Expensive as gold

POUND WISE

Both Titan and Gitanjali should see strong growth going forward, but the market seems to have priced in the bullishness.

With the festival of Diwali around the corner, jewellery will surely be in high demand. And the attractive manner, in which branded jewellery is displayed today, will definitely entice customers.

But if the stock prices of two of the branded jewellery players are anything to go by, it seems that the market has already "� too soon "� discounted the bullishness.

The stock of Gitanjali Gems, the company that houses famous brands such as Gili, Nakshatra and D'damas, has shot up 70 per cent since August.

Titan, which derived around 53 per cent of its revenues from its jewellery division last year, is trading at 48.11 times its trailing twelve-month earnings. Are these stocks attractive investments still?

Of the $22 billion domestic jewellery market, branded jewellery accounts for only 3 per cent. "Shifting buying preferences where jewellery purchases are fast becoming lifestyle purchases will make branded jewellery an aspirational product," says Manjunath Jyothinagar, president of Gitanjali group.

The overall market is growing at 20 per cent CAGR. And G K Nair, director of Gitanjali Gems, expects the share of branded jewellery to go up to 35 per cent in five-six years.

This should not be difficult considering the efforts players are taking to woo customers. "There will definitely be a shift from unbranded to branded jewellery, going forward," says S Natraj, head-research, equitymaster.com.

"Titan will be the lead beneficiary of this shift, as it is the pioneer in branded jewellery. And the growth will be led by GoldPlus," he feels.

GoldPlus is a brand initiative recently announced by Titan to expand its jewellery business in semi-urban areas.

Analysts are seeing GoldPlus to be a key growth driver for the company. The jewellery under the GoldPlus brand is designed to suit local tastes.

The company, which has already kicked off its GoldPlus operations in two cities "� Erode in Tamil Nadu and Ratlam in Madhya Pradesh, aims to have as many as 10 GoldPlus stores by FY07. In fact, Titan sees equal potential in both Tanishq and GoldPlus.

"Three-four years down the line, GoldPlus will also be as big as Tanishq will be at that time," says V Govindraj, VP - retail & marketing, Titan.

At present, the company has 84 Tanishq outlets, which will touch 90 by FY07-end. Then, adding 10 stores every year, the company plans to take the tally to 120 in three-four years. The company will carry out the entire expansion via the franchisee route, thus requiring no capital outlay.

The jewellery division's contribution to Titan's overall revenues has consistently been on the rise. In the June quarter, it contributed 64 per cent to the revenue vis-a-vis 47.11 per cent in FY05. Also, the segment sales have posted an impressive 44.68 per cent CAGR growth over the last three years. "We will be able to sustain these rates for at least the next five years," says Govindraj.

Gitanjali Gems too is trying to ensure growth by endeavouring to offer something to every segment. "Amid a fledgling market, almost every segment has immense potential. We don't want neglect any segment," says Jyothinagar.

The company is also creating lines for men. It has placed its various brands at different price-points and each brand has been positioned differently. "Our current share in the branded jewellery market is 20 per cent, and we aim to garner half of this growing market by 2008-10," says Mehul Choksi, chairman and managing director of Gitanjali.

At present, the company has a retail network of over 1,000 stores including standalone stores, exclusive distributors and jewellery outlets featuring exclusive Gitanjali jewellery.

The company has set a target of 500 more jewellery outlets in the next two-three years. Besides expanding its existing capabilities, Gitanjali is also currently focused on exploring the inorganic route to expand its retail operations.

Gitanjali recently acquired Desire Lifestyle, a jewellery retailer, and also picked up 51 per cent in Shubalavanya Jewel Crafts, a player in handcrafted jewellery.

The company has formed a joint venture company, Spectrum Jewellery, with Sanghavi Exports, which sells the Sangini brand jewellery. It has formed another joint venture "� Modali Jewels "� with Modern India, to launch made-to-order brand.

Besides, Gitanjali had acquired a US-based jewellery retail chain, comprising 100 stores, for $40 million. "We will be looking out for acquisitions in the US in the range of $100 million," says Nair.

The company is considering an investment of Rs 200-500 crore for its retail expansion over the next one year. "The funds for the expansion will be met partly by the proceeds from the IPO and partly through internal accruals. The balance will be met by debt," says Nair.
 

JEWELLERY GROWTH
Revenue growth (%)	Titan	Gitanjali Gems
FY06	47.91	18.24
FY05	25.68	3.01
FY04	23.34	13.63

Both Titan and Gitanjali have posted good y-o-y revenue growth for the June quarter. The former's sales shot up 54.09 per cent to Rs 441.01 crore. Its jewellery sales surged 73.3 per cent, supported by 35 per cent volume growth.

But margins have taken a beating. A Motilal Oswal report says, as Titan's jewellery division operates on fixed making charges per gram of jewellery, a 40 per cent y-o-y rise in gold prices has been one of the key reasons for the decline in its margins. As per the report, EBITDA may have gone down by an estimated 200 bps.

Gitanjali's sales rose 49.89 per cent to Rs 498.15 crore. Its net profit soared 137.12 per cent to Rs 21.10 crore. The margins too improved. The stock is currently trading at 16 times its trailing three-quarter (annualised) earnings.

Although Gitanjali has posted good numbers and looks reasonably priced over Titan, the stock has run up quite a lot.

On Titan, Natraj says, "While the company has good credentials to back itself, the stock is too expensive to be attractive at the current levels."