Gitanjali Gems retails branded gold and diamond jewellery and exports cut and polished diamonds. The company’s stock has moved in tandem with broader markets, up about 18 per cent since the start of this year. Gitanjali’s revenues are about a 40:60 mix of gold and diamonds.

At Rs 354, the stock trades at 10.3 times the trailing 12-month earnings and eight times the estimated earnings for FY13. Valuations are at a discount to branded jewellery retailer Titan Industries, but at a premium to other jewellery players such as C Mahendra Exports and Shree Ganesh Jewellery House.

Given the near-term demand weakness and the company’s high interest costs, investors can retain holdings in the stock, but avoid fresh buying.

Rocketing gold prices in rupee terms and waning consumer demand have done their bit in taming Gitanjali’s scorching growth seen earlier. Consolidated revenue growth for the company fell to 31 per cent in the June 2012 quarter from the 47 per cent in the March 2012 quarter. Higher debt and interest costs have weighed on performance too.

However, with a large export basket, the weak rupee does help. Strong brands and a wide retail footprint in the Indian market will help the company capture a revival in domestic demand. Also, stability in rupee and lower interest rates could stimulate domestic jewellery purchases.

Domestic strength

About half the company’s revenues come from the domestic market, through retailing gold and diamond jewellery. Branded jewellery in India is seeing a sudden influx of regional jewellers going national and building their brands. Gitanjali already has strong and established brands such as Nakshatra, D’damas, Asmi, Gili, and Sangini.

With an own-store count of 233 stores, plus a presence in 577 shop-in-shops and 319 franchise outlets and other retail outlets, Gitanjali has a vast retail footprint. Plans are on to widen this reach, increasing retail touch points to about 4,200. Domestic same-store sales growth is healthy at 18 per cent in value terms.

Though global gold price has cooled off, the price in rupee terms is up 11 per cent over the last year. High inflation has curtailed domestic jewellery spending, with low volume growth for jewellers.

Indian gold demand dropped 38 per cent in the first quarter of the current fiscal, while rough diamond imports were up only marginally at 5 per cent over the year-ago period.

In the export markets, Gitanjali’s revenues come primarily from cut and polished diamonds, a low-margin business. While the company is shifting away from this business — revenue share dropped to 50 per cent in FY-12 from the 60 per cent-plus levels in the years before — it is still significant. The global diamond demand is flat; polished diamond prices are down 13 per cent in the year-to-date.

The remaining exports are in jewellery sales to wholesale and retail jewellers, besides own retail chain stores in some countries. These offer higher margins than loose diamonds trade. Further, the company’s presence in the better growth markets of the US and China balances out poorer demand in the European market and a possible slowdown in the West Asian markets.

Interest costs bite

Consolidated revenues and net profits have grown 35 and 47 per cent annually over the past three years. Debt-equity is on the high side at 1.2 times as of end-March 2012.

Interest costs in the June 2012 quarter more than doubled over the previous year, eating away 6 per cent of sales. Interest cover shrunk to 1.9 times, from the 2.7 times in the years earlier. A stretched working-capital cycle is partly to blame for the high debt.

comment COMMENT NOW