Tribhovandas Bhimji Zaveri IPO Analysis

With a track record of 145 years, Tribhovandas Bhimji Zaveri (TBZL) is a well-known and trusted jewellery retailer in India, particularly in Maharashtra. Started as a partnership firm initially, it became public limited company in July 2007. Currently, it has three promoters: Shrikant Zaveri, Binaisha Zaveri and Raashi Zaveri. Having registered office at Zaveri Bazaar, famously known for the gold jewellery business in the Indian financial hub, Mumbai, the company mainly sells gold and diamond-studded jewellery along with other products like platinum and Jadau jewellery across its showrooms. To cater to the changing taste across regions, it offers wide variety of jewellery from regions across India and also offers jewellery from various parts of world such as Italy, Turkey and Thailand. The company retails its jewellery through 14 showrooms with total carpet area of 48,818 sq ft, in 10 cities. Of the 14 show rooms, 11 are large format high street show rooms with carpet area of 3,000 sq ft and more and the remaining three are small format high street showrooms with carpet area of 1,000-3,000 sq ft. Currently, the company has six showrooms in Maharashtra, three in Andhra Pradesh, three in Gujarat, and one each in Kerala and Madhya Pradesh. Twelve out of 14 show rooms are under lease. Gold jewellery is the major contributor to revenue. In the nine months of fiscal ended March 2012 (9M of FY2012), gold jewellery constituted 72.48% of the total revenue. As a strategy to improve the margin, the company plans to increase share of diamond jewellery revenues in total revenue. The share of diamond- studded jewellery in total revenue increased from 21.62% in FY 2010 to 22.08% in FY 2011 and to 25.20% in 9M of FY2012. With the increase in scale of operations through expansion of retail outlets, the profitability has improved substantially in the past three years. The net profit margin has doubled from a mere 1.7% in FY 2008 to 3.4% in FY 2011 and has further increased to 4.5% in 9M of FY 2012. The marketing activities are focused on generate footfalls in showrooms throughout the year with launch of bangles and chain festivals, Oodiyanam festivals, advance payment scheme called, "Kalpavruksha" (paying advance amount throughout a plan period) . The design and manufacture of jewellery is done either in house or by third parties. The company outsources manufacturing of gold jewellery by paying making charges and supplying gold to approximately 150 external jewellery manufacturers in different states like AP, Kerala, Maharashtra, Gujarat, Karnataka and Rajasthan. It also procures readymade jewellery from over 120 different vendors in Jaipur, Kolkata, Ahmedabad, Rajkot, Amritsar, Cochin and Hyderabad and a small numbers from vendors in Italy, Thailand and Turkey. Diamond studded platinum jewellery is sourced from three vendors in India. Likewise, the company purchases gold bars from authorized dealers and banks, and diamonds from site holders. A centralized procurement policy and purchase in large volumes help the company to get stock at lower prices than the competitors and enable it to sell at competitive prices at showrooms. To mitigate the risk of changes in gold prices, at end of each day, the company endeavors to purchase the same amount of gold in rupee terms that was sold across all the showrooms that day. The company has subsidiaries Tribhovandas Bhimji Zaveri (Bombay) and Konfiaance Jewellery Pvt Ltd. Tribhovandas Bhimji Zaveri (Bombay), a 100% owned subsidiary of the company, manufactures diamond-studded jewellery for sale in the parent company showrooms. The company had a facility in Kandivali, Mumbai, which has a carpet area of 5,755 sq. However, to meet its growing needs, it has opened up a new facility at Kandivali, Mumbai, in FY 2011. Since the commencement of new facility, the company has shifted majority of production activity to the new facility during 3Q of FY 2011. The new facility has production capacity of (based on one eight-hour shift per day) approximately 1,00,000 carrats of diamond-studded jewellery, 4,000 kg of gold refining and manufacturing 4,500 kg of gold jewellery components in a carpet area of 17,739 sq ft. In the nine months ended December 2011, it has produced 37,402 carrats of diamond-studded jewellery as against 35,509 carrats in FY 2011. Konfiaance Jewellery Pvt Ltd was initially a 60% JV of the company with Parinda Bajaj to market precious stones and gems and manufacture and sell Jadau jewellery and other ornaments. However, it never commenced operation. TBZL bought back remaining 40% stakes from Parinda Bajaj in June 2011 and made it a 100% subsidiary. As per the termination agreement, pursuant to making Konfiaance Jewellery a 100% subsidiary, TBZL shall not engage in the business of Jadau jewellery in Hyderabad for two years from June, 22, 2011, and cannot use the brand name, ‘Krsala', effective from 1 June 11. Sales of Jadau Jewellery in Hyderabad were Rs 8.43 crore for FY 2011. With an objective of becoming a leading jewellery brand in India, TBZL is planning to open additional 43 show rooms (25 large and 18 small format high street show rooms) by end of FY 2015. After expansion, the company will have its showrooms across 43 cities in 14 states against 10 cities in five states currently. The carpet area is expected to increase to around 1.5 lakh sq ft from current 48,818 sq ft. To meet the capital requirements, the company is coming out with an IPO to raise Rs 200-Rs 210 crore by issuing 16.67 million shares of face value Rs 10 each at price band of Rs 120-Rs 126 per share through book building process. The company initially intends to use Rs 19.19 crore to open nine large format stores in eight cities in FY 2013 and utilize Rs 160.45 crore for meeting the incremental working capital requirements while the remaining fund will be deployed for the general corporate purposes. So as to reward the employees and enable them to participate in the company's growth and incentivize their performance, the company proposed TBZ ESOP Scheme in January 2011. Under this scheme, the company has granted 111,309 options and 97,124 restricted stock units, together convertible into 208,433 equity shares of face value Rs 10 each, which represents 0.42% of the pre-issue paid-up equity capital and 0.31% of the fully diluted post-issue paid-up capital. Strengths: Retailing jewellery is the promoter's family business. Due to the rich experience in the gold and diamond jewellery coupled with very good track record of the brand name, TBZ, the company naturally enjoys trust in quality of its products with its customers. Dedicated design team of 25 designers includes skilled professionals working on CAD (Computer Aided Design) to develop new products and designs to meet customer requirements. This will ensure the competitiveness of the company amid challenging environment and changing trends. Procurement of jewellery from suppliers in different regions across India diversifies the product mix and also allows exposure to various regional preferences, thereby expanding the designs in the product basket. Well-established systems and procedures, effective inventory management through Oracle E business suite software and comprehensive corporate planning and budgeting help in a better management of chain of retail shops. All established stores and yet to be opened stores are strategically placed in the top (developed and developing) cities of the respective states. High street format stores in Tier I cities can command higher margin than the other peers. Weakness: The Indian retail jewellery industry is highly fragmented and dominated by the unorganized sector from which the organised retail jewellery sector faces intense competition. Competition from many organized players also. The company has registered trademark, "Tribhovandas Bhimji Zaveri", and has the right to use it as part of trading or company name. Two retiring partners of the company have also right to use the company's trademark and brand name, "Tribhovandas Bhimji Zaveri", in their business. Further, certain old retired partners have also right to use brand name, "Tribhovandas Bhimji Zaveri", with modifications through prefixes and suffixes specified in the respective deeds. This may affect/ dilute the company's brand image. 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 adversely affect the company's business. Further any loss of inventory due to theft and any other means cannot be recovered through insurance and may affect the operations. Taxes and other levies like imposed by the Central or state governments can affect the industry For example, effective March 17, 2012, the government further extended excise duty to non-branded jewellery at an effective rate of 0.3% on the value of the jewellery sold. Further, it has also increased basic customs duty on gold bars other than tola bars from 2% to 4%; gold in any other form from 5% to 10%; platinum from 2% to 4%; and cut and polished colored gemstones from nil to 2%, and increased countervailing duty on gold ores and concentrates from 1% to 2%. Any further increase on existing taxes and other levies or the imposition of any other taxes or levies by the Central and the state governments may adversely affect operations. Valuation: On standalone basis, in FY 2010-11 the company reported 35% rise in the top line to Rs 1193.93 crore, which coupled with 200-basis point improvement in the operating profit margin to 7.3% powered 139% spike in net profit to Rs 40.42 crore. In the nine months ended December 11, the company reported a net profit of Rs 50.50 crore on net sales of Rs 1117.37 crore, thanks to further increase in the operating margin to 9.2% during the period. The company has aggressive expansion plans on hand. Normally expansion in retail industry involves substantial increase in fixed overheads (especially for companies like TBZL which focuses on high street formats), which take time to be absorbed by higher revenues, which can lead to volatility in company's profit in future. TBZL recorded annualized EPS of Rs 10.1 on post-issue equity capital of Rs 66.67 crore for the nine months ended December 2011. The offer price discounts the annualized earnings of the nine months ended December 2011 by 11.9x – 12.5x in the lower and higher end of the price band, respectively. Industry major Gitanjali Gems trades at 6.3x on TTM net profit, while Thangamayil Jewellery trades at TTM PE of 4x. The company fits into medium and small diamond jewellery manufacturing industry, which has TTM PE of 8.4.