Listed jewels make Tara less attractive: VS Fernando

Tara Jewels Ltd (TJL) is part of the Tara group promoted by Rajeev Sheth (Chairman & Managing Director) who holds a diploma in gemology and has over three decades of experience in jewellery business. He reportedly promoted Rose International in 1981 and became promoter-managing director of Inter Gold India (P) Ltd in 1989. TJL was incorporated in 2001 as Tara Ultimo (P) Ltd. Consequent to the merger of two group companies viz. T Two International (P) Ltd and Tara Jewels Exports (P) Ltd in fiscal 2009, the company’s name was changed to the present one.
 
TJL is an integrated player in the jewellery industry with experience ranging from designing to retailing. Its operation is divided into three divisions namely, manufacturing, exporting and retailing.  The product portfolio includes gold, platinum, and silver jewellery with or without studded precious and semi-precious stones. TJL’s products have presence across different price points and cater to customers across all the market segments.

The company has four manufacturing units - one in China and three units in Mumbai (two in Seepz and one in MIDC). The manufacturing units are spread over an area of 84,584 square feet employing 35 designers and 955 craftsmen.

Currently TJL derives nearly four-fifths of its turnover from exports of studded jewellery manufactured in-house as well as by third parties. The company’s exports are concentrated with USA and Hong Kong accounting for approximately 40% and 35% of the revenue. Its top ten customers account for nearly 70% of the export sales. 

TJIL entered the jewellery retail business in October 2008 and conducts its retail operations under the brand “Tara Jewellers”. As on August 31, 2012, TJL had 30 retail stores spread over an aggregate area of 29,949 square feet. Retail business accounts for about one-fifth of the company’s turnover.

Financials
Post-merger of group companies in 2009, TJL has posted impressive financials. From Rs 702 cr in 2009, the company’s top line surged to Rs 1280 cr in fiscal 2012. Profit at the net level flared from Rs 7 cr to Rs 52 cr during this period.  The company’s sales from retail operations increased to Rs 183 cr in fiscal 2012 from Rs. 15 cr in fiscal 2010 at a CAGR of 258%. On a capital of Rs 18 cr, the company posted an EPS of over Rs 26 and its book value was worth more than Rs 137 at the end of last fiscal.

The Offer: As per CARE Rating, this issue size were to be Rs 220 cr comprising of fresh issue of Rs 150 cr and ‘offer for sale’ of Rs 70 cr. Whereas the offer for sale amount has remained unchanged, the company has pruned the fresh issue by more than Rs 40 cr.  Thus the present IPO consists of a fresh issue of Rs 109.50 cr and an offer for sale of Rs 70 cr from one of the existing shareholders. The price band being Rs 225 to Rs 230 for Rs 10 paid up share, the quantum of the offer works out to between 78 and 80 lakh shares.

Issue Object: The fresh issue is to meet the expenses of establishing retail stores (Rs 66 cr) and repayment or pre-payment of loans (Rs 50 cr). The IPO also provides an exit route for one of the existing shareholders, Fabrikant H.K. Trading Limited, who invested in the company as early as 2006.

Issue Grading: The offer has been graded by Credit Analysis and Research Limited which has assigned “CARE IPO Grade 3” indicating average fundamentals. According to CARE, while its grading reflects the experience of the promoters in the Gems & Jewellery Industry with fully-integrated operations, established marketing and distribution channel, the grading is constrained by the high operating risk arising out of the customer and geographical concentration of sales, working capital intensive operations, susceptibility to volatile raw material prices and forex fluctuation.

Valuation: Jewellery industry commands a P/E of more than 19x and P/BV of 3.4x as compared to the market composite of 15.4x and 2.1x respectively. Nevertheless, many a jeweler is currently discounted in single digit and the industry’s average operating margin is abysmally low at less than 5% as compared to the market composite of over 22%.

Currently Jewellery industry discounting is largely influenced by Titan which commands a P/E of 40x. The most recent jewellery IPO TBZ too is quoting at more than 27x its trailing twelve-month earnings. Considering these, TJL’s P/E of less than 9x may perhaps look cheap. But, does that merit investment? TJL is yet to pay dividend. Scrips like Shree Ganesh Jewel is currently offering more than 5% yield on its current market price which is less than a half of TJL’s offer. In fact, among the listed stocks, Renaissance , Thangamayil and Shree Ganesh Jewel look far more attractive than TJL.

As regards the post-listing performance of jewelers, Thangamayil and TBZ, which opened subdued on listing, have fetched sizeable returns in recent months while Shree Ganesh and Renaissance are still quoted at a heavy discount.

Concerns

• Proposes to deploy major portion of issue proceeds in retailing where risk is more which has not been appraised by any external agency
• Stiff competition resulting in low operating margin
• Exposed to high forex fluctuation and business concentration risk
• Promoters and group members engaged in similar line of business posing conflict of interest
• Expansion plans are at a nascent stage
• Since most of the showrooms are on lease, the prospects may be curtailed if the company fails to extend the lease.
• Though posted record profit in fiscal 2012, net cash flow from operation was negative
• Company yet to pay dividend 
• Promoters’ average cost of is just Rs 15.67 a share

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