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PC Jeweller: Diamond sales, forex gain lift profits - Views on News from Equitymaster

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  • Nov 14, 2013 - PC Jeweller: Diamond sales, forex gain lift profits

PC Jeweller: Diamond sales, forex gain lift profits

Nov 14, 2013

PC Jeweller Limited (PCJ) declared its results for the second quarter of financial year 2013-2014. The company was listed in December 2012 and therefore has not reported corresponding quarter numbers for 2QFY13 (July to September). Hence, we present quarter on quarter analysis. The company reported 19% QoQ de-growth in sales, while net profit grew by 14.3% QoQ for the quarter.

Performance summary
  • Net sales decreased by 19.4% QoQ during 2QFY14.
  • PCJ's domestic turnover declined by 41.7% QoQ. The decline was predominantly a result of higher base of 1QFY14. In the last quarter, volumes were up substantially due to decline in gold prices.
  • Export sales increased by about 112% QoQ.
  • Raw material cost as a proportion of sales declined substantially from 83.3% to 78% QoQ. Other expenses, on the other hand increased proportionately to sales from 6.3% to 7.6% sequentially. Decline in material cost led to 10.8% QoQ increase in operating profit (EBITDA); on an absolute basis. Margins improved by 3.7% QoQ to 13.4%.
  • Other income declined by 30.5 % QoQ; while the finance cost decreased by 1.6% QoQ during 2QFY14.
  • Profit after tax for the company grew by 14.3% QoQ.

Financial performance snapshot
(Rs m) 1QFY14 2QFY14 Change
Net sales 13,790 11,117 -19.4%
Expenditure 12,445 9,627 -22.6%
Operating profit (EBDITA) 1,345 1,490 10.8%
EBDITA margin (%) 9.8% 13.4%  
Other income 144 100 -30.5%
Interest 307 302 -1.6%
Depreciation & amortisation 29 30 3.2%
Profit before tax 1,154 1,259 9.1%
Tax 254 231 -9.3%
Profit after tax 900 1,028 14.3%
Net profit margin (%) 6.5% 9.2%  
No. of shares (m)   179.1  
Reported earnings per share (Rs)   5.7  
P/E (x)*   NA  
*P/E based on trailing twelve months basis not available
as the company was listed in December 2012

What has driven performance in 2QFY14?
  • Decline in sales was a result of seasonality as domestic jewellery demand is usually less in 2Q. Also, in 1QFY14, the jewellery demand increased sharply as a result of decline in gold prices. This affected the next quarter demand.

  • Domestic sales de grew by 41.7% QoQ. This was a result of about 47% sequential decline in volumes.

  • Export sales have increased 112% QoQ due to lower base of 1QFY14 (exports de-grew by 22.5% QoQ in 1QFY14). As a result, contribution of export has increased from 15% to 38% QoQ.

  • Despite decline in sales, the company's operating profit (EBITDA) grew by 10.8% QoQ. This reflects the impact of increased contribution of diamond jewellery sales from 25.7% to 30.3% in 2QFY14. Therefore, there has been a substantial improvement in EBITDA margin sequentially from 9.8% to 13.4% QoQ.

  • Segment wise, in export, the EBIT improved to 18.7% from 15.5% in the last quarter as a result of rupee depreciation and the positive impact of mark to market on account of forex gain. EBIT margin in domestic segment has also come in at 11.4% as compared to 10.1% in 1QFY14.

    Segment wise performance
    (Rs m) 1QFY14 2QFY14 Change
    Revenue (Rs m) 2,010 4,252 111.6%
    % of total revenues 14.6% 38.2%  
    EBIT margin 15.5% 18.7%  
    Revenue (Rs m) 11,780 6,866 -41.7%
    % of total revenues 85.4% 61.8%  
    EBIT margin 10.1% 11.4%  
    Total Revenues 13,790 11,117  
What to expect?
PCJ's 2QFY14 results were impacted by seasonality of jewellery business. Also, heavy increase in volumes in the last quarter resulted in subdued demand this quarter. Nevertheless, the demand in coming quarters is expected to be robust given that the wedding season is round the corner. However, the company is expected to face supply side constraints resulting from RBI's new 80:20 rule for import and export of gold. Also, its debt levels are expected to increase given that the ‘gold on lease model' is not permissible any more.

PCJ, however, is going ahead with its expansion plans and is likely to open 5 new stores during the third quarter as it is upbeat on the growth potential of organized jewellery retail in India.

At the current price of Rs 88, the stock is trading at 5.5 times our estimated FY16 earnings. We maintain hold view on the stock. However, we do not recommend any mid cap stock to be more than 4%-5% of one's total portfolio.

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