Gitanjali Gems: Gem of a buy

With the Canadia brand well accepted overseas, the Tri-Star buyout fits Gitanjali's strategic interests.

Gitanjali Gems, a leading diamond exporter, has made another overseas acquisition, in a bid to strengthen its presence in foreign markets.

It has bought a majority stake in US-based Tri-Star Worldwide, a licensee of Canadmark, which enables it to be a manufacturer and global distributor of Canadia brand diamond jewellery. Gitanjali has not disclosed the takeover size. In December last year, it had also acquired US-based Samuels Jewellers.

Senior company management said the certificate of origin of diamonds has become increasingly relevant in several overseas markets. This is owing to the growing reluctance of consumers to purchase 'Blood Diamond' "� diamonds that are sourced from war-torn African countries.

As the Canadia brand of diamond jewellery is well accepted in overseas markets, it fitted Gitanjali's strategic interests. Also, the Gitanjali management would be focused on deriving synergies in the North American market, between its earlier acquisition and Tri-Star.

The stock on Wednesday gained 2.3 per cent to Rs 227.5, in contrast to the broad selling pressure on the Street.

Gitanjali Gems will finance its latest acquisition via a recently concluded $110 million FCCB issue. It had also raised Rs 331.5 crore from its IPO in February last year.

The company's consolidated operating profit margin grew by 20 basis points y-o-y to 6.2 per cent in the December 2006 quarter. The scrip is reasonably priced at 13 times estimated FY07 earnings (excluding the Tri-Star takeover).

Hero Honda: A bumpy ride

Hero Honda's performance in the December 2006 quarter was adversely affected by rising raw material costs and the competitive pressure in the industry, which forced the company to offer discounts to customers.

The two-wheeler maker's operating profit declined 20.1 per cent y-o-y to Rs 301.9 crore in Q3 FY07, compared with 15.2 per cent growth in net sales to Rs 2,666.05 crore. Its operating profit margin too plunged by 500 basis points y-o-y to 11.3 per cent in the same quarter.

Analysts say its operating margins in Q3 FY07 were the lowest in the past 27 quarters. Hero Honda had to grapple with its adjusted raw material costs, with the costs as a percentage of net sales rose by 440 basis points y-o-y to 73.6 per cent in the December quarter.

Meanwhile, Bajaj Auto too saw its operating profit margin slump by 370 basis points y-o-y to 14.2 per cent in the last quarter, because of fierce competition in the entry-level segment, coupled with higher raw material costs.

Hero Honda's two-wheeler sales grew 12.25 per cent y-o-y to 8,96,113 units in the last quarter.

Though its overall market share improved q-o-q, analysts said in the premium segment, the company lost market share to Bajaj Auto in the December 2006 quarter. The company realisation per vehicle was estimated to have improved by 2.6 per cent y-o-y in the quarter, while that of Bajaj Auto rose 4.5 per cent. Hero Honda hiked prices of its products on January 1.

However, analysts expect its operating margins to remain subdued over the next few quarters owing to higher marketing spends, including the one on the occasion of the Cricket World Cup 2007, and there would be no respite from high metal prices. The stock, trading at 14 times its estimated FY08 earnings, leaves little room for further upside.