Saturday, February 28, 2015

Gitanjali Gems Ltd: Buy
CMP: Rs.53.35

Till recently, Mehul C Choksi, the promoter & managing director of Gitanjali Gems, was easily India's best known jeweler. He had a host of brands (Nakshatra, Gilli, Asmi and d'Damas, among others), endorsed by a bevy of celebrities, in his portfolio.

While Gitanjali Gem's growth has been remarkable under Choksi, the problems started to arise in May 2013 when the Reserve Bank of India, or RBI, in an attempt to contain the current account deficit, imposed severe restrictions on the gold business. This caused a crash in share prices of jewellers and triggered margin calls. Choksi, who had mortgaged shares to lenders, saw the Gitanjali Gems stock fall ~90 per cent. 

Choksi has since attempted to change the business model of Gitanjali Gems, which does annual business of around Rs.10,000 crore (FY14 revenue is Rs.12,436 Cr), from domestic to greater focus on exports (he has already raised the contribution of exports to total revenues to 60% from 40% earlier), accompanied by a switch from gold to diamond jewellery. Apparel also figures in the plan: jewelry brands like Gilli and Diya have been extended to apparel. In addition, Gitanjali Gems is starting an "affordable jewellery segment and paying more attention to ultra HNIs (high networth individuals)", according to Choksi.

Meanwhile, Choksi started to implement cost cuts methodology. By the middle of last  year he has already reduced the workforce by 1,000 to 3,800 and has replaced expensive brand ambassadors with inexpensive ones. 

The RBI clampdown on gold imports, disallowing of gold loans to jewellers and the rise in import duties completely derailed the working capital cycle last year. In the earlier regime, it was able to 'fix' the purchase price after sale of goods had been effected [gold was available on loan, and its price was fixed after its sale], which meant it had a comfortable working capital cycle financed from within the trade. Post the clampdown, jewellery manufacturers need to pay the cost of gold on purchase and wait three to six months for realisations.

Today, Gitanjali Gems has more than 20 branded jewellery lines and over 1,250 retail outlets. In the last few years, the company has also expanded its reach outside India in the US China, and West Asia. 


(i) The government is expected to reduce the import duty from the current 10% to 2-5% percent in the budget. A cut in gold import duty will increase the gold volume in country, will reduce prices and minimize smuggling. Moreover, in its Budget proposals, the Commerce Ministry has suggested the Finance Minister to consider reduction in import duty on the yellow metal.

(ii) The government is trying to free the gold trade, as they no longer require restrictions on gold. They are flush with dollars and there is declining current account deficit, so captains of this sector expect the removal of gold curbs. 

(iii) In an announcement on February 18, 2015, Reserve Bank of India (RBI) eased the import restriction on gold. There have been great fall in the gold imports in the last few months, especially December 2014 and January 2015. Under the order issued by RBI, nominated banks are now permitted to import gold on consignment basis. All sale of gold domestically will, however, be against upfront payments. Banks are free to grant gold metal loans. Star and Premier Trading Houses (STH/PTH) can import gold on DP basis as per entitlement without any end use restrictions. While the import of gold coins and medallions will no longer be prohibited, pending further review, the restrictions on banks in selling gold coins and medallions are not being removed.  The industry sees positive development from the FM in this front. 

(iv) Nirmala Sitharaman, Minister for Commerce and Industry, had hinted last month that the gems and jewellery sector may get some incentives in the Budget. The sector employs about 3.5 million people and is expected grow to be $80-85 billion by 2018.  

(iv) The government is likely to announce special jewellery parks in line with SEZs in different parts of the country.

(vi) The industry thinks that the government will make a special effort to promote jewellery below 18 carats.

Financials: Gitanjali Gem Ltd.  group revenue jumped 25 percent year on year to $554.3 million (INR 34.5 billion) in the third quarter that ended on December 31. The company's expenses rose 30 percent to $520.4 million (INR 32.3 billion). Profit surged 90 percent to $15.4 million (INR 960 million).

Group diamond revenue contracted 26 percent to $164 million (INR 10.2 billion); however, jewelry segment sales jumped 58 percent to $406.4 million (INR 25.3 billion).  Revenue from other product sales fell  74 percent to $579,000  (INR 36 million). Intersegment revenue, which was deducted from the total, decreased  58 percent to $16.7 million  (INR 1 billion).

Sales  from Gitanjali's operations in India surged 143 percent to $265.6 million (INR  16.5 billion), while operations from outside of the country experienced  a sales decline of  14 percent  to $288.7 million (INR 18 billion).

Standalone revenue, which measured Gitanjali's sole operations without its subsidiaries,  jumped 39 percent year on year to $281.6 million  (INR 17.5 billion) in the third quarter. Profit improved to $6.3 million (INR 394 million) compared with $373,000 (INR  23.2 million) one year earlier.

The group's overdrawn position of working capital totaled $23.6 million (INR 1.5 billion) as of December 31. 
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