Renaissance Jewellery IPO Allotment

Renaissance Jewellery IPO Allotment

eClerx, BGR Energy, Transformers, Brigade Enterprises, Jyothy Lab

eClerx Services 270 to 315 95 to 100


BGR Energy 425 to 480 380 to 400


Transformers & Rectifiers 425 to 465 180 to 200


Brigade Enterprises 351 to 390 110 to 120


Jyothy Lab. 690 230 to 240


Burnpur Cement Ltd. 12 2 to 3


Edelweiss 825 780 to 800


Renaissance Jewellery 150 20 to 25


Kolte Patil 145 75 to 80


Kaushalya Infra 60 13 to 14


SVPCL 42 - 3 to -4

Yes Bank, Empee Distilleries, Mundra Port, Edelweiss Capital, Axis Bank, Hero Honda, Renaissance Jewellery, Kolte Patil, Kaushalya, Jyothy, Ranbaxy

Yes Bank, Empee Distilleries, Mundra Port, Edelweiss Capital, Axis Bank, Hero Honda, Renaissance Jewellery, Kolte Patil, Kaushalya, Jyothy, Ranbaxy

Renaissance Jewellery: Avoid

Investors can stay away from the initial public offer from Renaissance Jewellery. Though the offer is modestly priced and the company has a good financial record, the business carries a relatively high-risk profile at this juncture due to client concentration and US-centric operations.

The vulnerability of earnings to a US slowdown, dollar depreciation and the possibility of increase in gold or diamond prices peg up the uncertainties surrounding the earnings prospects.
Business

Renaissance Jewellery makes and sells studded precious jewellery to international retailers; it also has a small domestic presence through a retailing venture. Over 95 per cent of its revenues originate from the US.

The company operates three jewellery manufacturing units located in SEEPZ and Bhavnagar. Studded jewellery exports offer higher scope for value-addition and margins compared to the export of cut and polished diamonds, which is the predominant business for many of the Indian gem/jewellery exporters. A decade-long presence in this business and a good design pipeline have helped Renaissance establish strong relationship with key clients and steadily scale up its revenues and profits over the past few years.

While net sales (consolidated) have grown over two-fold to Rs 440 crore in the three years to FY-07, net profits have grown over three-fold from Rs 6 crore to Rs 25.4 crore over the same period. The planned expansion of capacities by 50 per cent, funded by this IPO, could aid the company in further scaling up revenues and profits should strong demand trends be sustained.
Uncertainties and risks

However, there appear to be a few uncertainties attached to the business prospects at this juncture. One, the company’s current sales are highly reliant on its top clients, with the biggest accounting for 42.3 per cent of revenues in FY-07 and the top five for nearly 95 per cent.

The company caters to large retail chains and wholesalers without any specific long-term sourcing contracts with the latter. This makes the business quite vulnerable to any churn in the client base.

Second, with over 95 per cent of the company’s revenues derived from the US, any slump in US retail sales could impact the company’s sales growth. Jewellery sales in the US markets are priced on a piece basis rather than on a cost-plus basis as is the practice in the Indian market. Therefore, the company’s ability to pass on any spike in raw material costs (on the prices of gold or diamonds) to customers may be limited, especially while competing with other suppliers.

Operating profit margins in this business are already thin, with the company managing a 6-7.5 per cent margin in recent years. With jewellery exports from India into the US ceasing to enjoy duty waivers under the generalised system of preferences with effect from July 2007, Indian exports have been exposed to higher competition than before.

Third, a higher tax incidence on account of the applicability of MAT to two of the company’s units from the coming fiscal may also potentially impact earnings.
New initiatives

The company however, has a few initiatives in place to address client and geographic concentration. For one, it plans to use the offer proceeds to fund a venture in the US which will target smaller and mid-rung retailers in addition to the large ones that are already being catered to. If successful, these efforts could help the company reduce its client concentration and gain better bargaining power as a supplier. Second, the company has forayed into markets such as West Asia to reduce its US dependence.

However, these initiatives are in a relatively nascent stage. Investors can closely watch progress on these fronts, post listing and consider exposures to the stock, at a later date.

Seen purely in terms of valuation, however, this offer is modestly priced in relation to listed players in the jewellery space.

The company’s net profits of Rs 25.4 crore for FY-07 translate into a per share earnings of about Rs 19.5 on the pre-offer equity base and to Rs 12 on the fully diluted equity base (factoring in warrant conversion). Based on the fully diluted equity for the sake of conservatism, this translates into the PE multiple of 10.5-12.5 times at the two ends of the price band.

Offer details: The company is offering equity shares in the price band of Rs 125-150, along with one detachable warrant, for every two shares. Each warrant is convertible into one equity share during the period from April 1 2009 and May 31 2009. The conversion will take place at a 25 per cent premium to the issue price for this IPO. IPO proceeds will be deployed towards investment in a foreign marketing subsidiary and substantial expansion of manufacturing capacities at Mumbai and Bhavnagar

Renaissance Jewellery IPO Analysis

Promoted by Niranjan Shah and his family, Renaissance Jewellery manufactures and sells studded gold, platinum and silver jewellery and is primarily focused on international markets with 96% of revenue accruing from the US. The company also markets studded jewellery products through retail stores operated through its 100% subsidiary Renaissance Retail Venture Pvt Ltd (RRVPL). RRVPL has eight retail outlets (five in Mumbai, one in Pune, one in Lucknow and one in Gurgaon) and 16 shops in shops. The retail products are sold under the brand name, Lucera. It also commenced exports of loose diamonds from its facility situated at Opera House in Mumbai in July 2007.

Two of its three manufacturing units are located at the Santacruz Electronics Processing Zone’s (Seepz) special economic zone (SEZ) in Mumbai. The other is a 100% export-oriented unit (EOU) at Bhavnagar in Gujarat. The 100% subsidiary RRVPL has a manufacturing facility at MIDC, Andheri, Mumbai, to cater to the domestic retail market. Another 100% subsidiary Verigold Fine Jewellery Pvt Ltd (VFJPL) has a manufacturing facility for studded jewellery at Seepz-SEZ in Mumbai.

Renaissance Jewelry New York Inc. (RJNY), another 100% subsidiary, caters to independent mid-range retailers in the US, accounting for 56.9% of the US market.

A talent base of about 40 designers develops about 500 new designs every month, resulting in over 30,000 designs. There were about 2,000 employees at the manufacturing facilities end September 2007.

Strengths

• The installed capacity will increase to 3,250 kg in the year ending March 2008 (FY 2008) from 2,250 kg in FY 2007. Capacity utilization is increasing: from 64.07% in FY 2004 to 81.33% in FY 2007. The consolidated capacity would increase to 4,000 kg in FY 2010.

• RRVPL plans to increase the number of retail outlets in India from eight to more than 250 in the coming five years after examining the performance of the existing outlets.

Weaknesses

• Dependent on a few customers. Top customer accounted for 40.93% and 42.35% of consolidated revenue in FY 2006 and FY 2007, respectively. Top five customers accounted for 99.03% and 95.98% of consolidated revenue, respectively. Top two customers and top five customers accounted for 82.62% and 99.68% of consolidated revenue, respectively, in the three months ended June 2007.

• A substantial portion of total turnover is from exports in US dollars. Any fluctuation in the exchange rate will impact profit. Though imports and working capital funding in US dollars is a natural hedge, this may not be able to effectively mitigate the adverse impact of currency fluctuations on operating results.

• Rising gold prices could impact demand for ornaments. Also, the dependence on US may affect demand if there is slowdown in that country’s economy.

Valuation

Sales grew at a CAGR of 37.6% and profit after tax (PAT) at a CAGR of 94.7% between FY 2003 and FY 2007. At the price band of Rs 125 – Rs 150 on post-issue equity (of Rs 21.02 crore) including conversion of warrants, consolidated FY 2007 EPS works out to Rs 12.1 and P/E 10.3-12.4. On quarterly annualised EPS of Rs 13.8, P/E is 9.1 – 10.9. However, of the PAT of Rs 7.23 crore in Q1 (ending June 2007) of FY 2008, translation gain on forex fluctuation stood at Rs 5.14 crore. One detachable warrant will be issued along with two equity shares which can be optionally converted at 25% premium to the IPO price between 16^th to 18^th month from date of allotment.