IPO Note | Gems and Jewellery March 20, 2010
Shree Ganesh Jewellery House
NEUTRAL
Lack Lustre
Issue Open: March 19, 2010 Issue Close: March 23, 2010
Rationale for 'Neutral' View
Issue Details
Shree Ganesh Jewellery House Ltd. (SGJHL) is one of the largest manufacturers
Face Value: Rs10
and exporters of handcrafted gold jewellery in India. SGJHL's products are primarily exported to countries like U.A.E, Singapore and Hong Kong. On the lower and
Present Equity Capital: Rs48.5cr
upper end of the price band, the stock would quote at 9.4x and 9.7x its
Post Issue Equity Capital: Rs60.7cr
post-diluted FY2010E estimates, respectively. Considering the peer valuations on
Issue size (amount): Rs371-385cr
FY2010E estimates, we believe that the stock is fairly priced. Hence, we recommend a Neutral view on the IPO IPO..
Issue Price: Price Band of Rs260-270 Promoters holding pre-issue: 88.3%
Key Highlights Expanding product portfolios and foraying into manufacture of machine -made machine-made jewellery: The company has traditionally been into the manufacturing of plain jewellery products. Going ahead, the company plans to diversify its product offerings
Promoters holding post-issue:70.7%
by venturing into the manufacturing of bangles and machine-made Italian jewellery.
Book Building
We believe that these measures would enable the company to reduce its dependence
QIBs
At least 60%
on a single product and also tap new markets, thereby resulting in higher revenues
Non-Institutional
At least 10%
and profitability.
Retail
At least 30%
Widening geographical presence: SGJHL exports a significant portion of its products to the U.A.E, Singapore and Hong Kong, deriving 95% of its total revenues from these markets. The company intends to diversify its customer base in the European,
Post Issue Shareholding Pattern
Australian, African and untapped Middle-Eastern markets, apart from increasing
Promoters Group
70.7%
MF/Banks/Indian FIs/FIIs/Public & Others
29.3%
its present customer base. This strategy is likely to bode well for the company, de-risking its model from over dependence on a few countries. Strengthening presence in retail branded jewellery: SGJHL has 13 retail outlets and intends to open 46 retail outlets across India. Pursuant to its retailing plans, the company also proposes to sell its products to retail chains or distributors, on a franchisee model, who, in turn, will sell it to the end customers. The company also plans to venture into the overseas retail markets through overseas subsidiaries. Setting -up of gold refining facility for old/used gold: SGJHL plans to set up a gold Setting-up refinery plant with an annual installed capacity of 1,000 kg of gold at its proposed unit at Domjur. Refining pre-used gold in-house would improve the company's margins, going ahead.
Objects of the Issue Particulars Expansion at exixting facility and setting up new capacities
Amount (Rs cr) 144.9
Setting up of retail outlets and marketing costs
68.0
Working Capital Requirements
50.0
General corporate purposes and Issue expenses
*
Total
*
Source: Company RHP, Angel Research
Please refer to important disclosures at the end of this report
Viraj Nadkarni +91 22 4040 3800 Ext: 309 Email:
[email protected]
Shree Ganesh Jewellery House | IPO Note
Company Background SGJHL is one of the largest manufacturers and exporters of handcrafted gold jewellery in India, and has been awarded the "Outstanding Export Performance and Contribution in the Trade for Plain Precious Metal Jewellery Exports by Unit from EoU/EPZ" for FY2008 and FY2009 by the Gems and Jewellery Export Promotion Council (GJEPC). The company's products include handcrafted and hallmarked gold jewellery, gold enameled jewellery and gold jewellery, studded with precious stones such as diamonds, rubies, emeralds, sapphires and pearls, and semi-precious stones such as garnet and cubic zirconium. Its portfolio includes rings, earrings, pendants, bracelets, necklaces, bangles and medallions. The company's products have presence across different price points to cater to all customers across the high-end, mid-market and value-market segments SGJHL's products are primarily exported to countries such as the U.A.E, Singapore and Hong Kong, and exports constituted around 99% of its gross sales in FY2009. SGJHL's export income has risen at a CAGR of 72.7% from FY2007 to FY2009 and its share in India's gold jewellery exports has increased from 1.8% to 6.1% during the same period. During FY2007, FY2008, FY2009 and the six months ended September 30, 2009, the company has exported 86.7%, 94.1%, 99.2% and 94.8% of its products, respectively. SGJHL received the "Four Star Export House" certificate from the Joint Director of Foreign Trade, Government of India in June 2009, and has been bestowed the status of a "Nominated Agency" under the Foreign Trade Policy, which allows it to import precious metals directly. The company has four manufacturing units, located in the Manikanchan SEZ at West Bengal, which is presently the only jewellery SEZ in West Bengal, spread across an area of approximately 12,339 sq. ft. During FY2009 and for the six months ended September 30, 2009, the company achieved a production of 12,843.6 kg and 5,679 kg of gold jewellery, respectively. West Bengal is known for the availability of craftsmen ("karigars") skilled in the manufacture of handcrafted jewellery. The company intends to set up an additional jewellery manufacturing unit at the Manikanchan SEZ to supplement its existing facilities. It also plans to expand its portfolio by commissioning a new vertical in machine-made Italian and lightweight jewellery at Mondalpara and at Domjur, in West Bengal. As on January 31, 2010, SGJHL had 13 retail outlets and it intends to open 46 retail outlets across India, including outlets under the shop-in-shop and franchisee models.
IPO Details SGJHL proposes to make its IPO in the price band of Rs260-270 per share, at a face value of Rs10 each, and to issue 1.43cr shares, of which 21.3 lakh shares are offered for sale by Credit Suisse PE Asia Investments (Mauritius) Limited. Therefore, the fresh issue by the company will be to the extent of 1.2cr shares. The company plans to use the proceeds for the Expansion of existing facility at the Manikanchan SEZ, to create additional facilities at Mondalpara and Domjur, to set up retail outlets and for marketing costs, to meet working capital requirements and for general corporate purposes.
March 20, 2010
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Shree Ganesh Jewellery House | IPO Note
Key Highlights Expanding product portfolios and foraying into manufacture of machine-made jewellery SGJHL exports a significant portion of its products to various international markets including the U.A.E, Singapore and Hong Kong. Exports have been an important part of the company's growth and it intends to continue its strong emphasis on international markets. The company further intends to diversify its customer base in the European, Australian, African and untapped Middle-Eastern markets, apart from increasing its present customer base in the UAE and South-East Asia. The company already has a subsidiary in Singapore, and intends to incorporate another subsidiary at Dubai for the easy procurement of gold and for catering to the Middle-East and African markets. To achieve its expansion plans, SGJHL intends to enhance its production capacities by expanding its existing manufacturing facilities. The company plans to increase the production of diamond studded jewellery by the setting of the proposed unit at Domjur and at the new unit at the Manikanchan SEZ. It also has plans to manufacture machinemade gold jewellery at the proposed units at Manikanchan, Domjur and Mondalpara.
Exhibit 1: Capacity Expansion Plans Location
Current Capacity
Planned Capacity
Total
(in gms)
(in gms)
(in gms)
24,000,000
-
24,000,000
1,100,000
1,100,000
Manikanchan a) Plain Gold b) Electroforming c) Bangles
600,000
600,000
d) Italian
3,000,000
3,000,000
e) Diamond Studded
1,000,000
1,000,000
5,700,000
29,700,000
2,000,000
2,000,000
Total
24,000,000
Domjur a) Diamond Studded b) Electroforming
2,250,000
2,250,000
Total
4,250,000
4,250,000
600,000
600,000
1,500,000
1,500,000
450,000
450,000
2,550,000
2,550,000
Mondalpara a) Bangles b) Italian c) Plain Gold Total Source: RHP
Strengthening presence in retail branded jewellery: SGJHL has 13 retail outlets and intends to open 46 retail outlets across India. Pursuant to its retailing plans, the company also proposes to sell its products to retail chains or distributors, on a franchisee model, who, in turn, will sell it to the end customers. The company also plans to venture into the overseas retail markets through overseas subsidiaries. SGJHL carries out the retail marketing of its manufactured products through its branded stores, "Gaja". The company has a tie-up with Mr. Sabyasachi Mukherjee for jewellery designing, and has recently launched the collection designed by him. Going ahead, the company plans to continue to tie-up with other leading designers for jewellery designing. March 20, 2010
3
Shree Ganesh Jewellery House | IPO Note
Exhibit 2: Expansion in Retail Outlets Particulars
Owned and LLeased eased
Shop -inshop Shop-in-in-shop
Franchisee
Total
4
3
6
13
Current Outlets Planned Additions
17
18
11
46
Total
21
21
17
59
Source: RHP
Setting-up of gold refining facility for old/used gold SGJHL plans to set up a gold refinery plant with an annual installed capacity of 1,000 kg of gold at its proposed unit at Domjur. The facility would refine pre-used gold, which would subsequently be utilised as a raw material for jewellery manufacture. Currently, the company procures refined gold from suppliers such as Al-Marhaba Trading FZC, Ibrahim Al-Sayegh Jewellery FZE, the Bank of Nova Scotia, the Standard Chartered Bank and the State Trading Corporation of India. Refining pre-used gold in-house would eliminate cost factors such as commissions, import costs and duties and other incidental expenses, and reduce the basic raw material input costs. The company intends to source old/used gold from government agencies, the domestic and international markets, as well as through its proposed retail network. The said reduction in raw material costs would improve the company's margins, going ahead
Pursue strategic alliances In order to expand its operations, the company intends to enter into strategic alliances. SGJHL has already entered into an agreement with Vishal Retail for a "Shop-in-Shop" arrangement through their existing outlets nationwide. The company also plans to venture into the overseas retail market, especially in the Middle-Eastern countries, the African countries and Europe, through its overseas subsidiaries.
Status of 'nominated agent' enables SGJHL to import gold directly, thereby eliminating intermediary costs SGJHL has been granted the status of a "Four Star Export House" by the Joint Director General of Foreign Trade, Government of India, and has been bestowed the status of a "nominated agency" under the Foreign Trade Policy, which allows it to import precious metals directly. As a nominated agent, the company shall be able to import gold directly for manufacturing purposes and thereby eliminate the costs incurred on intermediaries, allowing it to price its products competitively.
March 20, 2010
4
Shree Ganesh Jewellery House | IPO Note
Key Concerns Limited operating and financial history in the manufacture of machinemade jewellery, and undertaking retail operations The company has limited experience in setting-up and operating a manufacturing facility similar to its proposed projects, and in undertaking retail operations at a larger scale. This may hinder its ability to operate the proposed plants and retail outlets in a commercially successful manner. The company shall also be required to employ a large work force, and its limited experience in handling labour related issues may also prove to be a concern. These factors may adversely affect its operations and, consequently, its financials.
Revenues are highly dependent on a few major clients The company's revenues are highly dependent on a few major clients. The breakdown of business relations with any of these clients could have a materially adverse effect on revenues and profitability, the exact quantum of which is not possible to ascertain as on date. For the six months ended September 2010, the company's share of sales from its top client, top three clients and top five clients was 22%, 46.3% & 63.6%, respectively.
High dependence on few raw material suppliers SGJHL derived 40.5% of its raw material (gold) from Al-Marhaba Trading FZC in FY2009. Any breakdowns in supply agreements will compel the company to look at other sources of supply, which will be time consuming, cost escalating and will derail production activities.
No long-term contracts with any of its customers; orders are not backed by a Letter Of Credit facility SGJHL does not have any long-term contracts with its customers and any change in the buying pattern of the customers could adversely affect the business of the company. Moreover, none of the orders placed for the products are backed by a Letter Of Credit, but are through a bill discounting facility with banks on with recourse basis, and, in such circumstances, any delay or non-receipt of payment from the customers may result in an increase in working capital cycle/ bad debts, affecting the company's liquidity position and profitability.
March 20, 2010
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Shree Ganesh Jewellery House | IPO Note
Outlook and Valuation Over FY2007-09, SGJHL on a standalone basis reported robust revenue CAGR of 61.5%. The dual effect of capacity addition (resulting in higher production), coupled with rising prices of gold, enabled the company to clock such growth. On the EBITDA and PAT fronts as well, the company reported a robust CAGR of 49.7% and 61.4%, respectively, over FY2007-09, on a standalone basis. On a consolidated basis, SGJHL's Revenues, EBIDTA and PAT surged by 95.9%, 24% and 51%, respectively, in FY2009.
Exhibit 3: Revenue Growth (Standalone) FY2007-09 2,500.0
49.7% CAGR
2,000.0 1,500.0 1,000.0 500.0 0.0 FY2007
FY 2008
FY 2009
Net Sales (Rs cr) (LHS)
Source: Company RHP, Angel Research
The proceeds of the issue will be utilised by the company for purposes like adding capacities, diversifying its product offerings, spreading its geographical presence, scaling up its retail chain segment and setting up of a gold refining facility. All the initiatives are likely to bode well for the company on the top-line as well as on the operating margins front in the long-run.
Exhibit 4: Peer Comparison FY2010E Particulars.
Gitamjali Gems
SGJHL
116
270
6,753
2,978
M.cap (Rs Cr)
979
1,639
EPS
22.3
27.7
P / E (x)
5.2
9.7
P/Bv (x)
0.4
2.9
EV / Sales (x)
0.4
0.4
EV / EBIDTA (x)
4.7
6.3
M.cap / Sales (x)
0.1
0.6
OPM (%)
9.4
6.7
NPM (%)
4.4
5.6
ROE (%)
8.6
30.2
CMP (Rs) TTM Sales (Rs Cr)
Source: Company RHP, Angel Research; Note: SGJHL valuation at upper-end of price band
March 20, 2010
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Shree Ganesh Jewellery House | IPO Note
Exhibit 5: Key Financials Y/E March (Rs cr)
FY2008
FY2009
FY2010E
1,460
2,860
2,978
-
95.9
4.1
88.5
133.6
168.2
-
50.9
25.9
OPM (%)
7.2
4.5
6.7
EPS (Rs)
41.3
62.3
27.7
Net Sales % Chg Net PProfit rofit % chg
P/E (x)
6.5
4.3
9.7
P/Bv (x)
2.6
1.7
2.9
ROE (%)
29.6
31.1
30.2
ROCE (%)
23.7
15.9
20.8
EV/Sales
0.3
0.1
0.4
EV/EBITDA (x)
3.9
2.7
6.3
Source: Company RHP, Angel Research; Note: Projected valuations are at the upper-end of the price band
On the lower and upper end of the price band, the stock would quote at 9.4x and 9.7x its post-diluted FY2012E estimates, respectively. Considering the company's future plans like adding capacities, diversifying its product offerings, spreading its geographical presence, scaling-up its retail chain segment and setting-up of the gold refining facility, we believe that the company will benefit both in terms of top-line growth and operating margin improvement in the long-run. However, considering the peer valuations on FY2010E estimates, we believe that the stock is fairly priced. Hence, we recommend a Neutral view on the IPO IPO..
March 20, 2010
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Shree Ganesh Jewellery House | IPO Note
Profit and Loss Account (Consolidated) Y/E March
(Rs cr) FY2008
FY2009 1HFY2010
1,433.8
2,291.0
1,336.0
25.4
567.9
83.8
1,459.2
2,858.9
1,419.8
Service income
0.5
1.2
0.6
Other income
13.4
82.5
26.7
1,473.0
2,942.5
1,447.1
1,335.9
2,133.6
1,228.3
30.7
578.2
84.7
(36.3)
(10.3)
(9.5)
Staff costs
8.7
11.4
5.4
Other manufacturing expenses
3.4
1.4
1.0
Administration expenses
9.3
12.4
12.4
Selling and distribution expenses
3.5
4.0
1.2
1,355.2
2,730.7
1,323.5
117.8
211.9
123.6
Interest and finance charges
26.0
74.6
40.2
Depreciation / Amortisation
1.6
2.0
1.1
90.2
135.3
82.3
2.7
1.7
2.0
(1.2)
(0.1)
(0.3)
- Wealth Tax
0.0
0.0
0.0
- Fringe Benefit Tax
0.1
0.1
0.0
88.5
133.6
80.6
Adjustments
3.5
0.0
0.1
Deferred tax impact of adjustments
1.3
-
-
Total of adjustments after tax impact
2.3
0.0
0.1
90.8
133.6
80.7
Income Sales - Of products manufactured by the Company - Of products traded by the Company Total
Total Income Expenditure Raw materials consumed Purchases of traded goods (Increase) / Decrease in inventories
Total Expenditure PBIDT
PBT Provision for tax - Current tax - Deferred tax charge/(release)
Profit after tax and before adjustments
Adjusted Net PProfit rofit Source: RHP
March 20, 2010
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Shree Ganesh Jewellery House | IPO Note
Balance Sheet (Consolidated) Y/E March
(Rs cr) FY2008
FY2009 1HFY2010
Fixed Assets (i) Gross Block
11.3
15.6
16.9
Less : Accumulated depreciation
1.9
3.3
4.1
Net Block
9.3
12.3
12.8
(ii) Capital Work In Progress / advances
2.7
1.9
5.6
12.1
14.2
18.4
Intangible assets (net of amortisation)
2.2
1.6
1.3
Investments
0.4
0.3
0.2
Deferred Tax Assets (net)
1.6
1.7
2.7
78.1
78.6
128.8
(ii) Sundry Debtors
168.2
208.2
331.3
(iii) Cash & Bank Balances
307.2
598.4
684.1
21.6
98.5
65.6
0.2
1.4
6.6
Total Current Assets
575.3
985.2
1,216.4
Total Assets
591.5
1,002.9
1,239.0
108.3
345.1
376.5
26.6
27.2
21.5
154.3
197.6
324.1
3.0
3.2
3.3
299.3
429.9
513.6
- Equity Share Capital
21.4
21.4
48.5
- Preference Share Capital
80.0
80.0
0.0
- Securities premium account
16.8
16.8
72.1
- Capital reserve
30.2
30.2
30.2
- Amalgamation reserve
3.3
3.3
3.3
- Translation reserve
0.0
0.0
0.0
- General reserve
0.5
0.5
1.2
147.0
277.6
358.3
Net block
Current assets, loans and advances (i) Inventories
(iv) Loans and advances (v) Other current asset
Liabilities & PProvisions rovisions (i) Secured Loans (ii) Unsecured Loans (iii) Current Liabilities & Provisions Minority Interest Net W orth Worth Represented by : Share Capital
Reserves and Surplus
- Profit and loss account Source: RHP
March 20, 2010
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Shree Ganesh Jewellery House
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Ratings (Returns) :
Buy (> 15%) Reduce (-5% to -15%)
Accumulate (5% to 15%) Sell (< -15%)
Neutral (-5 to 5%)
Shree Ganesh Jewellery House
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