Shree Ganesh (Shree Ganesh) Jewellery House Limited is tapping the capital markets with an issue to raise Rs 371 crs-385 crs in a price band of Rs 260-270. The issue has opened on Friday the 19th of March and closes on Tuesday the 22nd of March. The issue includes a fresh offer and an offer for sale from a PE investor M/s Credit Suisse PE Asia Investments (Mauritius) Limited.

Business
Shree Ganesh is one of the largest manufacturers and exporters of handcrafted gold jewellery in India. The company manufactures handcrafted and hallmarked gold jewellery, gold enamelled jewellery, and gold jewellery studded with precious stones such as diamonds, rubies, emeralds, sapphires, pearls etc and semi-precious stones such as garnet, cubic and zirconium etc. The portfolio includes rings, earrings, pendants, bracelets, necklaces, bangles and medallions. The products are available across various price points to cater to all customers across high end, mid market and value segments. The company uses besides its in house team of designers, top rated designer like Sabyasachi Mukherjee.


Shree Ganesh was set up in 2002 by Mr Nilesh Parikh and his brother Mr Umesh Parikh. They have their own manufacturing facilities and are also located in a dedicated SEZ in Manikanchan, very close to Kolkatta’s international airport. The ‘Karigar’ or skilled craftsman is a speciality of the artisan from Bengal and the company is very close to this source of its employees. The company sells more than 90% of its products by way of exports and they are primarily to the UAE, Singapore and Hong Kong.

The company has promoted a brand by the name of ‘GAJA’ which is a short form for Ganesh, which is the name of the company and also denotes the famous elephant god which is revered and invoked each time something new or auspicious is done. He is considered to be a remover of obstacles and each time one prays for wealth and prosperity it is always Ganesh and Lakshmiji. In short Ganesh and ‘Gaja’ imply auspicious, wealth, prosperity and jewellery purchase is always considered as a sign of prosperity and the beginning of good times and well being.

Shree Ganesh believes in being near to the skilled labour which is Kolkatta. Its large size of gold processing gives it a huge cost advantage. It uses modern methods of manufacturing which reduces wastage, cost of production and ensures that business is scalable and deliveries can be affected in the shortest period of time.

The company has been concentrating on exports and primarily to the UAE, Singapore and Hong Kong. Going forward it intends to increase the geographical reach to include other countries as well. It is targeting Europe and America. It plans to increase the product portfolio and is adding new machinery for making chains and bangles in the present capacity expansion. The company had also entered into the retail market in a very cautious and phased manner to establish the brand and local presence. The successful launch and acceptance of branded jewellery like ‘Tanishq’ from Titan is a big boost for the company. It is a well known fact that the big concern in buying gold jewellery or jewellery from the un-organised sector is the quality and the purity. When branded jewellery is bought these doubts are automatically removed and taken care of. Shree Ganesh plans to open 46 retail outlets over the next three years comprising of 14 owned outlets, 3 outlets on rent, 18 outlets on shop-in-shop basis and 11 outlets on a franchisee model for retailing products manufactured by them. 

Financials
Shree Ganesh reported revenues of Rs 1283.03 crs in March 2008, Rs 2218.20 crs in March 2009 and Rs 1325.80 crs in the six months ended September 2009. The net profit in the same period was Rs 89.66 crs in March 2008, Rs 132.45 crs in March 2009 and Rs 79.96 crs in the six months ended September 2009. The business of Shree Ganesh is highly cyclical as festivals and major events where jewellery are purchased or gifted happen in the second half of the financial year. Events like Diwali, Chinese New Year, and the global New Year 1st January, Christmas, Eid etc all happen in the second half. This makes the sales for Shree Ganesh skewed. It would be fair to assume the sales breakup to be between 40-42% in the first half and roughly 58-60% in the second half. The margins in this business being enjoyed by the company are in the 5.6% to 6% mark and are fairly stable. These margins are sustainable and are likely to continue until the sales mix between exports and domestic does not change.

Margins domestically are always better than exports, but the growth in these sales are sometime away. Three four years down when the company has opened 46 outlets and each of these start achieving reasonable sales level, there incremental margins would make some change in the net margins earned by the company. The important point to note is the growth in sales achieved by the company is in the region of 64% compounded over the last three years. This growth will add to the top line and the bottom line of the company. A mere extrapolation of last year’s numbers could give a reasonable indication of the future, giving weightage to the base effect.

Objects of the Issue
The objects of the issue are to finance the expansion plans of the company.

Comparison
The business model of Shree Ganesh is different from the listed players in the country. By and large almost all the players listed are in the diamond business and are in the business of cutting and polishing diamonds. Raw or rough diamonds are cut, polished and exported. A few players have also set up retail distribution through franchisees or shop-in-shops etc like Gitanjali Gems, but they are basically into diamonds and diamond related. Titan too is not strictly comparable as they are into watches and more recently into jewellery. They have established a large distribution chain and of their total sales of Rs 3800 crs, roughly 75% or 2800 crs comes from jewellery. Titan started as a watch company and is now into jewellery, watches and eye care.

Shree Ganesh is primarily into the manufacture of hand crafted gold jewellery which is by and large exported. Its domestic presence is just about happening and it would be sometime before it happens. In terms of valuations the only listed entity that this company could be compared is Titan Industries which at its current price of Rs 1824 is trading at a price earnings multiple of just over 30 times based on its nine monthly annualised numbers of net profit of Rs 199 crs on an equity capital of Rs 44.39 crs. Undoubtedly a large retail chain like Titan cannot be compared with Shree Ganesh, but the margins enjoyed by Shree Ganesh and the margins enjoyed by Titan in retail are almost similar and are therefore comparable.

Shree Ganesh earned an EPS of Rs 27.28 for the year ended March 2009 on the old capital of 4.85 cr shares. In the first half of the current year the EPS has improved to Rs 16.47. It would be fair to assume that the top line for the current year ending March 2010 would be Rs 3100 crs and the net profit Rs 185-186 crs assuming a net margin of 6% which is being earned currently. On the fully diluted equity of 6.068 cr shares the EPS would be Rs 30.65.

Shree Ganesh is offering shares in a price band of Rs 260-270 which means that based on March 2009 stand alone earnings and pre-money equity the shares are being offered at 9.53 times at the lower end and 9.89 times at the higher price band. Similarly if we are to look at projected March 2010 numbers and post-money equity of 6.068 cr shares, the EPs comes to Rs 30.65, implying a price earnings multiple of between 9.53 and 9.89 times.

Conclusion
Recently there was an IPO from a Tamil Nadu based company which was into jewellery retailing in Tamil Nadu called Thangamayil Jewellery Limited. This company was a manufacturer and retailer having limited presence in just Tamil Nadu and his issue did well. Shree Ganesh is a manufacturer and exporter, much larger in size and now looking to expand manufacturing and establish a local brand available at March 2010 earnings multiple of just under 10 times. The issue looks reasonable priced, offers plenty of appreciation in the medium term and long term and has the potential to also offer some listing gains.

I believe investors looking for solid gains and appreciation in the medium and long term must subscribe to this issue.

SEBI disclaimer: – I intend to subscribe to the above issue