'Forget gold, future growth will come from diamond'

Q&A with Mehul Choksi, CMD of Gitanjali Gems

The share price of Gitanjali Gems, one of world’s largest integrated jewellery sector players with diamond business as core DNA, has tanked over 80% in one month. Mehul Choksi, CMD of the company attributed the stock fall to the recent decisions of the Reserve Bank of India (RBI) to restrict gold import which created a panic among foreign institutional investors (FIIs) resulting into massive sale in stocks. Nothing has changed with the RBI’s stance for the company. In turn, we estimate our overall margins to move up this financial year, says Choksi in an exclusive interview with Dilip Kumar Jha. Edited excerpts :

 

Why is this panic selling? Have Gitanajali’s fundamentals changed with RBI’s gold import restrictions?
 

At 23%, foreign institutional investors (FII’s) holding is the largest in any jewellery company in India. FIIs perceived the RBI’s gold import restrictions to impact on our company being a global player. But, in fact, our business in the US market has improved in the last few months due to the revival in the overall US economy. Similar improvement we have witnessed elsewhere including the Middle East, Japan and even in Indian markets. While we admit a decline in our gold business with 25-30% of contribution from this segment in overall turnover of the company, the remaining 70-75% which is the core DNA is gradually improving. Since, the share of gold business was just 5% in our overall profit, the loss from this segment will be overcome from the diamond sector which is a high margin business.

 

How are you navigating through this situation?

It is true that we will be impacted due to gold import restrictions, but not to an extent as perceived by the market. Over the last two years, as a part of our growth strategy we had launched a number of gold jewellery collections. But, now with the change in the government’s policy we will focus on core competency of diamond jewellery.

 

Gitanjali is a high debt company. Will it affect capital your raising programme for future growth?

As on FY13, our net debt stood at Rs 4,327 crore as against sales of Rs 16,418 crore. Our debt equity ratio has stayed at 1:1 in last few years. Net debt and EBITDA ratio has improved from 6X to 4X in last four years. Net working and sales ratio has improved from 60% to 44% in last four years.

Keeping in mind, our next five years growth plan, we may raise capital to meet our growth aspirations.

 

How will you protect margins?

Although the gold jewellery constitutes 25-30% of our topline, its contribution to profit margins stands at a negligible at 5%. We expect the growth of the business to come from diamond jewellery which has better margins and improving our profitability on overall basis.

 

Can you give your view on media report on recent NSE order?

We have not received any communication from NSE. We will wait for the formal order, if any, and review our options.

 

What is the group business model and Gitanjali’s strategy?

We are into manufacturing, distribution and retailing of jewellery globally. We are one of the world’s largest manufacturers of precious jewellery having facilities at Mumbai, Hyderabad, Surat, Jaipur, Delhi, Kolkata, Coimbatore and China. We are also one of the biggest retailers of jewellery worldwide having over 4000 points of sale (POS). These POS are well spread across in India and overseas.

 

What are the expansion and diversification plans of the group?

Our future growth will come from diamond jewellery sales which have better value addition. Gitanjali plans to introduce lower category of 9 carat or 11 carat of gold and diamond jewellery in Indian market. We also plan to increase our store presence in the US, Middle East, China and Japan which have a positive outlook and have grown by nearly 15% in the last one year. The international market especially USA and Japan have shown double digit growth in the last six months and the trend is expected to continue in future.

 

What so many brands under one house?

The Indian jewellery consumers are diverse based on region, categories, price points and occasions. The multi brand portfolio of Gitanjali caters for this diverse requirement of the Indian consumers and acts as an entry barrier for other competitors. We have already consolidated the businesses of all Indian brands under one roof i.e. Gitanjali Brands (100% subsidiary of Gitanjali Gems) the value of which can be unlocked for the benefit of all our stakeholders.

 

Prime Securities is blocked in Gitanjali share. What is your take?

We learned from media that Prime Securities has pledged lots of mid cap shares and there were some regulatory issues with that. Understandably, Gitanjali is one of them.