Shree Ganesh Jewellery House IPO Analysis

Incorporated in August 2002 in West Bengal, Shree Ganesh Jewellery House (SGJHL) is promoted by Umesh Parekh and Nilesh Parekh, third generation entrepreneurs of family run gem & jewellery business. The company is one of the largest manufacturers and exporters of the handcrafted gold jewellery from India and markets its jewellery products under brand name ‘Gaja', ‘Sitaare', ‘GM', ‘Marigiold', ‘G elements', ‘Gold Bridals', ‘Dianique', ‘You' and ‘Distar'. The products include handcrafted and hallmarked gold jewellery, gold enameled jewellery and gold jewellery studded with precious stones and semi precious stones. The products are primarily exported to countries such as UAE, Singapore and Hong Kong.

The company has four manufacturing units located in Manikanchan SEZ in West Bengal,which is presently the only jewellery SEZ in West Bengal. The company has 14 subsidiary companies, all of which are into manufacturing and exports of gold products, including one overseas subsidiary: Shree Ganesh Jewellery House at Singapore. Apart from Gokul Jewellery House, the company is set to amalgamate its 11 other subsidiaries with one of its subsidiary, Easy Fit Jewellery.

The total capacity of the company as of year ended March 2009 was 17,500 kg of gold products. The company plans to expand its manufacturing capacity to 43,000 kg of gold products per annum by FY 2012. To raise capex funds, the company is tapping capital market with an issue of 1,42,69,831 equity shares of face value Rs 10 each, at a price band of Rs 260- Rs270 per share, through book building process. This issue of 1,42,69,831 equity shares includes fresh issue of 1,21,36,497 equity shares by the company and an offer for sale of 21,33,334 equity shares by its PE investor, Credit Suisse PE Asia Investments (Mauritius). Thus, the total equity capital of the company post-issue will amount to Rs 60.68 crore.

The entire project cost along with the working capital requirements of the company (totaling to Rs 281.64 crore) is to be met by equity proceeds. The company intends to use more than 25% of the net issue proceeds for general corporate purposes like repayment of loans, etc. All the projects are expected to be completed by November 2010.

Expansion Plans:

* At Mondalpara,West Bengal, the company plans to set up manufacturing unit of plain and studded gold Jewellery with annual capacity of 450 kg of gold, two units for manufacture of machine made Italian jewellery, with an annual installed capacity of 1,500 kg of gold and a facility to manufacture of bangles with annual installed capacity of 600 Kg of gold. The company also plans to incorporate a hall marking plant at this unit. The total capex of this unit is Rs 13.71 crore.
* At Domjur,West Bengal, the company plans to set up annual installed capacity of 2,000 kg of diamond studded jewellery along with an electorforming plant with an annual installed capacity of 2250 Kg of gold and gold refinery plant with an annual installed capacity of 1,000 kg of gold. The capex of this project is Rs 74.93 crore.
* The company plans to expand its existing manufacturing facility at Manikanchan SEZ, West Bengal, by setting up of facility for manufacture of diamond studded jewellery with a capacity of 1,000 kg of gold and 75,000 carats of diamond per annum, a facility for manufacturers of bangles with and annual installed capacity of 600 kg of gold, an electroforming plant with an annual installed capacity of 1,00 kg of gold jewellery, and an unit for manufacturer of machine made Italian jewellery with an annual installed capacity of 3,000 kg of gold. The total capex of this unit amounts to Rs 55.86 crore.
* Apart from setting up the manufacturing units, the company plans to expand its reach by opening 49 retail outlets in different formats by FY 2013. The breakup of the different format outlets are: 14 owned outlets, 3 outlets on rent, 11 franchise model outlets and 11 shop-in-shop outlets. The company has entered into an agreement with Vishal Retail for shop-in-shop arrangements in existing outlets. The capex for expanding the retail outlets is estimated at Rs 68.04 crore.
* In order to strengthen and diversify its customer base and for easy procurement of gold, the company intends to incorporate a subsidiary in Dubai.
* Due to its presence in the raw material intensive gem & jewellery industry, the company plans to provide Rs 69.10 crore for its working capital requirements.

Strengths:

* Strategic location of the company in West Bengal makes it easy for availability of karigars (skilled workmen) for handcrafted jewellery at low costs.
* The market share of the company in the domestic gold jewellery exports has jumped from 1.83% in FY 2007 to 6.10% in FY 2009. The company follows a strategy of expanding its presence into various geographies and product portfolios and is foraying into manufacture of machine made jewellery so as to consolidate its presence in the market.
* Even in the tough times following global economic meltdown in FY 2009, the company reported a 69% spike in net sales to Rs 2148.50 crore and a 48% jump in net profit to Rs 132.45 crore. The company has also maintained operating margins at 6.1% despite the economic meltdown.

Weaknesses:

* Gold and diamond jewellery are luxury products, forming discretionary purchases by consumers. Thus, rising gold and diamond prices, inflationary pressures or adverse economic conditions may affect sales adversely.
* Shortages of raw materials or volatility of raw material prices may also adversely affect demand. company.
* Exports formed 99.23% and 94.84% of total sales of the company for FY 2009 and H1 of FY 2010, respectively. Exports to the UAE account for approximately 48.78% and 36.62%, respectively, of the total exports. Thus, any political or economic instability in the UAE would adversely affect the the company.
* As a new entrant to the extremely competitive domestic retail jewellery market, the company has to face tough competition with astrong players in the organized retail players andun organized market players.
* All of the company's present and proposed manufacturing facilities are situated in one geographic area and thus exposed to risk or adverse developments affecting that area.
* Some of the subsidiaries of the company were reporting losses as of FY 2009. The performance of the subsidiaries, though small, will affect the financial performance of the company.

Valuation

SGJHL has set a price band of Rs 260 to Rs 270, which translates into a PE of 9.9x to 10.2x annualized EPS for the half-year ended September 2009 on post-issue equity. P/E on FY09 EPS on post issue equity works out to be 11.9x and 12.4x respectively. Against this industry composite TTM average PE stands at 12.6.