Not shining through

Small size and limited presence reduce the appeal of Thangamayil Jewellery’s IPO.

Thangamayil Jewellery is in the business of selling gold jewellery, which accounts for a large chunk of its revenues, and silver and diamonds. The company has in-house facility to make jewellery which takes care of about 40 per cent of its requirements, while the remaining is fulfilled from suppliers who are specialist in design and jewellery-making. The higher outsourcing strategy is largely because designs keep on changing and are procured from different parts of the country to offer choice to the customers. Currently, the company operates seven jewellery showrooms across five towns in the state of Tamil Nadu. It is a popular brand in these markets with a customer base of about one lakh. Its strong position is reflecting in its growth; its revenues have grown 74 per cent annually from Rs 26.85 crore in 2004-05 to Rs 246.85 crore in 2008-09. During this period profit grew at 116 per cent annually to Rs 7.49 crore.

Expansion plan
The company wants to expand further and plans to invest Rs 47.83 crore in the business. Out of this, Rs 12.83 crore will be funded from internal accruals, Rs 6.24 crore from a pre-IPO placement and the balance through the IPO. The company intends to open six new showrooms, of which, a few would be in nearby states. It believes that the new outlets will be operational by March 2011 – one showroom every quarter.

On the demand side, although there is competition from both, the organised and unorganised players, the company believes that a strong brand in the growing south Indian markets and its strategy to provide high quality products and price assurance should help it to grow in future.
 

HIGH GROWTH
in Rs crore	FY07	FY08	FY09	H1FY10
Sales	127.2	224.5	246.8	209.5
Operating profit	6.5	10.8	16.7	14.9
Operating profit (%)	5.1	4.8	6.8	7.1
Net profit	3.1	5.6	7.5	8.0
Net profit (%)	2.4	2.5	3.0	3.8
Source: RHP

Exploiting synergies
Typically, the break-even sale for every new showroom is considered to be at about 150 grams of gold on a daily basis, which the company believes could easily be crossed as some of its showrooms are already selling about 600-650 grams of gold every day. Additionally, it feels optimising advertising and promotion expenses and effectively managing inventory and designs will also prove helpful.

The company has already reported sales of Rs 209 crore for the six months ended September 2009, whereas net profit at Rs 7.97 crore is a little more than profits achieved in the last fiscal. Since the new showrooms will gradually become operational by next year, expect the company to grow by about 50 per cent in 2010-11.

Outlook
Although its growth plans and past track-record indicate better prospects, considering its small size, presence limited to regional markets, high competition, low equity base and susceptibility of revenues and earnings to gold prices dilute the investment case. Investors with a high risk appetite may consider the issue given that it is reasonably priced at 6 times at upper price-band of the offer price of Rs 75 and annualised fully-diluted earnings and 4 times 2010-11 estimated earnings. Also, as the company aims to maintain its dividend payout ratio of about 30 per cent, the dividend yield could work out to about 4.5-5 per cent going ahead.