ABMoney expects listing gains for PC Jewellers IPO

Aditya Birla Money has come out with its report on PC Jewellers (PCJL) IPO. According to the research firm, the company has plans to add 20 more showrooms by FY14. The equity infusion (IPO) and retained earnings would fund the growth capital over the next few years. Investors can subscribe to the issue with medium to long-term perspective. There is a possibility of listing gains as well if the current market momentum continues, says ABMoney.

PCJL is predominantly north-based organised jewellery company and markets its jewellery under brand name of “PC Jeweller”. As of 30th Sept12, the company had 30 showrooms (all are company owned, company operated, barring 1 showroom) located across 23 cities in north and central India with an aggregate area of ~0.16 mn sq.ft. The company has 5 owned jewellery manufacturing facilities, with 2 located in Selaqui, Dehradun, Uttarakhand; 1 at Noida, UP (for domestic market) and 2 at Noida SEZ in Uttar Pradesh (to cater to export sales). The company is relatively young among its listed peers with its 1st showroom opened on 13th Apr 2005, albeit promoters (Mr Padam Chand Gupta and Mr Balram Garg) are in this business since 1981. During FY09-FY12, sales have grown at CAGR of 69.7% to Rs 30419.3 mn and adjusted PAT has grown at CAGR of 129.4% to Rs 2300.5 mn.

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PCJL has developed “PC Jeweller” as a strong brand in north and central India as a jewellery retailer with a wide range of jewellery products, particularly diamond jewellery and jewellery for weddings. The company offers wide range of product offerings and caters to diverse customer segments, from the value market to high-end customized jewellery. The company predominantly focuses on sales of diamond jewellery with contribution to revenue from operations to the tune of 11.9%, 15.0%, 17.9%, and 21.9%, during FY10, FY11, FY12 and 6MFY13 respectively. The gradual increment in contribution of diamond jewellery sales has led to gradual expansion of EBITDA margins from 7.9% in FY09 to 10.9% and 12.6% in FY12 and 6MFY13 respectively.

As of September 30, 2012, PCJL had 30 showrooms located across 23 cities in north and central India. Of these 30 showrooms, 27 are large-format (with an area of 3,000 sq.ft. or more), including showrooms at Karol Bagh and South Extension in New Delhi, and Gurgaon and Panchkula in Haryana which have an area greater than 10,000 sq ft each. The large-format showrooms are located typically in high street areas with high visibility and footfall. The strategy is to open one of the largest showrooms in that area, so as to attract footfalls and convert customers from unorganized segment to organised one.

PCJL’s net sales, EBITDA and PAT have grown at a CAGR of 69.7%, 88.5% and 129.4% during FY09-FY12 period respectively. EBITDA margin has gradually expanded from 7.9% in FY09 to 10.9% during FY12 and 12.6% during 6MFY13, led by increase in contribution from high margin diamond jewellery. As of 30th Sept12, the company had a net debt of Rs 2980.8 mn, with net debt-equity ratio of 0.43x. The company has healthy return ratios with RoE of 52.2% (avg of 56.2% for FY09-FY12 period) and RoCE of 37.5% (avg of 37.5% for FY09-FY12 period) in FY12.

PCJL source gold for its operations under the gold loan schemes of canalizing agencies and international bullion suppliers. Under the gold loan schemes, the price of gold purchased is fixed on the basis of prevailing gold rates on sale to customers within the applicable credit period, thereby minimizing any risk relating to gold price fluctuations during the period between procurement of gold and sale of gold jewellery to customers.

Outlook and Valuations: With rising disposable income, burgeoning middle class and rising aspirations of Indian consumers, discretionary spends are increasing and jewellery is going to attract decent share of consumer wallet due to emotional attachment (from wedding perspective and gifting option) and also a hedge against inflation. As of now, organised sector accounts for only 5-6% of the total market and with increasing knowledge about quality and brand awareness, there will be a massive shift of consumer from unorganised to organised segment.

With presence in 23 cities in India, we believe PCJL is well-placed to tap the growth opportunity in jewellery segment in India. The company has plans to add 20 more showrooms by FY14. The equity infusion (IPO) and retained earnings would fund the growth capital over the next few years. The strong financial performance during last 3-4 yrs is a t estimony to the fact that, management has the capability to scale the business profitably.

At upper price band of Rs 135, the business is valued at P/E of 8.6x FY13E annualised earnings and P/BV of 2.2x FY13E annualised book value (pre-issue) and 1.7x FY13E annualised book value (post issue). PCJL’s PAT has grown at CAGR of 129.4% during FY09-FY12 period to Rs 2300.5 mn and the company has already clocked profit of Rs 1419.8 mn during the first half of the current fiscal. Assuming 20% growth (based on the planned expansion) in PAT in FY14E over annualised FY13E PAT, the EPS for FY14E (based on the diluted post issue capital) will be ~ Rs 18.9, implying P/E ratio of ~7x (at upper price band). Looking at the FY13E RoE of 28.3%, we believe the offering is relatively cheaper amongst the peer-set aspiring a national footprint leaving something on the table for the investors. We recommend investors to subscribe to the issue with medium to long-term perspective. There is a possibility of listing gains as well if the current market momentum continues.

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