Gitanjali Gems

Investors with a medium-term horizon may buy the stock of Gitanjali Gems on the strength of its brands, retail reach in domestic markets and an expanding overseas retail presence. Growth prospects hinge on exploiting the relatively untapped domestic branded jewellery market, besides facing a lower degree of competition in this space.



At Rs 196, the stock is at 8.2 times consolidated trailing 12-month earnings, a steep discount to comparables such as Titan Industries and Rajesh Exports.

The organised, branded jewellery market is still in the early stages of development. Many jewellers, such as Goenka Diamonds and Rajesh Exports are now establishing national brands in a bid to diversify. Gitanjali is several steps ahead of most such players, with a strong retail presence within India and a clutch of well-established brands. The jewellery segment accounted for 54 per cent of consolidated sales in FY-10, up from the 50 per cent in FY-09. Facilities to source and polish diamonds will serve to maintain operating efficiency, while focus on higher-value diamond jewellery will offer it better margins than gold jewellery. Additionally, with gold prices still relatively high, volumes have picked up in diamond jewellery, boding well for the company.

Brand strength

A key factor working in favour of Gitanjali is the strength of its four main brands — Nakshatra, D'damas, Gili and Asmi. It also has brands such as Sangini and Vivaaha , all of which have good brand recall.

Gitanjali operates primarily in the diamond segment; its gold offerings are few. The only other significant jewellery brand with a national presence is Titan Industries' Tanishq, which is primarily into gold jewellery rather than diamonds, and which has a vast retail footprint.

Gitanjali's retail reach spans over 3,000 outlets, of which about 500 are exclusive outlets of the company. About 3.5 lakh sq.ft was added in FY-10, taking the total retail footprint to about 1 million. Plans are on to add a further 3 lakh sq.ft in space, through franchisees as well as owned stores. New expansion is also slated to come up in the relatively untapped Tier II and Tier III cities.

Overseas markets

Exports account for 60 per cent of consolidated sales, a mix that has been maintained over the past three years. While the consumption pattern in the developed markets of the US and Europe have turned cautious following the recession, Gitanjali has a diverse overseas market exposure. Retail operations in the US stem from takeovers of existing jewellers with store count now at 133. The company will, however, not look at significant scaling up of retail chains here.

Gitanjali also has a foothold in Chinese markets, which hold good potential as purchase of gold and diamond jewellery picks up there. By the end of FY-11, the company plans to increase store count by 100. Other export regions include West Asian markets.

Interest cost pressure

Sales grew at a compounded annual rate of 24 per cent over the past three years while net profits registered a growth of 29 per cent in the same period. On the back of a better product mix stemming from its move to a retailer from diamond polishing, operating margins improved from 5 per cent in FY-07 to 7 per cent in FY-10.

However, improved operating margins have been offset by higher interest outgo, leaving only a slight improvement in net margins; from 2.6 per cent in FY-07 to 3.1 per cent in FY-10. Further, interest cover is slim at 2.5 times. With its expansion plans and a rising interest rate scenario, interest pressures are unlikely to wane in the near term.

The company has outstanding FCCBs of about $73.86 million, (about Rs 332 crore), maturing by November 2011. The conversion price is at Rs 220 per share.

Real estate foray

Cash flows are likely to be buoyed by the company's monetising its land holdings, though it is not looking to become a full-fledged property developer.

It will develop residential projects of about 4 lakh sq.ft in Mumbai, with an investment of about Rs 300 crore. Estimated revenues are around Rs 400 crore, likely to accrue in FY-12