Indians love gold as much as they love their cricket team winning matches. The yellow metal is bought or gifted for births, coming-of-age rituals, sundry birthdays, weddings, harvest festivals, retirements, religious offerings and dental fillings; except for the last, most of it is in the form of jewellery.
In the past five years, an increasing number of jewellery firms have been entering the equity markets. After Thangamayil Jewellery Ltd and Shree Ganesh Jewellery House Ltd successfully raised money in 2010, three companies have filed for initial public offerings (IPOs) in the past couple of months. Tribhovandas Bhimji Zaveri Ltd, Joyalukkas India Ltd and Ratanchand Jewellers Pvt. Ltd want to raise money from the primary market—all for expanding retail operations. While the first two are well-known brands with stores across the country, the last is primarily an exporter.
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The investment thesis for a jewellery retailer goes like this: India accounts for 10% of the world jewellery demand. In 2010, domestic demand was 745.7 tonnes, up 13% from the previous peak in 1998, according to industry lobby World Gold Council.
With organized jewellery retail being only 6-10% of the overall market (depending on which research agency’s version you believe in), there is a lot of untapped potential. A growing middle class, which wants to splurge on the finer things in life and is increasingly brand-conscious, makes for a very successful recipe on paper.
That’s why a primarily export-oriented firm such as Rajesh Exports Ltd wants to open 550 stores in India over the next three years, according to a retail industry website, and Tanishq and Gitanjali Gems Ltd are opening new stores, the Tribhovandas prospectus points out.
However, stock prices of such firms show a mixed performance. Since February 2010, when Thangamayil listed, four of every five listed gems and jewellery firms in India (including some exporters) have underperformed the BSE-100 Index.
What could be the reasons? Jewellery retail is a working capital-heavy business and net profit margins typically hover around 3.5-5%. Most jewellers book profits mainly from making jewellery and building brands takes a long time, especially in newer markets where these firms typically want to expand. Needless to say, other problems affecting organized retail, such as lack of skilled personnel, attrition rates and rising lease rentals, affect this segment, too.
Thus, while it looks like easy pickings, investors may have to wait a while to strike gold in this sector.
Graphic by Paras Jain/Mint
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