Tara Jewels – IPO Analysis

Tara Jewels (TJL) is tapping the market to raise funds to the tune of Rs 110 crore comprising fresh issue through the IPO route. Further, one of its strategic investors, Fabrikant H.K. Trading, is selling its stake for around Rs 70 core, taking the total offering to the market to around Rs 180 crore. The price band for the same is fixed at Rs 225-230 per share, which would result in approximately 78 lakh shares (assuming a higher band). The issue will open on November 21, 2012 and will close on November 23, 2012. The shares of the company will be listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

The issue proceeds of around Rs 110 crore (proceeds from the stake sale will not be received by the company) would be used to meet the expenses of establishing 20 new retail stores by FY13 and for the repayment or pre-payment of existing loans. Around 55% of the proceeds (approximately Rs 60 crore) would be used to set up retail stores, while sums of Rs 30 and Rs 20 crore would be utilised to repay or prepay loans taken from SBI and ICICI Bank respectively.

Further, one has to note that company has allotted 1,800,000 equity shares to Crystalon Finanz AG for an aggregate amount of Rs 40.5 crore by way of Pre- IPO Placement, which are at Rs 225 per share.

TJL was incorporated in 2001 and its business can be broadly divided into three segments – manufacturing, exports and retailing. The company has a wide-ranging product portfolio that includes gold, silver, platinum with or without studded (diamond) jewellery, etc. Currently, the company has four manufacturing units, one of which is located in Panyu, China, two in SEEPZ, Mumbai and another in MIDC, Mumbai. The company primarily exports to countries like Australia, China, Canada, South Africa, UAE, UK, USA as well as to 12 countries in the European Union (EU) zone. TJL started its retail operations in India in 2008, and currently has 30 stores spread over an area of around 29949 sq. ft. across 19 cities in the western and northern parts of the country.

For FY12, around 81% of the total turnover came from exports and currently only 19% comes from domestic retail stores. Of the total exports, around 70% of the sales comes from its top 10 clients (including the likes of Wal-Mart, JKB International, Matsumoto Industrial, Sterling Jewelers, Zale Corporation), which also looks like a concern to some extent.

For FY2012, on a consolidated basis, TJL’s topline grew by 20% to Rs 1400 while its bottomline grew by 33% to Rs 54 crore YoY. The EBITDA margin of the company has increased by 94 basis points to 9.54% on a YoY basis. We believe that the company’s topline growth of 20% could be a result of higher gold prices and the rupee’s depreciation against the dollar rather than being volume-led.Having stated the positives at the outset, we also wish to bring to investors’ notice that TJL is raising funds for the domestic retail segment which has just 19% of its turnover and where it faces stiff competitions from various regional players. The company has a presence only in northern and western India and new retail outlets are also being planned in the same zone.

There is also some amount of scepticism on whether the set objectives for which it is raising funds can really be achieved. The company plans to open 20 new stores by the end of this fiscal, which means it has to set these up in a short span of just 4 months. Any delay on this front could affect its growth. The debt-equity ratio of TJL is 2.14x and it has more than Rs 600 crore of debt on its books. We believe that the amount earmarked for debt repayment (Rs 50 crore) will not in any way help it improve its debt-to-equity ratio.

Another point to note is that the industry in which the company operates is seasonal in nature. Where the second half of the year sees good demand on account of the festive season, the first half typically tends to be quiet.

On the positive front, TJL is not run as a family business unlike other jewelery firms. In contrast, the company is in the hands of an experienced management and is operated in a highly professional manner. It is also technologically advanced, which gives it an edge in terms of productivity and business efficiency. TJL’s retail segment majorly focusses on and caters to the mid-market in India by providing affordable luxury jewellery, and thus has a good growth opportunity. It also hedges its exposure to gold, and hence, it has no major impact potentially arising out of the volatility in gold prices. Another significant point is that the company owns the brand rather than being held by any individual.

While its peers are available at significantly lower P/E multiples – Renaissance Jewellery (4x), Rajesh Exports (8.8x), Shree Ganesh (1.6x) and Gitanjali (8.3x) – on a Post Issue basis, this stock intends to command a P/E of 10.5x its FY2012 EPS, which is on the higher side.

You can expect a post-listing spike in its share price as most jewellery stocks are currently doing well thanks to the ongoing festive season. Considering the same, investors with a high-risk appetite could look at investing in this counter. For others, watch this space for more updates.