Gitanjali Gems

 Gitanjali Gems

Gitanjali Gems

 Gitanjali Gems 

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.

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

We recommend a ‘buy' in Gitanjali Gems from a short-term trading perspective. The stock gained 3.4 per cent in the last trading session accompanied by above-average volumes. It has gained 10 per cent in the last three trading sessions. The stock has been in a sideways movement between Rs 90 and Rs 150 since last June. Within this sideways move, a short-term uptrend is in motion in the stock since the May low of Rs 92.5. Third leg of this uptrend is currently in motion that can take the stock higher towards its June 2009 peak once more.

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

The substantial price falls suffered by the stock of diamond jeweller, Gitanjali Gems, offers an entry for investors with a long investing horizon. At Rs 41, the stock has fallen 87 per cent from a high of Rs 315, in May 2008. The share trades at just 2.4 times its trailing standalone earnings versus closest competitor Titan’s price-multiple of 16 times.

The stock’s fall may have been precipitated by the floundering gems and jewellery industry — imports and exports deteriorated, both mining and production were put on hold —but appears to have discounted a fair bit of the negative news.

For Gitanjali, a rising proportion of domestic retail sales (as opposed to exports), a shift in product mix towards jewellery (from low-margin polished diamonds) and diversification moves suggest reasonable growth prospects over the long term.

The company’s presence across the value chain allows sourcing from both the Diamond Trading Corporation and other mines (helping better cost control), while forward integration in the jewellery business (from processing of rough diamonds into jewellery, branding and retail) lowers business risk and allows better margins than pure diamond exporters.
Key segments

Gitanjali operates in three main lines of business — diamonds and jewellery, the nascent lifestyle products and SEZs. Within the diamonds segment, the company processes (cutting and polishing) and exports diamonds; besides retailing diamond and gold jewellery in India and overseas. The jewellery segment did well in the past three years, clocking a CAGR of 63 per cent, with contribution to revenue going up from 22 per cent in 2006 to 42 per cent in the latest quarter.

The company expects to move to a 50:50 mix over the next year or so. This segment generates a better return on capital employed, 15 per cent versus the 1.5 per cent offered by diamonds (year-to-date figures).

Through the lifestyle business, the company retails watches, silver wear, cosmetics, perfumes, leather and accessories. Gitanjali’s SEZ initiative has not begun to contribute to revenues as yet.

Besides some in-principle approvals, it has one notified 80-hectare gems and jewellery SEZ at Hyderabad.In another initiative, Gitanjali recently entered into a joint venture agreement with the Kuwait-based Hassan’s Optician Company to secure a foothold in the eyewear segment.

Brand recall

Gitanjali is a top player in the branded jewellery market; the only other player with a significant national footprint being Titan Industries’, Tanishq. Gitanjali, however, leans towards the premium end, with an emphasis on diamond jewellery. Brands include the high-end Nakshatra and D’damas, daily wear Gili and Asmi, bridal collections Vivaha and Maya, pure-gold Collection G, and couples collection Sangini.

Most command good brand equity, and the infancy of India’s branded jewellery market will allow it to make the most of the opportunities thrown up as the market develops. Distribution is through ‘shop-in-shops’ housed in malls, independent jewellers, besides exclusive stores.

The domestic branded jewellery business appears very promising for the company at this juncture; a focus on premium jewellery leaves it less susceptible to cutbacks on spending by the mid-lower income groups.

The segment grew 20 per cent in the nine months ended December 2008. The problems related to global recessions and a cutback in US consumer spends may pose challenges for the diamond export segment.
On solid ground

Helped by its expanding retail footprint, Gitanjali’s sales have grown at a compounded annual rate of 25 per cent in the past three years, far surpassed by a 151 per cent growth in net profits in the same period.

A shift in product mix and cost-cutting measures pushed net profit margins from 1 per cent in FY 2005 to 5.2 per cent in the previous financial year. Gross margins improved from 2.5 per cent to 6.7 per cent in the same period.

Exports have always formed a bulk of revenues, though the share has come down to 52 per cent (December ’08 quarter) from the 71 per cent in 2005. Despite this, and significant imports, the company has not suffered any forex loss as yet.

Leverage is fairly low at 0.7 times (consolidated); coupled with a growing interest cover from 2.5 times in 2005 to its current 6.6 times, the company may not run into near-term funding roadblocks. Loans are primarily to fund working capital — the sector it operates in calls for high working capital. Its fund-raising spree through 1 per cent FCCBs and GDRs has left it with enough funds on hand to tide over for the next few quarters at least.
Challenges

Gitanjali’s SEZs concentrate primarily on gems and jewellery processing which is currently lacklustre. About $73.86 million of the FCCB, outstanding as of March ‘08, is due by 2011. Given the conversion price of Rs 220, the conversion option appears unlikely to be exercised, should the market price remain unattractive until 2011.

The bonds then may have to be redeemed, taking out more than Rs 250 crore of the company’s funds, assuming no conversion has taken place since March ‘08. Working capital forms about 40 per cent of sales; debtors make up almost half the assets with collection periods averaging five months. Hiccups in collection could restrict cash flows and revenues.

Today's Pick - Gitanjali Gems

We recommend a buy in Gitanjali Gems from a short-term perspective. From the charts of Gitanjali Gems, we see that the stock was on a medium-term downtrend from the resistance level at around Rs 475 till it found support at around Rs 210 in early April 2008. However, after finding support at Rs 210, the stock reversed the direction and commenced its up move. Subsequently, the stock breached the medium-term down trendline and penetrated the 21-day moving average in mid Apr il. In the recent time, the stock penetrated 50-day moving average, pointing further bullishness. The daily relative strength index is featuring in the bullish region and the weekly RSI is steadily rising in the neutral region. Moreover, the daily moving average convergence and divergence has entered the positive territory. Our short-term outlook for the stock is bullish. We expect the stock’s current up move to continue to our price target of Rs 328Investor with short-term perspective can buy the stock while keeping the stop-loss at Rs 273 level.

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Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems

Gitanjali Gems: Buy

With a growing retail presence, strong brands, improving product mix and an international acquisition strategy that could strengthen its exports business, Gitanjali Gems is set to accelerate growth over the next two-three years.

At the current market price of Rs 412, the stock trades at about 16 times its likely FY-09 earnings per share. The valuation is at almost a 50 per cent discount to Titan Industries, which owns the Tanishq brand of jewellery retail stores. In terms of size, Gitanjali’s domestic jewellery business is as large as Tanishq and the company has well-known brands such as Nakshatra, Gili and D’Damas in its bouquet. This makes it fairly well-placed to capitalise on buoyant domestic consumption trends as well. The risk of a slowdown in exports is somewhat mitigated by rapidly increasing share of the domestic business in overall revenues. Margins are also likely to improve with the increase in the export of higher value-added items. These factors may help the stock command improved valuations in the future. Gitanjali is also involved in the development of special economic zones for gems and jewellery and is now developing 200 acres of land in Hyderabad.

While this could lead to additional revenues from real estate, we have not factored payoffs from this business into our estimates. The company lacks a track record in this business, which is, in any case, fraught with risk. An investment in the stock can be considered with a two-year horizon.

Growing branded retail presence

Gitanjali Gems has a promising domestic retail business, which at Rs 1,432 crore, accounted for 40 per cent of its revenues in FY-07. The share of domestic revenues improved to nearly 50 per cent in the first half of FY-08. Gitanjali Gems retails gold and diamond jewellery under well-known brands such as Gili, Nakshatra and Asmi (the latter two have received marketing support from DTC till date). It also has a joint venture with the U.A.E-based retailer, Damas, to sell jewellery in India under the name D’Damas.

Recent developments point to an increasing focus on the domestic segment. One is its acquisition of the Nakshatra brand from Diamond Trading Company (DTC), the marketing arm of De Beers, for Rs 100 crore. This strengthens the company’s grip on the market at a time when other traditional jewellery exporters are also getting into the branded retail business. Nakshatra is also a fairly mature brand now and this may mean marginal incremental investments on brand building from here on.

Gitanjali has also recently entered into a joint venture with an Italian fashion group, Mariella Burani, to introduce the latter’s luxury and fashion products in India through a chain of stores. It struck a similar joint venture with Italian jewellery and watch retailer Morellato, which makes brands such as Cavalli, Moschino and Miss Sixty under licence, for distribution of watches and jewellery brands in India.

With a wider product range and potential to tap the premium end of the market through tie-ups with international retailers, Gitanjali is likely to make larger strides in the domestic retail space.

Improving product mix

While domestic retail is likely to drive revenue growth, operating margins are also likely to improve as the company’s product mix shifts from low-margin cutting and polishing of diamonds (CPD) towards jewellery. Jewellery sales now account for 40 per cent of revenues. This share is likely to increase on the back of growing outsourcing of fabrication of jewellery to India. Gitanjali is also well-placed to capitalise on this trend with the acquisition of two retail chains in the US, Samuels Jewellers (100 stores) and Rogers (50 stores). The $100-million retailer, Samuels, will outsource 60 per cent of its fabrication work to Gitanjali.

While higher jewellery sales will increase on the one hand, the acquisitions provide direct access to the US market. A presence in retailing may give the company higher margins than would be the case with sales to international wholesalers.

The ability to command better prices as a result of these bodes well for profitability in the backdrop of higher prices of gold and precious stones. Gitanjali may also be better placed to withstand any slowdown in exports to the US compared to other gems and jewellery exporters.

Gitanjali Gems may acquire another US company

Gitanjali Gems is betting big on the US retail market. After taking over Samuels Jewellers in December 2006, the firm is now close to acquiring another leading jewellery retailer for around $100 million. Sources close to the deal said the due diligence process is almost complete, and the company is going ahead with the transaction.

“It’s one of the leading jewellery retailers having over 100 outlets across the country. The deal will be completed in two months,” said sources. The company is being advised by Keynote, a Mumbai-based boutique investment bank. Gitanjali shares rose marginally to close at Rs 361 on Thursday.

The Mumbai-based company has also lined up plans to raise capital for its proposed acquisition and domestic expansion. The firm wants to raise $100 million through a global depository receipt (GDR) issue. It has also proposed to issue 10 million convertible equity warrants on preferential basis to the promoters and raise around Rs 320 crore. An extraordinary general meeting (EGM) has been called on November 3 to consider the fund-raising plans.

Last December, the company acquired 97% stake in Samuels Jewellers Inc, operating 97 stores spread across 18 states, for Rs 100 crore. It further infused another Rs 100 crore as working capital. The acquisition was financed through internal accruals and proceeds from the $110-million foreign currency convertible bonds (FCCBs) issue. Sources said Gitanjali is currently in the process of turning around the loss-making US retailer, and is expected to achieve break even by 2007 end.

The company’s other plans include a proposed foray into the luxury retail market through its new venture Luxury Connexions (Lx) and luxury malls. The group plans to invest Rs 100 crore over the next three years for establishing luxury malls across India and acquiring international brands which would be sold through Lx outlets. Sources said these would be positioned to facilitate and promote the growing luxury retail market in India vis-a-vis international brands.

The plans include setting up luxury malls in eight cities, beginning with Hyderabad and subsequently moving to Mumbai, Bangalore, Delhi, Kolkata, Ludhiana, Chandigarh and Chennai. The luxury malls would house global brands, restaurants, spas, international jewellery brands, connected wedding stores encompassing designer products finely bundled with personalised services to suit the growing needs of India’s upper middle class.

Gems exports rise

The country's gems and jewellery exporters will be able to meet their target of $18.5 billion this fiscal, despite a sharp appreciation of rupee.

Cheaper imported raw material, which constitutes 70 per cent of their finished products, is expected to neutralise the impact of a robust rupee.

The Gems and Jewellery Export Promotion Council had set a target of $18.5 billion for the current financial year against $17.2 billion achieved in 2006-07.

"We have already achieved exports worth $9.4 billion for the April-September period, a 26 per cent growth year-on-year," Council chairman Sanjay Kothari told reporters on Thursday.

Since the gems and jewellery sector is an import-based industry, the rupee appreciation makes the raw material less expensive.

He said the industry is looking at an growth rate of 8-10 per cent this year, adding that of the $17 billion exports achieved, diamonds constituted 80 per cent. The domestic gems and jewellery industry is valued at $15 billion.

"We are looking at a total market size of $50 billion by 2015, of which exports would be around $30 billion," he said.

Gitanjali Gems launches IT company

Gitanjali Gems, a Rs 1,250 crore jewellery company, today announced its foray in the information technology (IT) sector. The company has floated Ivida Technologies, a wholly owned subsidiary, to launch its software, technology and telecom business.

The subsidiary will be essentially engaged in web development, infrastructure management and enterprise resource planning (ERP). Explaining the rationale behind the move, Sam George, director, Ivida Technologies, said, "The company intends to tap opportunities in the retail boom and the IT sector in general."

He also mentioned that technology will play a key role in Gitanjali’s expansion plans as the company is looking at automating all its retail operations.

Apart from addressing the IT requirements of the group company, the subsidiary will also cater to its independent clients. George said, "The company has bagged some US-based jewellery clients for the web portal operations. We are also in talks with companies to be their enterprise resource planning (ERP) partners in India." He further said that the third area of immediate concern for Ivida would be hardware and networking.

The company is also looking at partnering with solution providers like JDA, SAP and others for specific retail solutions. Subsequently, Ivida also aims to focus on media and graphics and knowledge processing outsourcing operations. Currently, it has a team of 30 people, which would be scaled upto 75 by the end of the first operational year.

Duty free for India Gold Jewellery scrapped

The US has terminated the duty-free tariff regime for India’s exports of gold jewellery and brass lamps.

The US President, Mr George Bush, issued a proclamation on Friday ending the ‘generalised system of preference’ (GSP) – a tariff regime that allows the US Government to extend preferential tariff arrangements for select countries, according to reports from Washington.

Consequently, these exports would attract import tariff applicable for exports from other countries engaged in the same trade.

Duty-free imports into the US under the GSP accounted for $32.6 billion worth of goods from developing countries in 2006, according to the reports.

India shipped gold jewellery worth $1.6 billion and $20 million worth of brass lamps under the GSP programme in the first 10 months of 2006, the US Trade Representative stated when initiating the review last year.

Along with India, Brazil and some other developing countries have also been targeted under a programme revamped late last year by the US Congress.

On paper, the reason for such termination could be that such duty-free access is no longer required for these products as the countries in question have reached a specified threshold level from where they could compete without the aid of concessional tariff.

A Bill approved by Congress in December last stipulated new guidelines for determining whether a particular product is eligible for duty-free treatment under the GSP programme.

But trade policy analysts here attribute the US decision to terminate GSP benefits for particular products of India and Brazil to their joint stand against the continued heavy farm subsidy payout by the US and their refusal to cut tariffs on industrial goods as demanded by developed countries during the recent G4 trade talks held in Germany.

Indian jewellery exports will now attract 6.5 per cent duty in the US.

Out of the total jewellery purchased by US from various countries, Indian jewellery accounts for 33.2 per cent, according to GJEPC News, published on the Gem and Jewellery Export Promotion Council (Council) Web site.

The effect of this could be that Indian jewellery may lose some business to China, said Mr Vasant Mehta, Vice-Chairman of the council.

However, the extent of the actual effect will only realised by the end of the year, he added.

With the applicability of import duty, Indian jewellery now comes on par with and will compete against products from China, Hong Kong, Thailand, as these nations do not enjoy duty-free imports either.

Representatives of the export community do not see the levy of 6.5 per cent as a serious threat to the business.

If the burden is evenly shared between the Indian supplier, US importer and the end-consumer, then the real impact is negligible, according to manufacturers.

Ultimately, it all boils downs to the product itself, i.e., the quality and the design, said Mr Rajesh Mehta, Chairman of Rajesh Exports.

Gitanjali Gems taps Saudi retail market

Gitanjali Gems has entered into a MOU for a 50:50 joint venture with Sulieman Al Othaim of Saudi Arabia, one of the leading retail chains in the Middle East. The joint venture will facilitate the entry of the company into the mainstream retail segment in Saudi Arabia leveraging Sulieman Al Othaim's chain of specialty stores across the region.

The company will market and distribute new jewellery brands such as Rayana, La Baguette and Hart to Hart for the local market and Indian brands like Nakshatra, Asmi and Sangini. Apart from this, these brands would also be marketed through other independent retail chains.

The stock has gained 0.61% at Rs213 on volumes of over 1,474,000 shares on the BSE.