Gitanjali Gems Ltd. Result Update: Q1 FY 12 C.M.P: Rs. 348.00 Target Price: Rs. 393.00 Date: Sept. 24 th 2011 BUY Stock Data: Sector: Gems & Jewellery Face Value Rs. 10.00 52 wk. High/Low (Rs.) 238.25/147.16 Volume (2 wk. Avg.) 527000 BSE Code 500114 Market Cap (Rs in mn) 29586.38 Share Holding Pattern 1 Year Comparative Graph 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 56.58% Rs. 1232.32 million. 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. Net Sales and PAT of the company are expected to grow at a CAGR of 26% and 40% over 2010 to 2013E respectively. Gitanjali Gems BSE SENSEX The company incorporated wholly owned subsidiaries in Italy, USA and Hong Kong in precious stones, diamonds jewellery and pearls segment. Years Net sales EBITDA Net Profit EPS P/E FY 11 94564.02 6303.02 3548.10 41.81 8.34 FY 12E 113476.82 7575.92 4580.26 53.97 6.46 FY 13E 131633.12 8792.06 5470.95 64.46 5.41 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 348.00 29586.38 41.41 8.34 1.18 30.00 Rajesh Exports 122.05 3603.65 10.01 12.19 2.26 60.00 Asian Star Co. Ltd. 953.00 1016.97 26.67 35.73 2.76 20.00 Shrenuj & Co. Ltd. 60.20 457.74 4.51 13.35 0.94 30.00 Investment Highlights Q1 FY12 Results Update Gitanjali Gems Ltd has posted net profit of Rs 1232.32 million for the quarter ended on June 30, 2011 as against Rs 787.01 million in the same quarter last year, an increase of 56.58%. It has reported net sales of Rs 25953.27 million for the quarter ended on June 30, 2011 as against Rs 18659.07 million in the same quarter last year, a rise of 39.09%. Total income grew by 39.22% to Rs.26002.60 million from Rs.18677.48 million in the same quarter last year. During the quarter, it reported earnings of Rs 14.52 a share. Quarterly Results - Consolidated (Rs in mn) As At June-11 June-10 %change Net sales 25953.27 18659.07 39.09% PAT 1232.32 787.01 56.58% Basic EPS 14.52 9.34 55.47% 2
Net Sales & PAT growth During the quarter, Net sales rose by 39.09% to Rs. 25953.27 million from Rs.18659.07 in the same the quarter last year and the Total Profit for quarter ended June 2011 was Rs.1232.32 million grew by 56.58% from Rs.787.01 million compared to same quarter last year. EPS Due to increase in equity capital the basic EPS of the company stood at Rs.14.52 for the quarter ended Jun 2011 from Rs.9.34 for the quarter ended Jun 2010. 3
Break up of Expenditure 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. 4
Completes Brand Valuation for key Indian Brands in its portfolio The value of Gitanjali Gems four leading diamond jewellary brands- Gili, Nakshatra, Asmi and D Damas- rose 84 per cent in the last two years due to tightening loopholes as suggested by UK-based valuer Brand Finance Plc. It has almost doubled in last two years from Rs. 1502 to Rs. 2769 crore. The overall corporate brand value of the company was estimated at Rs. 5584.00 crore. Company Profile Gitanjali Group is world s largest branded jewellery retailer. Its 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, and Japan. 5
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. 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. 6
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 113476.82 131633.12 Other Income 25.83 159.94 199.93 235.91 Total Income 65302.17 94723.96 113676.75 131869.03 Expenditure -60885.06-88420.94-106100.83-123076.96 Operating Profit 4417.11 6303.02 7575.92 8792.06 Interest -1724.31-2087.21-2358.55-2594.40 Gross Profit 2692.80 4215.81 5217.37 6197.66 Depreciation -445.41-563.72-335.50-355.63 Exceptional Items 0.00 180.67 0.00 0.00 Profit before Tax 2247.39 3832.76 4881.87 5842.03 Tax -231.90-267.12-292.91-362.21 Profit after Tax 2015.49 3565.64 4588.96 5479.83 Minority Interest -13.78-17.54-8.70-8.87 Net Profit 2001.71 3548.10 4580.26 5470.95 Equity Capital 842.70 848.72 848.72 848.72 Reserves 20999.64 24324.98 28913.94 34393.77 Face Value 10.00 10.00 10.00 10.00 EPS 23.75 41.81 53.97 64.46 7
Quarterly Ended Profit & Loss Account (Consolidated) Value (Rs. In mn) 31-Dec-10 31-Mar-11 30-Jun-11 30-Sep-11E Description 3m 3m 3m 3m Net Sales 26541.71 24266.14 25953.27 30624.86 Other Income 60.08 65.59 49.33 44.40 Total Income 26601.79 24331.73 26002.60 30669.26 Expenditure -24791.40-23001.13-23950.47-28542.37 Operating Profit 1810.39 1330.60 2052.13 2126.89 Interest -561.48-539.85-601.77-625.84 Gross Profit 1248.91 790.75 1450.36 1501.05 Depreciation -138.64-53.85-67.56-70.26 Exceptional Items 0.00 180.67 0.00 0.00 Profit before Tax 1110.27 917.57 1382.80 1430.78 Tax -94.55 26.83-145.99-103.02 Profit after Tax 1015.72 944.40 1236.81 1327.77 Minority Interest -10.07 10.68-4.49-4.58 Net Profit 1005.65 955.08 1232.32 1323.19 Equity Capital 842.70 848.72 848.72 848.72 Face Value 10.00 10.00 10.00 10.00 EPS 11.93 11.25 14.52 15.59 8
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% 6.68% 6.68% PBT Margin (%) 3.44% 4.05% 4.30% 4.44% PAT Margin (%) 3.09% 3.77% 4.04% 4.16% P/E Ratio (x) 14.68 8.34 6.46 5.41 ROE (%) 9.23% 14.16% 15.42% 15.55% ROCE (%) 9.57% 12.34% 12.81% 13.29% Debt Equity Ratio 1.33 1.21 1.08 0.95 EV/EBITDA (x) 6.65 4.69 3.91 3.37 Book Value (Rs.) 259.19 296.61 350.68 415.24 P/BV(X) 1.34 1.18 0.99 0.84 Charts: Net Sales & PAT 9
P/E Ratio(x) Debt Equity Ratio 10
EV/EBITDA (x) P/BV(x) 11
Outlook and Conclusion At the current market price of Rs.348.60, the stock is trading at 6.46 x FY12E and 5.41 x FY13E respectively. Earning per share (EPS) of the company for the earnings for FY12E and FY13E is seen at Rs.53.97 and Rs.64.46 respectively. Net Sales and PAT of the company are expected to grow at a CAGR of 26% and 40% over 2010 to 2013E respectively. On the basis of EV/EBITDA, the stock trades at 3.91 x for FY12E and 3.37 x for FY13E. Price to Book Value of the stock is expected to be at 0.99 x and 0.84 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.393.00 for Medium to Long term investment. Industry Overview The Gems and jewellery sector has a huge market in India and abroad alike. This market encompasses various kinds of jewels including gold, colored gemstones, costume jewelleries, platinum and diamonds. The sector is expected to register a compound annual growth rate (CAGR) of 13 per cent during 2011-2013, according to a report Indian Gems and Jewellery Market Forecast to 2013, by research firm RNCOS. The RNCOS report came out in the year 2010, and was indirectly supported by the findings of a leading industry body and published in the same year. The growth rate of the gems and jewellery industry in India stands at 15 per cent, while the domestic jewellery market was worth US$ 16-18 billion. As far as exports are concerned, this sector constitutes more than 12 per cent of the total exported products. The journal estimated that by year 2015 the gems and jewellery sector will help India earn about US$ 25-35 billion in form of export revenue. A steady sale of jewelries, especially of 12
gold, has helped the gems and jewellery industry in India flourish at this rapid rate. Moreover, people are also investing their money in gold as a future recourse to counter tough times. In addition, India has evolved as a great place for diamond processing, according to the industry body. Gems and Jewellery Industry in India: Industry Structure Gold is the principal raw material for making jewellery in India. In 2007 gold had a market share of US$ 12.24 billion (Rs 550 crores), while diamond had a market share of US$ 2.56 billion (Rs 115 crores). Eighty per cent of the gems and jewellery industry in India is dominated by gold and the rest is controlled by diamond and gemstone industry. This trade in India is mainly fragmented as 96 percent of total business comes from unorganised sector. Gems and Jewellery Industry in India: Gold The importance of gold in the Indian gems and jewellery sector is significant. In the year 2008 India had a gold consumption rate of 24 per cent, according to the report Indian Gems and Jewellery Market Forecast to 2013, by research firm RNCOS. This made the country become 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 expected that the Gems and Jewellery industry would enjoy a growth of about 8.5 per cent in the period upto 2015. It is also estimated that about 600 tonnes of gold is used to make jewellery. Gems and Jewellery Industry in India: Diamond 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. 13
Export of Gems and Jewellery When it comes to export in the year 2006-2007 Indian gems and jewellery industry made exports worth US$ 17.1 billion. During the 2007-2008 time periods this number rose to US$ 20.88 billion, which meant a growth rate of 22.27 per cent. Of this total export about 26.91 per cent were gold jewellery, whole diamond jewellery constituted 70.59 per cent of the total number. During the first part of the 2008-09 fiscal period the export rate rose by 17 per cent and reached US$ 9.05 billion, and by the end of 2009 the export reached US$ 25.11 billion. In the year 2010 this grew even further and reached US$ 37.14 billion. Majority of the gems and jewellery products from India are sent to the US and European markets constitute about 60 per cent of India s gems and jewellery exports. Indian exporters are also exploring other new markets including South America and East Asia. The statistical calendar year, 2011 shows that the gems and jewellery industry in India has exported products worth US$ 6659.27 million till the month of May. During the April-May period of 2011, gold jewellery export reached US$ 2264.53 million, while polished and cut diamond export was recorded at US$ 4259.70 million. This meant that both these segments have increased their growth rate even further. While the diamond processing segment has grown at the rate of 12.97 per cent, the gold jewellery segment has recorded a growth rate of 19.87. The colored gemstones segment too has recorded an increase in profit compared to the last year and has earned US$ 44.65 million with a growth rate of 19.42. Rough diamonds consists of three per cent of the total export ration of Indian gems and jewellery industry. Gems and Jewellery Industry in India: Government Initiatives While presenting the budget 2009-10 in Lok Sabha, Mr. Pranab Mukherjee, the Union Minister of Finance, announced an increase in custom duty on gold and silver as the price of gold has increased manifold. 14
Gold bars currently attract customs duty at the specific rate of Rs 100 per ten grams while other forms of gold (excluding jewellery) are chargeable to a duty of US$ 5.63126 (Rs 250) per ten grams. These rates were fixed in 2004. Along the same lines, the customs duty on silver (excluding jewellery) will be increased from US$ 11.2625 (Rs 500) per kg to US$ 22.5251 (Rs 1,000) per kg. These revised rates would also apply to gold and silver, including ornaments that are not studded, when imported by a bona fide passenger as baggage, he said. Gems and Jewellery Industry in India: Road Ahead The huge growth of the Indian gems and jewellery industry has seen the advent 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 jewelry industry the surge in 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, according to 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. 15
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