IPO ANALYSIS

Conservative investors can refrain from investing in Tara Jewels, an exporter and retailer of gold and diamond jewellery, during its initial public offer. Tara Jewels does have a few factors going for it — a strong client base, quick ramp-up of retail stores, cheaper metal alloys that could prop demand in an environment of high gold prices and healthy margins.

But the offer band of Rs 225-230 places it at around 8 times estimated consolidated earnings for 2013-14 on a post-issue basis. Other jewellery stocks are available at the same or even cheaper valuations. Competitor Gitanjali Gems, larger by far, trades at a forward estimate of 7.4 times. The company is raising Rs 179.5 crore through this IPO, of which Rs 70 crore is an offer for sale.

Export dependence

In the jewellery business, companies with established domestic brands usually enjoy much better valuations than those who rely mainly on exports. Tara Jewels manufactures gold and studded gold jewellery. The US and the trading hub of Hong Kong make up the bulk of its export destinations. The company’s client base is strong and it has long-standing relationships with its clients, which aids in maintaining a secure customer base.

The company is also planning to move into the lucrative Central and Latin American markets, including setting up of manufacturing plants there too. But client concentration is high, with a third of exports stemming from three clients. Any change in sourcing strategies of these clients could hinder steady export growth. Biggest client Wal-Mart, for example, accounted for Rs 141 crore exports in 2009-10 which dropped to Rs 130 crore two years later. Revenues from other key clients have also fluctuated over the years.

Growing retail presence

Better valuations for the stock will hinge on the company’s ability to increase its domestic presence significantly from here. Tara Jewels has a chain of 30 stores in domestic markets under the name ‘Tara Jewellers’ through which it retails jewellery. Ramp-up of contribution from this segment has been good since the company launched its retail efforts in FY10 — this avenue made up 13 per cent of total revenues last fiscal, from the barely 2 per cent at the time of launch.

Of the issue proceeds, Rs 67 crore will be used for opening 20 new stores. It could further tilt the revenue mix towards the higher-margin domestic retail business.

While a timeline of March 2013 is provided for the opening of these stores, it appears rather tight, given that the company is yet to tie up properties for any of these stores. It has already faced delays in store openings earlier.

Healthy margins

Consolidated revenues have grown at a compounded annual rate of 23 per cent over the past three years to Rs 1,400 crore in FY-12. On better control over operating costs, net profits zoomed 97 per cent to Rs 56 crore in the same period.

Operating margins are healthy at 9-10 per cent, higher than most peers. But heavy debt — the company’s debt-equity ratio is 2.1 times on a pre-issue basis — and resultant interest outgo dragged net profit margins to 4 per cent, on par with peers.

Rs 50 crore of the issue proceeds will be used to repay high-cost debt, which will bring the debt-equity ratio post issue to 1.3 times. Even so, interest cover is slim at 2.1 times. Given the working-capital intensive business, the longer working capital cycle, and capacity expansion plans, the company may require further funding which could push debt back up in the long-term.

The offer is open for subscription till 23 November. Enam Securities and ICICI Securities are the lead managers to the issue.

bhavana.acharya@thehindu.co.in

(This article was published on November 21, 2012)
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