Price glitters though brand is hazy!

OFFER AT A GLANCE
Name	PC Jeweller Ltd
Public Offer	Fresh issue of 4.51 cr shares of Rs 10 each
Offer Price	Between Rs 125 and Rs 135
% on Total Equity	25.2%
Post-IPO Free Float	30.0%
Application Quantity	90 & Multiples of 90
Offer Opens	December 10, 2012
Bid/Offer Closes	December 12, 2012
IPO Grading	CARE & CRISIL
Grade	3 out of  5
Lead Managers	SBI Cap, Kotak Mahindra
Registrar	Karvy Computershare

 

The Offer

Fresh issue of 4,51,33,500 equity shares constituting 25.2% of the company’s post-issue  equity capital of Rs 179.10 cr. Of the issue, 358,500 shares are reserved for employees. Not more than 2,23,87,500 shares  are earmarked for QIBs of which 30% (67,16,250 shares) is reserved for Anchor Investors. One-third of the Anchor Investor Portion is reserved for domestic Mutual Funds. Of the issue, 67,16,250 shares are kept for Non-Institutional category and not less than 1,56,71,250 shares are reserved for Retail Investors.

The offer is being made through book building route with a price band of Rs 125 to Rs 135 valued between Rs 564 cr and Rs 609 cr. Investors should apply for a minimum of 90 shares and multiples of 90 thereafter.    

 

Issue Object

The company proposes to utilize Rs 516.85 cr towards establishment of new showrooms. The balance amount is earmarked for general corporate purposes.

 

Issue Grading

The offer has been graded by both CARE and CRISIL who have awarded identical IPO Grade 3 indicating average fundamentals. The grading reflects the experience of the promoters and management team, long track record of operations and established brand image of the company. However, the rating has been constrained by the high operating risk arising out of stiff competition from organized and unorganized players, working capital intensive operations, volatile raw material prices, foreign exchange fluctuations, etc.

 

Pedigree

Even though the promoters have long experience in jewellery business, the issuer- company PC Jeweller Ltd (PJL) was established only about seven years ago after a split between two partners. Founded as P Chand Jewellers Private Limited by Padam Chand Gupta and his brother Balram Garg in 2005, the name was changed to PC Jewellers in October 2007. Strangely, in November 2009, the name was further changed to PC Jeweller. The change of names and also the litigations faced by the company do indicate that there were other claimants to the name.  

Nevertheless, notwithstanding its age, PJL is one of the leading companies in the country today in the organized jewellery retail sector. PJL’s business has grown rapidly in recent years. From just one showroom in April 2005 the company has expanded to 30 showrooms by September 2012.  “PC Jeweller” brand is visible across 23 cities in north and central India with an aggregate area of approximately 1,64,572 sq. ft. All of these showrooms are operated by the company except the Chandigarh showroom, which is managed by a third party. Of 30 showrooms, 27 are large-format (with an area of 3,000 sq.ft. or more) – 11 showrooms have an area of more than 5,000 sq. ft. of which four are more than 10,000 sq.ft.

In addition to the showroom sales, PJL also sells gold and diamond jewellery through online (website).  It also exports gold and diamond jewellery on a wholesale basis to international distributors in Dubai and Hong Kong. Export sales amounts to more than 33% of the company’s revenue. In fiscal 2012 gold jewellery, diamond jewellery and other jewellery contributed 72.5%, 26.7% and 0.8% respectively of the company’s revenue from domestic sales.

PJL has two manufacturing facilities in Selaqui, Dehradun, Uttarakhand, catering to domestic sales. Two more units at the Noida SEZ, Uttar Pradesh, cater to export sales. In November 2011 the company added an additional 34,000 sq.ft. jewellery manufacturing facility in Noida.  In fiscal 2012 the company reportedly processed 4,832 kg of gold.

 

Valuation 

PJL has registered phenomenal growth in recent years.  From Rs 321 cr in 2008, revenue leapt to Rs 3041 cr in fiscal 2012. Net profit has jumped from Rs 12.96 cr to Rs 231.29 during this period. Of late, contribution from the more profitable diamond jewellery is on the rise.  In fiscals 2010, 2011, 2012 and for the six months ended September 30, 2012, domestic diamond jewellery sales constituted 17.9%, 22.9%, 26.7%, and 32.6% respectively of PJL’s domestic sales and 11.9%, 15.0%, 17.9%, and 21.9%, respectively  of its gross revenue. The management expects the ratio to improve further in the coming years.

Having well established in North and Central India, PJL now plans to expand its showroom network across India, including in southern and western parts of the country. The company intends to open 7 new showrooms by the end of current fiscal and another 13 showrooms by next year. Thus, growth prospects are reasonably good for the investors.

Coming to the IPO pricing, Jewellery-Retail industry currently enjoys a P/E of more than 33x and P/BV of 6.6x as compared to the market composite of 16.2x and 2.2x respectively. Of course, the current discounting is largely influenced by Titan which commands a P/E of 42x and P/BV 13.9x. PJL’s fiscal 2012 bottom line discounts the upper end of the price band less than 8 times. The diluted EPS on the post-IPO equity gives a P/E of a little more than 11x which looks comfortable for the prospective investors.

How PC Jeweller compares with peers
SCRIP	NOS	M-CAP	P/E	P/BV	P/R	OPM	YLD	PRICE
(Unit)		(Rs Cr)	(X)			(%)		(Rs)
Titan Industries		27,357	42.5	13.9	3.0	9.6	0.6	308
Gitanjali Gems		4,402	16.8	1.6	0.5	4.6	0.6	478
Tribhovandas		1,874	29.4	5.4	1.4	9.0	0.3	281
Thangamayil		477	8.9	2.7	0.4	8.8	2.0	348
Jewellery-Retail	4	34,110	33.3	6.6	1.7	7.4
Market Composite	2,965	6,808,542	16.2	2.2	1.3	22.5
PC Jeweller	Hi-band	2,418	7.8	3.3	0.7	9.1	0	135
	Lo-band	2,239	7.2	3.0	0.6	9.1	0	125

 

Concerns

• Proposes to deploy the issue proceeds in retailing where risk is more which has not been appraised by any external agency
• Stiff competition resulting in low operating margin
• Promoter group members engaged in similar line of business posing conflict of interest as the use of “PC Jeweller” or similar trade names may jeopardise company’s growth
• Since most of the showrooms are on lease, the prospects may be curtailed if the company fails to extend the lease on commercially acceptable terms.
• Though posted record profit in fiscal 2012, net cash flow from operation was negative in three out of last four years including last fiscal
• Company yet to pay dividend 
• Promoters’ average cost of is less than Rs 4 per share