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Senco Gold is a Kolkata-based jeweller and is among the few listed players in the industry. The company’s Initial Public Offering (IPO) happened in July, 2023 at an issue price of ₹317. We had recommended that investors subscribe to the offer then.
Since then, in a period of nine months, the stock has performed well and returned around 150 per cent. At its current price of ₹800 the stock now trades at a trailing PE of 35 times as compared to 15 times at the time of IPO. Cheap valuations and reasonable business prospects were factors driving our subscribe call. Now, with valuation on the expensive side, we recommend that investors lock in on the gains and book profits.
While Senco Gold still trades cheaper than peers such as Kalyan Jewellers and industry leader Titan, two factors must be taken note of here. One, being a smaller player as compared to them, Senco will likely continue to trade at a discount. Two, the peer valuations too appear very expensive now.
Jewellery business is fiercely competitive where the companies operate with thin margins. Senco’s net margin in the last three years have ranged between 3 and 4 per cent. Besides, there are risks such as demand sensitivity to prices. The recent rally in gold prices might weigh on the demand for gold jewellery as buyers might defer their purchases.
Although the company’s performance has been good post IPO, given the unfavourable risk-reward now, investors can book profits.
Business
Senco Gold primarily operates in the East and North-East (E&NE) part of the country and has a strong presence. As on February 2, 2024, the company has 158 stores spread across 16 States in the country. While 90 stores are company-owned and company-operated (COCO), 65 are franchisee showrooms.
In metros, Tier-1 and Tier-2 cities, the showrooms are largely COCO. Franchisee stores are predominantly present in Tier-3 and Tier-4 cities, thereby expanding through asset-light model. Franchisee stores contributed 32 per cent to the total revenue of the company.
The company’s growth depends on how the East and North-East (E&NE) States grow as most of their stores (117 out of the total 158) are now present in this region. But note that this region contributes to only about 15 per cent of India’s total market.
That said, the company is expanding in the northern region of the country, which holds 18-23 per cent of India’s total jewellery demand. The management’s plan is to open 18 to 20 stores a year. While the industry continues to be dominated by unorganised players, the organised players are gaining market share steadily. By FY26, the share of organised players is estimated to improve to 42-47 per cent compared to 33-38 per cent in FY22. Regulatory developments such as HUID (Hallmark Unique Identification) and implementation of GST have given a push to the organised players.
Bridal jewellery holds the biggest chunk of total demand by constituting 50-55 per cent. This is followed by daily wear, 35-40 per cent and then fashion jewellery, 5-10 per cent.
Senco Gold offers a wide array of products and caters to customers in all three above-mentioned segments.
These positive factors appear fully priced at current levels.
Performance
Revenue from operations has expanded 26 per cent to ₹4,104 crore in 9MFY24 versus ₹3,263 crore in 9MFY24. EBITDA grew to ₹288 crore from ₹250 crore in the same period. The company registered a profit-after-tax (PAT) of ₹149 crore in 9MFY24, a growth of 12 per cent compared to the corresponding period of the previous fiscal.
Notably, the average transaction value has expanded to ₹64,400 in 9MFY24 compared to ₹57,300 in FY21.
However, the EBITDA margin moderated to 7 per cent in 9MFY24 as against 7.7 per cent in the same period last year. Also, PAT margin shrank to 3.6 per cent from 4.1 per cent in the period under consideration. The margins dropped despite an improvement in stud ratio (share of diamond jewellery in the revenue) to 11 per cent in 9MFY24 compared to 8 per cent in FY22.
The margin decline was because of the offers and discounts the company offered to attract customers, due to competition.
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