Gitanjali Gems: The worst seems to be over

Business Standared 7 May, 2014 writes: 

• Till recently, Mehul C Choksi, the promoter & managing director of Gitanjali Gems Ltd (Rs.77.15), was easily India's best known jeweller. He had a host of brands (Nakshatra, Gilli, Asmi and d'Damas, among others), endorsed by a bevy of celebrities, in his portfolio. 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: it is currently trading at Rs 77.15, down from Rs.649 in April 2013. 

However,  very recently the central bank, announced some relaxations in the import of gold into India. These are yet to be implemented; also related clarifications/notifications have not been issued by the customs department. 

It is expected once the existing relaxations come into force, more gold will come into the market, which has entered a lean season. Policy changes, expected next month, could further relax import norms. It is widely expected in Budget 2014-15, to be presented in the first half of next month, the import duty on gold will be cut two-three per cent. The cumulative impact of this could be a further dip in prices—-7-10 per cent—-in the next one or two months.

This single  move can push the price of the shares of Gitanjali Gems Ltd above Rs.100. 

The Business Standard of 7 May, 2014, further writes: 

Making a new start

• Choksi has since attempted to change the business model of Gitanjali Gems, which does annual business of around Rs 10,000 crore, from domestic to greater focus on exports (he has already raised the contribution of exports to total revenues to 60 per cent from 40 per cent earlier), accompanied by a switch from gold to diamond jewellery. Apparel also figures in the plan: jewellery 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.
• Lenders are not entirely convinced about the plans for expansion abroad and are looking into the viability of its 120 overseas stores. They are still coming to grips with the company's operations, its changing business model and the effect RBI's new norms will have on the company. Ernst & Young is said to be preparing a report on these issues. An email sent to EY did not elicit a response.
• Meanwhile, Choksi has started to implement cost cuts. Thus, he has reduced the workforce by 1,000 to 3,800 and has replaced expensive brand ambassadors with inexpensive ones. And yet, he has not been able to entirely convince the lenders, who recently met the company's management. One of the lenders points out that the company's heavy dependence on working capital to run its day-to-day operations is an unviable proposition. Says a banker: "We have our doubts about the company attaining profitability through working capital support." One way to unlock value is to leverage the brands. The lenders want all brands to come under one roof so that they have greater access to them. Currently, the numerous brands are not under the flagship, Gitanjali Gems, but under different subsidiaries. Three years ago, 70 per cent of the brands were valued at Rs 6,500 crore. Today, the company values all its brands together at Rs 11,000 crore.
• Gitanjali Gem's managing director, Mehul C Choksi, is credited with adding a corporate touch to the jewellery business in India. In 1990, he corporatised Gitanjali Gems, a company founded by his father in 1966. In those days, most businesses functioned like a family-run small unit. Choksi, 55, changed things completely. He took over his family's tiny Mumbai diamond business and turned it into a retailing giant. The diamond business he took over had stuck to cutting and polishing rough diamonds for generations. Choksi started making jewellery and retailing them. 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. While Gitanjali Gem's growth has been remarkable under Choksi, the restrictions on gold imports have badly hit its domestic business. Choksi now wants to focus on exports to spur growth and to bring back the shine the business once had.

All the points towards a HIGHER SHARE PRICE in the coming days, as the whole sector is expected to come out of the blues.