PC Jeweller: Buy

The Budget may not have cut import duty on gold but it has proposed a gold monetisation scheme to tap the vast stocks of the yellow metal in the country. This scheme also seeks to provide gold to domestic jewellers and replace the gold metal loan scheme in operation now.

When implemented, this could further ease gold supplies in the country. After the Modi Government assumed charge last year, most of the gold import restrictions were reversed.

Gold metal loans, which allow credit periods to jewellers, were permitted again, and the 80:20 rule requiring export of at least a fifth of the gold imported was removed.

Improved gold supply, along with a pick-up in demand, saw jewellery stocks regain market favour.

Among the big gainers is the stock of PC Jeweller which has more than doubled since our buy recommendation last July. The company did well even in the tough times with profit in 2013-14 rising 23 per cent over the previous year.

This was aided by regular additions of new stores. Profits slipped in the June and September quarter this fiscal, but this was more due to one-off volume benefits and high forex gains in the prior periods.

The company made a strong comeback in the recent December quarter with revenue growing 40 per cent and profit rising 37 per cent year-on-year.

The momentum should continue, thanks to an improving demand-supply scenario and the company’s expansion plans.

The PC Jeweller stock at ₹254 trades at about 13 times its trailing 12-month earnings, higher than seven-eight times it traded at in the past.

But this is due to subdued earnings in the quarters prior to December and a justified re-rating to reduce its gap with peers such as TBZ that trades at over 20 times. Investors with a long-term perspective can still buy the PC Jeweller stock.

Many factors are going in the company’s favour.

One, the growing consumer shift towards branded jewellers will help players such as PC Jeweller. Next, the company’s strategy to increase the share of higher-margin domestic sales and diamond-studded jewellery should improve margins.

Also, the company, which has rapidly scaled up its store count to 50, has aggressive expansion plans. It has targeted opening 20 stores every year for the next five years; this will include using the franchisee route.

Most of the expansion is planned to be funded through internal accruals.

The company’s low leverage (debt-to-equity of 0.6 times as of September) provides room for raising debt too.

PC Jeweller has also set up its own website for online sales and tied up with e-commerce players, Flipkart and Snapdeal.

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