Tara Jewels IPO Analysis

CM RATING 38/100 Tara Jewels is promoted by first-generation entrepreneur Rajeev Sheth. The company is predominately an exporter of studded diamond jewellery, which constituted about 81% of total turnover as on March 2012 But to tap the growing domestic mid-income segment, Tara set up its first retail showroom in October 2008. Currently the company has net 29 stores spread over area of about 29,950 sq feet across suburban areas of metros, mini metros and cities with higher concentration of the mid-income segment. Each store is around 1,000 sq feet, carrying about Rs 2.5 crore worth of inventory of fashion jewellary. Tara plans to open about 20 new stores across west India, central India and the NCR region in India by March 2013. The company claims to have pioneered the western retail jewellery format in exclusive Indian showroom. The retail stores are developed exclusively on a company-operated model, which ensures higher control and higher margin. Its entire retail jewellary is manufactured in-house at its four manufacturing facilities (of which one is located in China) spread over area of 84,500 sq feet. A good portion of its studded-diamond jewellery export is also manufactured in-house. Nearly 81% of its total sales as on March 2012 were predominately studded-diamond jewellery exports to countries like Australia, China, EU, South Africa, UK and US. It caters to marquee customers like Walmart, Zale Corp, Sterling Jewellers, Dicia Jewels, JC Penny, Helzberg, and JKB International. About 10 customers constitute 70% of its export sale. The company is entering the capital market to raise about Rs 109.50 crore by issuing around 78.04 lakh equity share of face value of Rs 10 each at the price range of Rs 225 to Rs 230 per share. The proceeds from issue of shares will be used by the company for setting up 20 new retail stores and to pay off about Rs 50 crore of working capital loans. Along with fresh issue, there is also offer for sale of Rs 70 crore by selling shareholder Fabrikant HK Trading. The company has also allotted about 18 lakh equity shares to Crystalon Finanz AG, which is an investment arm of Austria-based Swarovski Group at price of about Rs 225 per share and raised about Rs 40 crore as pre IPO placement. Strengths Retail jewellary is manufactured in-house and thus company has better control on costs and design and fashion. It is not into trading business. The company can leverage its stud jewellery exports business by further penetrating existing markets, by expanding customer base, entering new geographies and manufacturing new jewellery products. It has plans to enter into new geographies namely Russia and South America. Tara acquires gold on loan or lease basis from bullion suppliers. Thus, it is able to withstand fluctuations in gold price and as a policy does not trade in gold. Similarly for diamonds, the company places order only after receipt of firm orders from customers and works on back-to-back basis, thereby keeping its job work margin intact and protecting itself from price fluctuations and any inventory gain or loss. Despite exporting to large giants and MNC companies worldwide, the company exports directly under its brand name Tara or through brands such as Heart2Heart, Candy Hearts, Snow Diamonds and Cherished Hearts, whose intellectual property (IP) rights remain with the company. Weaknesses The company's net debtor's position comes to around 90 days. Working capital will continue to be a challenge as it caters to large giants who generally dictate terms of payments although they do not default and require fewer provisions. Currently, the company is availing Section 10A benefits for its export revenue and, thus, pays MAT for its export profit and normal tax for retail profit. However, post FY 2014, the benefits of Section 10A will cease and company will start paying full tax on its profit. Valuation Consolidated net sales in FY 2012 were up by 22% over FY 2011 and increased focus on retail stores, which fetch better margin, resulted in higher OPM of 9.4% and OP of Rs 131.82 crore, up by 36%, and PAT rose 33% to Rs 54.12 crore. EPS on post-IPO equity of Rs 24.5 (assuming IPO price of Rs 230 per share) and Rs 24.70 crore (assuming IPO price of Rs 225), works out to Rs 22.1 and Rs 21.9, respectively. The shares are being offered in the price band of Rs 225 to Rs 230 per equity share of Rs 10 face value. The P/E at the lower band works out to 10.1 times and at the upper band works out to 10.4 times. Diamond and jewellery exporters used to trade at low P/Es due to the low margin in this business. However, gradually, many of them have ventured into retailing in domestic market. Those who succeeded have been able to garner better margin and higher P/E. Tara Jewels's performance on the stock market will also depend on how much success it achieves in its domestic retail business.