Retail thrust

A good track record and expertise in larger-sized diamonds are positives, but the IPO pricing leaves little room for upsides in the near-term.

Goenka Diamond is an integrated player with presence across the diamond value-chain (sourcing, cutting and polishing). It exports a major part of the production. It also owns a diamond jewellery making unit at Mumbai, which supports its small presence in the domestic retail jewellery segment. Going ahead, the company has drawn up plans to expand its retail jewellery business. In order to funds these plans (includes working capital requirement of Rs 84 crore), invest in its Russia-based rough diamond sourcing subsidiary (Rs 25 crore), the company is coming out with an IPO to garner Rs 135-145 crore.

The business
While the promoters have over four decades of experience in the business, the company claims to have built expertise in processing larger-sized diamonds, which has helped earn higher realisation and margins. This along with focus on newer markets helped it perform well even during last year’s economic slump. Leveraging on its strengths, it ventured into diamond jewellery making in 2003, which was extended by setting up its own retail outfits in 2008 under the brand, G WILD, which is targeted at the youth with products ranging Rs 10,000 to Rs 500,000. Thereafter, it launched its CERES branded stores, which caters to the upmarket population with products priced upwards of Rs 500,000 going to over Rs 1 crore.
 

SPARKLING PERFORMANCE
in Rs crore	FY08	FY09	9M FY10
Volume (carat) ^	36,262	52,662	30,641
Sales per carat (Rs) ^	45,005	65,086	97,239
Total income	200.7	450.7	410.5
EBITDA	15.1	32.6	41.2
PAT	12.4	26.7	33.6
EPS (Rs) *	5.6	12.0	20.1
RoCE (%)	21.4	24.3	23.7
P/E (x) @ Rs 135	-	11.3	6.7
P/E (x) @ Rs 145	-	12.1	7.2
Post-issue equity EPS is Rs13.9;  ^ pertains to diamonds business * Represents annualised EPS for FY10;                         Sources: RHP

In order to capture the opportunities in the domestic market, it is expanding its network of G WILD to 22 stores (from 5 currently) and CERES to 3 stores (from one) by end of 2011-12, besides diamond processing and jewellery making facilities. In the diamonds export business, its current SEZ facilities at Surat are sufficient to sustain growth.

Conclusion
The company’s past track record has been good with robust growth in revenues and profits, on the back of improved realisations and volumes. Given its expansion plans for the retail business (about a third of revenues; enjoys better margins of 20 per cent) and assuming 10-15 per cent growth in the diamond export business (margins of 6-7 per cent), the company’s revenues and profits would grow by about 25-30 per cent in 2010-11, resulting in an EPS of Rs 19. At the offer price of Rs 135-145, the PE works out to 7.1-7.6, which is slightly higher than players like Gitanjali Gems. While Goenka’s return ratios and margins are better, the IPO pricing captures most of these medium-term upsides. Hence, investors with a liking for this business and patience may consider this offer.