Gitanjali Gems

Gitanjali Gems, with its wide product range, could gain a larger share of the domestic branded jewellery market

Beta: 0.79
Institutional Holding: 8.52%
Current dividend Yield: 4.01%
Current P/E: 2.69
Current m-cap:
Rs 381.9 cr

THE GEMS and jewellery sector has taken a hit due to the global financial slowdown. However, for the branded jewellery segment, the retail demand still looks robust. While there are a few players in this segment, Gitanjali Gems seems to be uniquely placed with its business model that tries to tap both international and domestic gems and jewellery markets. The stock has fallen by over 80% in the last few months, and currently, it is trading at one-fifth of its book-value. This provides a good entry for investors, looking for a pie of the branded jewellery and luxury segment in their portfolio.

BUSINESS:

Gitanjali Gems is one of the leading diamond and jewellery manufacturers and retailers. It has an integrated business model, which includes sourcing and retailing of diamonds and branded jewellery. The company sources diamonds from Diamond Trading Company (DTC), the rough diamond sales and distribution arm of the De Beers Family of companies.

Gitanjali earns nearly 45% of its revenues through exports, while it has a wide range of established brands like Nakshatra, Gili, Asmi, Sangini, Giantti in the domestic branded jewellery market. It also has a joint venture with UAE-based retailer Damas to sell jewellery in India under D’damas brand.

The company also is trying to push its lifestyle business with its subsidiary Gitanjali Lifestyle, which has nearly 35 outlets. It has entered into a 50:50 JV with Italian group Morellato and Sector for distributing the latter’s jewellery and watch brands such as Cavalli, Galliano Moschino and Miss Sixty. Besides, the company has struck a similar JV with Italian fashion group Mariella Burani to introduce the luxury and fashion products of the Italian company in India. The company has entered in the US with by acquiring two retail chains Samuels Jewellers, which has 100 stores, and Rogers that owns 50 stores.

Further, Gitanjali is also setting up a special economic zone for gems and jewellery in Hyderabad that spread across 200 acres of land.

FINANCIALS:

The top line of the company has been growing consistently. It has showed a compounded annual growth rate (CAGR) of 20% in the last four years ended March 2008. Operating profit during the period grew by a CAGR of 55%, while net profit stood at 86% per year. The top line of the company has been growing consistently. It has showed a compounded annual growth rate (CAGR) of 20% in the last four years ended March 2008. Operating profit during the period grew by a CAGR of 55%, while net profit stood at 86% per year.

In the last four quarters, the jewellery business showed a sustained growth, helping boost profitability, while contributing 40% in the total revenue. However, the diamond segment has showed a lower profit growth. The segment suffered a net loss in the December 2008 quarter that weighed on the company’s profitability. However, for year ended December 2008, the company has managed to sustain growth in its profit margins.

GROWTH DRIVERS :

The risk of a slowdown in exports is somewhat mitigated by the company’s plan of rapidly increasing the domestic business. It has entered into a tripartite share purchase agreement with MMTC and the newly formed JV company MMTC Gitanjali (MGPL) to grow its jewellery showroom line. Through MGPL, the company plans to establish and maintain a large number of retail jewellery showrooms. It also plans to add 0.5 million square foot of space in its existing 1.5 million sq ft showroom area in the next 18 months. Besides, Gitanjali plans to boost its presence in the lifestyle business. Its subsidiary Gitanjali Lifestyle has signed a JV agreement with Kuwait-based Hassan’s Optician to import, manufacture and distribute sunglasses, eyewear, contact lenses and other similar products under different brands.

RISKS/CONCERNS:

The company has experienced a significant growth in its interest expenditure in the last two quarters that adversely affected its net profit. The gross block grew at a CAGR of 45% in the last four years that could explain the decline in interest cover ratio to 2.7 in the December quarter.

The diamond segment is struggling to show a growth in profitability in the last six quarters and weighs on bottom line. While the company plans to cut down on the wholesale activity in the diamond segment, it also expects a further drop in the segment’s fruitfulness in the coming quarters.

VALUATIONS:

Due to a high beta, the company has witnessed a loss of nearly 75% in its market capitalisation, while the Sensex has lost more than 50% in 2008. At the current market price, the P/E is at 10% of its average since March 2006. With a wider product range and potential to tap the premium end of the market through tie-ups with international retailers, Gitanjali is likely to make larger strides in the domestic retail space.