The second gems and jewellery company to come out with an initial public offering (IPO) this year, Tara Jewels Ltd, has put on offer shares worth Rs.109.5 crore at an issue price band of Rs.225-230 per share. There is also an offer for sale of shares worth Rs.70 crore by Fabrikant HK Trading Ltd, an affiliate of M Fabrikant and Sons, dealers of gems and jewellery, in the same price band.
In the last two months, since mid-September, the stock price for Tribhovandas Bhimji Zaveri Ltd (TBZ), the other jewellery company to list this year, has run up more than 100%. This kind of return can create a lot of buzz for Tara Jewels, but before you jump in, here are things you need to consider.
Business and financials
The company is primarily in the business of exporting jewellery and it has recently ventured into retail jewellery stores. At present, it has 30 stores across the country. So far, retail remains a small but fast growing part of the overall business; income from retail operations grew from around 2% in FY10 to around 13% in FY12. As of March 2012, around 81% of income came from exports. The management has indicated that attractive margins in the retail segment means now there is greater focus on that business.
The company plans to use a majority of the IPO funds for retail expansion as it wants to open 20 new stores by March 2013 and the rest for repaying debt. As on March 2012, it had a consolidated total revenue of around Rs.1,400 crore—most of this is from exports where they have a strong foothold. Retail jewellery business, on the other hand, is competitive and the company has to contend with the likes of Tanishq, Gitanjali and Orra, among others.
According to CARE research data quoted in the IPO prospectus, India is the largest consumer of gold in the world, but only 4% of total jewellery sales happen through organized retail. In case of Tara Jewels, while sales have grown at a compounded annual rate of around 32% in the last two years, operating profit margin has been 4.5-5%, which is low compared with other listed companies, mainly because retail is a small part of their overall income.
Valuation and risks
Given its FY12 earnings per share of Rs.29.97, at the upper end of the IPO price band of Rs.230, the stock is priced at a historical price-earnings (P-E) multiple of 7.67 times. This is on the lower side if you look at other listed peers. So there is room for upside going forward.
The caveat is the slowing demand for gold. Latest data from World Gold Council shows that demand for gold (volume) in India is down 24% year-to-date compared with the previous year. Sale of gold jewellery is linked to the increasing wealth and consumption by individuals, so a lot also hinges on the pace of economic growth in India.
Moreover, opening new stores means adding capital expenditure and inventory of gold, which will take some time to convert into sales and reflect on the profit margin. Says Rajeev Sheth, chairman and managing director, Tara Jewels, “For the planned retail expansion, store format size of 1,000 sq. ft is a scalable model and average inventory per store is around Rs.2.5 crore. So break even happens much earlier.”
The IPO has been assigned CARE IPO grade 3, indicating average fundamentals. This reflects the inherent risks in expansion and also the fact that it is a seasonal business. Future sales and profitability are linked to external factors such as economic growth, global gold price and Indian currency strength against the dollar.
High risk, high return
The uncertainty in equity markets makes the issue timing poor. No doubt that a comparable stock such as TBZ has doubled its price in the last two months. But keep in mind that the stock had corrected around 25% from the issue price just before shooting up. This shows the seasonal nature of the business and that the market links the stock price to gold demand in a particular period.
Sheth disagrees, “Jewellery market is not so related to gold prices.” He adds that when prices are up, the total amount spent doesn’t change, people just settle for lesser volume of gold. Nevertheless, if you are enticed by the performance of TBZ stock and want to take a chance, remember this is a high-risk high-return segment.
For long-term investors, a better option, if you want to take exposure to the listed jewellery space, is to wait till after listing as the uncertain equity environment can give you a better secondary market entry price.