Thangamayil Jewellery

Thangamayil Jewellery's IPO looks attractive. However, given the cyclical nature of its business, the upside could be limited. Those with higher risk appetite should go for it

IPO details:
Price Band: Rs 70-75
Net issue size:  Rs 28.75 crore
Date: January 27 – 29

 
THANGAMAYIL Jewellery is a Madurai based company engaged in manufacturing and retailing of precious jewellery. The company is an established brand in Tamil Nadu and currently operates five retail outlets. Post IPO it plans to expand its network of retail showrooms to 11. It proposes an initial public offer of close to 4 million shares to raise Rs 28.75 crore. This issue includes an employee reservation of shares worth Rs 0.90 crore, hence, net issue for the public stands at Rs 27.85 crore. A part of the proceeds will also be used to meet the working capital requirement of the company. The IPO proceeds will form about 60% of the total cost of these two objectives while the rest of the funding requirement is to be met through internal accruals and pre-IPO placement to the promoters.

BUSINESS:

The company currently trades in gold, silver, diamond and platinum jewellery. The ornaments are made to order as per specific requirement of the customer and the same are manufactured at the company's unit near Madurai. A portion of the jewellery is also bought readymade from various dealers in Andhra Pradesh, Gujarat, Kerala and West Bengal. The company is also in the business of jewellery exchange and has popularized the concept of hallmarking in the region. The company currently has five retail outlets across the state of Tamilnadu. While the company started its biggest showroom at Madurai in 2001, the remaining four showrooms were opened in the last two years.

FINANCIALS:

The topline of Thangamayil has experienced an impressive growth of more than 70% for the last five financial years when compounded annually. Net profit on the other hand has more than doubled every year in the period. While the cash profit demonstrated an equally impressive CAGR of 75% during the period, the cash flow from operating activities remained negative and has risen on an average by 66% .

CONCERNS:

The company is still to identify the locations for three of its proposed show rooms . The cost of project for these three plans turn out to be Rs 12 crore, about 55% of the total cost of projects. 

   Inventories during the last five financial years have increased at a CAGR of 54% which is much higher than that of other competitors like Rajesh Exports (32.5%) and Su-Raj Diamond & Jewellery (20%) . Consequently, the inventory turnover ratio has declined in FY09 and stands at an unimpressive 5 against 54 and 10 for Rajesh and Su-Raj respectively. While negative cash flow and rising working capital requirement is not unknown phenomena for the industry, barring FY06, Thangamayil has failed to generate a positive cash flow.

VALUATION:

Post issue the company will be valued at 6.5 times its annualised H1 FY 10 earnings at the higher end of the price band and 6.1 times at the lower end. The valuation looks attractive compared to the P/E ratio of established players like Su-Raj Diamond and Gitnjali Gems, which are in the range of 8-9.5. However, given the cyclical nature and the working capital requirement of the industry, the issue may be a good bet for investors with higher risk appetite.