PC Jeweller: Bright prospects - Buy

Investors with a long-term perspective can consider buying the stock of PC Jeweller, one of the leading jewellery brands in the country. The new regulations over the last one to two years, including mandatory PAN for purchase of gold above ₹2 lakh, compulsory hallmarking of jewellery and, recently, a levy of 3 per cent GST, are moves in the right direction and positive for organised jewellers.

The shift in demand from unorganised to organised players with changes in regulations, coupled with the company’s efforts to enter Tier-II/III markets and launch of new products, should all aid growth.

In the near term, the demand recovery in the domestic gold market should also help. WGC data shows that demand for gold jewellery in India rose to 126.7 tonnes in the June quarter, up 41 per cent over the same period last year. In the March 2017 quarter, the demand was just 99 tonnes.

Of the few listed jewellers in the space, PC Jeweller looks a good buy. On a trailing 12-month earnings, the stock trades at about 30.6 times. In the last two years, it has traded at around 19 times.

The stock has seen a sharp re-rating in the last two years, thanks to improved sales and earnings visibility. After trading at a discount to TBZ two years back, the stock has now bridged the valuation gap.

On one-year forward (2017-18) earnings, both PC Jeweller and TBZ trade at about 24 times now.

PC Jeweller has 75 showrooms across 18 states. It also has six franchise stores and an online platform.

Since 2012-13, the company’s sales have grown at a compounded annual rate of 21.6 per cent and PAT has grown at an annual rate of 13.4 per cent.

The GST rate at 3 per cent versus 2 per cent earlier (1 per cent excise and 1 per cent VAT) for gold jewellery, has not rattled customers much. All jewellers in the organised space, including PC Jewellers, are likely to benefit from GST on several counts. One, they are likely to gain market share as several unorganised retailers come under the tax net. Currently, the industry is divided between organised and unorganised players in the ratio of 30:70.

The other benefit from implementation of GST is the reduction in taxes because of input tax credit (on expenses including marketing and rentals).

Also, given that under the new tax regime, it is not necessary to pay tax in every State, PC Jeweller expects to save 1 per cent tax on inter-State sale of jewellery.

Over the next five years, PC Jeweller wants to grab more share of the market from the unorganised players by opening more stores in Tier-II/III markets.

A good number of the new stores will be in small-store format with average size of about 1,500 sq ft, it says. For the current fiscal year, the company targets opening 25 to 30 showrooms, of which about 15 will be small-format stores and the rest franchise outlets. Franchising as a sales strategy has many benefits.

One, with lower inventory investment, it reduces capital outlay and, second, given that it improves operating leverage, profits rise and shareholder returns go up.

The company sees good demand for its franchise model now as, post GST, a lot of small mom-and-pop stores have been finding GST compliance difficult and approaching it for franchisee rights.

In recent times, PC Jeweller has been focussing on digital marketing too to grow sales. Setting up of the virtual reality zones at showrooms (which can reduce inventory at the store) and the push to its online portal, are some of the efforts in this direction.

In the June 2017 quarter, the company reported a revenue of ₹2,119 crore, up 27 per cent from the same quarter last year. Revenue from the domestic market accounted for ₹1,383 crore (up 32 per cent year-on-year).

The company opened three new showrooms (one franchisee and, two company-owned), two in UP and one in Haryana taking the total showroom count to 78. All the three showrooms were in Tier-II locations. It also launched three new collections — Amalia, Tatvam and Mother, all targeting young women.

PC Jeweller has a manufacturing capacity consisting of five production facilities spanning over 1.07 lakh sq ft as of March 2017 (up 30 per cent from 2015-16). It intends to increase this capacity over the next two years, so that it can have better control on costs and a larger in-house team to bring more designer collections. The operating profit margin stood at 11 per cent in the June quarter, down from 12.4 per cent in the same quarter last year due to lower sales of studded jewellery and higher discounts. However, higher other income and lower interest outgo helped net profit grow about 27 per cent year-on-year.

The company’s profit margins may only look up from here, given the focus on growing sales through franchise model, which will improve operating leverage. Additions to high-margin collections and diamond jewellery should also aid margins.

The outstanding debt in the company’s balance sheet has been falling over the years. The company’s debt-to-equity ratio stands at 0.21 times in 2016-17, down from 0.26 times in 2015-16. Much of the funds for capacity expansion will be from internal accruals, says the company.

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