Gitanjali Gems : Designed to glitter : Buy: Business Line

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With the buying habits of the Indian consumers gradually developing as disposable incomes rise, higher-end brands begin to assume greater importance. In jewellery, the branded market is niche, but is gradually growing in size on strong domestic demand. Multiple jewellery manufacturers are now launching their own brands and stores.

Here, Gitanjali Gems scores over most listed counterparts with its clutch of strong established brands and wide retail footprint. An operational jewellery special economic zone with another in the pipeline helps diversify revenue base away from retail.

In the export market too, consumption is showing signs of improving. Good growth in consolidated revenues and profits, increasing demand for diamond jewellery over gold, and low valuations are other positives.

Investors with a two-year perspective can accumulate the stock of Gitanjali Gems, trading at Rs 249, at a valuation of 6.3 times the trailing 12-month consolidated earnings. Valuations are at a discount to closest comparable peers such as Rajesh Exports and Titan Industries.

BRAND STRENGTH

Consumers are slowly shifting their focus from gold to diamond jewellery. The key wedding demand is also gradually including more diamond sets rather than gold alone. Diamond jewellery is the bastion of Gitanjali's offerings. Diamonds also offer better margins than gold. Gitanjali, though, does have gold product lines to tap into the huge — and resilient — gold demand. The branded jewellery market is fairly nascent. Gitanjali has a first-mover advantage here, with well-established national brands and a wide retail reach. Competition is limited to a few brands such as Orra and Titan Industries' Tanishq. Gitanjali's portfolio has brands with a strong recall such as Nakshatra, Asmi, D'damas, Gili, Sangini and Collection G.

To diversify out of jewellery and tap the demand for premium-branded accessories, the company retails watches and household articles, such as Roberto Cavalli, Morellato and Greggio Argento. Its retail footprint in the country is wide and spans 1.4 million square feet, with over 3,000 points of sales.

Gitanjali plans to increase total retail space to two million square feet over the next two-to-three years. The company has a debt-equity at 1.2 times, fairly reasonable for a retailer. It also has the approval to raise up to $250 million in equity, though immediate fund-raising is not on the anvil. Bankrolling expansion should not, therefore, be hard to come by.

In the overseas market, Gitanjali has acquired majority stake in jewellery houses, such as the Italy-based Giantti, giving it the ability to tap different consumer segments across regions and capitalise on recovering demand in these markets. Overseas outlets number about 400, across the US, West Asia and Japan. Export revenues, in fact, grew 36 per cent in the nine-month period ending December '10. While such superior growth is largely the result of 2010 being a year when jewellers restocked after the 2009 slump and may, therefore, tame going forward, consumer demand is certainly on the rise.

DIVERSIFICATION

Apart from retailing jewellery, Gitanjali has a functioning special economic zone for gems and jewellery in Hyderabad.

Another SEZ at Raigarh is in the pipeline. Apart from reducing retail concentration , manufacture of jewellery is a backward integration of sorts, allowing for better inventory management, cost controls and margins .

The company is further monetising its land bank in Mumbai by constructing housing complexes, which will bring in close to Rs 300 crore FY-12 onwards.

STRONG GROWTH

Consolidated revenues clocked a three-year compounded annual growth of 23 per cent to Rs 6,527 crore in FY-10, while net profits grew 30 per cent to Rs 200 crore. In the nine months ending December '10, consolidated revenues grew 43 per cent while net profits expanded 87 per cent.

Jewellery is an inherently low-margin business. However, key input cost increases — that of diamond and gold — are mostly passed onto consumers, shielding it from a steep erosion in margins.

For the nine months ending December 2010, operating margins held at 7 per cent, the levels seen in FY-10, even as rough diamond prices shot up over 70 per cent. Interest charges and depreciation brought net margins down to 3 per cent in FY-10, though margins improved to 4 per cent in the nine-month period ending December '10. Its inventory turnover ratio improved slightly to 110 days in FY-10 from 115 days the year before