Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Jewellery Stocks that could glitter... - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 27, 2012

    Jewellery Stocks that could glitter...

    This is the concluding article of a series of five articles on the Gems and Jewellery Retail Industry in India.

    In Part I of this series, we highlighted the changing scenario of the Rs. One Trillion plus Indian Jewellery Retailing industry. With the growing Indian economy and middle class, demand for branded jewellery is rising. The jewellery sector is following the megatrend of moving from an unorganized, to a branded organized one. Also, recognition of gold and jewellery as an investment asset class, and increasing exports, has benefitted the Jewellery Industry.

    In Part II we discussed the actors for assessing the potential in branded jewellery, and the upsides to such investments. Factors to consider for branded jewellery companies include real estate rentals, working capital cycles, the intense competition, the degree of diversification into other jewellery products, and/or into other non-jewellery related businesses (e.g. Gitanjali Gems is also in the lifestyle and apparel business). The positives for investing in this sector are the growth of the industry and the benefits brought by branding. Branding broadens the consumer base via segmentation, and increases operational efficiency because of the systematic approach to management.

    Part III then highlighted the concerns that branded jewellers face. Among these are higher customs duty, service tax hikes, higher marketing expenses to build brands, and intense competition. Competition comes from sources - from family jewellers, from regional and branded national players, and from the newly developing "online" jewellery businesses. Also, inherently branded retail companies with stores, need to bear the cost of expensive real estate rentals, and also manage their inventory and working capital cycles well. Finally, in the wake of the recent budgetary announcements, the taxation issues have been accentuated, which, along with other cost pressures and can dampen profit margins.

    In Part IV, we examined the business models, and qualitative and fundamental aspects of the three main players of this industry, namely Titan Industries (Tanishq), Gitanjali Gems, and Shree Ganesh Jewellery House.

    In our last and final article, we add financial analysis to our assessment to decide which, if any, of these three companies is worth investing in.

    Sales growth - Over the last 5 years, the sales compounded annual rate of growth (CAGR) for Titan has been close to 35%. This is higher than Gitanjali's 26%, but much lower than Shree Ganesh's 111%. Shree Ganesh, the export oriented company's CAGR was high as it started with a much lower base in 2006.Another consideration is that Titan Industries and Shree Ganesh's sales growth has been relatively consistent, whereas Gitanjali's has been volatile.

    Working capital management - Branded jewellery retailers require huge investments in high value inventory. They have to stock a minimum product range, and adequate inventory to cater to customer requirements. Cash conversion cycle is a good indicator of this working capital efficiency.

    Cash Conversion Cycle = Inventory days + Receivable days - Payable days

    Cash conversion cycle is the best for Titan Industries at 25 days, with Shree Ganesh a close second at 27 days. However, this parameter is a very high 161 days for Gitanjali implying operational inefficiency. A closer look Gitanjali's ratio reveals that receivable days in particular are a very high 140 days.

    Titan turns over its inventory into cash every 93 days, as compared to Gitanjali's 96 days. Since Shree Ganesh is 85% export oriented, its inventory turns are comparatively lower or 17 days. Titan and Gitanjali with their retail stores need to maintain higher inventory levels than Shree Ganesh to meet customer demands.

    Profit margins - Operating profit margins for Titan, Gitanjali and Shree Ganesh have been 9%, 7% and 8% respectively over last 5 years. In terms of net profits, Shree Ganesh scores over the other two with 6% Profit After Tax (PAT) margin. The PAT margin for Titan is 5%, and for Gitanjali it is 4%.

    Return ratios - Return on capital employed (RoCE) has been an average of 42% for Titan, and this has been steadily increasing from 29% in 2007 to 64% at present. Gitanjali's average RoCE over the past five years is only 10%! While Shree Ganesh's average RoCE over the past 5 years is 45, it has been steadily falling from 88% in 2007, to 30% currently. The return on equity (RoE) numbers tell the same story.

    Quality is Important - Overview of the 3 Main Branded Jewellery Companies
    Factor Titan Industries Gitanjali Gems Shree Ganesh Jewellery House
    Revenues - All Businesses Rs 65.7 bn Rs 51.2 bn Rs 52.4 bn
    Revenues - Jewellery Business Rs 50.5 bn Rs 51.2 bn Rs 52.4 bn
    Diversification -Jewellery % Total Revenues 77% 100% 100%
    Number of Brands 3 7 8
    Raw Materials Gold - 85% of Raw Mat'l Costs Diamonds, Semi and fully precious stones - 89% Gold - 85% of Raw Mat'l Costs
    Potential of other businesses High - Accessories, Watches, Time Wear, Eye Wear Medium - Lifestyle retailing The company is setting up branches of a finance company that would provide gold loans.

    Major Branded Jewellery Retailers - Key (Financial) Parameters (over last 5 years)
    Factor Titan Industries Gitanjali Gems Shree Ganesh Jewellery House
    Sales CAGR (5 years) 35% 26% 111%
    Cash Conversion Cycle (in days) 25 162 27
    Inventory Days 93 96 18
    Receivable Days 6 140 59
    Payable Days 73 74 50
    Last 5 yrs' Profit Margins      
    Operating 9% 8% 7%
    Net Profit 5% 4% 6%
    Return Ratios      
    RoCE 42% 10% 45%
    RoE 40% 12% 55%
    TTM PE (x) 38 12 3

    Valuation - A company's valuation reflects the degree to which a company is seemingly over or undervalued by the market. Titan is trading at a "high" trailing twelve month (TTM) price to earnings (PE) multiple of 38. Gitanjali's TTM PE is 12, whereas Shree Ganesh's is a very low TTM PE of 2.8.

    Our review indicates that based on fundamentals and financials, Titan and Shree Ganesh both seem to be performing on par with each other. However, Shree Ganesh has a much lower valuation (TTM PE 2.8), especially when compared to Titan's TTM PE of 38.

    As we conclude this five part series on the Gems and Jewellery industry, we recognize the potential of investing in Shree Ganesh. However, it would not be advisable to invest your money into Shree Ganesh based solely on the criteria discussed. You will need to dig deeper to unearth which companies are "real jewels" to invest in.



    Equitymaster requests your view! Post a comment on "Jewellery Stocks that could glitter...". Click here!

    1 Responses to "Jewellery Stocks that could glitter..."


    Dec 21, 2012

    Pathetic and useless article. If numbers meant anything, you know who would be the richest.

    Equitymaster requests your view! Post a comment on "Jewellery Stocks that could glitter...". Click here!

    More Views on News

    Titan: Jewellery Business Lights up the Quarter (Quarterly Results Update - Detailed)

    Aug 10, 2017

    However, growth at these levels are unlikely to be sustainable.

    Avenue Supermarts Ltd. (IPO)

    Mar 7, 2017

    Equitymaster analyses Initial Public Offering (IPO) of Avenue Supermarts Limited.

    Titan: Beating the Demonetisation Blues (Quarterly Results Update - Detailed)

    Feb 14, 2017

    Titan Industries declared its results for the third quarter of financial year 2017 (3QFY17). While topline growth was 14.7% YoY, net profit grew by 13.1% YoY during the quarter. Here is our analysis of the results.

    Titan: Margin Improvement Saves the Day (Quarterly Results Update - Detailed)

    Nov 16, 2016

    Titan Industries declared its results for the second quarter of financial year 2017 (2QFY17). While topline growth was flat, net profit grew by 23.5% YoY during the quarter. Here is our analysis of the results.

    Titan: High Gold Prices Spoil the Show (Quarterly Results Update - Detailed)

    Aug 9, 2016

    Titan Industries declared its results for the first quarter of financial year 2017 (1QFY17). The company reported 3.3% YoY increase in sales, while net profit fell by 16.3% YoY during the quarter.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms