• MARCH 23, 2012

The gems amongst Branded Jewellers

This is the fourth 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 factors for assessing the investment 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.

So, we determined that there is an opportunity to invest in this "brick and mortar" Jewellery sector. We also recognized the challenges that the branded players have to tackle in this industry. Insightful analysis of the fundamentals, along with a review of the financials becomes important in selecting the right branded companies to invest in.

In this fourth article, we compare the main players in this industry namely Titan Industries (Tanishq), Gitanjali Gems, and Shree Ganesh Jewellery House based on their fundamentals.

Raw material requirements - It is crucial to understand the number, availability, price volatility and sensitivity of the raw materials these jewellery companies use. As much as 89% of Gitanjali Gem's raw material costs consist of diamonds, and precious, and semi-precious stones. This allows Gitanjali to command high margins. However, for both Titan and Shree Ganesh gold forms almost 85% of total raw material cost. Gold has multiple uses and its prices vary with that of the market. This makes Titan and Shree Ganesh highly dependent on volatile gold prices and economy changes. Whereas, Gitanjali's raw material (diamonds, precious stones) prices are relatively stable.

Big Three's Brands - Titan's line of jewellery brands includes its flagship Tanishq, along with Goldplus for smaller towns and markets, and Zoya targeted at the for affluent segment of society. Titan also recently launched its brand Mia, aimed at working women. Gitanjali's list of brands includes Gili, Asmi, D'damas, Maya, Dia, Sangini and Nakshatra. Shree Ganesh Jewellery too offers a number of brands. These are GAJA Gold, Gold Bridals, Gold Elements, Marigold, Sitaare, Distar, GM Gold and YOU.

All these companies have several brands, and many of these are popular ones. However, if a company has too many brands, the differentiation may not be clear to consumers, and also brands may cannibalize each other. Further, operational complexity increases with too many brands, and this will likely reduce efficiency. In this respect, Titan's strategy of a few brands with clear segmentation seems to be doing well for the jewellery maker.

Consumer Trust in Brands - While there are various measures of brand acceptance such as brand recall and loyalty characteristics, debtor days also is an indication of the confidence that consumers have with brands. The ability to collect quickly from its customers, franchisees and dealers, in addition to representing customer trust, also improves cash management which is critical success factor for companies. A look at debtor days for all three companies reveals that Titan collects receivables at the fastest pace of 6 days. On the other hand, Gitanjali and Shree Ganesh, collect receivables in 140 days and 59 days respectively. This implies that Titan is viewed with more faith by consumers, and the company also benefits from successful better cash management.

Other businesses - Titan originally was a watchmaker. Then seeing the opportunity in an allied business of branded jewellery; in 1996, it became the first Indian branded jeweller. As of now, almost 80% of its revenues come from jewellery. Titan's other businesses - Time-wear, Eyewear, along with the recently introduced Accessories business are also faring well and can be future stars. The Accessories, Time-wear and Eyewear markets are underpenetrated in India, and so there is much upside potential for huge growth. All Titan's businesses can leverage its brand building and management strength. As for Gitanjali, it is in the Lifestyle apparel retailing business. The Lifestyle retailing space in India is already too crowded with presence of Shoppers' Stop, Trent's Westside and others. It remains to be seen how well Gitanjali is able to do in this area of business. Interestingly, Gitanjali has recently entered a business which is totally unrelated to its branded jewellery and lifestyle businesses - the Infrastructure and Real Estate business focussing on SEZ, malls, housing and jeweller parks.

The table below pulls together a comparison of the characteristics we have explored so far.

Quality is Important - Overview of the 3 Main Branded Jewellery Companies
FactorTitanGitanjali GemsShree Ganesh Jewellery House
Revenues - All BusinessesRs 65.7 bnRs 51.2 bnRs 52.4 bn
Revenues - Jewellery BusinessRs 50.5 bnRs 51.2 bnRs 52.4 bn
Diversification - Jewellery % Total Revenues77%100%100%
Number of Brands378
Raw MaterialsGold - 85% of Raw Mat'l CostsDiamonds, Semi and fully precious stones - 89%Gold - 85% of Raw Mat'l Costs
Debtor Days614059
Potential of other businessesHigh - Accessories, Watches, Time Wear, Eye WearMedium - Lifestyle retailingThe company is setting up branches of a finance company that would provide gold loans.
All numbers are as of March 31, 2011

Which "gems" do we invest in?

Based on our qualitative assessment, we also realize that the growth driver for each company is different.

Titan has been able to consistently grow its jewellery business on the back of brand strength and operational efficiency.

Gitanjali Gem's focus on stone studded jewellery which yields higher margins seems to be the reason for its growth. Also, its raw materials (diamonds, precious stones) are less sensitive to the economy than if it depended on gold.

Shree Ganesh is originally an exporter of jewellery and is a comparatively new player in retailing. Exports, which are currently 88% of its business, have led the company to grow fast off a relatively small turnover base. Now, it seeks to also grow with the domestic market via retailing.

In our next, fifth and final article of this series on the Gems and Jewellery Retail industry, in addition to the fundamentals, we will analyse the financials of these companies. The total picture will help us discover which of these raw diamonds will sparkle best as investments.

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