Kalyan Jewellers shares in action after credit rating upgrade; here's what India Ratings say

Shares of Kalyan Jewellers India Ltd, which fell to a low of Rs 394 earlier today, entered the positive after India Ratings and Research (Ind-Ra) upgraded the jeweller's long-term and short-term debt ratings to ‘IND A+’/‘IND A1+’ from ‘IND A’/‘IND A1’. The outlook on the long-term debt rating is stable, India Ratings said, as it cited  strong growth momentum, an improvement in credit metrics, Kalyan's established brand image,  its diversification across geography and products; and improvement in working capital cycle.

From the day's low, Kalyan Jewellers shares climbed 2.74 per cent to hit a high of Rs 404.80 on BSE. 

India Ratings said the upgrade factored in a significant improvement in the consolidated operating performance and credit metrics in 9MFY24. Kalyan Jewellers continued to witness healthy same store sales growth and demand traction in new stores. The consolidated revenue grew 30 per cent YoY in both FY23 and 9MFY24. Ebitda growth from the improved scale coupled with adoption of a capital-efficient franchisee model has resulted in strengthening of the leverage and return indicators, it said.

The management plans to divest non-core assets and convert certain company-owned showrooms to franchises, which Ind-Ra expects to contribute to the improvement in leverage levels.

"The ratings are also supported by KJIL’s improving geographic and product diversification, as witnessed from a rise in the revenue contribution from the non-south market and higher-margin studded jewellery. However, the rating continues to be constrained by the high regulatory oversight and increasing competitive intensity which could exert pressure on industry margins," India Ratings said.

India Ratings said Kalyan Jewellers' management plans to reduce its overall debt from the existing levels while funding incremental expansion through internal accruals and franchise capital infusion. Based on the existing Ebitda trend, and assuming the net debt remains stable or declines, Ind-Ra expects the net leverage to improve in FY24 and remain below 2 times in the medium term.

Besides, Kalyan's share of the south in the consolidated revenue fell to 51 per cent in FY23 (FY22: 56 per cent; FY21: 70 per cent) and further to 44 per cent in 9MFY24, indicating the company’s expansion across non-south states, the rating agency said. 

Kalyan has hired renowned celebrities as brand ambassadors to capture market share in the northern regions of India, it added.

The company plans to add mid-size showrooms. As the expansion of showrooms is being done through the franchise model, the inventory carrying cost will be on the franchisee, leading to optimisation of inventory on the company’s balance sheet. The outcome of the company's strategy related to expansion of stores through the franchise model and optimisation of capex and inventory remains key monitorable, India Ratings said.

Kalyan Jewellers' cash flow from operations and free cash flows remained positive in FY23. Ind-Ra expects them to remain positive in the medium term, given that it intends to expand through the low capital intensity franchise model over the medium term, India Ratings said.

"The overall cash flows are likely to remain positive over FY25-FY26, with the optimisation of inventory maintained at the existing showrooms and likely stabilisation in gold prices. KJIL’s total inventory in FY23 was funded through working capital limits (50 per cent) along with advances from customers (20 per cent) and equity. Although the average utilisation of its fund-based working capital limits stood at 92 per cent for the 12 months ended December 2023, Ind-Ra derives comfort from KJIL’s readily monetisable inventory. KJIL has prepaid all its outstanding long-term debt obligations as on 30 September 2023. Ind-Ra expects the liquidity profile of KJIL’s to remain adequate over the medium term," it said.