Kalyan Jewellers: Can it Outshine Titan? 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

There are businesses where making money is easy and there are businesses where making money is hard.

Where do you think the diamond & jewellery industry fits?

Is it easy to make money in the jewellery business or difficult? I think it is difficult.

Jewellery companies are not exactly known for their huge wealth creation abilities.

But why is it so? Why are jewellery companies not able to create a lot of value for their owners or shareholders?

Well, it has to do with the industry structure itself.

We have done some analysis, and we have found that on an average, raw material expenses account for 94% of the gross sales of the jewellery companies.

This is extremely high.

If you are selling jewellery and you have only Rs 6 left on sales of Rs 100 after paying for raw materials, you are indeed skating on very thin ice.

And the less said about the net profit margin the better.

Fathom this.

The average net profit margin of the listed jewellery stocks in India stood at a mere 1.5% between FY14 and FY23.

That's true. The diamond and jewellery industry has earned, on an average, a measly Rs 1.5 on a sale of every Rs 100 on an aggregate basis over the last 10 years.

Honestly, I don't know of any other industry where profit margins are this low.

To make matters worse, it also requires a lot of investment to start a jewellery business.

The business is quite cyclical in nature where the demand soars during the wedding and the festive season and then, slows down dramatically for the remainder of the year.

But the business needs to always maintain high inventory, which means that a large portion of your capital is blocked in inventory. Thus, the capital requirements for the business are also huge.

It is this combination of high capital investment coupled with low profit margins, that has proved to be the waterloo for most jewellery companies in India.

For perspective, the average return on equity earned by the listed jewellery companies for the 10-year period between FY14 and FY23, stood at 13.0%.

Now, 13% is indeed below par.

You are not considered a decent business if you don't have average return on equity of around 15%.

Clearly, an average jewellery business is not even a decent business for it fails to earn 15% on a consistent basis.

However, there is one company in the diamond and jewellery business in India that's not just a decent business but qualifies as a great business.

In fact, it has been one of the biggest wealth creators of the last couple of decades.

I am talking about none other than the big daddy of the jewellery business i.e. Titan Ltd.

What makes Titan special is that it may account for just 10% of the aggregate revenues of the listed jewellery stocks in India.

But when it comes to profits, Titan accounted for close to 60% of the entire profits that the sector generated in FY23. That's indeed true. Nearly 2/3rds of the entire profits of the listed jewellery companies in India in FY23, came from Titan.

Not just that, Titan's ROE numbers are also significantly better than that of the entire industry. As we saw, the industry ROE averaged 13% over a 10-year period.

Titan on the other hand has averaged an ROE of almost 25% during the same period. Yes, that's correct. Titan's ROE is not only as high as the industry average but doing it consistently over a 10-year period, puts Titan in the category of a great business.

Now, Titan has managed to do what the rest of the industry has struggled to achieve over the last many years. It has been able to charge a hefty premium for the jewellery it sells at its Tanishq outlets.

Its customers have been more than willing to pay this premium in exchange for the trust and the credibility that Titan commands in the industry. I asked one of my jeweler friends as to why Titan's jewellery is more expensive than the others.

Well, he gave me one word answer and it was 'brand'.

You see, jewellery is a tricky business and there are chances that you may end up with a substandard product if you don't buy from a trusted jeweller.

Titan has managed to fill this gap exceedingly well and has positioned itself as one of the most trusted brands in the diamonds and jewellery space.

This trust, along with its pan-India reach, its unique designs and its economies of scale, has allowed Titan to earn margins that are almost twice the industry average and this in turn has translated into enormous wealth creation over the last couple of decades.

Therefore, the verdict is clear. If you have to be a wealth creator like Titan, you need to be able to charge a hefty premium from customers in exchange for trust and reliability of the highest order.

Is Kalyan Jewellers upto this task? Can Kalyan Jewellers do a Titan and emerge as a big wealth creator over the next few years. Well, if you look at the company's operating margins as well as net profit margins, you get no indication that it commands the pricing power that Titan does.

Its operating margins over a 5-year period have averaged 7% vs 11% for Titan whereas net profit margins have averaged just 1.3% versus almost 7% for Titan.

Its return on equity has also averaged close to 10%, which is not only significantly below Titan but also below that of a decent business.

Valuation wise however, Kalyan Jewellers is trading at a PE ratio of almost 100x its latest twelve-month earnings. And here's the shocker. Its valuations are higher than Titan, which is trading at a PE of 90x.

It appears as if investors are expecting Kalyan Jewellers to have the same future as Titan or perhaps even better.

However, there are no signs as of now that this is indeed the case. Kalyan Jewellers continues to remain an average business at best and it will really have to perform some miracle if it wants to be in the same league as Titan.

The risk-reward of investing in Kalyan Jewellers doesn't at all look in favour of investors at the current price point.

Let me know what do you think?

I will see you again in the next video. Goodbye and happy investing.