The initial public offer (IPO) of Senco Gold, which is set to open for bidding on July 4, has received positive reviews so far as analysts believe the company has a strong foundation and the outlook also looks favourable over the long term.
The company and its shareholders plan to raise Rs 405 crore from investors. It has set the price band of the issue at Rs 301-317 per share and raised Rs 121.49 crore from 21 anchor investors.
Analysts at SBICAP Securities pointed out that at the upper end of the price band, the business is trading at a P/E multiple of 15.5 times its FY23 EPS. Senco has delivered consistent revenue growth, profitability and RoE over the last three years. The company’s topline and bottomline have recorded a three-year CAGR of 19 percent and 20 percent, respectively.
“With its strong legacy in the jewellery business, the company is likely to grow its market position in other parts of the country,” the brokerage house said.
Company and prospects
Senco Gold is a pan-India jewellery retail player with a history of more than five decades. It is the largest organised jewellery retail player in the eastern region based on the number of stores. The company primarily sells gold and diamond jewellery.
SAIF Partners India IV Ltd (invested in 2014) and Oman India Joint Investment Fund II (2022) are two of its prominent existing shareholders. As of March 2023, Senco has 136 showrooms, in 96 cities and towns over 13 states across India.
According to a CRISIL report, the domestic gems and jewellery market was roughly Rs 4,70,000 crore in FY23, with gold jewellery dominating the overall market with a 66 percent share. The organised players continued to grow faster than the industry at a 20 percent CAGR between FY17 and FY23, compared to 14 percent for the industry.
The superior growth rate and a transition towards unorganised to organised retail players are fuelling the optimism of analysts. Apart from that, improving economic growth, rising urbanisation, increasing disposable income levels, and mandatory hallmarking are positives for the organised players.
“Senco Gold is available at lower than industry peers' valuations. A strong brand name and a legacy of over five decades, strong company-operated showrooms, and an established asset-light franchise model are expected to benefit the company. Therefore, we assign a ‘subscribe’ rating for the issue on a medium- to long-term basis,” said analysts at Geojit Financial Services.
Financials
The company has given a robust financial performance with revenue increasing from Rs 2,660 crore in FY21 to Rs 4,077 crore in FY23, while the net profit jumped from Rs 61.5 crore to Rs 158.5 crore during the same period.
The debt-to-equity ratio for FY23, FY22 and FY21 was 1.5x, 1.4x, and 1.1x, respectively. It has a PAT margin of 2.3 percent, 3.7 percent, and 3.9 percent in FY21, FY22, and FY23, respectively. It intends to prioritise diamond jewellery (currently 7 percent of the revenue), which involves higher margins than gold jewellery, to increase its overall profit margins.
Risks and concerns
Among the key risks to their recommendations, analysts note Senco’s high working capital cycle compared to peers and involvement of Senco Gold and its directors and promoters in certain legal and regulatory proceedings.
The company requires a significant amount of working capital to drive growth and primarily to finance the purchase of raw materials. As of March 23, the company has a total working capital sanction limit amounting to Rs 2,073 crore.
Besides, the company operates in a highly competitive and fragmented market as the players in the Indian retail jewellery sector often offer their products at highly competitive prices and many of them are well established in their local markets, which is another risk that investors should keep in mind.
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