Although Shree Ganesh Jewellery House’ track record and growth plans appear good, the IPO pricing already captures the medium-term upsides.
With major economies of the world under recession, export oriented industries had horrid time until recently. Nevertheless, gold jewellery exports in 2008-09 grew at over 20 per cent. One of the gold jewellery companies that did well during this period was Shree Ganesh Jewellery House. The company deals in handcrafted and hallmarked gold jewellery and studded gold jewellery. To tap the rising demand for gold jewellery, the company plans to increase its manufacturing capacity by setting up two new units at Domjur and Mondalpara and expand its unit at Manikanchan SEZ (all located in West Bengal). That apart, it also has plans to expand its retail jewellery business. These projects are estimated to be fully operational by March 2013. To fund its growth plans and working capital needs, the company has come out with an IPO to raise around Rs 315-328 crore (excluding the offer for sale).
| ON A GROWTH TRACK | |||
| in Rs crore | FY08 | FY09 | H1 FY10 |
| Revenue | 1,283.0 | 2,218.0 | 1,326.0 |
| EBITDA (%) | 8.5 | 9.1 | 8.9 |
| Net profit | 90.0 | 133.0 | 80.0 |
| EPS (Rs) * | 18.5 | 27.3 | 26.4 |
| P/E (x) @ Rs 260 | - | - | 9.8 |
| P/E (x) @ Rs 270 | - | - | 10.2 |
| * EPS for FY10 is annualised; Source: RHP | |||
The gold push
The major raw material for the company is gold. It imports majority of its gold requirements from the Bank of Nova Scotia, Al Marhaba Trading and other agencies. As a “nominated agency”, the company can import precious metals directly thereby eliminating intermediary costs. Since majority of the company’s sales accrue from exports, foreign exchange exposure gets naturally hedged.
Exports contribute around 95 per cent of turnover, and major customers on its rolls include jewellery wholesalers of Middle-East countries. The company has jewellery making capacity is 30,500 kg, with 12,000 kg capacity added in February 2010. Besides, another 12,000 kg capacity is also expected to be added in the next two years from the proposed expansions. These would help the company increase its output, as it forays into geographies like Europe, Africa and Australia.
The company forayed into retailing in India through tie-ups with large retail chains followed by opening own outlets. It is now planning to increase its own retail outlets from 13 to 49 over the span of next three years, which would source finished products from the proposed facilities at Domjur and Mondalpura.
Conclusion
At the upper price band, the stock is being valued at 10.2 times its annualised 2009-10 earnings and considering the post-IPO equity. While there are no strict comparables, companies like Gitanjali Gems (which is in the jewellery and diamonds business) is trading at 7.1 times its trailing 12 months earnings.
In terms of performance, Shree Ganesh Jewellery House has seen its revenues grew at 64 per cent between FY07-FY09 on account of increasing reach in the international markets. However, EBITDA margins sustained at around 9 per cent even as the revenue mix contained more of low value-added jewellery business. But, despite higher interest costs (moved up 8-fold) in this period, net profits grew by over 60 per cent.
Going ahead, in the domestic retail business, the company is expected to focus on Tier ll and lll cities. While in the exports business, it aims to discover newer markets, both of which would aid future growth. While the fundamentals and growth plans appear good, the IPO pricing captures the likely growth in earnings for 2010-11.
