What's wrong with Gitanjali Gems? - Views on News from Equitymaster

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What's wrong with Gitanjali Gems?

Jul 26, 2013

The stock of Gitanjali Gems share price is under the clutches of bears right now. It has fallen by almost 85% over the last two months! At the time of writing the stock had hit lower circuit.

Let us first understand the reasons for this massive fall in such a short span of time. Recently, SEBI barred the promoter of the company Mr Mehul Choksi and 26 other entities from trading in the market for a period of six months. It is believed that the promoter along with these entities was indulging in market manipulation of company's shares. This led to a huge correction in stock price.

RBI's step to curb gold imports also took a toll on share price. CARE's downgrade of its bank facilities sensing liquidity crunch further hammered the stock.

It may also be noted that 35% of the promoter's equity was pledged as of 30 March 2013. Fall in the stock price for the reasons mentioned above may have triggered margin calls. This further accentuated the fall as lenders may have started selling the shares lying with them as collateral. This is evident from the fact that promoter holding has fallen from 59.4% in March 2013 to 55.0% in June 2013.

Due to these reasons the stock has corrected by almost 85% in a short span of two months. Right now, it is quoting at Rs 85 odd from Rs 600 odd levels that prevailed in May 2013. Of course, a correction of such amount presents a buying opportunity provided the stock's fundamentals are intact. And institutional investors being better informed are considered to have a better gauge of the overall market perception.

Let us have a look at how the institutional holding of the stock has moved over the quarter. This will help us assess the market perception on the stock.

Institutional shareholding movement in Gitanjali Gems
Particulars Mar-13 Jun-13
Institutions24.4%27.4%
FII's20.0%21.7%
DII's4.5%5.8%
Non Institutions 16.1%17.6%
Bodies Corporate 11.6%13.8%

It can be seen that institutional shareholding across categories has increased. In fact, over the last 4 quarters the shareholding of LIC has gradually increased from almost nil to about 5% now. This means that broader market still believes in the long term story of the stock.

However, we have a contrary belief. First it may be noted that the institutional shareholding in the stock has increased over the last 2-3 quarters due to rising gold prices. Gitanjali being a play on gold prices, led most investors to jump in on the anticipation of good returns. The fundamentals of the stock are not that encouraging either. The consolidated debt to equity (D/E) ratio of the company has been above 1x over the last five years. The return ratio's (RoE) got a push in the last two years due to increasing asset turnover. Else they were mostly in lower double digits ranging from 10-13%. Promoter pledge of about 35% also increases the risk of investment.

Lastly, it should be noted that the promoter of the company has been banned for trading for an alleged manipulation in stock price. Thus, there is a question over management integrity with stock rigging instance being quite evident. While this is not a case of fudging books like Satyam it questions the ethics of management. In the past, there have been numerous cases where stocks were beaten down due to integrity issues and have not recovered. And Gitanjali Gems could be one of them. While the broader market is trying to play over the gold story we feel that investors should steer clear of Gitanjali Gems. While the fall may excite on initial instance it could be a trap which an average investor can find very difficult to come out in future.

Jinesh Joshi

Jinesh Joshi (Research Analyst) holds a masters degree in Finance and has over 8 years of experience in tracking equities. He has a keen affinity for number-crunching and is often sought after for his valuable insights on financial modeling and valuations. He has a keen eye for spotting emerging growth opportunities across sectors and market caps. Jinesh contributes to our Megatrend investing service The India Letter.

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7 Responses to "What's wrong with Gitanjali Gems?"

Ranjeet barnwal

Aug 1, 2017

View on ifci liye garment gitanjali gems

Like (2)

nachiket Patel

Mar 2, 2015

dear Sir I need advice
for invest in gitanjali gems for
long term

Like (29)

roohanika

Dec 21, 2014

i took 2000 shares of gitanjali gems few months bak fr 550rs each n now its 51 rs..i have incurred sucha big loss...plz help me recover it...im soo depressed cz of ds..:/

Like (41)

H.G.NIRANJAN

Dec 1, 2014


i have purchase 450 shares @ 60.00 now price is 60.15 .
what to do now, plz suggest

Like (22)

Praveen V. Bhandwalkar

Jun 2, 2014

Dear Sir,

Please tell us whether can we Buy Gitanjali Gems at the current levels and if so how much period one has to hold it.......

Like (20)

manoj kumar

May 31, 2014

i have purchase 2000 shares @ 88.00 now price is 82.40 .
what to do now, plz suggest

Like (16)

Jayesh Shah

Sep 13, 2013

When reality is revealed it may beat Satyam.Whatever may be the case with Satyam.At least the company had solid business backing.In case Gitanjali gems there is huge gap between the actuals and the presentation.There is no reality in the compnny's being the largest jewellery maker in gold and studed jewellery. Also, this is a myth that the company has huge foreign income.If proper investigation is done you will find the company is over financed.the banks may be finding it difficult to have sufficient cover for their lending.It seems that management always tries to find some excuse for addititional funding from financial institutions.

Like (31)
  
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