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Sep 25, 2012, 02.40 PM IST
CRISIL Research has come out with its report on Thangamayil Jewellery. The research firm revises the FY13 and FY14 revenue and earnings estimates upward for Thangamayil on account of significant rise in gold prices and timely addition of new stores.
CRISIL Research has come out with its report on Thangamayil Jewellery . The research firm revises the FY13 and FY14 revenue and earnings estimates upward for Thangamayil on account of significant rise in gold prices and timely addition of new stores.
About the company: Madurai-based Thangamayil manufactures and retails gold and gold jewellery. The company opened its first showroom in 2001 and currently has 22 branches. It mainly sells gold and gold products, which constitute ~95% of its revenue.
CRISIL Research has revised Thangamayil Jewellery Ltd’s (Thangamayil’s) CRISIL IER fundamental grade to 3/5 (pronounced three on five) from 2/5. The grade indicates that the company’s fundamentals are ‘good’ relative to other listed equity securities in India. CRISIL Research has assigned a valuation grade of 3/5, indicating that market price is ‘aligned’ to the current level of Rs 226. We also revise our one-year fair value to Rs 239 from Rs 204. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument’s future market price or its suitability for a particular investor.
The company’s successful opening of new stores and their healthy performance are the main reasons for the upward revision in the fundamental grade. Despite high gold prices and rising competition in its primary market, Tamil Nadu one of the leading gold consuming states of India, the company’s strategic execution selection of store location and size has helped it grow faster than expected. The company has evolved from a single location jewellery retailer to a multi-location player in the past three years and has created a strong brand. After opening six stores in FY12, it has added seven more stores during the six months of FY13 (20% of its total area), taking the total number of stores to 22 (45,000 sq.ft). Its gold volume has increased at a CAGR of 18.3% in the past five years, from 1,309 kgs to 3,036 kgs. With the addition of four new stores in the next six to eight months, we expect it to soon reach the 50,000 sq.ft. mark (with a total store count of 26) and its gold volume to increase to 4,651 kgs by FY14. Thangamayil is also benefiting from rising gold prices on account of appreciation of its gold inventory. Its gross margin improved from 10.6% in FY10 to 12.6% in FY11 and further improved to 13.3% in FY12. With further appreciation in gold prices during the initial months of FY13, we expect gross margin to be in the range of 12.5-13.0%, which is higher than the FY06-11 average but lower than the FY12 average on account of lower volumes due to high gold prices. Better inventory management in times of rising gold prices also supports the grade.
Although higher gold prices have resulted in higher profitability, Thangamayil’s older stores faced volume pressure, which has constrained our grade. Its same store sales (of the nine old stores) were down by 24% in Q1FY13 (Apr-June 2012) on account of higher gold prices and jewellers’ strike in April (in response to the changes in the Union budget). Also, any sharp fall in gold prices will have a significant bearing on inventory.
Financial outlook: CRISIL Research revises the FY13 and FY14 revenue and earnings estimates upward for Thangamayil on account of significant rise in gold prices and timely addition of new stores. While we have revised FY13 margin estimates upward on account of higher expected gross margin, we maintain the FY14 margin estimate. EPS for FY13 is expected to be Rs 42.5; it is 42% higher than our previous estimate.
Valuation grade (3/5 current market price is aligned): CRISIL Research has used the P/E multiple to value Thangamayil. Based on the relative valuation of its peers, we continue to assign a multiple of 6x to FY14E EPS of Rs 39.9. Post the upward revision in earnings estimates, we have revised our one-year fair value to Rs 239 per share.
Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.
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