Goenka Diamond and Jewels Limited are tapping the capital markets with its IPO which has already opened on Tuesday the 23rd of March and closes on Friday the 26th of March. The issue is for one crore shares in a price band of Rs 135-145. The issue is already subscribed on day one itself.

Business
Goenka Diamonds is in the business of cutting and polishing of diamonds and manufacturing and retailing of diamond jewellery. The company started as an exporter of coloured stones and since 1994 expanded into diamond trade. It started diamond studded jewellery in 2003 and established its own diamond processing unit at Surat in the SEZ. 2007 saw the company expanding further by setting up another facility for processing rough diamonds in Mumbai for the local market and for jewellery making operations. The first retail jewellery store was launched in July 2008. The company has a subsidiary in Russia for participating in auctions of rough diamonds. The advantage of having a local company is the price advantage given to local companies.

In retail the company has five stores under the G WILD brand of which three are company operated, one under a franchisee and one as a shop in shop. The company operates one premium store in Mumbai under the brand name CERES. The company also sells high end diamond jewellery through its corporate office to exclusive clients, business associates and select retailers. Currently it employs 172 full time employees.

The key strengths of the company lie in the fact that it processes high end diamonds and ‘bigger’ diamonds. Its average realisation per carat has been rising from Rs 14,700 per carat in 2005 to Rs 65,000 per carat in 2009. The same has increased substantially in the first nine months of the year ending March 2010. The company has a diverse customer base, yet the top ten customers accounted for 97.44 % of the revenues from the diamond processing segment. These have reduced in subsequent year to92.09% and 87.06% in the nine months ended December 2009. It is likely to reduce further as the retail arm of the company improves its presence and sales.

Going forward the company intends to increase its focus on the retail business and has planned the setting up of new stores. It would increase marketing spend on creating these two brands and better penetration by opening more stores.

Objects of the issue
The objects of the issue include the following: –

The company plans to open new stores and proposes to set up 17 stores of its brand G WILD by fiscal 2012. These stores are expected to be opened in Bangalore, Amritsar, Chandigarh, Kolkata, Pune, Delhi, Gurgaon, Kanpur, Indore, Ahmedabad, Nagpur and Hyderabad in 2010-2011 and in Chennai, Kochi, Guwahati, Goa and Jaipur in 2011-2012.
It also plans to open its premium store CERES in Kolkata and Delhi.

Goenka Diamonds proposes to invest Rs 25 crs in its subsidiary M.B.Diamonds LLC which participates in state auctions for purchasing rough diamonds. The sales of this subsidiary in financial years 2008 and 2009 have been Rs 439.73 lakhs and Rs 506.61 lakhs respectively.

Financials
The company has reported sales of Rs 200.62 crs for the year ended March 2008, Rs 451.29 crs for March 2009 and Rs 409.15 crs for nine month ended December 2009. The corresponding net profits after tax for the same periods are Rs 12.41 crs, Rs 27.38 crs and Rs 33.28 crs implying a net margin of 6.18%, 6.06% and 8.13%. The retail venture should typically have better margins but the same is not indicated separately.

The company pays comparatively lower tax as the Surat unit is part of an SEZ and is exempt from100% tax till 2010-2011 and for 50% tax for a block of five years from 2011-12 to 2015-16. Going forward the tax rate would even otherwise rise as the retail jewellery would attract the normal rate of tax.

The company has been very liberal in issuing bonus shares. In 2000 there was a bonus issue of seventy five shares for one share. This is probably one of the highest ratios seen even in private limited companies going public. This is not the end of the bonus issues. In March 2008 there was another bonus issue this time of eleven shares for each share held. The last bonus issue was in September 2009 where the company issued seven bonus shares for every eight shares held. What this effectively means is that for every 100 shares held by the promoter, by way of these three bonus issues his holding has become 171,000 shares or an increase of 1710 times in ten years. It is indeed heartening that the company going public has such a glittering and shining track record of rewarding the shareholders/promoters of the company.

Valuations
The company had earned an EPS of Rs 3.84 on post-IPO capital for March 2008, Rs 8.47 for March 2009 and Rs 10.29 for the nine months of the current year ending March 2010. If we were to annualise the nine months earnings the EPS would be Rs 13.73. The price earnings ratio for the year ending March 2009 would be between 15.94 times at the lower end and 17.12 times at the upper end. Similarly based on nine months ending December 2009 would be 13.12 and 14.09 times while based on nine months annualised would be 9.83 times and 10.56 times respectively.

A fair comparison could be Gitanjali Gems which is trading at a PE multiple of 6.86 times its nine months annualised earnings for December 2009. It may be mentioned here that the turnover of Gitanjali Gems was Rs 2693 crs for March 2009 and is already Rs 2563 crs in the nine months of the current year. The retail presence of Gitanjali is well established.

Conclusion
There is a lot of hype about this company and growth so far has been very impressive. The fact that the issue is subscribed on day one and there is primary market interest in the issue is likely to see interest during listing. Listing gains are likely but the fact that by and large diamond company shares have not rewarded investors is also a well known fact. Investors would be well advised to look only for listing gains from this issue.

I believe investment in this company should be made only for listing gains.

Sebi disclaimer: – I do not intend to subscribe to this issue.