Sparkle is here to stay for jewellery companies after a good Q2

Krishna KarwaMoneycontrol Research

Jewellery sector companies reported a very decent quarterly performance and are riding on tailwinds such as a market share shift to the organised sector, gradual revival of consumer sentiment, and regulatory support in the form of relaxation of PMLA (Prevention of Money Laundering Act) provisions. While Titan, the leader in the pack, had a dazzling quarter, the valuation tempers our excitement. We are relatively more comfortable with PC Jeweller, a company that is building a strong domestic business while simultaneously offering some comfort on valuation. Finally, for those willing to take a little more risk, Lypsa Gems & Jewellery and Rajesh Exports are worth taking a look at.

Preponement of Diwali from late October/November to mid-October this year, coupled with healthy footfalls and an increase in purchases, had a positive impact for jewellery companies. With the wedding season already underway and expected to go on till H2FY18 end, top-line traction should continue.

The sector is also reaping benefits from the following:-

PMLA norms relaxation

In October 2017, just a few days prior to Diwali, statutory requirements relating to KYC (know your customer) were eased considerably, thereby ensuring that Q3FY18 began on a good note for jewellery companies. Though PMLA rules may be reinstated in due course, it remains to be seen as to how the new directives impact the jewellers.

The ‘organised’ transition

Measures such as GST implementation, crackdown on black money, and new regulations (pertaining to hallmarking of gold jewellery carat count) are likely to trigger transition of business from informal entities to tax-compliant ones at a fast pace. Since India’s jewellery sector has a very high share of unorganised entities (upwards of 65 percent), the organised players are likely to reap the benefit of this shift.

Product mix change and promotional spends

Jewellery companies have been consciously altering their product offerings in favour of high-margin studded and wedding jewellery variants. They have been stepping up their spending on advertisements to improve their brand recall.

Asset-light expansion

Even as small and mid-size jewellers up the ante, network augmentation has been one of the cornerstones for large jewellery companies in a bid to tap market share in tier 2/3/4 regions of India. However, they are preferring an asset light expansion strategy by predominantly opting for tie-ups with franchises.

Key jewellery stocks at a glance

What do we like in the sector?

Titan: The well-known jewellery major’s numbers were impressive for the second quarter in succession in FY18.

The company’s future strategy entails increased impetus on premiumisation of its jewellery output, extensive marketing and branding activities, improving the product mix towards wedding jewellery, and keeping debt levels low.

PC Jeweller: The company’s range of products include gold, wedding, and diamond jewellery.

PC Jeweller’s growth will be primarily driven by its domestic business. The company is planning to capitalise on the favourable prospects of India’s organised retail through aggressive outlet expansion, introduction of new brands, and prioritizing diamond jewellery sales.

Lypsa Gems & Jewellery: The wholly integrated diamond company sources raw diamonds from major mines, before polishing and selling the same internationally (75 percent of turnover) and in India.

Execution of export orders (for diamond/diamond studded jewellery amounting to Rs 16 crore) to UAE-based customers in H2FY18 and tie-ups with e-commerce platforms to sell branded jewellery in the Indian markets could be the future growth drivers.

The company’s initiatives to derive a higher proportion of revenue from high-margin products and pare debt should support margins.

Lypsa now plans to start jewellery retailing in India and scale up its capacity to manufacture small-sized diamonds. Its business model is undergoing a change from a pure trader to a manufacturer and retailer, the effect of which should start reflecting in the medium-term.

Rajesh Exports: The company deals in jewellery variants (handmade, casting, machine, stamped, studded, tube, electro-formed) and processes nearly 35 percent of gold products (medallions and bullion) manufactured in the world.

By virtue of acquiring Valcambi, the world’s largest gold refinery at Switzerland, Rajesh Exports strengthened its existing global leadership further with a total precious metals refining capacity of 2,400 tons per annum.

On the back of a robust clientele list spanning bullion banks, central banks, and wholesale/retail jewellers across the world, the company aims to increase its supply of investment gold bars.

Rajesh Export’s continued emphasis on value-added products, new launches (of gold jewellery designs), and pan-India ‘SHUBH’ retail store additions (from 81 outlets at present) should start yielding results from FY19.

Valuation & price performance – an overview

PC Jeweller’s historical financial consistency has been impressive and the company’s future outlook is promising, too. At 20.5x FY19 projected earnings, the stock trades at a steep discount to Titan, and therefore, is worthy of being included in a portfolio.

Inspite of Titan’s strong track record, the recent price rally has left little valuation headroom. At 55.7x FY19 projected earnings, accumulation on corrections is recommended.

Additionally, investors with a good risk appetite may want to consider the following stocks:

Lypsa, at 3.2x FY19 projected earnings, offers downside protection on account of the undemanding valuation. However, upside is contingent on successful progression towards retailing.

At 16.1x FY19 projected earnings, Rajesh Exports’ valuation seems to offer comfort given the multiple arms of its business.

Follow @krishnakarwa152

For more research articles, visit our Moneycontrol Research Page.