SME IPO - cautious on Patdiam Jewellery, says VS Fernando

By VS FernandoFluctuating financials, related party dealings, group firms’ conflict of interest, etc. advise one to tread cautious Patdiam Jewellery IPO.

The OfferFresh Issue of 13,17,000 equity shares of face value of Rs 10 at a price of Rs 38 each aggregating to Rs 5 cr. The IPO constitutes 30.5% of the post-issue paid up equity capital of the company. Of the public offer, 69,000 shares are reserved for the `Market Maker’ – BCB Brokerage. The lead manager to the issue, Pantomath Capital Advisors, has underwritten the entire issue.  Investors have to apply for a minimum of 3000 shares or Rs 1,14,000. The shares are to be listed on the SME platform of BSE.   Issue Object Besides achieving the benefits of listing, the IPO is expected to help the company to fund the working capital requirement. BackgroundThe Mumbai-based Patdiam Jewellery Ltd (PJL) was promoted by Samir Kakadia (45 years) and his spouse in 1999. The company reportedly set up its jewellery manufacturing unit at MIDC (SEEPZ) in the year 2000. Samir Kakadia’s brother, Praveen Kakadia (52) and business associates Chhagan Navadia and Mahesh Navadia acquired stake in the company in 2002. PJL undertook modernization and computerization of its jewellery unit in 2003. The company had an equity base of Rs 2 cr until March 2015 and came out with its maiden bonus in the ratio of 1:2 in August 2015 which enhanced the capital to Rs 3 cr. On the enlarged equity, the company’s managing director, Samir Kakadia and his spouse collectively hold 34%, chairman Pravin Kakadia and his son Dhruv Kakadia control 34%, Chhagan Navadia and his brother Ganesh Navadia hold 21% and Mahesh Navadia has 11%. Strangely, the Navadias who control 32% do not have any board representation.    Business   PJL is engaged in the business of designing, manufacturing and marketing of jewellery made out gold and platinum with studded diamond, precious and semi-precious stones. The company is 100% export oriented, primarily catering to US and Middle East markets. It also exports to Europe, Australia, Hong Kong and Japan. The company focuses on high end and medium range diamond jewellery. Its products include rings, earrings, pendants, bracelets, necklaces, etc whose price ranges between $50 and $1,60,000. PJL claims to develop about 200 designs in a month to keep pace with the latest trends in the market as well as consumer requirements. PJL has an annual production capacity of 1 lakh pieces of jewellery. In fiscal 2015 it produced 34000 pieces at a capacity utilization of 34%. In the next three years, the company has planned to increase the capacity utilization to 35%-43%.  Financial PerformanceThe 16-year-old PJL has a mixed track record. Though its capital base has remained relatively low, the company has accumulated reserves of more than Rs 22 cr even after its recent bonus issue. Also, the company’s operating margin is impressive as compared to the industry average. However, the company’s performance in the recent years shows an unpredictable trend.The company’s turnover which was at Rs 48 cr in fiscal 2011 steeply fell to Rs 28 cr next year. In fiscals 2013 and 2014, it had a modest growth. But, on the eve of the IPO, the company’s top line has leapt from Rs 36 cr to Rs 53 cr. Compared to some of its industry peers PJL’s operating margin is impressive at 11%. In fact, the margin has steadily increased from fiscal 2012. Nonetheless, the company’s receivables are relatively high. Its debtors to sales ratio have invariably been more than 51% which was as high as 85% in 2014.  The company writes off significant amount of receivables every year. In fiscal 2011 more than Rs 1 cr was written off as bad debts. In 2013 and 2014 the company had to write off Rs 60 lakh and Rs 46 lakh respectively. Last year more than Rs 3 cr was written off which badly dent the company’s bottom line. In fact, it added less than Rs 4 cr to reserves in last five years.       Valuation & PerceptionEven though PJL’s profit before exceptional write-off is attractive at Rs 4.3 cr as compared to its current equity base (Rs 3 cr), its bottom line yields an EPS of only Rs 1.74 which discounts the offer price more than 31 times. Peers like Renaissance and Tara Jewels are currently available at less than 4 times their earnings. When scrips like Goldiam International, which offers 3.9% yield, is available at Rs 39, PJL whose dividend prospects are a distant dream cannot sustain at the IPO price for long.Notwithstanding the promoters’ experience and business acumen in jewellery, investors cannot be comfortable with companies which have dealings with promoters’ private firms who have clear conflict of interest. The promoters have at least three firms engaged in related lines of business. Group firm Patdiam Jewels is dealing in low-end jewellery. Another Partnership firm, Patdiam, which was incidentally formed in the same year of PJL’s incorporation with similar objective, is engaged in diamonds business. This firm derived one-third of its sales of Rs 75 cr from PJL.  Yet another partnership firm, Zest Corporation, is engaged in diamond jewellery for domestic market. The consolidation of group’s all gems and jewellery business into the public company before the IPO would have instilled confidence in the minds of investing public.