IPO REVIEW: C MAHENDRA EXPORTS

Gujarat-based C Mahendra Exports, which is engaged in sourcing, trading, processing and manufacturing of diamonds and diamond jewellery, is raising `165 crore to fund its expansion plans.

The company intends to invest 40 per cent of the issue proceeds in its Belgium-based subsidiary, C Mahendra BV/BA. Another `36 crore will be deployed for setting up a diamond processing unit in Gujarat. The rest will be split between a jewellery manufacturing unit in Mumbai, retail outlets and development of its brand, Ciemme Jewels.

It aims to scale up its exclusive showrooms from nine to 24 by 2013. While the positive for the company is its network both in India and in key overseas markets, it has plans to expand it on the back of an integrated model. The main concern, though, is the volatile earnings track record.

Strengths and weaknesses

An integrated diamond and diamond jewellery group, C Mahendra has a strong global footprint via its robust marketing and distribution network. The group has two facilities for cutting and polishing diamonds at Varachha and Udhana in Surat. It also owns a jewellery manufacturing facility in Mumbai under the brand Ciemme Jewels.

Given that the control over the supply of rough diamonds is concentrated with a couple of companies, its sourcing and supply is uncertain.

Though diversification in the retail business will improve its operating margins, the working capital-intensive nature of the industry and a long conversion cycle could limit its ability to generate steady, free cash flows. A huge surge in rough diamond prices could adversely impact its profit margins as rough diamonds form 94 per cent of its total cost of production at present. The group's limited track record in the retail business may also pose challenges in scaling up this business. Forex fluctuations and a delay in setting up units could also impact its financials going forward.

Valuations and outlook

In the first quarter of 2010-11, the company's net profit stood at `40 crore on revenues of `677 crore.

On a pre-IPO equity base, C Mahendra has reported an EPS of

`14.71 for 2008-09, `1.35 for 200910 and `8.96 for the quarter ended June 2010. Assuming 30 per cent growth in the 2010-11 net profit over 2008-09 (ignoring the 2009-10 numbers which appear to be an aberration), the EPS is 14.49 on a post-issue base, and aprice to earnings ratio of 6.55 to 7.59 times.

While this is lower than peers such as Gitanjali Gems, its relatively volatile earnings coupled with higher competition from established retail jewellery brands make it a highrisk investment.