Kalyan Jewellers IPO opens for subscription, grey market premium vanishing; should you subscribe?

Kalyan Jewellers Initial Public Offering (IPO) opens for subscription today with the company looking to raise Rs 1,175 crore through the public issue. However, shares of Kalyan Jewellers in the grey markets were trading flat, hinting at diminishing interest from investors. The IPO of Kalyan Jewellers follows the likes of Anupam Rasayan, Laxmi Organic Industries, and Craftsman Automation, which attracted investors into their public issues this week. Ahead of the IPO, Kalyan Jewellers has managed to raise Rs 352 crore from anchor investors.

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Kalyan Jewellers IPO is a mix of fresh issue and an offer for sale (OFS) by existing shareholders. Through the IPO, promoters will trim their stake to 60.53% from the current 67.99% while public shareholding in the company will increase to 39.47% from 32.01%. The price band for the IPO has been set at Rs 86-87 per share and investors can bid for the issue in a lot of 115 shares. Investors will need to shell out Rs 14,964 for one lot. Half of the issue is reserved for qualified institutional buyers (QIB) while 15% is for NIIs and 35% for retail investors. Employees of Kalyan Jewellers can also subscribe to the issue with a discount of Rs 8 per share.

Grey market premium declines

In the grey market, shares of Kalyan Jewellers have given up their gains and are now trading flat. “Kalyan Jewellers is trading at Rs 5 premium in the grey market, which is not significant,” Dinesh Gupta, Partner, UnlistedZone told Financial Express Online. He added that such a premium could turn negative soon. “Earlier, Kalyan Jewellers shares were quoting a slightly higher premium but now the shares are almost flat,” he said.

Are valuations too high?

Over the financial year 2018 to the previous fiscal year, Kalyan Jewellers has reported a revenue CAGR of -2.9% and a net profit CAGR of 0.46%. When compared with listed peers, Kalyan Jewellers 3-year EBITDA growth CAGR has been 1.9% which is significantly lower than peers like Titan and Tribhovandas Bhimji Zaveri. The average net profit margin is also lower when compared to peers. Dismal margins, high D/E ratio, and falling CFO and FCF warrant a “clear avoid” rating for Kalyan Jewellers IPO by Aditya Kondawar, Founder and COO, JST Investments, told Financial Express Online. He added that the issue is priced at a high ratio of 96.7x P/E.

Similarly, analysts at Choice Broking said that the company is demanding a TTM P/S valuation of 1.2x, which is at a significant premium to the peer average of 0.4x. “Thus considering the above observations we assign an “AVOID” rating for the issue,” they said. Subdued macroeconomic environment, Continued losses in the Middle East operations, Slower expansion in the showroom network, Unfavorable forex movements, and intense competition have been listed as some of the risks aligned with Kalyan Jewellers.

Could be a long-term bet

While Geojit Financial Services acknowledge that Kalyan Jewellers IPO is priced on the higher side, but still advise investors to “Subscribe”. “Given the forecasted improvement in profitability & balance sheet, India’s appetite for gold, strong pan India presence, brand recall and diversified product offering, we assign a “Subscribe” rating on a long-term basis,” they said.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)