Thangamayil Jewellery - fixed deposits

South-based jewellery retailer Thangamayil Jewellery has introduced one, two and three-year fixed deposit schemes at interest rates of 10, 11 and 12.5 per cent respectively.



Both cumulative and non-cumulative options are available.

Investors with a higher risk appetite may choose between a one-year cumulative or a two-year non-cumulative option to balance portfolios and enhance returns.

Thangamayil is a jewellery retailer with outlets in seven small cities in Tamil Nadu. The company is well-established in the Madurai market, and plans on taking this brand recall into small towns.

The deposit rates offered by Thangamayil are highly attractive. But locking capital into long-term deposits is a risky bet on multiple grounds.

One; rural markets hold substantial potential but are highly fragmented. Smaller towns may also have certain preferred local players. Under such circumstances, breaking into these markets may take time.

Two; Thangamayil's fixed deposit offer comes just five months after it raised Rs 28.75 crore through an initial public offering. The company still retains about half the proceeds.

Funds were raised to part-finance the opening of seven stores, in as many cities, and renovation of its flagship Madurai store. The funds were used to meet working capital requirements also.

The company had raised Rs 4.2 crore through fixed deposits in FY-10 also.

While interest cover of 4.6 times in FY-10 remains reasonably comfortable, it may yet come under marginal pressure with fresh infusion of deposits.

Nevertheless, the company has superior interest cover when compared with its jewellery counterparts.

Debt-equity of the company stands at a reasonable 0.9 times.

While rates offered by Thangamayil are well above those on bank fixed deposits, investors have to note that the risks attached to the company, and the industry itself, are also high.

Investors who have an appetite for risk are thus advised to take up either of the following two options.

FD Options

Those leaning towards the conservative side can consider an investment in the one-year cumulative deposit, which offers post-tax yields of 9.5, 8.4 and 7.4 per cent in the 10, 20 and 30 per cent tax brackets respectively.

Interest is compounded monthly under cumulative deposits. With one-year bank deposits carrying a pre-tax interest rate of 6 to 7.5 per cent per annum, investors may take advantage of Thangamayil's superior rates to better portfolio returns.

Investors with a higher risk appetite may invest in the two-year non-cumulative deposit, which carries an annual interest rate of 11 per cent. Even with a probable interest rate uptrend in the offing, bank deposits are still unlikely to match rates offered by Thangamayil in the medium term.

The minimum investible amount under any option, cumulative and non-cumulative is Rs 5,000. Investments need to be made in multiples of Rs 1,000.

Business

The inherent nature of the jewellery business requires operating on high inventory and thin margins.

Thangamayil Jewellery is a small-scale player, concentrated on a handful of small markets in Tamil Nadu alone.

Revenues recorded a good 53 per cent compounded annual growth for the past three years, while net profits grew 73 per cent in the same period.

FY-10 saw the company clock Rs 451 crore in revenues, on the back of opening three stores during the year. Net profits stood at Rs 16 crore.

Operating margins for FY-10 are at 6.8 per cent, a shade lower than the 7.6 per cent of the year before.

However, net profit margins fared a tad better, standing at 3.6 per cent in FY-10, the same as the previous year. Margins are also better than a good many of its peers.

However, new market penetration will call for higher ad spend and marketing expenses, and new stores will result in higher depreciation — both of which could further dent margins. Owing to inventory stocking, Thangamayil's operating cash flows have been negative for the past four years, and cash on books is negligible.