AVOID as currently does not offer scope for appreciation
Tara Jewels Limited is tapping the capital markets with an IPO and an offer for sale in a price band of Rs 225-230. The issue includes a fresh issue of Rs 109.5 crs and an offer for sale of Rs 70 crs making a total issue size of Rs 179.5 crs. The company had on Tuesday completed an allocation to anchor investors of 11.59 lac shares at Rs 230 per share. The issue closes on Friday the 23rd November 2012.
| Price Band | Rs 225 – 230 |
| Total issue size in Rupees | Rs 17950 lacs |
| Fresh Issue in Rupees | Rs10950 lacs |
| Offer for sale in Rupees | Rs 7000 lacs |
| Issue size in number of Shares | 79,77,778 Equity Shares at Rs 225 to 78,04,348 Equity Shares at Rs 230 |
| Employee Reservation | 79,778 Equity Shares atb Rs 225 to 78,043 Equity Sahres at Rs 230 |
| QIB’s | 39,49,000 Equity Shares at Rs 225 to 38,63,152 Equity Shares at Rs 230 |
| Non Institutional Investors | 11,84,700 Equity Shares at Rs 225 to 11,58,946 Equity Shares at Rs 230 |
| Retail Investors | 27,64,300 Equity Shares at Rs 225 to 27,04,207 Equity Shares at Rs 230 |
| Book Running Lead Manager | Enam Securities Private Limited |
| ICICI Securities Limited | |
| Syndicate Member | Axis Capital Limited |
| Isssue Opening Date | Wednesday 21st November 2012 |
| Isssue closing date | Friday 23rd November 2012 |
| IPO Grade | CARE grade 3/5 indicating average fundamentals |
| Anchor Investors | Alloted 11,58,945 equity Shares at Rs 230 |
| Pre-IPO placement | Alotted 18,00,000 Equity Shares at Rs 225 to Crystalon Finanz AG |
| Paid -up Capital Pre IPO | 1,98,00,000 Equity Shares (including allotment to Pre-IPO investor) |
| Paid -up Capital Post IPO | 2,46,66,667 Equity Shares AT Rs 225 to 2,45,60,870 Equity Sahres at Rs 230 |
| Market Cap pre listing | Rs 44550 lacs at the lower end and Rs 45540 lacs at the upper end |
| Market Cap post listing | Rs 55500 lacs at the lower end and Rs 56490 lacs at the upper end |
| Bid Lot | 50 Equity Shares |
| Bidding Amount for Retail | 850 Equity shares at Rs 230 or Rs 1,95,500 per application |
Business
Tara Jewels is an integrated player in the jewellery industry with experience ranging from designing to retailing of jewellery. The business can be broadly divided into three operations namely manufacturing, exporting and retailing. The portfolio of products includes gold, platinum, honeydium, pristiniumand silver jewellery with or without studded precious and semi-precious stones. The products are available across various price points and cater to customers across high end, mid-market and value market segments.
The company has four manufacturing units of which 2 are located at SEEPZ in Mumbai and one unit at MIDC in Andheri East, also in Mumbai. The fourth unit is located at Panyu in China. On the retail front the company currently has 30 stores as on date and under the objects of the issue, 20 new stores are to be added in the remaining part of the financial year 2012-13.
The company exports studded jewellery manufactured by themselves as well as third part manufacturers. The country exports to a number of countries including Australia, China, Canada, European Union, South Africa, UAE, UK and the USA. The business of Tara Jewellers is to manufacture and export jewellery to organised retail players and also use co-branding with some of them. It would be logical to believe that this would entail earning higher margins but they have not been achieved so far.
Retail Stores
The retailing began in October 2008 under the brand Tara Jewellers. The average store size is around 1000 square feet and the total aggregate area of 30 stores under operation is 29,949.01 square feet. The company’s strategy is to have retail stores across suburban areas of metro cities, mini metros and cities with higher concentration of mid-income segment. Sales from retail operations in March 2012 were Rs 183 crs which have grown from Rs 93 crs in the previous year ended March 2011.
An optimum turn on the inventory is anywhere around 3.2-3.5 times the inventory which means a sale of Rs 80 million to Rs 87.5 million per store. The key challenge would be to open more and more stores and saturate the city with stores.
Objects of the Issue
The objects of the company are as follows: –
| 1. Establishment of Retail Stores | Rs 664.80 million |
| 2. Repayment or pre-payment of loans | Rs 500.00 million |
| 3. General Corporate Purposes | XXX |
The company would be raising from the IPO a sum of Rs 1095 million and has already raised through the Pre-IPO a sum of Rs 40.5 million, making the total gross proceeds of this issue Rs 1500 million. The reason for specifying the above is that the two objects of the issue exceed the total amount to be raised.
Financials
The total income of Tara Jewels has risen from Rs 8,062 million in the year ended March 2010 to Rs 11,436 million in March 2011 and to Rs 14,011 million in March 2012. In the two months ended May 2012, the revenue was Rs 1,791 million. The net profit in the same period has been Rs 241 million, 407 million and 541 million. In the two months ended May 2012 the net profit has been Rs 65 million. The net margins have been improving in the period under review from 2.99% to 3.56% and in the year ended March 2012 to 3.86%. In the two months ended May 2012 the net margin is 3.63%.
| Rupees in millions | ||||
| 2 Months | ||||
| Income | Mar-10 | Mar-11 | Mar-12 | May-12 |
| Revenue from operations | 8044.26 | 11422.91 | 13990.87 | 1788.73 |
| Other Income | 17.93 | 12.77 | 9.69 | 2.53 |
| Total Income | 8062.19 | 11435.68 | 14010.56 | 1791.26 |
| Expenditure | ||||
| Cost of Raw Material Consumed | 3679.17 | 5386.95 | 5137.77 | 1449.00 |
| Purchase of Traded Goods | 2497.73 | 5413.19 | 6708.59 | 616.85 |
| Changes in inventories of goods | 349.57 | -1518.37 | -579.65 | -638.17 |
| Employee Benefits Expenses | 239.88 | 359.38 | 433.10 | 69.99 |
| Finance Costs | 272.76 | 325.39 | 470.51 | 92.45 |
| Depriciation and Amortisation Expenses | 109.88 | 123.79 | 142.27 | 22.75 |
| Other Expenses | 609.80 | 811.20 | 972.83 | 93.70 |
| Total Expenditure | 7758.79 | 10901.53 | 13285.42 | 1706.57 |
| Profit Before Tax Exceptional Items | 303.40 | 534.15 | 725.14 | 84.69 |
| Exceptional Items | 0.00 | 0.00 | 0.00 | 0.00 |
| Profit Before Tax as restated | 303.40 | 534.15 | 725.14 | 84.69 |
| Total Tax Expenses | 58.15 | 121.66 | 169.66 | 19.73 |
| Net Profit after Tax as restated | 245.25 | 412.49 | 555.48 | 64.96 |
| Less Minority Interest | 4.13 | 5.64 | 14.20 | 0.00 |
| Net Profit after Tax as restated | 241.12 | 406.85 | 541.28 | 64.96 |
| 2.99 | 3.56 | 3.86 | 3.63 | |
| Fully diluted and annualised EPS | 22.01 |
| PE AT LOWER | 10.22 |
| PE AT UPPER | 10.40 |
The working capital cycle of the company is huge and it requires a large working capital whether it is for exports or retail sales. A typical retail store of Tara Jewels has an inventory level of Rs 25 million and the average sales per store for the year ended March 2012 has been Rs 63 million. This translates into an inventory turn of 2.52 times. The funds raised through the IPO would go towards funding the setting up of new stores and besides the inventory the other expenses in setting up a store would be roughly 8.24 million.
The sundry debtors of this company average roughly one third of the total revenue. The level of inventories at Rs 5889.70 million and trade receivables of Rs 4672.24 million or a total of Rs 10,561.94 million or 75.38% of the total revenue for the year ended March 2012. This is certainly high and is also reflected in the interest paymentsmade by the company of Rs 470.51 million. The debtors and the inventory are quite high for this company. This is after the company leases gold where its risk on account of fluctuation in gold and currency volatility is taken care of. It also reduces the actual pay out for purchasing gold which is under processing or manufacture.
Track Record of Merchant Bankers
The company has two merchant bankers namely Enam Securities Private Limited and ICICI Securities Limited.
Enam Securities Private Limited
Enam Securities Private Limited has brought a total of 27 IPO’s in the last three years with 4 in FY2012, 15 in FY2011 and 8 in FY2010. Of these 27 issues, 15 were trading at a premium to the issue price, 30 days from date of listing while 12 were trading at a discount to the issue price.
ICICI Securities Private Limited
ICICI Securities Limited has brought a total of 14 IPO’s in the last three years with 2 in FY2012, 9 in FY2011 and 3 in FY2010. Of these 14 issues, 3 were trading at a premium to the issue price, 30 days from date of listing while 11 were trading at a discount to the issue price. They were also the merchant bankers for the IPO from Shree Ganesh Jewel House Limited which against an issue price of Rs 260 is trading under Rs 120.
Comparisons
The company has chosen to compare itself with Titan Industries, Gitanjali Gems, Goenka Diamonds and Renaissance Jewellery. The comparison with these companies shows that it is strictly not comparable. Titan Industries has a topline which is far in excess than that of Tara Jewels. Though the RHP of the company on page 84 shows the revenues of Titan to be Rs 8983.14 million they are actually 88,484.3 million as reported on the BSE website. Similarly in the case of Gitanjali Gems also the revenue mentioned is Rs 12,498.28 million while in reality it is ten times higher at 1,24,982.77 million. The way it has been mentioned in the RHP gives a picture that Tara Jewels Limited is having the highest revenue amongst the peer group chosen. The mistake is repeated in the case of the other companies as well and it appears at closer look that figure in Rs crs has been mentioned as Rs million in the RHP. The company has given a corrigendum to this effect in some newspapers but for clarity purpose it would have helped if it had said so at the roadshow held in Mumbai.
Tara Jewels is quite expensive when compared to Gitanjali and exorbitant when compared to Renaissance. I believe that the less talked about Goenka Diamonds the better simply because that is a stock which is not talked about in investment circles and is suspected to be manipulated. A fair comparison would be with TBZ which had tapped the markets earlier in the year or a south based company Thangamayil Jewellery. This company reported revenues of Rs 11,316.2 million for the year ended March 2012 and had a net profit margin of 5.22%. The revenues in the first half of 2012-13 have grown to Rs 7315 million and the net profit to Rs 276.8 million.
Tara Jewels Limited had earned a net profit of Rs 541.28 million in the year ended March 2012. The EPS based on the old capital prior to the pre-IPO was Rs 30.07. The same EPS based on the fully diluted post issue capital would be Rs 22.09.
Valuations
Tara Jewels is offering shares at a price of Rs 225-230 which based on the fully diluted post issue capital of 24.587 million shares at the lower end would imply an EPS of Rs 22.01 and at the upper end of the price band would imply an EPS of Rs 22.11. The PE being asked by the company would be in the range of 10.22 at the lower end and at 10.40 at the upper end. The last diamond or jewellery company or retail story was TBZ. The company had offered shares at a price band of Rs 120-126 and the PE based on nine months ended December 2011 annualised on a fully diluted basis was 11.93 to 12.52 times.
Concerns
The company’s working capital cycle is extremely high and it needs to reduce the same to become profitable. Secondly it is important for the company to reduce its trading in finished goods as the margins in the same cannot be the same as manufacturing. Towards this end the company is increasing its focus on retailing and plans to set up stores in the country. The focus is on the Western, Central and Northern parts of the country. Based on the optimum turn on the inventory it becomes apparent that you need between 13-15 stores for an incremental topline of Rs 100 crs per annum. Tara Jewels needs to achieve an incremental turnover of anywhere between Rs 300-400 crs in the next two to three years to become more profitable and achieve benefits of retailing and hence better margins. This implies by default setting up of a minimum of 45-60stores in the next two years, which would be a challenge for the company.
Key Drivers
The aspirations ofthe rising middle class, higher disposable incomes, working couples, fashion consciousness increasing would all point to better demand for jewellery no doubt. The competition from other brands, unorganised jewellers will help establish organised players but proper pricing, quality assurance, hallmarking of jewellery and value for money would be important drivers.
Conclusion
The business environment is challenging for the jewellery business. The present model makes margins and hence profits difficult to come by. The key to improving bottom line and hence profits is reducing the quantum of traded sales where logically margins are lower, reducing the working capital cycle and increasing the better margin retail sales. The third option appears to be the easiest and I believe the company would focus on the same. However opening 25-30 stores every year and improving the average sales per store from the current Rs 63 million per annum to around 82 million per annum (a 30% growth) would be a challenge and require bandwidth to achieve. These are difficult to guarantee and investment to be made or not should be considered.
SEBI Disclaimer : – I do not intend to apply.
