TBZ: BUY

An unusual set of circumstances has robbed premium jewellery retailer Tribhovandas Bhimji Zaveri (TBZ) of its sheen, with its stock price tumbling 23 per cent even as the Sensex has gained 30 per cent in the last one year.

But TBZ’s profits look set to bounce back on a likely revival in jewellery demand as well as profit margins. The stock is trading at a price-earnings multiple of about 15 times its estimated earnings for 2014-15, compared with 32 times for market leader Titan Industries.

After expanding sales by 23 per cent and profits by 70 per cent annually in the three years to 2012-13, TBZ’s net profits declined by 35 per cent in 2013-14. The company relies entirely on imported supplies of gold and diamonds to meet its raw material requirements and the free fall in the rupee last year increased its costs.

Stringent regulatory curbs on gold imports, which included raising the import duty from 2 to 10 per cent, a ban on gold supplied on lease or credit and the 80:20 rule that made the metal available only to re-exporters, also hurt TBZ. It forced the company to curtail sales and shell out a stiff premium to source its primary raw material. TBZ’s interest costs doubled last fiscal on higher working capital requirements.

But the company’s fortunes are now set to see an equally dramatic turnaround. For one, rolling back earlier curbs, RBI has recently allowed banks to resume the supply of gold on lease as well as on credit to domestic jewellers. This should enable TBZ to cut its financing costs by 4-5 percentage points, reduce its inventory and hedge itself better from gold price fluctuations.

Two, domestic gold prices are likely to ease this year with global gold prices tumbling and the rupee stabilising. This should revive Indian jewellery demand, which has always surged on lower prices. TBZ’s premium brand image, its presence in high-street locations and the fact that over 60 per cent of its sales come from wedding-related purchases make it an ideal player to cash in on this trend.

Unlike its peers, TBZ has also been cautious with its store rollout plans in the last one year, keeping both its debt levels and fixed costs under check. After rapidly expanding its national footprint between 2010 and 2013 by doubling its store count, the company added just two stores last fiscal.

Over the next one year, higher revenues from older stores and lower costs should give TBZ’s profits a boost.

Over time, a higher contribution from diamond jewellery (currently at 25 per cent of sales) should boost profitability.

Assuming a 15 per cent sales growth and a modest rebound in margins, the company should manage earnings per share of about ₹12.5 for 2014-15, against ₹8.20 last year.

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