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Tuesday, November 20, 2012

Tara Jewels Limited IPO Review



Issue Highlights

Issue Period
21/11/12-23/11/12
Price Band
Rs. 225-230
Face Value
Rs. 10
Lot Size
50
Issue Type
100 % Book Building
Industry
Gems & Jewellery
Listing
BSE,NSE
Registrar
Link Intime India
Issue size
Rs. 179.5 crore
Maximum Retail Subscription Limit
Rs.  1,95,500 (17 Lots)

Issue Details

Offer for sale: of Rs. 70 crore by Fabrikant HK Trading Ltd.
Fresh equity: Rs. 109.5 crore

Industry Analysis

India is the largest consumer of gold in the world importing 970 tonnes of gold in the financial year 2011 and 95 % of this gold found its way into jewellery manufacturing. India is also a  leading diamond processing nation with a market share of 60 % in value terms (and 90 %  in volume terms).India with its low-cost skilled labour force having expertise in  jewellery manufacturing and diamond processing-cutting, polishing and setting-qualifies for the leadership position in gold & diamond jewellery manufacturing .Gems & jewellery sector is predominantly an export oriented industry. In FY 2011, Gems & Jewellery sector accounted for 17.5 % of India’s total merchandise exports amounting to 43 billion US dollars. Since FY 2002, Gems & Jewellery industry has been growing at a CAGR of 21.33 %.In India, retail jewelry-manufacturing accounts for only 4 % of the total jewellery market while rest is dominated by unorganized players comprising local goldsmiths and small neighborhood jewellery shops.

Company Analysis

The company is an integrated player of the industry with expertise in designing and retailing jewellery and has been conferred with the ‘Star trading House‘status by the Ministry of Commerce & Industry .

Tara jewels limited is engaged in following business activities-
1.       Jewellery manufacturing with manufacturing units in Panyu (China) and rest three in Mumbai (2 units in SEEPZ and 1 in  MIDC)
2.       Jewellery export to 19 countries
3.       Jewellery retailing under the brand name Tara Jewel Ltd from 30 existing stores

The product portfolio of Tara Jewels Ltd includes gold, silver, platinum, Honeydium and Pristinium with or without studded precious stones and its client list includes reputed names like Christ Uhrean & Schmuck and Walmart. The company primarily exports to Australia, China, Canada, European Union (12 countries), South Africa, UAE, UK and USA.

Strengths 

·         The company is presently having 30 retail outlets and plans to open 20 new retail outlets
·         Tara Jewel Ltd holds a leadership position in jewellery export sector
·         The company employs high end technology and machines for manufacturing of precision oriented jewellery
·         Tara Jewels Ltd maintains long term relationships with customers by collaborated brands like Heart2Heart, Candy Hearts, Snow Diamonds and Cherished Hearts.

Concerns

·         Being a predominantly export oriented company; dollar-rupee exchange fluctuations could be fatal for the company.
·         Alike all export oriented companies rising rupee is detrimental  to its profitability
·         The company’s foray into retail business  with its limited  operating history makes it vulnerable to the fierce competition posed by the established players
·          A major fall in gold and raw diamond prices could be fatal for the company as gold and diamond constitute for more than 90 % of the total raw material cost
·         Top 10 customers accounted for 70 % of the total export revenue and such type of client concentration  poses risks like pricing pressure sudden volume drop owing to order cancellations  etc. might affect the profitability
·         Income from the USA accounts for the 40 % of the total income and any slowdown in the USA could severely affect the profitability of the company.
·         Net cash flow from operations in negative for FY 2012

Objects of the Issue

1.       To raise funds for establishing new retail outlets : Rs. 66.48 crore
2.       Existing loan disposal: Rs. 50 crore
3.       Listing is supposed to enhance the brand value
4.       Issue related expenses: NA


Financial analysis #

·         Post issue equity considered for the calculations
·         FY 2012 Financial data used

Parameter
Value
P/E
10.4
P/B
2
Return on Equity (ROE)
19.5 %
Profit CAGR (4 year)
25 %
PEG
.42
Net Profit Margin (NPM)
4%
Current Ratio
1.2
Market Cap to Sales Ratio
.4
Debt Equity Ratio
3.2
PEG
.2
Return on Capital employed
25 %
Inventory Turnover Ratio
2.37
Interest Cover
1.5
Net Asset Per Share
Rs.113

Comparison with the peers #

·         Peer data for FY 12 as per moneycontrol site as on 20/11/2012

Peers
P/E
NPM
ROE
Debt/Equity
Titan Industries Ltd.
39.97
6.71%
41.87%
.07 *
Gitanjali Gems
15.3
3.28 %
9.81%
1.01
Goenka Diamonds
43.21
3.84%
7.36%
.41
Renaissance Jewellery
3.08
5.79%
13.84%
.63
Tara Jewels Ltd
10.4
4%
19.5%
3.2

·         * FY 2011 figure

Inference

Prima-facie fundamentals of the company looks intriguing but underlying weaknesses can’t be ignored. Though Tara Jewels is an export leader but presently it is not having a proven jewellery retailing track record. Tara jewels  had negative ‘Cash flow from operations’ for the financial year 2012 and the same was counter balanced by higher  borrowing resulting in a higher debt-to-equity ratio and problems in interest payment. Besides, geo-political risks like slowdown in USA and any major fall in gold prices would be fatal for the company as we have seen in FY 2009 due to global recession Tara jewel saw its net profit contracted by 67%.In a way to repay debt and for increasing its retail footprint this issue is being floated and the company has already allotted 18 lakh shares to Crystalon Finanz AG at the price of Rs. 225 per share in Pre-IPO placement. Tara Jewel is not a value buy but it has registered a lucrative growth in its sales and profit over last 4 years and investors who are comfortable with the underlying risks may apply for this issue. If Tara Jewel continues to grow in future and performs well on the jewellery-retailing front this stock could fetch handsome returns in future provided favorable geo-political situation and broader markets not going into a tailspin.

            Disclaimer

Analysis is for the information purpose only. Though due diligence has been taken while preparing this  report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of the report.

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