Tribhovandas Bhimji Zaveri Limited (TBZ) is tapping the capital markets with its IPO in a price band of Rs 120-126. The issue is for 1,66,66,667 shares and opens on Tuesday the 24th of April and closes on Thursday the 26th of April. The company has allocated 24,99,999 equity shares at Rs 120 to anchor investors.

Business

TBZ is a well-known and trusted jewellery retailer in India with 14 showrooms in 10 cities across 5 states, having a total carpet area of 48,818 sq ft. The company sells gold jewellery and diamond studded jewellery. Other products sold include platinum jewellery and jadau jewellery but their contribution to the total sales is not very significant. Of these 14 stores which include the flagship store in Zaveri Bazaar, 11 are large format stores having a carpet area of 3000 sqft or more and 3 stores are in the category of small format with a carpet area of 1000-3000 sq ft.

The company plans to open 43 new showrooms of which 25 would be large format and 18 would be small format. The total stores at the end of fiscal 15 would be 57 stores with a carpet area of 1.5 lakh sq feet spread across 43 cities in 14 states.

The company has a jewellery manufacturing unit at Kandivli in Mumbai and has set up another facility as well at Kandivli with a capacity of 1 lac carats per day per shift. The total carats produced in fiscal 2011 was 35,509 carats implying this capacity would be more than adequate for the entire expansion that has been planned in the next three years.

The company has a total of 1,192 employees. Of the total sales of Rs 11,939.31 million in 2010-11, 72.51% was from gold jewellery, 22.08% was from diamond studded jewellery and 5.41% was from others. This mix has improved in favour of diamond jewellery against others in the nine months period ended December 2011, where gold forms 72.48%, diamond studded 25.2% and others 2.32%. There are better margins in diamond compared to gold and it becomes imperative to improve the mix.

The objects of the issue

Financials

The revenues of the company have grown by 35% in the year 2010-11 over the previous year while in the current nine months ending December2011; they have grown at just under 25% assuming nine months annualised numbers. The net margins in the same period have improved significantly from 1.91% in 2010, to 3.35% in 2011 and still further to 4.5% in the nine months ending December 2011. This improvement or change in net margins may not be sustainable going forward as jewellery business is competitive in nature. It may however be prudent to expect margins to remain stable. There is also an element of inventory gain in these margins which has not been separately shown in the accounts of the company, looking at the way gold prices have been increasing in the last few quarters.

The company has a huge requirement of working capital and therefore pays a significant amount as interest. In FY10 it paid interest costs of Rs 196.08 million which was 116% of its net profit. This has come down significantly in the next year ending March 11 where thoughthe total interest paid has gone up to Rs 224.69 million, as a percentage of net profit it has almost halved to 56%. In the nine months period ended December 2011 the interest payment has again moved up to Rs 236.27 million and as a percentage of net profit reduced to 47%. Where the interest payments are so significant compared to the profits, the happiest group of people are the lenders to the company.
The EPS of the company for the year ended March 2010 was Rs 3.38 which has more than doubled to Rs 8.01 for year ended March 2011. For the current nine months the EPS is Rs 10.06 on pre-IPO equity which on a post-IPO and nine months annualised basis remains the same as the dilution of equity is also 33%.

Track Record of Merchant Bankers

IDFC Capital

IDFC Capital has handled a total of 12 issues in the period 2009-11 and no issues in 2011-12. Of these 12 issues at the end of one month of trading, six issues were trading higher than their issue price and six were trading below their issue price. If however one were to look at the closing price as of Friday the 20th of April, 10 issues are trading below their issue price and only two are trading above their issue price.

Avendus Capital Private Limited

Avendus has handled a total of 5 issues in the period 2009-2012. Of these five issues 4 were trading at a discount at the end of one month of trading while only on was trading at a premium. Based on prices of 20th April all five issues are trading at a discount. Avendus was also one of the merchant bankers who brought the issue of Shree Ganesh Jewellery. This issue was priced at Rs 260 and its close as of Friday the 20th of April was Rs 83.30. Previous issues need not reflect on the present issue but need to be kept at the back of the mind.

Comparisons

TBZ has chosen Titan Industries, Gitanjali Gems and Thangamayil Jewellery as its peers in comparison with other listed companies. Titan Industries has a huge presence all over the country and the brand Tanishq and the number of outlets are far in excess of what TBZ has and proposes to have. The company is a debt free company and has a turnover of over Rs 6,500 crs in the nine month period ended December 2011 and a net profit of Rs 455.47 crs. Its revenue in the year ended March 2011 was Rs 6,577 crs and its net profit 430.42 crs implying a net margin of 6.54%. Gitanjali Gems is the next company and had revenues of Rs 9289 crs for the nine months ended December 2011 with a net profit of Rs 384.34 crs. In the year ended March 2011 its revenues were Rs 9456.40 crs and net profit of Rs Rs 354.81 crs. The third company is Thangamayil Jewellery which had revenues of Rs 825.61 crs for the nine months ended December 2011 and a net profit of Rs 49.95 crs. The net margin was 6.05%. Its revenue in the previous year ended March 2011 was Rs 658.26 crs and a net profit of Rs 31.33 crs. The EPS was Rs 22.84 for the year and it is Rs 36.40 for the nine months ended December 2011. If one were to annualise the same it amounts to Rs 48.53.

Jewellery companies typically enjoy lower valuations than most other industries and the one exception in this field is Titan Industries. Titan is talked about as a retail and aspiration story which is why it commands the PE that it does. To expect that others would get a similar valuation looks a little farfetched currently. Gitanjali enjoys a PE of 5.92 while Thangamayil which has begun its growth story only in the last three years and now has 16 stores and all of its stores are typically in Tier 2 and tier 3 towns mainly in Tamil Nadu and South India, enjoys a PE of a mere 3.46 times.

Valuations
TBZ shares are being offered on a fully diluted nine months annualised basis at a PE of 11.93 at the lower end of the price band of Rs 120 and at a PE of 12.52 at the upper end of the price band of Rs 126. This is based on an EPS of Rs 10.06. The share in no way is cheap and considering the performance of the sector and the challenges with growth expecting immediate gains is certainly ruled out. Only investors willing to ride the share over the long term could look at the share.

Concerns
TBZ is a late entrant to the retail expansion. The brand is 146 years old but it took the company 134 years before it opened its second store. In fact in the last 12 years it has opened 13 stores and its plans to open 43 stores in 3 years looks like a tall order. There will be hiccups in rolling out the same. Secondly the inventory at each store needs to be funded. It requires about Rs 25-27 crs of inventory at the large store and roughly 8 crs at the smaller store.The company plans to open 25 large stores and 18 small stores which require approximately Rs 800 crs of inventory. There are also expenses involved in the opening of the store and the amount being raised from the IPO is about Rs 200 crs. Assuming that the investment in inventory and expenditure in roll out of stores would be spread out over the next three years it still implies additional borrowings of approximately Rs 450 to 500 crs which would impact the leverage and bottom line of the company.

Conclusion
TBZ is a late entrant into the business of jewellery retailing. It is an established brand but is co-owned by its other family factions and though the company is trying to create a separate image with “the original TBZ” the brand does get diluted. The valuations being asked for compared to similar companies is substantially on the higher side and leaves little or no room for any appreciation in the short to medium term. The massive expansion from 14 stores to 57 stores, implying quadrupling the store strength in a mere three years may not roll out in time as planned and also would need large capital infusion whether owned or borrowed. All these factors make investment in the company one of a long term and returns only after a couple of years. Investors willing to wait for the long term may apply for the issue, while those not having so much of patience may look at the issue once it is listed.

SEBI Disclaimer: – I do not intend to subscribe to the above issue