TBZ IPO: Reasonably valued, peers score on size

Jewellery retailer Tribhovandas Bhimji Zaveri (TBZ) plans to leverage Indian consumers’ rising incomes and demand for gold despite its run up in the last five years. The 148-year-old company, which plans to raise about Rs 200 crore, has priced the issue at a reasonable valuation of 12-13 times its FY12 estimated earnings. However, there are better, established names, such as Titan Industries (37 times FY12 earnings) and Gitanjali Gems (six times FY12 earnings). Both outshine TBZ on counts of size and reach. Thus, only the investors with an appetite for risk should subscribe to the offer.

A few positives
Majority of the company’s sales (94 per cent) comes from the western and southern regions, which together account for 70 per cent of India’s total gold consumption. The company has the largest number of stores in Maharashtra (six) and Gujarat (three). Half of the company’s 14 showrooms opened between August 2007 and October 2008, which indicates the management’s opportunistic strategy to capitalise on the gold price’s bull-run that started in 2007. Majority of its outlets (11) are large-format, high-street stores with an area of 3,000 square feet and above.

The company recorded an average sales growth of a robust 41 per cent between FY07 and FY11, while the operating profit margin (OPM) has improved from 6.2 per cent to 7.3 per cent in same period. Net profit has grown at a compounded annual growth rate (CAGR) of 52 per cent despite higher interest costs. If the 9MFY12 performance is annualised, sales are expected to grow at 25 per cent in FY12 and it is likely to record a five-year high OPM of a little over nine per cent. This could rise further as the company plans to increase the share of diamond-studded jewellery from 25 per cent in 9MFY12 (up from 22 per cent in FY11), to 40 per cent in the next few years, as the margins there are three times higher than in gold jewellery.
 

ETCHED IN GOLD
	FY10	FY11	9MFY12
Net sales (Rs  cr)	885	1,194	1,117
Change (in %)	32.3	34.9	NA
Operating profit (Rs  cr)	47	87	102
Change (in %)	11	37.2	NA
Net profit (Rs  cr)	17	40.4	50.5
Change (in %)	63.5	137.6	NA
Source: Company

ISSUE DETAILS
Issue size (Rs  cr)	200-210
Price band (Rs /sh)	120-126
Issue opens	24-Apr
Issue closes	26-Apr
CRISIL rating	3 out of 5

 

Many concerns
Spending on jewellery is highly discretionary, susceptible to economic slowdown and uncertain trend of gold prices. For example, Titan Industries’ volumes have been affected (nine per cent growth) in 9MFY12, including the festive season though it has been ahead of the market (down 33 per cent).

In FY10-FY12e, while TBZ’s sales are expected to grow at a CAGR of 30 per cent, Titan’s rate is expected to be higher at 41 per cent despite the latter’s jewellery business being five times larger than TBZ. Both companies will earn operating margins of nine per cent by FY12-end.

TBZ plans to quadruple its showroom network to 57 by FY15 (36 large formats) and triple the carpet area to 1.5 lakh square feet (currently 49,000 square feet) covering 43 cities across 13 states. However, attracting adequate footfall in non-metros would be a tough task, especially due to slowdown and competition.

Inventory formed about 84 per cent of total assets as in December 2011 and inventory turnover has consistently declined from 3.1 times in FY08 to 2.8 times in FY11 and further drastically down to two times in 9MFY12. The company needs to grow its sales at a faster rate than the past average of 41 per cent (FY07-FY11) or manage its inventory better.

The company’s debt to equity ratio and interest cost to sales ratio is high at 2.8 times and 2.1 per cent, respectively, as in December 2011. Thus, TBZ continues to carry interest rate risk as the Reserve Bank of India is not looking at any further rate cuts after the surprise 50 basis points cut. Moreover, the central bank has also advised banks to classify accounts of jewellers as ‘high risk’. On the other hand, Titan is a zero net debt company with very negligible debt.