Shree Ganesh Jewellery House IPO Review

Investors with a higher risk appetite can subscribe to the Initial Public Offer of gold jewellery exporter, Shree Ganesh Jewellery House (Ganesh Jewellery). In the price band of Rs 260-270, the offer values the company at about 11.6 to 12.1 times the annualised FY10 per-share earnings on a post-issue equity.

At the upper end of the price band, the company will raise about Rs 385 crore, of which Rs 57.6 crore represents an offer for sale of shares by a private equity investor.

Factors that support investing in this offer include enhanced manufacturing capacities, operating partly from special economic zone (SEZ) that allows tax breaks, gold refining that could help improve margins, and the company's increasing presence in the domestic jewellery market. Risks stem from its export dependency, limited retail reach and possible delays in setting up manufacturing units.

Export-oriented

Ganesh Jewellery manufactures and exports gold and gold-studded jewellery, besides a domestic jewellery chain under the name Gaja. Products span various price points, from the value market to the high-end segment.

Close to 95 per cent of revenues (for the half year ended September 2009) were exports, primarily to West Asia, Singapore and Hong Kong. For the financial year 2008-09, exports made up almost 99 per cent of revenues. The company plans to further penetrate West Asia and South-East Asian markets, having already set up offices in Singapore and Dubai.

While export exposure is high, both current and intended markets hold better potential than markets such as the US and Europe where other listed jewellery players such as Renaissance Jewellery are concentrated. The strength showcased by revenues for FY-09, which were up 77 per cent over FY-08, a difficult period for gems and jewellery players is a confidence building factor. Customers include Wondercut Pte, Denzong Hong Kong, Ibrahim Al Sayegh Jewellery and so on.

Manufacturing capacity

The company's existing facility at Manikanchan SEZ, West Bengal, has an annual capacity of 30,500 kg of gold. About Rs 145 crore of the issue proceeds will fund the ramping up of manufacturing capacity, by setting up plants in three locations. Land has already been tied up in one of these locations. Manufacturing capacity will therefore add 11,400 kg to gold capacity.

Besides jewellery manufacturing units, Ganesh Jewellery will set up a gold refining plant with an annual capacity of 1,000 kg of gold, thus capitalising on replacement demand — exchanging old gold for new. Refining used gold would then address a part of the raw material requirement of the company, thereby reducing raw material costs to an extent resulting in improved margins.

Retail reach

In the fast-growing domestic jewellery market, Ganesh Jewellery has marked a presence through its Gaja brand, and associated brands such as Sitaare, Marigold and G Elements, together addressing women's, children and men's jewellery. The branded jewellery market is yet in a nascent stage, and the company may be poised to increase revenues from this segment as it develops.

Its current store network is minimal at 13 stores combining company-owned stores, shop-in-shops and franchise outlets. Rs 68 crore of the issue proceeds will go towards setting up an additional 46 stores across the country. Risks in this space stem from its small store count and stiff competition from brands such as Tanishq and those of Gitanjali Gems which have a wider reach. Additionally, it has an agreement with Vishal Retail to set up shop-in-shops, with three already in place. The retailer is presently undergoing debt restructuring, and the future of the store chain is yet unclear.

Financials

Sales have clocked a whopping 157 per cent three-year compounded annual growth rate, while net profits have grown 127 per cent in the same period. The main raw material is gold, accounting for more than 90 per cent of sales. The company addresses risk of price fluctuations to some extent through a transparent system customers deciding on the timing of gold purchases. Ganesh Jewellery also goes in for bill discounting with banks, limiting losses on exchange rate fluctuations.

Gross margins have been steadily improving from 2006-07, moving from 7.6 per cent to 9.4 per cent for FY-09. The first half of FY-10, however, saw a slight dip to 9.1 per cent. Higher interest costs due to huge increases in debt have resulted in a slide in net margins from 8.9 per cent in 2006-07 to 6.2 per cent in FY09. Still, margins are superior to most listed players in the gems and jewellery space.

Most debt had been taken on to fund gold imports. Even so, the debt-equity ratio is at 0.78 times, below most jewellery players. Rs 50 crore of the issue proceeds will fund working capital.

Issue details

The issue is open from March 19 to 23. On offer are 14,269,831 shares, of which 2,133,334 shares are an offer for sale. The book running lead managers are Axis Bank, ICICI Securities and Avendus Capital.