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Tuesday, December 11, 2012
PC Jeweller, promoted by Padam Chand Gupta and Balram Garg, is one of the leading jewellery companies in India in the organized jewellery retail sector. The company's operation includes manufacturing, retail and export of jewellery. It offers gold jewellery, diamond jewellery and other jewellery including silver articles, with a focus on diamond jewellery and jewellery for weddings. As of September 30, 2012, the company had 30 showrooms under the "PC Jeweller" brand located across 23 cities in north and central India with an aggregate area of approximately 1,64,572 sq.ft. All of these showrooms are operated and managed by the company, with the exception of Chandigarh showroom, which is operated and managed by a third party. The company has developed a strong brand in markets of north and central India. It also sells gold and diamond jewellery through online sales. It also exports gold and diamond jewellery on a wholesale basis to international distributors in Dubai and Hong Kong. The company has two jewellery manufacturing facilities in Selaqui, Uttarakhand, that cater to its domestic sales. It has also set up two jewellery manufacturing facilities at the Noida SEZ, Uttar Pradesh, that cater to its export sales. Also, in November 2011, it commenced manufacturing operations at an additional 34,000 sq.ft. jewellery manufacturing facility in Noida, to further increase manufacturing capabilities. For FY 2012 and half year ended September 2012, it has processed 4831.96 kg and 2725.47 kg of gold, respectively, at its own manufacturing facilities. The manufacturing enables the company to control costs and increase the profit margin and gain a competitive advantage over some of its competitors who do not have their own manufacturing facilities. In addition to it, the company also outsources some of its jewellery manufacturing to independent contractors in India to manufacture jewellery based on designs that company develops and provides to these contractors. In FY 2010, FY 2011, FY 2012 and half year ended September 2012, its purchase of traded goods amounted to 4%, 5%, 0.1% and 0.02%, respectively, of its revenue from operations. The company invests in nationwide, regional and local store-level advertising campaigns, marketing initiatives and event sponsorships to increase visibility and customer traffic at its showrooms. It has also introduced innovative customer-oriented marketing initiative. For example, "Jewels for Less" scheme, which enables its customers to make advance payments in monthly installments during the scheme period to purchase, at the end of such period, jewellery of a value higher than the aggregate advance amounts paid. As of 30th September 2012, it had 50,582 subscribers enrolled under this scheme and had a deposit of Rs 70 crore from these members. In addition, it recently commenced the "Swarn Manjusha" scheme, which enables its customers to make advance payments in monthly installments during the scheme period and purchase jewellery at the prescribed discounted rates at the end of the completion of the relevant periods. It also enables the subscriber to fix the rate of the gold (for 24 carat quality gold) as on the date of payment under the scheme. The company also offers a buy-back policy for its diamond jewellery at a minimum of 90% of the invoice price, excluding applicable taxes, and in the case of gold jewellery, at the value of gold in such jewellery at then prevailing market rates, excluding applicable taxes, thus encouraging loyalty from customers. The company's procurement policy is aimed at de-risking the business from gold price fluctuations by sourcing gold under the gold loan schemes from canalizing agencies and international bullion suppliers. Under such arrangements, the price of gold purchased is not fixed on procurement, but rather within the applicable credit period, on the basis of prevailing gold rates on sale to customers, thereby minimizing any risk relating to gold price fluctuations between the time of procuring the raw material and selling the finished product to customers. In domestic operations the company is typically entitled to fix such prices within a period of 90 to 180 days from the date of procurement. Similarly, in export operations, it is generally entitled to fix such prices within a period of up to 270 days from the date of procurement. In addition, it also purchases small amounts of gold used in domestic operations on an outright payment basis. It also melts old jewellery that its customers sell to or exchange with it and use this as raw material for new gold jewellery. It sources its cut and polished diamonds principally from various diamond traders in India. Purchase of diamonds is on a fixed payment basis, i.e., the price and the credit period is fixed at the time of purchase. Larger diamonds are also imported from locations such as Hong Kong and Dubai. The company is entering capital market to raise money in the range of Rs 564 crore to Rs 609 crore by issuing around 4.51 crore equity shares (of which 3.58 lakh equity shares are reserved for eligible employees) of face value of Rs 10 each at the price range of Rs 125 to Rs 135 per share. The proceeds from issue of shares will be used to expand its showroom network across India, including in southern and western parts of India. It intends to open an additional 20 showrooms by FY 2014, all of which are to be financed through the net proceeds. All of the proposed showrooms are intended to be large-format showrooms. The company's retail network expansion plans are aimed at not only increasing sales volumes, but also enabling to consolidate its position as a leading Indian jewellery retailer in the organized jewellery retail sector, by increasing its brand visibility, geographical presence and market share. Strengths The company's own manufacturing facilities enables it to control costs and increase profit margins and gives a competitive advantage over some of its competitors who do not have their own manufacturing facilities. The company's procurement policy is aimed at de-risking the business from gold price fluctuations by sourcing gold under the gold loan schemes from canalizing agencies and international bullion suppliers. The company's operations currently benefit from certain direct tax incentives. The manufacturing unit located at Noida SEZ, Uttar Pradesh, is exempted from income tax (current tax) till March 31, 2015, and partly exempted till March 31, 2025, while other manufacturing unit located at Noida SEZ, Uttar Pradesh, is partly exempted till March 31, 2022. The company's two manufacturing units in Selaqui, Uttarakhand, are eligible for deduction of 100% of profits and gains for the two units until March 31, 2013 and 2014, respectively, and a deduction of 30% of profits and gains for the two units until March 31, 2018 and 2019, respectively. Weaknesses The company operate in an industry that is highly competitive, unorganized and has fragmented markets Jewellery purchases are discretionary and are often perceived to be a luxury purchase. For FY 2012 and half year ended September 2012, it has generated 61% and 57% of total domestic sales, respectively, from its operations in Delhi NCR and any adverse developments affecting its operations in this area could have an adverse impact on revenue and results of operations The company obtains most of its gold under gold loan schemes, which are governed by specific conditions of the Ministry of Commerce and Industry, Government of India, and the applicable RBI regulations. Any adverse change in the regulations that govern such arrangements or any event due to which it is not able to procure gold under the gold loan schemes using non-fund based credit facilities may materially and adversely affect the business, financial condition and results of operation. The company has significant working capital requirements primarily to finance the purchase of raw materials. Pursuant to a circular dated December 30, 2010, the RBI has categorized jewellers as a high risk business and, as a result, banks are required to apply enhanced due diligence measures before granting loans to jewellers. The company had negative net cash flows from operating activities amounting to Rs 337.7 crore, Rs 29.33 crore and Rs 141.9 crore in FY 2012, FY 2011 and FY 2009, respectively. The company is exposed to currency exchange risks. Valuation In FY 2010, FY 2011, FY 2012 and half year ended September 2012, domestic diamond jewellery sales constituted 18%, 23%, 27%, and 33%, respectively, of company's domestic sales and 12%, 15%, 18%, and 22%, respectively, of company's total revenue from operations in these periods. The management expects the relative proportion of domestic diamond jewellery sales of its domestic sales to increase in the future. The company continues to increase focus on diamond jewellery and other precious stone jewellery, as these typically involve higher profit margins than other types of jewellery. The company's total consolidated net sales for FY 2012 stood at Rs 3041.93. Of this, gold jewellery, diamond jewellery and other jewellery contributed 66%, 34% and 0.5%, respectively. The domestic gold jewellery, diamond jewellery and other jewellery contributed 73%, 27% and 0.8%, respectively, of its revenue from domestic sales. The operating profit margin stood at 10.9%. The net profit was Rs 230.93 crore. For the half year ended September 2012, total consolidated net sales stood at Rs 1855.7. Of this, gold jewellery, diamond jewellery and other jewellery contributed 68%, 32% and 0.2%, respectively. The domestic gold jewellery, diamond jewellery and other jewellery contributed 67%, 33% and 0.3%, respectively, of its revenue from domestic sales The operating profit margin stood at 12.6%. The net profit was Rs 141.66 crore. In FY 2010, FY 2011, FY 2012 and half year ended September 2012, its export sales represented 34%, 34%, 33% and 33%, respectively, of its revenue from operations in these periods. At a price band of Rs 125 to Rs 135 per equity share of Rs 10 face value, the P/E at the lower band works out to 9.69 times and at upper band it works out to be 10.47 times the EPS of Rs 12.9 for FY 2012 (on post-IPO equity). There is a discount of Rs 5 to retail bidders and eligible employees. In the diamond, gems and jewellery sector, companies such as Gitanjali Gems, Shree Ganesh Jewellery House, Tribhovandas Bhimji Zaveri, and Thangamayil Jewellery are trading at a PE of 9x, 1.6x, 32x, and 7.9x times their respective FY 2012 earning.