Jewellery Stocks that could glitter...

Updated: Apr 06, 2012, 18:06 PM IST

This is the concluding article of a series of five articles on the Gems and Jewellery Retail Industry in India.

In Part I of this series, we highlighted the changing scenario of the Rs One Trillion plus Indian Jewellery Retailing industry. With the growing Indian economy and middle class, demand for branded jewellery is rising. The jewellery sector is following the megatrend of moving from an unorganized, to a branded organized one. Also, recognition of gold and jewellery as an investment asset class, and increasing exports, has benefitted the Jewellery Industry.

In Part II we discussed the actors for assessing the potential in branded jewellery, and the upsides to such investments. Factors to consider for branded jewellery companies include real estate rentals, working capital cycles, the intense competition, the degree of diversification into other jewellery products, and/or into other non-jewellery related businesses (e.g. Gitanjali Gems is also in the lifestyle and apparel business). The positives for investing in this sector are the growth of the industry and the benefits brought by branding. Branding broadens the consumer base via segmentation, and increases operational efficiency because of the systematic approach to management.

Part III then highlighted the concerns that branded jewellers face. Among these are higher customs duty, service tax hikes, higher marketing expenses to build brands, and intense competition. Competition comes from sources - from family jewellers, from regional and branded national players, and from the newly developing "online" jewellery businesses. Also, inherently branded retail companies with stores, need to bear the cost of expensive real estate rentals, and also manage their inventory and working capital cycles well. Finally, in the wake of the recent budgetary announcements, the taxation issues have been accentuated, which, along with other cost pressures and can dampen profit margins.

In Part IV, we examined the business models, and qualitative and fundamental aspects of the three main players of this industry, namely Titan Industries (Tanishq), Gitanjali Gems, and Shree Ganesh Jewellery House.

In our last and final article, we add financial analysis to our assessment to decide which, if any, of these three companies is worth investing in.

Sales growth: Over the last 5 years, the sales compounded annual rate of growth (CAGR) for Titan has been close to 35 percent. This is higher than Gitanjali's 26 percent, but much lower than Shree Ganesh's 111 percent. Shree Ganesh, the export oriented company's CAGR was high as it started with a much lower base in 2006.Another consideration is that Titan Industries and Shree Ganesh's sales growth has been relatively consistent, whereas Gitanjali's has been volatile.

Working capital management - Branded jewellery retailers require huge investments in high value inventory. They have to stock a minimum product range, and adequate inventory to cater to customer requirements. Cash conversion cycle is a good indicator of this working capital efficiency.

Cash Conversion Cycle = Inventory days + Receivable days - Payable days

Cash conversion cycle is the best for Titan Industries at 25 days, with Shree Ganesh a close second at 27 days. However, this parameter is a very high 161 days for Gitanjali implying operational inefficiency. A closer look Gitanjali's ratio reveals that receivable days in particular are a very high 140 days.

Titan turns over its inventory into cash every 93 days, as compared to Gitanjali's 96 days. Since Shree Ganesh is 85 percent export oriented, its inventory turns are comparatively lower or 17 days. Titan and Gitanjali with their retail stores need to maintain higher inventory levels than Shree Ganesh to meet customer demands.

Profit margins - Operating profit margins for Titan, Gitanjali and Shree Ganesh have been 9 percent, 7 percent and 8 percent respectively over last 5 years. In terms of net profits, Shree Ganesh scores over the other two with 6 percent Profit After Tax (PAT) margin. The PAT margin for Titan is 5 percent, and for Gitanjali it is 4 percent.

Return ratios - Return on capital employed (RoCE) has been an average of 42 percent for Titan, and this has been steadily increasing from 29 percent in 2007 to 64 percent at present. Gitanjali's average RoCE over the past five years is only 10 percent! While Shree Ganesh's average RoCE over the past 5 years is 45, it has been steadily falling from 88 percent in 2007, to 30 percent currently. The return on equity (RoE) numbers tell the same story.

Quality is Important - Overview of the 3 Main Branded Jewellery Companies

Factor Titan Industries Gitanjali Gems Shree Ganesh Jewellery House
Revenues - All Businesses Rs 65.7 bn Rs 51.2 bn Rs 52.4 bn
Revenues - Jewellery Business Rs 50.5 bn Rs 51.2 bn Rs 52.4 bn
Diversification -Jewellery % Total Revenues 77% 100% 100%
Number of Brands 3 7 8
Raw Materials Gold - 85% of Raw Mat'l Costs Diamonds, Semi and fully precious stones - 89% Gold - 85% of Raw Mat'l Costs
Potential of other businesses High - Accessories, Watches, Time Wear, Eye Wear Medium - Lifestyle retailing The company is setting up branches of a finance company that would provide gold loans.

Major Branded Jewellery Retailers - Key (Financial) Parameters (over last 5 years)

Factor Titan Industries Gitanjali Gems Shree Ganesh Jewellery House
Sales CAGR (5 years) 35% 26% 111%
Cash Conversion Cycle (in days) 25 162 27
Inventory Days 93 96 18
Receivable Days 6 140 59
Payable Days 73 74 50
Last 5 yrs' Profit Margins
Operating 9% 8% 7%
Net Profit 5% 4% 6%
Return Ratios
RoCE 42% 10% 45%
RoE 40% 12% 55%
TTM PE (x) 38 12 3

Valuation - A company's valuation reflects the degree to which a company is seemingly over or undervalued by the market. Titan is trading at a "high" trailing twelve month (TTM) price to earnings (PE) multiple of 38. Gitanjali's TTM PE is 12, whereas Shree Ganesh's is a very low TTM PE of 2.8.

Our review indicates that based on fundamentals and financials, Titan and Shree Ganesh both seem to be performing on par with each other. However, Shree Ganesh has a much lower valuation (TTM PE 2.8), especially when compared to Titan's TTM PE of 38.

As we conclude this five part series on the Gems and Jewellery industry, we recognize the potential of investing in Shree Ganesh. However, it would not be advisable to invest your money into Shree Ganesh based solely on the criteria discussed. You will need to dig deeper to unearth which companies are "real jewels" to invest in.

Courtesy: Equitymaster

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