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Shree Ganesh Jewellery: Growth is there but... - Views on News from Equitymaster
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Shree Ganesh Jewellery: Growth is there but...
Apr 26, 2010

Recently we had a conference call with the management of Shree Ganesh Jewellery House Ltd to understand the company’s plans and its future prospects. The company primarily caters to high end customers that include individuals as well as companies (retailers). To cater to the rising demand or growing orders it has capacities in place. The ramp up of capacities is also taking a place as per schedule. The company is not likely to face any hurdles in terms of growth owing to ramp up of capacities. For handcrafted jewellery, one needs to have requisite workforce. The company has also employed skilled labour to execute the orders. It has in place its own team that tries and comes up with original and exquisite designs.

The company has been granted the status of Four Star Export House and has been bestowed the status of a nominated agency under the Foreign Trade Policy. This status allows the company to import precious metals directly. As a nominated agent, the company directly imports gold for manufacturing purposes thereby eliminating costs incurred on intermediaries. On account of this, the company is able to price its products competitively. So to grow, the necessary resources are in place.

The company is planning to increase its retail presence in India. Management of the company has indicated that it does not want to go for an aggressive growth plan. The gold price volatility does not affect them as these costs are entirely pass- through. The contracts secured carry 8% margins. Recently, they have bagged an order of Rs 5 bn to be executed in this fiscal year itself.

While everything sounds good in terms of growth, the problem lies in the working capital requirement. For the full year ended March, 2010, the company has put up a good show. On a standalone basis, for the full year, the company has grown its net sales and net profits by 37% YoY and 27% YoY respectively. The company did manage to grow its profits but the management also told us that the total debts on the books went up to Rs 11 bn by way of short term borrowings. Even in the past, despite robust growth in profits there has been corresponding rise in borrowings.

The gearing ratio for the company was expected to come down. The funds raised through the IPO were expected to suffice the company’s shortfall of funds. However, as the company receives new orders, it has to set aside 110% margin money to secure raw materials. It is in the form of deposits. Upon executing the order, the company would get cash inflows. But one thing is clear that every time the company grows its sales and profits, its working capital requirements will also see a rise. Consequently, the margins and the return on capital are not likely to be that impressive. This is because of huge working capital requirement that forces the company to resort to additional short term borrowings.

Case in point is the latest financial year results. Despite high earnings, the company had to resort to additional borrowings. These are not long term obligations and will be repaid soon. But as mentioned earlier, short term borrowings are here to stay. If not by way of borrowings, then the company may go for equity dilution to grow. Consequently, it will regularly approach capital markets.

To conclude...
Thus, while on an absolute valuation basis, we would readily give the stock a P/E multiple of 7-8 (IPO was at 9.8 times diluted earnings) times, we believe there are better business models around that the investor can take advantage of.

We thus believe that it would be better if one exits the stock. Statistically speaking, the stock is quite cheap presently and may revert to the IPO price in the not too distant future. However, one may have to take a call on whether one still wants to stay invested in a company that is not likely to do a great deal for shareholder value creation from a long-term perspective.

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