Goenka Diamonds and Jewels Limited listed on Friday. The day was hectic in all respects and it has created some records but unfortunately of the dubious type. The share saw huge trading volumes but the delivery volumes were very poor. The share has been controversial from day one and it appears that this share and controversy are made for each other or that this share likes being in the limelight.

Diamond company shares have not been very kind to shareholders or investors and Goenka has kept up with that track record. The share opened at Rs 130 on the BSE and Rs 124 on the NSE. Within a few minutes of opening the lows were made at Rs 92.35 on the BSE and Rs 92.20 on the NSE. Short covering and at times frantic short covering saw the share rise to its highs of Rs 141.35 on the BSE and Rs 141 on the NSE.

The traded volume was huge with over 6.72 cr shares being traded. This volume is 7.17 times the final IPO size of 93.71 lakh shares. The delivery volume of 19.26 lakh shares was a mere 2.87% of traded volume which is indeed very low and surprising to some extent. However as a percentage of total IPO size the delivery is 20.55%. This figure is also very low and if compared with recent IPO’s where the first day results in delivery of anything between 50 and 80% is significantly lower. One way of describing this trade is the fact that post the listing of Shree Ganesh Jewellery, the sentiment towards diamond or jewellery companies is fairly negative. On top of this is the subscription of Goenka which is itself a major story and has further weakened the sentiment. In this backdrop, people have short sold the stock in the morning.  

Readers will recall that the weighted average at the end of the first two hours of trade was Rs 108.70 or thereabouts and the share price was about 2 Rs higher. The share then went into a huge speculative drive, short covering and the volume increased in the next four hours from 1.9 crs to over 6.7 crs. This extremely heavy volume and poor or negative sentiment saw short covering at the fag end. The weighted average close of the day was just about Rs 127-127.50 but the last trade was around Rs 120-121.

The delivery percentage is very low and the huge volume, even more than normal indicates that the share is under speculative control and it may be best to stay away from the share for some time. The fact that delivery has yet to happen also indicated that weakness could step in if the share breaks and trades below Rs 115 and then Rs 110 for some time. I believe this share is likely to be injurious to health even for traders.

Goenka Diamonds and Jewels Limited which had tapped the capital markets with a public issue in the price band of Rs 135-145 for 100 lakh shares listed today. The issue was subscribed on day one and was oversubscribed 1.65 times. This issue at the end of subscription finally closed at 1.07 times subscription. The final allotment figure reduced further to 0.9371 times only.

The share opened at Rs 130 on the BSE and Rs 124 on the NSE. The highs were Rs 130 on the BSE and Rs 124 on the NSE, which were the opening rates itself. The lows were Rs 92.35 on the BSE and Rs 92.20 on the NSE. The share was under continuous selling pressure but seems to be holding on at current prices around Rs 110.

The traded volume at 1.89 cr shares is already twice the final IPO size of 93.71 lakh shares. The share has an average traded price of just about 108-109 which is around current market price. The pressure is there and the last hour of trade will determine where the share closes. If the share is unable to move up there could be fresh selling and cause the share to break Rs 100 mark all over again.

More on the issue at the end of the day, when details about delivery details are made available.

Goenka Diamonds and Jewels Limited which had tapped the capital markets with an IPO for 1 crore shares in the price band of Rs 135-145 is to list on Friday the 16th of April. The issue subscription was fairly controversial and the subscription figure which normally increases with each subsequent day, actually reduced on each subsequent day.

From the table above it is clear that the subscription from HNI’s reduced from the second day onwards and there also seems to be a big withdrawal in the QIB category as well on the last day. The issue which was subscribed 1.65 times on day one was subscribed a mere 1.07 times on the final day. This means that QIB’s and HNI’s have withdrawn applications to the extent of 80 lakhs in a span of two days while retail investors have put in bids for an additional 21.93 lakh shares. The mathematics indicates that the first day subscription was only to entice the retail investor to subscribe and whatever was put in by him has been withdrawn by the HNI and QIB.

The story does not end here itself. The issue closed with a subscription of 1.07 times but the final allotment has slipped substantially to finally reach a figure of 0.9371. This means that within the time space of issue closing for subscription and final allotment, bids for 13.3 lakhs have been withdrawn. This whole issue looks like a big trap for the retail investor and he is most likely going to pay for it dearly.

At the time of the issue analysis it appeared that the issue did not have much in it for the investors and therefore I had recommended that the issue was only meant for ‘listing gains’. With the kind of activity that has happened and mass withdrawals it appears that leave aside listing gains, listing losses are a certainty. This appears to be a fit case for an investigation by the regulator into what happened and who trapped the innocent retail investor.

At the end of day I remember the James Bond movie title “Diamonds are forever”. I believe investors who get dazzled by diamonds or jewellery tend to lose their shirts. It sure is most unfortunate. 

Goenka Diamonds and Jewels Limited had tapped the capital market with its IPO which opened on Tuesday the 23rd of March and closed on Friday the 26th of March. The issue was for 1 crore shares in a price band of Rs 135-145. The issue managed to get subscribed by 1.07 times.

What is interesting to note is that the issue was subscribed much earlier and on the second day itself had received decent support. The QIB portion was subscribed but that appears to have reduced because of withdrawals. The final QIB portion of 50% of the issue remained undersubscribed and received a support for 78% of the reservation. It is also worth mentioning and highlighting that not a single application was received from any FII.

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.

Goenka Diamonds and Jewels Limited has announced its price band for its IPO which opens on Tuesday the 23rd of March and closes on Friday the 26th of March. The price band is Rs 135-145. The issue is for 1 crore shares and the company would raise between Rs 135 to Rs 145 crs at the lower and top end of the price band respectively. ICRA has assigned a grade of 2/5 for the company indicating below average fundamentals.