PC Jeweller - IPO Analysis

The markets are on a roll, and as always a host of companies have lined up to raise money from a booming primary market. This obviously will have investors wondering on which IPO to invest in and which to avoid? This is exactly where we step in, bringing you the best and the most incisive analysis of the issues on offer. We analysed the Bharti Infratel IPO which hit the markets last week and had recommended high risk investors to go for it and those who are a little risk averse to take a measured exposure to it. Before that there was Tara Jewels another jewellery manufacturing company and here, we take a look at whether the PC Jeweller issue is worth subscribing to.

After Tara Jewels, PC Jeweller (PCJ), another jewellery manufacturing company is tapping the primary market to raise funds. The company will issue a total of 4.51 crore equity shares (face value of Rs 10 each), of which 0.35 crore shares are reserved for employees. The net public offering is 4.47 crore equity shares which will be offered at a price band of Rs 125 to Rs 135 per share, (retail investors would get a Rs 5 discount on the price fixed). The company intends to raise around Rs 564 crore on the lower band and around Rs 609 crore on the higher band through this issue.

The issue will open early next week, i.e. Dec 10, 2012 and is slated to close on Dec 12, 2012. The shares of the company will be listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

PCJ has been in existence for about seven years now, having established its first outlet in 2005 at Karol Bagh Delhi. Unlike other more older jewellery firms, this one is quite new and is currently trying to establish itself in the market. However, its aggressive advertisement campaigns have ensured a strong brand recall for it.The company currently has 30 retail showrooms. Of these, 13 are in the Delhi/NCR region and contribute to around 56% of the total domestic sales of the company. The others are spread across different parts of North India and contribute to the remaining 44% of its sales. It has five manufacturing facilities with an approximate area of 1 lakh sq. ft. These facilities processed around 4831.96 kg of gold during FY2012.

Of the total sales, around 70% comes from the domestic market and the remaining come from the export of jewellery, particularly to Dubai and Hong Kong. If we consider the break-up of diamond studded and gold jewellery, these constitute around 32% and 68% respectively of the total sales. The company is focussing strongly on diamond jewellery, which has better margins. This is evident from the fact that the contribution of this segment to the EBITDA has gone up from 16% in 2010 to 32% as on 30th September, 2012. Over the same time frame, the overall EBITDA margins improved from 9.99% to 12.58%.

On the financial front, for FY2012, PCJ’s topline grew at a robust rate of 54% to Rs 3041 crore while its bottomline grew by 56% to Rs 230 crore on a YoY basis. The EBITDA margin of the company has increased by 87 bps to 10.88% on a YoY basis. This indicates that its financial growth in the past has been quite good and we believe that it would see a good growth going ahead too, considering that it has a good growth strategy in place, where it will increase its presence by 67% i.e. from the current 30 showrooms to 50 showrooms by FY2014.

On the valuations front, at an FY2012 EPS of Rs 12.84, the company is available (on its post issue capital base) at a P/E multiple of around 9.7x (lower band) and 10.5x (on higher band), which we believe is fairly valued. Its peer TBZ (which also has the same business mix – around 70% of the total sales comes from gold and around 25% from studded jewellery) is trading at a P/E multiple of around 31x, which is very high. In others, Rajesh Exports is available at a P/E multiple of 9x and Gitanjali at 9.20x.

With a strong brand recall and an increased focus on the diamond jewellery segment, we believe that PCJ could see good growth going ahead. Further, the Rs 5 discount for retail investors would be an added advantage.

We recommend that readers should go ahead and invest in this issue, as we believe that the stock would provide good returns going ahead. Do keep a track of this space to know more about future public issues.