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Business News/ Markets / Stock Markets/  Despite a 169% run in 1 year, Equirus Capital sees another 43% upside in Thangamayil Jewellery
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Despite a 169% run in 1 year, Equirus Capital sees another 43% upside in Thangamayil Jewellery

Equirus Capital expects a 42 percent upside in jewellery stock ano(TJL) by March 2025. Strong visibility and robust financials would enable TJL to command a premium multiple than current levels, it said.

Equirus Capital expects a 42 percent upside in jewellery stock Thangamayil Jewellery (TJL) by March 2025. Strong visibility and robust financials would enable TJL to command a premium multiple than current levels, it said.Premium
Equirus Capital expects a 42 percent upside in jewellery stock Thangamayil Jewellery (TJL) by March 2025. Strong visibility and robust financials would enable TJL to command a premium multiple than current levels, it said.

Despite a multi-bagger run in the last 1 year, brokerage house Equirus Capital expects a 42 percent upside in jewellery stock Thangamayil Jewellery (TJL) by March 2025. Strong visibility and robust financials would enable TJL to command a premium multiple than current levels, it believes.

The brokerage has initiated coverage with a 'LONG' recommendation on the stock with a target price of 1,935. The stock has already rallied 169 percent in the last 1 year, however, it has fallen 9 percent in 2024 YTD.

The stock is now 12 percent away from its record high of 1,544.95, hit on December 28, 2023. Meanwhile, it has skyrocketed 188 percent from its 52-week low of 472.50, hit on February 27, 2023.

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"We believe TJL is in a sweet spot to benefit from both industry-led tailwinds and robust expansion plans. Demand growth stemming from an unorganised-to-organised shift will be accentuated by increased hallmarking coverage in towns/cities of Tamil Nadu – at present, 75 percent of cities/districts in the state are under mandatory hallmarking coverage. Additionally, a narrowing gap in making charges of unorganised and organised players would further push consumers towards organised and large players like TJL; in this scenario, the company would benefit from its strategic presence in most tier II and III cities/districts of Tamil Nadu," explained the brokerage.

Estimates

With back-end processes and infrastructure in place, supported by the required balance sheet strength, the brokerage expects TJL to deliver a robust 26 percent revenue, 29 percent EBITDA, and 33 percent PAT CAGR over FY23-FY26E.

Read here: Indiamart Intermesh: Jefferies initiates coverage with 'buy' rating, sees 26% upside

Investment Rationale

Dominating Tamil Nadu’s retail jewellery landscape: In South India, which forms 40 percent of India’s total jewellery market, Tamil Nadu holds a dominant 25 percent share. TJL, a recognized jewellery brand, with 3 percent market share, is well-known for its designs and retail chain network (56 stores), majorly spread across tier II and III cities of the state. This strategic presence helps it tap rural income/investments typically parked in gold for wedding/investment needs, leading to sustained volume growth, stated the brokerage.

Macro tailwinds continue to favour organised players: With gold being prone to smuggling and considered as an easy medium to park black money, the government has maintained a laser-sharp focus on tracing each piece of gold to its seller through hallmarking. This has also ensured the purity of gold, protecting gullible buyers. With the third phase of hallmarking coverage already implemented, most of Tamil Nadu has been brought under the mandatory hallmarking ambit. This would further boost the shift from unorganised to organised players, with TJL emerging as one of the key beneficiaries, noted the brokerage.

Read here: Govt's shift towards value maximisation may boost PSU stocks, says Jefferies

Strong area addition, sustained SSSG – key growth drivers: The brokerage pointed out that after a long pause in store additions over FY15-FY19 amid regulatory headwinds and debt issues, TJL embarked on an expansion drive in FY20. However, this was again halted by GST, demonetisation, and COVID. With all disruptions behind and strong SSSG now achieved (FY23: over 25 percent), TJL should add about six stores in FY24E; followed by the much-awaited flagship T. Nagar store and subsequent smaller format stores addition in Chennai.

Balance sheet strength, and return ratios supportive of expansion: Unlike the past, TJL currently has a sound balance sheet (net D/E: 1.9x) with solid return ratios (RoE: 22 percent), informed Equirus. This would support the company’s proposed expansion drive.

"TJL clocked a stellar FY23 RoE of 22 percent as a large part of the balance sheet is concentrated in debt, the primary source of inventory funding. A better metric for evaluating returns is RoCE, which stood at 13 percent in FY23; we believe TJL’s current RoCE profile looks good given that (a) 90 percent of its sales are of low-margin plain gold jewellery vs peers like Tanishq and Kalyan (studded share: >25 percent), and (b) larger players have a higher share of franchisee stores," explained the brokerage.

It also forecasted that strong topline growth and better margins (on scale benefits) would further take RoCE to 16.9 percent in FY26E.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decision.

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Published: 15 Feb 2024, 03:57 PM IST
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