Dec 27, 2012, 02.39 PM | Source: Moneycontrol.com
Emkay Global Financial Services is bullish on Gitanjali Gems (GGL) and has recommended buy rating on the stock with a target price of Rs 742 in its December 19, 2012 research report.
, Emkay Global Financial Services |
"GGL's transition from a low margin diamond processor to a jewellery manufacturer and retailer has borne fruit, with high value jewellery segment constituting 56% of revenues. This mix change has transformed GGL’s financial profile by driving revenues, improving margins and bringing stability to its business model. We expect the mix to improve in favour of jewellery to 65:35 by FY14E. Subsequently, we expect 25% CAGR in jewellery volumes to surpass 7% CAGR in diamond volumes over FY12-14E and EBIDTA margins to improve by 30bps to 6.9% in FY14E.
GGL’s domestic branded jewellery segment has witnessed strong growth, with revenues growing at a CAGR of 50% over FY07-12, owing to favorable market dynamics like rising income levels, aspiration for branded products and higher discretionary spending. We expect all these drivers along with GGL’s strong brand portfolio and continuous retail network expansion to sustain its growth momentum. We expect domestic jewellery volumes to grow by 30%, resulting in a 36% revenue CAGR over FY12-FY14E.
GGL is now ready to reap the benefits of its investments in creating brands and settingup retail network. With future growth plans entailing low capex and reduction in working capital, we expect improved capital efficiencies and sustainable free cash flow generation. This would improve the operating and financial metrics of the company. We expect ROCE and ROE to rise to 16% and 19% respectively in FY14E. We also expect free cash flows of Rs 1.1bn in FY14E.
GGL has undergone PER re-rating in the last two years with over 250% appreciation in market capitalization. This re-rating has been led by improved business mix, strong growth in domestic and international business and sustained improvement in profitability. But, sustainability of business model coupled with free cash flow generation and higher return ratios are yet to be factored, thereby leaving scope for further upsides. Buy the stock with a SOTP target price of Rs 742 which provides upside potential of 56%," says Emkay Global Financial Services research report.
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