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Investors with a high-risk perspective can subscribe to the initial public offering (IPO) of jewellery retailer PC Jeweller. The Delhi-based company, a major large-format player in North and Central India, has scaled up from 3 showrooms in FY-08 to 30 in 23 cities currently.
It plans to raise between Rs 556 crore to Rs 601 crore, most of which will be used to set up an additional 20 showrooms across the country by FY-14. At the price band of Rs 125- 135 per share and considering the 5 per cent discount for retail investors, the stock discounts its annualised FY-13 earnings by around 7.5 – 8 times.
This is lower than what peers such as Tara Jewels, Thangamayil Jewellery, Gitanjali Gems and TBZ trade at (between 8.5 to 30 times).
Better margins
PC Jeweller has gradually increased focus on the higher-margin diamond jewellery business. This segment accounted for around 34 per cent of its domestic revenues in FY-12, up from 16.4 per cent in FY-10. The company also has better control over costs such as employee expenses than peers.
This helps PC Jeweller post better operating margins (above 10 per cent) and net margins (above 7.5 per cent). The company also derives cost benefits from sourcing a part of its requirement from its five manufacturing facilities.
Jewellery exports on wholesale basis to overseas distributors account for around a third of overall revenues. This proportion should reduce with the company’s thrust on the domestic retail market, which holds more potential and offers better margins.
The company’s revenues between 2008 and 2012 grew at a compounded annual rate of around 75 per cent to Rs 3,042 crore while net profit grew at around 110 per cent annually to Rs 230 crore.
Despite rapid expansion, PC Jeweller has kept leverage low. On a post-issue basis, debt-to-equity will be a comfortable 0.29 times.
While growth may not continue at this scorching pace due to the base effect, it should still be healthy with the increasing customer shift towards large organised retailers in the jewellery market. .
Risks
But the IPO carries risks. PC Jeweller currently derives around 57 per cent of its revenue from 13 showrooms in Delhi and the national capital region.
Foray into other big cities including metros in southern and western markets should reduce concentration risk.
However, the jewellery markets in South and West India are highly competitive with established regional players, who are also ramping up. Penetrating these regions may thus pose challenges.
The company’s track record on execution has been impressive. But it could face time and cost overruns, given its aggressive target of setting up 20 new large-format showrooms (area over 3,000 square feet) on high-streets by FY-14.
A simultaneous pan-India expansion could spread thin the company’s managerial and financial bandwidth.
The pending approval for the IPO from the State Infrastructure and Industrial Development Corporation of Uttarakhand also poses uncertainty.
PC Jeweller’s public issue is the largest from jewellery retailers in recent years, thanks mainly to its planned large investments (Rs 457 crore) in finished products at the new showrooms. Slower than expected sales could dampen margins.
The issue opens on December 10 and closes on December 12.
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