Saturday, December 8, 2012

PC Jewellers - IPO - Apply

Compared to the public issues of Tribhovandas Bhimji Zaveri (TBZ) and Tara Jewels, PC Jeweller’s initial public offering (IPO) is priced lower, at a PE of 9.7-10.5 times FY12 earnings (considering post-issue capital). But that is for a reason.

Though the promoters have more than two decades of experience in the jewellery business, the company is relatively new (compared to its nearest competitors, particularly TBZ) in the jewellery retailing business. Second, its operations are concentrated in the northern region, with Delhi NCR forming 57 per cent of domestic revenue in the first half of FY13. On the flip side, it has reported strong growth in the past, coupled with healthy margins. Growth rates should remain healthy and geographical concentration risk will ease, thanks to expansion. In this backdrop, investors can subscribe to the offer.

The company is engaged in manufacture, retail and export of jewellery, with five manufacturing facilities spread over 83,000 sq ft. Exports (on a wholesale basis to international distributors) formed 33 per cent of revenues in the year’s first half, but its share is expected to go down with a focus on domestic business.

By FY14-end, the company aims to have 50 owned-stores across India, from 30 stores in 23 cities and eight states currently, with addition of 20 stores (half in the western and southern; rest in north and east), which is to be funded through the IPO proceeds. Retail area would also jump 81 per cent from the current 164,000 sq ft. While the expansion should mitigate the geographical concentration risk, establishing a strong brand name (as in northern India) in the new regions might not be easy.

The company’s ‘Jewels for Less’ scheme (50,000 members) started just two years earlier, has seen good response and its policy of ‘full refund’ for jewellery returned within seven days of purchase are positives and should help on this front.

The company has reported rapid and profitable growth in a short span of time, which instils confidence. Says CRISIL in its IPO grading note, “The pace of expansion has been faster compared to other players with addition of 25,000 sq ft every year. The stores have been profitable from the first year of operations."

Apart from expansion, sales growth (CAGR of 70 per cent in FY09-12, highest among its competitors) is also aided due to a focus on wedding jewellery (80 per cent domestic revenues), the largest segment and relatively less affected by slowdown since it is an essential (planned) purchase.

The company’s strategy is to open large formats (average size per store of 5,500 sq ft). Of the 30 stores, 27 have an area of over 3,000 square feet each, which includes 11 showrooms of more than 5,000 sq ft each (four above 10,000 sq ft).

Says Balram Garg, managing director of the company, “The large format reinforces our positioning as trusted jewellery retailer, enabling us to attract a diverse customer base, offers a wide range of jewellery, ensures effective inventory management and provides benefits of scale."

Put together, these moves along with the increasing contribution of diamond jewellery (32 per cent of revenues in the first half from 18 per cent four years ago) have led to higher operating profit margin (OPM) than its peers. And there is further scope for margin improvement. Says Garg, “We are more focused on bottomline growth as it will help expand our network faster." Declining share of exports in total mix will also help. Buying gold on lease basis (against purchase) since inception has ensured less pressure on the balance sheet. All these have helped net profit grow at a faster pace.

Smart Investor 
Equity Research Division

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