Gitanajali Gems IPO

Gitanjali Gems

Going aggressively retail

Polishing a well-established presence in retail

Gitanjali Gems (GGL) is an integrated diamond and jewellery manufacturer and its operations include sourcing, cutting and polishing roughs into diamonds and the crafting of diamond and other jewellery. The company derives nearly 85% of its revenue from sale of cut and polished diamonds, which are mainly exported. The remaining 15% of the revenue come from the sale of branded jewellery in the domestic market and export of jewellery in the international markets. Exports account for around 70% of total sales.

The company sells jewellery in India under four major brands: Gili, Nakshatra, Asmi and D’Damas. These brands are well established in the market and feature in top 10 best-known jewellery brands in India. Gili and Nakshatra are acknowledged as super brands.

Group company Gili India, in which GGL holds a 40% stake, owns the brand Gili. Nakshatra and Asmi are brands of de Beers. The D’Damas brand is owned by GGL’s 50:50 joint venture (JV) with Damas Jewellery LLC of the UAE.

For branded jewellery, GGL has established a large retail setup, which includes 26 exclusive distributors across India, around 620 outlets including those in host stores, five standalone stores and 17 franchisee stores in 30 cities and towns in India.

Recently, GGL entered into an agreement with the government of Andhra Pradesh to develop a special economic zone, spread across 200 acres in Hyderabad, exclusively for the gems and jewellery industry. The company has bagged 75 acres. A wholly owned subsidiary, Hyderabad Gems SEZ, was incorporated to oversee this project. GGL will invest Rs. 50 crore in the company.

GGL plans to utilise the proceeds of the IPO to invest in its subsidiaries / associate companies, expand its manufacturing capacities, and penetrate the retail market besides the development of SEZ near Hyderabad. The company will invest Rs. 75 crore in Fantasy Diamond Cuts, a 99.04% subsidiary, to establish retail outlets in medium and small cities in India. GGL will invest Rs 50 crore in the 50:50 JV with Damas Jewellery LLC to expand its retail operations.

Further, GGL plans to invest Rs. 10.2 crore in Brightest Circle Jewellery, in which the company holds a 33.34% stake along with two other Indian players, to expand its retail operations. Brightest Circle owns the Nakshatra brand of diamond studded jewellery.

Strengths:

1. India is the largest market for gold jewellery. Around 800 tonnes of gold are consumed in India annually. Besides, the diamonds processed in India amount to approximately 60% of the global consumption in value terms, 85% by weight and 92% by numbers
2. The branded jewellery segment in India, in which GGL operates, is reportedly growing at more than 20% per annum.
3. Retail jewellery sales offer around 15% net profit margin as against less than 3% in the polished diamonds business. Thus, a shift to jewellery business and retail expansion will strengthen the bottom line of GGL.
4. With established brands and integrated nature of business, GGL has strong prospects for topline growth and healthy profit margin.
5. Presently, GGL is the only company in India manufacturing the Asmi brand of jewellery, which is owned by the DTC.

Weaknesses:

1. One of the group companies, Digico Holdings, has a ‘sight-holder’ status with DTC. However, around 50% of the rough diamonds procured from DTC are used by other promoter group companies (controlled by Chetan Choksi, brother of GGL’s promoter Mehul Choksi) engaged in the same business. Also, GGL or its promoter does not control the operations of Digico, which is managed by Chetan Choksi. As a result, GGL has to purchase over 75% of its rough diamond requirement from the open market, which is costlier compared to the rough diamonds procured directly from DTC. There is also possibility of conflict of interest between the two brothers.
2. Diamonds and 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.
3. GGL amalgamated three of the promoter group companies – Gemplus Jewellery, Prism Jewellery and Giantti Jewels – with itself from 1 April 2005. As such, its results for the half-year ended September 2005 are not comparable with any of its previous financial results. It is, therefore, impossible to determine the growth rate or change in the operating profit margin of the company over the years. The comparable results available from FY 2003 to FY 2005 are disappointing with a continuous fall in OPM as well as the profit after tax (PAT).
4. In the current year, GGL will have to provide for doubtful debts of Rs 21.18 crore accumulated since 2001 as extraordinary item.
5. GGL’s business is highly working capital intensive and has been showing negative cash flow from operating activities.

Valuation:

GGL has set a price band of Rs 170 to Rs 195, which translates into a PE of 19.4x to 22.2x annualised EPS in the half-year ended September 2005 on post-issue equity. This business was once perceived as risky and non-transparent and was getting P/E of less than 10. However, retail initiatives by this sector have changed investor perception towards it. Now the sector gets average PE of around 20 on a TTM basis. Due to GGL’s established presence and aggressive plans, it can enjoy higher P/E than the sector’s.