government lowered import duties on gold, adding to its lustre, and a bountiful monsoon season has brightened the economic outlook. The World Gold Council has increased its 2024 forecast for India's gold consumption from 750 tonnes to 850 tonnes, signalling strong market optimism.

With Diwali just around the corner, we can expect an even greater rush for gold, which is good news for companies such as Kalyan Jewellers, which has already seen its stock price more than double this year.

But will the rise in demand push these stocks even higher? To find out, we need to delve deeper into the market dynamics and business strategies of these companies.

How did Kalyan Jewellers's stock jump 900% in just three years?

While gold prices have risen by 50% in the past three years, Kalyan Jewellers's stock has delivered a 900% return. Let's look at how it achieved this through smart execution and strategic shifts.

Going national

In 1993, Kalyan Jewellers started out as a regional brand primarily focused on southern India. By the time of its IPO in 2021, more than 60% of its stores were in the south. Fast forward to today and the landscape has shifted dramatically. The south now accounts for just 36% of its stores, with the rest of India contributing 64%.

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This shift didn’t happen by chance. Kalyan has expanded aggressively over the past three years, opening about 100 new stores outside Tamil Nadu, Andhra Pradesh, Kerala, Karnataka and Telangana and diversifying its revenue sources in the process.

Revamping the business model

In 2022, Kalyan Jewellers made a bold move, switching its business model to what’s known as FOCO — franchisee-owned, company-operated.

This strategy allows franchisees to handle capital expenses and manage inventory, which frees up capital for Kalyan to fuel its expansion.

The result? Enhanced profit margins.

Retail net margins are typically single-digit figures, so even a 1% increase is significant. Since adopting the FOCO model, Kalyan’s net margins have improved from around 1.5-2% to more than 3% in FY24, and they’re poised for further growth. With 89 showrooms under the FOCO model and another 130 set to make the transition, Kalyan’s margins could climb even higher.

Maximising local connections

Kalyan’s strength is its deep reach in non-metro areas, where 70% of its stores are located.

Its outreach programme ‘My Kalyan’ plays a crucial role here. With 1,011 My Kalyan centres acting as feeders for its main showrooms, Kalyan has forged strong local connections. These centres contributed 15% of Kalyan’s domestic revenue in FY24.

Studded with success

Kalyan Jewellers made a significant move into the online market in 2017 by acquiring Candere, a platform that specialises in jewellery. This wasn't just about expanding its reach; it was a strategic step into the lucrative world of studded jewellery, which offers much higher profit margins.

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For the fiscal year 2024, Candere alone brought in revenue of ₹130 crore. That's no small feat. But here’s where it gets even more interesting: studded jewellery, which makes up 30% of Kalyan’s total sales, is growing at an impressive 35% year-on-year.

Investors are taking note.

With Candere thriving and the studded jewellery segment expanding rapidly, Kalyan Jewellers is tapping into the growing appetite for high-end jewellery. This not only diversifies its portfolio but also strengthens its position in a competitive market.

Can Kalyan Jewellers continue to deliver stellar returns?

Investors are singing the company’s praises thanks to its robust returns, but can this glittering performance continue? It can, but this hinges on certain key aspects.

Expanding reach for richer revenues

The organised jewellery market is set to expand its market share from below 30% to about 60% over the next decade.

Kalyan Jewellers currently has a 6% share of the organised jewellery sector. As the market is predicted to balloon to $100 billion, maintaining its current market share would see Kalyan's revenue skyrocket to about $4 billion, or ₹34,000 crore. That’s twice its current revenue. This looks achievable, all other things being equal.

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Kalyan's aggressive expansion has seen it open 100 new stores in the past three years alone. It plans to open 250 more in the next decade, supported by the FOCO model and the digital push through Candere, so its revenue growth targets are not just aspirational but achievable.

Squeezing out more profit

Kalyan isn’t just increasing its store count; its also smartly slashing costs to boost profit margins. Here’s how:

Reducing ad spend: Promotions currently eat up about 2.2% of Kalyan's sales. However, forecasts by HSBC suggest this could fall to 1.8% in the next three to four years, potentially saving the company around ₹100 crore and improving profit margins by 0.3%.

Cutting operational costs: As more stores adopt the FOCO model and Kalyan boosts its online sales, it expects to see further savings in rent, depreciation and interest expenses. This could add another 0.4% to 0.6% to net margins.

Looking back to look forward

Kalyan's journey is similar to that of Titan Company around 2018, although Titan had additional business lines to buffer its financials. Kalyan has higher risk owing to its focus on jewellery and its geographical concentration.

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A decline in demand, similar to what was seen during the covid years (see the table below), could severely hurt its bottom line, as seen when it previously reported losses.

What’s next for Kalyan Jewellers?

Kalyan Jewellers has been impressing investors and getting great valuations. But as we all know, the market is unpredictable. For Kalyan, the goal is to stay sharp and flexible to ensure it can handle any ups and downs.

Hoping for another 900% return might be pushing it, though. Titan has quadrupled in value since 2018, which is really good, but still well short of 900%. At that time, Titan's jewellery business was a lot like Kalyan's is now. So, expecting Kalyan to skyrocket another 900% isn’t realistic. However, that doesn't mean it's out of the race. It still has a good chance of delivering strong returns. Exactly how much? We'll just have to wait and see.

For more such analysis, read Profit Pulse.

Note: We have relied on data from the company's annual report throughout this article. For forecasting, we have used our assumptions.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.The views expressed are my own and do not reflect or represent the views of my present or past employers.

Parth Parikh has over a decade of experience in finance and research, and currently heads the growth and content vertical at Finsire. He has a keen interest in Indian and global stocks and holds an FRM Charter along with an MBA in finance from Narsee Monjee Institute of Management Studies. Previously, he has held research positions at various companies.

Disclosure: The writer and his dependants do not hold the stocks discussed in this article