Gitanjali Gems Ltd. Result Update: Q2 FY 12 C.M.P: Rs. 310.00 Target Price: Rs. 347.00 Date: Dec. 28 th 2011 BUY Stock Data: Sector: Gems & Jewellery Face Value Rs. 10.00 52 wk. High/Low (Rs.) 387.40/156.35 Volume (2 wk. Avg.) 527000 BSE Code 532715 Market Cap (Rs in mn) 26310.32 Share Holding Pattern SYNOPSIS Gitanjali Gems is one of the largest integrated diamond and jewellery manufacturers and retailers in India. During the quarter ended, the robust growth of Net Profit is increased by 65.25% Rs. 1322.46 million. Gitanjali Gems Ltd has acquired 100% stake of 'Crown Aim Limited' ('Crown Aim'). 1 Year Comparative Graph The value of four leading diamond jewellary brands of Gitanjali Gems- Gili, Nakshatra, Asmi and D Damas rose 84 per cent i.e. Rs. 2769 crore in the last two years. Gitanjali Gems BSE SENSEX Net Sales and PAT of the company are expected to grow at a CAGR of 30% and 46% over 2010 to 2013E respectively. Years Net sales EBITDA Net Profit EPS P/E FY 11 94564.02 6303.02 3548.10 41.81 7.42 FY 12E 121987.59 8315.70 5058.88 59.61 5.20 FY 13E 143945.35 9848.55 6197.85 73.03 4.25 1
Peer Group Comparison Name of the company CMP(Rs.) Market Cap. (Rs.mn.) EPS(Rs.) P/E(x) P/Bv(x) Dividend (%) Gitanjali Gems 310.00 26310.32 41.81 7.42 1.05 30.00 Rajesh Exports 134.40 3968.29 11.14 12.06 2.49 60.00 Asian Star Co. Ltd. 1051.00 1121.54 26.18 40.15 3.05 20.00 Shrenuj & Co. Ltd. 58.05 441.58 4.57 12.70 0.91 30.00 Investment Highlights Q2 FY12 Results Update Gitanjali Gems Ltd has posted net profit of Rs 1322.46 million for the quarter ended on September 30, 2011 as against Rs 800.29 million in the same quarter last year, an increase of 65.25%. It has reported net sales of Rs 31676.41 million for the quarter ended on September 30, 2011 as against Rs 25097.10 million in the same quarter last year, a rise of 26.22%. Total income grew by 26.23% to Rs.31701.31 million from Rs.25112.96 million in the same quarter last year. During the quarter, it reported earnings of Rs 15.32 a share. Quarterly Results - Consolidated (Rs in mn) As At Sep-11 Sep-10 %change Net sales 31676.41 25097.10 26.22% PAT 1322.46 800.29 65.25% Basic EPS 15.32 9.50 61.32% 2
Net Sales & PAT growth During the quarter, Net sales rose by 26.22% to Rs. 31676.41 million from Rs.25097.10 in the same the quarter last year and the Total Profit for quarter ended September 2011 was Rs.1322.46 million grew by 65.25% from Rs.800.29 million compared to same quarter last year. EPS Due to increase in equity capital the basic EPS of the company stood at Rs.15.32 for the quarter ended Sep. 2011 from Rs.9.50 for the quarter ended Sep. 2010. 3
Break up of Expenditure Segment Revenue Particulars Q2 FY12 (Rs. in mn) Diamond 17194.49 Jewellery 16206.02 Others 110.46 Total 33510.97 4
Acquisition of 100% stake of 'Crown Aim Limited Gitanjali Gems Ltd has acquired 100% stake of 'Crown Aim Limited' ('Crown Aim'). Thus Crown Aim has become step down subsidiary of the Company. Crown Aim is a Hong Kong based Company engaged in the business of distribution of Jewellery to China, Japan, USA, Middle East and Europe. In Addition, Crown Aim has a Jewellery manufacturing unit in China and plans to setup retailing of Jewellery in China. Crown Aim also has a 100% subsidiary with the name Alfred Terry Holding Limited and a step down subsidiary named Alfred Terry Limited in London, for distribution of Jewellery in UK. Incorporation of wholly Owned Subsidiary 'Leading Italian Jewels S.r.l., Italy' Gitanjali Gems Ltd has incorporated a Wholly Owned Subsidiary in the name of Leading Italian Jewels S.r.l in Italy with a view to expand its business in Italy and adjoining region. The main activity of the newly incorporated wholly owned subsidiary is trading in precious stones, diamonds jewellery, pearls, etc. Incorporation of Wholly Owned Subsidiary GGL Diamond LLC in USA Gitanjali Gems Ltd has incorporated GGL Diamond, LLC in United States of America, through its wholly owned subsidiary Gitanjali USA, Inc. The main object of GGL Diamond LLC is to source and distribute diamond and jewellery. Incorporation of Wholly Owned Subsidiary 'Aston Luxury Group Ltd' in Hong Kong Gitanjali Gems Ltd has incorporated a Wholly Owned Subsidiary in the name of 'Aston Luxury Group Limited' in Hong Kong with a view to explore and expand the International business of the Company in Asia Pacific. 5
Company Profile Gitanjali Group is world s largest branded jewellery retailer. The company s headquarter is in Mumbai. Gitanjali Gems, incorporated in 1986, is one of leading players in jewellery segment. Founded in 1966, it was the first group company to engage in cutting and polishing of diamonds in Surat, Gujarat. Today this $900 million multinational group is one of largest manufacturer, retailers and exporters of diamonds. The company is the first to produce the world s smallest heart shaped diamond (0.03 carat) and developing some 25 patented facet patterns. Gitanjali Group's operates from sourcing of rough diamond, cutting, polishing and distributing, to jewellery manufacturing, which includes designing, mould making, wading, casting, spruce grinding, filing, polishing and setting. The company uses latest CAD and CAM processes and equipment for creating designs for jewellery. The company was first to offer diamond studded jewellery at reasonable prices. The company has won over 50 awards from the Ministry of Commerce, India for outstanding exports of diamond and jewellery, is today over $1000 million multinational group, and a publicly listed entity. Global presence Gitanjali Gems Ltd. has its operations throughout the globe, all the way from USA, UK, Belgium, Italy and the Middle East to Thailand, South East Asia China, & Japan. Business Divisions Diamonds-The Company is engaged in every part of diamond sourcing & processing. Diamonds are processed at the Group s units at Surat and Borivli in India, Bangkok in Thailand, and Qingdao in China. Recently its unit at Hyderabad SEZ it has gone also on stream. For its diamond export the company has received various awards from international organization as well as from Government of India. 6
Jewellery- The Company offers a diverse range of jewellery under gold, diamond and platinum segment. Company s designs include Indian traditional, ethnic, classic, contemporary and casual. The company uses the latest CAD/CAM processes and EDP for optimal efficiency in production and deliveries to its diverse markets. Retailing- The Company is also engaged in retailing its diamonds and jewellery. Currently the company markets over 40 brands that are owned and franchised under its retail chain Gitanjali Lifestyle. Infrastructure- Gitanjali plans to develop seven SEZs to be operationalised in 7-8 years and the company has already bought land in Panvel, outside Mumbai, and has approvals for five more SEZs. Company Brands Currently, it has brands that includes loose diamonds, diamond and other stonestudded jewellery (natural and synthetic), in gold, silver, steel and combinations, highend watches, jewellery-watches, luxury artifacts and accessories. The company markets its products through store chain namely Bezel, Giantti, World of Solitaire and Gitanjali Lifestyle. Under jewellery, the company has a portfolio of brands namely Nakshatra, Lucera, D Damas, Calgaro, Sangini, Rivaaz, Desire, Kashvi, Asmi, Maya, Diya, Ezee Diamonds and Stephan Hafner.Under watches, it retails brands like Philip, Sector, Marvin, Umbro, Miss Sixty, Roberto Cavalli, Iris, Morelaato and Just Cavalli. Under Home accessories, the company retails brand - Greggio Argento. Gitanjali Gems has a distribution network of 112 distributors and 1250 outlets in India. 7
Financial Results 12 Months Ended Profit & Loss Account (Consolidated) Value(Rs. in mn) FY10 FY11 FY12E FY13E Description 12m 12m 12m 12m Net Sales 65276.34 94564.02 121987.59 143945.35 Other Income 25.83 159.94 179.13 204.21 Total Income 65302.17 94723.96 122166.72 144149.56 Expenditure -60885.06-88420.94-113851.01-134301.01 Operating Profit 4417.11 6303.02 8315.70 9848.55 Interest -1724.31-2087.21-2462.91-2733.83 Gross Profit 2692.80 4215.81 5852.80 7114.72 Depreciation -445.41-563.72-300.00-315.00 Exceptional Items 0.00 180.67 0.00 0.00 Profit before Tax 2247.39 3832.76 5552.80 6799.72 Tax -231.90-267.12-471.99-577.98 Profit after Tax 2015.49 3565.64 5080.81 6221.75 Minority Interest -13.78-17.54-21.93-23.90 Net Profit 2001.71 3548.10 5058.88 6197.85 Equity Capital 842.70 848.72 848.72 848.72 Reserves 20999.64 24324.98 29405.79 35627.54 Face Value 10.00 10.00 10.00 10.00 EPS 23.75 41.81 59.61 73.03 8
Quarterly Ended Profit & Loss Account (Consolidated) Value (Rs. In mn) 31-Mar-11 30-Jun-11 30-Sep-11 31-Dec-11E Description 3m 3m 3m 3m Net Sales 24266.14 25953.27 31676.41 34210.52 Other Income 65.59 49.33 24.90 29.88 Total Income 24331.73 26002.60 31701.31 34240.40 Expenditure -23001.13-23950.47-29487.67-31850.00 Operating Profit 1330.60 2052.13 2213.64 2390.41 Interest -539.85-601.77-672.99-740.29 Gross Profit 790.75 1450.36 1540.65 1650.12 Depreciation -53.85-67.56-80.83-87.30 Exceptional Items 180.67 0.00 0.00 0.00 Profit before Tax 917.57 1382.80 1459.82 1562.82 Tax 26.83-145.99-118.81-125.03 Profit after Tax 944.40 1236.81 1341.01 1437.80 Minority Interest 10.68-4.49-18.55-18.92 Net Profit 955.08 1232.32 1322.46 1418.87 Equity Capital 848.72 848.72 863.20 863.2 Face Value 10.00 10.00 10.00 10.00 EPS 11.25 14.52 15.32 16.44 9
Key Ratios Particulars FY10 FY11 FY12E FY13E No. of Shares(in mn) 84.27 84.87 84.87 84.872 EBITDA Margin (%) 6.77% 6.67% 6.82% 6.84% PBT Margin (%) 3.44% 4.05% 4.55% 4.72% PAT Margin (%) 3.09% 3.77% 4.17% 4.32% P/E Ratio (x) 13.05 7.42 5.20 4.25 ROE (%) 9.23% 14.16% 16.79% 17.06% ROCE (%) 10.17% 12.34% 13.84% 14.50% Debt Equity Ratio 1.19 1.21 1.06 0.92 EV/EBITDA (x) 5.91 4.17 3.16 2.67 Book Value (Rs.) 259.19 296.61 356.47 429.78 P/BV(X) 1.20 1.05 0.87 0.72 Charts: Net Sales & PAT 10
P/E Ratio(x) Debt Equity Ratio 11
EV/EBITDA (x) P/BV(x) 12
Outlook and Conclusion At the current market price of Rs.310.00, the stock is trading at 5.20 x FY12E and 4.25 x FY13E respectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.59.61 and Rs.73.03 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 30% and 46% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at 3.16 x for FY12E and 2.67 x for FY13E. Price to Book Value of the stock is expected to be at 0.87 x and 0.72 x respectively for FY12E and FY13E. We expect that the company will keep its growth story in the coming quarters also. We recommend BUY in this particular scrip with a target price of Rs.347.00 for Medium to Long term investment. Industry Overview India possesses world's most competitive gems and jewellery market owing to its low cost of production and availability of skilled labor. Gems and jewellery form an essential part of the Indian tradition. The components of jewellery include traditional gold, diamond and platinum, accompanied by a variety of other precious and semiprecious stones. The Indian gems and jewellery sector is expected to grow at a compound annual growth rate (CAGR) of approximately 13 per cent during 2011 2013, on the back of increasing Government efforts and incentives together with private sector initiatives, according to a report 'Indian Gems and Jewellery Market Forecast to 2013', by research firm RNCOS. As per the research report, with India's consumption pegged at nearly 24 per cent in 2008, the country remains world's largest gold consumer and this share is expected to grow further. Moreover, India also forms the largest cutting and polishing Industry for diamond in the world. The Government policies and the 13
banking sector have provided a lot of assistance to this sector with around 50 banks providing nearly US$ 3 billion of credit to the Indian diamond industry. India will soon overtake the US to become the third-largest men's luxury jewellery market in the world, according to Euromonitor International. The study estimated that the country's men's jewellery market stood at around Rs 954 crore (US$ 194.4 million), in sales and it is projected to grow by 36.4 per cent in 2012. "Although it's a niche market, it is growing. Nobody can ignore it now," as per GR Radhakrishnan, Managing Director, GRT Jewelers, who pegs the share of men's jewellery in its total sales at 20-25 per cent. Indian sellers on ebay, a leading online marketplace, export an item internationally every 32 seconds, according to the company's Asian exporters' index. 44 pieces of jewellery are sold every hour by Indian sellers on ebay. Ratings agency CRISIL has launched a Gold Index to track the performance of gold prices in the Indian market. This is the first index launched by CRISIL in the commodities space. The purpose of the CRISIL Gold index is to provide an independent, relevant and common benchmark for performance evaluation of investment products with gold as underlying investment, according to a release from CRISIL. Swiss watchmaker Rado, a part of the world's largest watch conglomerate The Swatch Group, recently unveiled its luxury jewellery collection at the Rado boutique in Banjara Hills in Hyderabad. This range features beautiful diamond studded watches. The Rado jewellery collection brings together an exquisite selection of the brand's most celebrated products. The Swiss watch brand has been a pioneer in the use of innovative materials such as hard metal, high-tech ceramic, lanthanum and ceramos. It also features convex, dome-shaped sapphire crystals, affording innovative watch designs and shapes. The jewellery range is priced from Rs 30,000 (US$ 574.66) to Rs 4,000,000 (US$ 76,626.75). "In the last 3-4 years, a lot of Indians are investing in gold which is in the paper format. People should take a long-term perspective while investing in gold. ETFs as a 14
concept is picking up," as per Jiju Vidyadharan, Head, Funds and Fixed Income Research, CRISIL Research. Industry Structure The gems and jewellery industry in India is greatly dominated by the unorganized players, but with the growing economy and increasing income levels, the organized segment and retailing of branded jewellery is fast catching up in the currently fragmented market which is worth US$ 16 billion and shows huge potential for growth in the future. The centre of trade in India's Gems and Jewellery industry is Mumbai. Most imports of gold and rough diamond arrives in Mumbai. However, most of the processing of diamonds takes place in Gujarat. Key Industry Components Diamonds: Currently India is the major polishing and cutting hub for diamonds. India is also the third largest consumer of polished diamonds. The surge of urbanization and rapidly growing middle class in India has led Indian consumerism to new heights, particularly in the diamond jewellery sector. Every 11 out of 12 diamonds sold around the world are processed in India regardless of the place they are mined. Gold: The country became a leader in the table of most gold consuming nations with the consumption amounting to about 16,000 tonnes. The other key markets include Japan, China, Turkey, Italy, USA and UK. It is also estimated that about 600 tonnes of gold is used to make jewellery. Costume jewellery: The Indian costume jewellery market is also witnessing growth in the international market, as per the Export Promotion Council for Handicrafts. The industry body further stated that the Government is also working towards formulating an international compliance code for manufacturing costume jewellery. The current global costume jewellery and accessories market is estimated at US$ 16.3 billion, of which India only exports around US$ 53 million, thereby, providing a huge opportunity area for the Indian costume manufacturers. 15
Exports India is the largest market for gold jewellery in the world, representing an amazing 746 tonnes of gold in 2010. The net exports of gem and jewellery grew from US$ 22,616.35 in April-October 2010 to US$ 26,160.04 in April-October 2011. Gems and Jewellery Industry in India: Road Ahead The enormous growth of the Indian gems and jewellery industry has seen the arrival of many new branded jewellery shops in various metros of this country. Brands such as, Damas Jewellery, Reliance Retail, Swarovski, and Joy Alukkas are either opening or have already opened their new branches. The availability of cheap labour and presence of well skilled people in various states of India is helping in the growth of diamond polishing and gold jewellery markets. According to experts in the jewellery industry the growing demand for expensive jewellery in India is a result of the strengthening Indian economy. India will soon overtake the US in the not so distant future, as per a statement given by Rapaport Group, the well known keeper of global diamond related data. Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. 16
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