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I N D I A R ES E A RC H
I N I T I AT I N G C O V E R A G E
G E M S & J E W E L L E RY
JUNE 2012
Tribhovandas Bhimji Zaveri Limited
Go for the GOLD...
Abhijeet Kundu
+91 22 4031 3430
abhijeet@antiquelimited.com
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 1
Recommendation : BUY INITIATING COVERAGE
CMP
Target Price
:
:
INR110
INR158 Tribhovandas Bhimji Zaveri Limited
Potential Return : 44% Go for the GOLD...
Investment Highlights
Tribhovandas Bhimji Zaveri Ltd. (TBZ) is a high growth potential story in the organised
Abhijeet Kundu Indian jewellery sector backed by: 1) strong brand (the most important factor for trust
+91 22 4031 3430 amongst gold consumers); 2) innovative ability; and 3) aggressive expansion plans.
abhijeet@antiquelimited.com
We estimate TBZ to record strong earnings growth with a CAGR of ~52% to INR1.33bn
during the next two years (FY12-14e) led by a net sales CAGR of 42% to INR28.0bn.
We initiate coverage with a BUY recommendation and a target price of INR158,
implying FY14e PE of 8x.
Store expansion to drive growth
TBZ is embarking on a strong retail expansion plan to drive growth during the next
Market data
Sector : Retail three years. The company which currently operates about 14 stores across 10 cities in
Market Cap (INRbn) : 7 5 states (retail showroom carpet area of 47,796 sq ft), plans to add 43 showrooms (25
Market Cap (USDm) : 132 large format high street showrooms and 18 small format high street showrooms) by the
O/S Shares : 67 end of FY15e, which would take the total number of showrooms to 57 (total carpet
Free Float (m) : 17
area ~150,000 sq. ft.) in 43 cities across 14 states. This would drive sales at a strong
52-wk HI/LO (INR) : 123/103
Avg Daily Vol ('000) : 53 CAGR of 42% to INR28.0bn during the next two years.
Bloomberg : TBZL IN Profitability on a structural uptrend
Source: Bloomberg
PAT margins would witness consistent improvement during the next three years with the
Returns (%) application of the gold lease model. TBZ's interest outgo during FY13e and FY14e is
1m 3m 6m 12m estimated to drop to INR215m and INR360m, respectively, as against INR315m in FY12.
Absolute (8) - - -
This in turn would improve net margins by 53bps during FY13e and FY14e to 4.7%.
Relative (11) - - -
Source: Bloomberg Valuation and outlook
At the CMP of INR110, the stock trades at a PE of 8.5x FY13e and 5.6x FY14e. On an
Shareholding pattern
EV/EBITDA basis, it trades at 4.2x FY13e and 2.7x FY14e. We believe that TBZ would
Promoters
FII trade at a premium over its peers like Shree Ganesh Jewellery (which has yet to create a
74%
12% branding in the domestic jewellery retailing) and Thangamayil Jewellery (which is more
of a regional brand as compared to TBZ which has been able to create a presence
DII
3%
across both the key geographies of west and south India). We therefore value the stock
at a PE of 8x FY14e, providing a target price of INR158 and recommend a BUY.
Others
11%
Key financials
Year ended 31st Mar 2010 2011 2012e 2013e 2014e
Source: BSE Revenue 8,849 11,939 13,855 18,592 28,055
EBITDA 484 866 1,236 1,593 2,456
Price performance vs Nifty EBITDA margin (%) 5.5 7.3 8.9 8.6 8.8
105 EBITDA growth (%) 50.9 79.0 42.7 28.9 54.2
100 PAT (INRm) 154 392 572 867 1,325
PAT growth (%) 47.4 154.7 46.1 51.5 52.8
95
EPS(INR) 2.3 5.8 8.5 12.9 19.8
90 EPS growth (%) 47.4 154.7 46.1 51.5 52.8
85 PE (x) 47.9 18.8 12.9 8.5 5.6
May-12 May-12 Jun-12 Jun-12 EV/EBITDA (x) 17.6 9.8 6.9 5.4 3.5
TBZ NIFTY RoE (%) 23.1 36.6 34.5 19.9 23.3
ROCE (%) 16.7 26.1 32.0 33.5 40.2
Source: Bloomberg
Source: Company, Antique;
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 2
Background
TBZ is a 148-year-old jewellery retailer in India with 14 showrooms in 10 cities across
5 states, with a total carpet area of approximately 47,796sqft. They are primarily
focused towards gold and diamond-studded jewellery along with foray into platinum
and jadau jewellery. The designing and manufacturing of their products is done either
in-house or by third parties. All its showrooms trade under the name of "Tribhovandas
Bhimji Zaveri". Its flagship showroom in Zaveri Bazar, Mumbai, was established in
1864. Since 2001, TBZ has opened several showrooms, including seven during August
2007 and October 2008.
Out of TBZ's 14 showrooms, 11 are "large format" high street showrooms (carpet area
of 3,000 sq. ft. or more) and 3 are "small format" high street showrooms (carpet area
of 1,000-3,000 sq. ft.). Effective June 01, 2011, TBZ surrendered the lease for one of
its showroom to the lessor and on July 27, 2011 it opened a new showroom in Rajkot,
Gujarat. It has closed one small format showroom in Pune on March 31, 2012 and
opened a large format showroom in Pune on April 1, 2012.
Exhibit 1: Store locations
Location State No. of stores
Zaveri Bazar, Mumbai Maharashtra 1
Borivali, Mumbai Maharashtra 1
Santacruz, Mumbai Maharashtra 1
Ghatkopar, Mumbai Maharashtra 1
Thane Maharashtra 1
Pune Maharashtra 1
Punjagutta (Hyderabad) Andhra Pradesh 1
Basheerbagh (Hyderabad) Andhra Pradesh 1
Vijayawada Andhra Pradesh 1
Ahmedabad Gujarat 1
Surat Gujarat 1
Rajkot Gujarat 1
Indore Madhya Pradesh 1
Kochi Kerala 1
Total 14
Source: Company, Antique
Exhibit 2: Top 7 stores revenues (INRm)
2500
2000
1500
Top seven stores account for 1000
~70% of total company’s
500
revenues
0
Mumbai
Ghatkopar,
Mumbai
Gujarat
Borivali,
Panjagutta,
Ahmedabad,
Santacruz,
Zaveri
Bazar,
Hyderabad
Surat,
Mumbai
Mumbai
Gujarat
Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 3
India, a high potential market for organised jewellery
India is one of the largest markets of gold jewellery consumption in the world with
organised jewellery forming just 10% of the overall market. According to the Industry
estimates, the Indian gems and jewellery industry is expected to grow at about 10-
12% during the next three years. We expect organised jewellery retailers like TBZ to
grow at a strong pace and outperform their unorganised peers (family jewellers) led
by ramp up of retail space, consistent innovation and marketing.
India - the largest market for gold jewellery
India has been the largest consumer of gold jewellery (in tonnage terms) around the
globe over several decades.
In 2011, India accounted for Gold is a renowned metal not only for its traditional use for adornment but also for its
29% of total global gold stance as a time-tested investment-class asset. Gold is viewed by Indians as a secure
jewellery consumption, 25% of and easily accessible investment by the rural community, which accounts for around
total consumer bar and coin 70% of the population. In India, gold continues to have the added virtue of being an
investment demand inflation hedge, and allocation to gold is an ideal way to achieve a diversified portfolio
because of its low to negative correlation with other mainstream assets (historical
correlation on weekly returns for five years ending March 2010 of -0.2 to +0.4).
Gold is one of the limited ways in which Indian investors can diversify their currency
exposure. As per data from the World Gold Council (WGC), the consumption of gold
in India has doubled over the past two decades - going up from approximately
400tonnes in 1987 to about 800tonnes in 2007. In 2011, India accounted for 29% of
total global gold jewellery consumption, 25% of total consumer bar and coin investment
demand.
The WGC believes there is considerable potential for growth in the Indian jewellery
market given that domestic income levels are on the rise according to HIS Global
insight's projections for 2010-15, notwithstanding that budgets are being constrained
by the prevailing high price of gold.
CARE Research estimates that with the rise in the overall household income with multiple
members earning, the demand for gold in India is bound to remain robust despite its
higher prices in the last two years.
Exhibit 3: Country-wise consumer demand for Gold (tonnes) (4QCY11)
Countries Jewellery Total Total
bar and coin invest
India 567 366 933
Greater China 545 266 811
China 511 259 770
Middle East 166 34 200
USA 115 80 195
Other 59 482 540
World Total 1,963 1,487 3,450
Source: World Gold Council, Gold Demand Trends Q4-2011
Industry estimates indicate 10-12% growth in the gems and jewellery
sector
The growth outlook for the gems and jewellery sector in India is stable and CARE
Research expects the domestic industry to grow at a CAGR of 10-12% up to 2015. The
key drivers for growth will be higher disposable income, rising young population with
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 4
higher aspiration levels, higher number of working women and conscious marketing
efforts of companies.
Nevertheless the traditional demand drivers like weddings and festivals continue to be
in place (forming about 50-55% of the overall demand for jewellery in the country).
Over centuries, gold has been an inseparable part of the Indian society and fused
well into the psyche of an Indian. There is a culture of buying gold during auspicious
occasions of Diwali, Akshaya Tritiya, Dussehra, etc., and also during weddings. In
rural India, farmers typically buy gold jewellery after every successful harvesting season
as it forms the best form of investment (savings) and has proven to be a natural hedge
against inflation.
Unorganised retailing at 90% - Huge opportunity for organised retailing
According to CRISIL Research, the Indian jewellery retailing market is estimated at
INR973bn as of 2009-10. Within the jewellery retailing market in India, the share of
gold jewellery is estimated to be around 80%. The Indian jewellery retail industry is
highly unorganised with the organised market accounting for a mere 10%. Jewellery in
India is retailed mainly through three formats: national stores, regional stores, and
small family run businesses. The purchase of jewellery is largely based on trust exhibited
by customers. There are over 300,000 jewellery retail outlets across the country, indicating
a high level of fragmentation.
Exhibit 4: Jewellery retailing market composition (India)
Diamonds, 15%
Gold , 80%
Others, 5%
Source: Company, Antique
According to Industry reports, in the last few years, the Indian domestic market has
shown very promising signs for the organised gold jewellery retail industry. The growth
witnessed in the penetration of branded and organised retail across categories such
as Fast Moving Consumer Goods (FMCG), consumer durables, apparels and home
improvement can be replicated in the Gems and Jewellery sector. The two major sub
segments within jewellery, gold (22 carat and above) and diamonds, with the former
constituting 80% of the value of jewellery consumption and the balance 20% comprising
diamonds and gemstone jewellery. The overall size of domestic Gems and Jewellery
sector is pegged at INR870bn as of 2008-09) according to a FICCI-Technopak study)
and is expected to grow up to INR1,832bn by 2014-15e.
Increased urbanisation, higher percentage of younger population, multiple-income
families and more women in the workforce is giving rise to higher disposable income
level, leading to impulse buying and a preference for superior lifestyle. The median
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 5
age of an Indian is 25.3 years, one of the lowest in the world compared to 36.7 years
in the US and 44.2 in Japan. The urban population currently accounts for 29% of the
total population and is expected to increase to 40% by the year 2020. These factors
are currently driving the demand for gems and jewellery, especially diamond jewellery.
The neo-rich with an inclination to buy cutting-edge gadgets are purchasing jewellery
in modern and aesthetic design as a fashion accessory completely in contrast to the
rural folks who buy jewellery as an alternate medium of investment.
As per the National Sample Survey, in urban India the share of essential items like
food, clothing, electricity, fuel and footwear in the total average annual per capita
consumption has reduced, whereas the share of durable goods has increased, which
reflects the changing preferences of consumers. The increased consumer awareness
and consciousness generated through the vigilant measures adopted through campaigns
of the government is expected to drive the demand for branded and hallmarked
jewellery. However, in spite of the increasing preference for luxury items, the per capita
spending by an Indian is lowest in the world.
Increase in penetration of finance would aid the organised gems and
jewellery industry in India
The credit card market has expanded rapidly over 2002-03 to 2007-08 with the total
number of cards in circulation increasing nearly four-fold. The credit card penetration
in the country continues to grow at a steady pace but India remains underpenetrated
in comparison to many other Asia-Pacific countries. During 2007-08, cardholders had
collectively spent INR580bn. This level of spending translated into a CAGR of 29.2%
during 2002-03 to 2007- 08. Consumers credit card spends are generally directed
towards apparel shopping, fuel purchase and buying durables and jewellery.
Significance of diamond jewellery and low priced jewellery on the
rise led by elevating gold prices and improving lifestyle
There has been a steady rise of diamond studded jewellery in India for weddings,
engagements and for the purpose of gifts led by increased branding and fashion
consciousness. Also, with the rise in gold prices, consumers are turning to diamond-
studded jewellery which gives them a higher perception of luxury and value. The
introduction of certified diamonds has increased trust and made diamond valuations
more transparent. With only a gradual recovery from developed markets for diamonds,
especially the US, Indian manufacturers have now zeroed in on the ever-growing
demand from domestic market for diamond-studded jewellery. Many big and small
diamond companies have launched aggressive marketing campaigns to tap consumers
offering high-end branded jewellery with future buy back and exchange schemes.
Brand-awareness in the diamond industry among Indian consumers, much like the
developed world, is increasing, and hence, brands will play a key role in enhancing
the demand.
Further, there is a shift in consumer preference to low-priced diamond jewellery which
is about 50% cheaper than normal diamonds and even pure gold jewellery. Ornamental
'daily-wear' jewellery has rapidly gained acceptance and popularity in the Indian
market. Similarly, diamonds have rapidly gained importance. Consumers are gradually
preferring diamonds because of the guaranteed buy back schemes, transparent written
pricing and, most importantly, third-party certification.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 6
Organised jewellery gaining ground
In our view, branded and organised retail share will grow in urban markets and focus
on rural markets will increase penetration. Family owned businesses are moving towards
greater degree of professionalism and trust on the neighbourhood jeweller is being
replaced by hallmarking and certification of jewellery.
Organised retailing in jewellery includes Tata-owned Tanishq, Tribhovandas Bhimji
Zaveri, Gitanjali Group, Swarovski, Reliance Jewels, etc. who have set shop in major
cities. Apart from specialty retail players, retail chains such as Shoppers Stop, Lifestyle
and Big Bazaar now have "shop-in-shops" or jewellery counters from branded players
such as Gitanjali, Orra, Kiah, etc. The last few years have also seen the entry of
international luxury jewellery brands in India such as Cartier and Chopard. Further,
jewellery exporters are also actively looking at the domestic market and plan to open
their retail outlets.
Due to shrinking margins, large diamond processing companies are adopting a forward
integration strategy into the manufacturing or retailing of the jewellery business, both in
the business to business (B2B) and business to consumer (B2C) segments. This is expected
to lead to the entry of new jewellery retail stores and brands in the country, directed
towards attracting the increasingly brand-conscious consumers and also enacting
favourable exchange policies.
High gold prices and increase in borrowing & operating costs have made the survival
of family-owned jewellers difficult. Though the neighbourhood shop owners have their
own advantages of high level of customisation and strong customer relationships, they
are weighed down by factors like purity, low branding, higher gold wastage (at 0.5%-
1%) in manufacturing and weak exchange options. Organised retail provides guarantee
for the exchange of goods by charging only about 2% of the total asset value as
against 10-15% charged by local shops.
Aggressive expansion, innovation and marketing would aid
organised share
The key selling proposition of organised retailers in jewellery has been the quality
certification (hallmarking in jewellery industry parlance). Organised players have gained
significant leverage by providing certificates of quality for the goods sold at their
outlets. Some players have even made available "karatmeters" in their stores, whereby
consumers can verify the purity of gold being used.
Most organised retailers have laid high emphasis on jewellery designing, providing
consumers with a wider range of designs tailored for diverse purposes beyond the
traditional Indian wedding jewellery. These players have capitalised on the growing
popularity of ornamental 'daily wear' jewellery and diamond jewellery, to boost their
market share.
Additionally, organised players have been enhancing the overall consumer experience
by providing a better ambience in the showrooms. Most players have adopted
aggressive marketing strategies in order to attain visibility and brand value within the
highly competitive jewellery retailing space. Improved customer segmentation, targeting
mechanisms with specific designs and exclusive range and new usage styles have
attracted a new set of consumers and created new occasions.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 7
Investment Rationale
TBZ witnessed strong sales growth during FY07-11
TBZ posted a strong improvement in performance during the period (FY07-12), recording
35% CAGR in sales to INR13.9bn. This was in the backdrop of an 18% increase in
retailing space during the period. Therefore, its same store sales during the period
contributed to the tune of 17% CAGR. Its average revenue per store has consistently
been on the uptrend, increasing from about INR1,69,000/sqft to INR3,01,000/sqft, a
CAGR of 12% CAGR FY07-12.
Exhibit 5: Revenue trend (INRm)
16,000
13,855
14,000
11,939
12,000
10,000 8,849
8,000 6,687
6,000 4,394
4,000 3,052
2,000
0
FY07 FY08 FY09 FY10 FY11 FY12
Source: Company, Antique
Exhibit 6: Increase in revenue /average sqft (INR’ 000/sqft)
350
301
300 270
250
204
184 192
200 169
150
100
50
0
FY07 FY08 FY09 FY10 FY11 FY12
Source: Company, Antique
Exhibit 7: Retail space (sqft)
60,000
47,796
50,000 44,196 44,196
42,526
40,000
30,000 26,962
20,731
20,000
10,000
0
FY07 FY08 FY09 FY10 FY11 FY12
Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 8
Profitability witnessed consistent uptrend during the last three years
TBZ's EBITDA and PAT grew at a CAGR of 45% and 50% to INR1,241m and INR572m,
respectively, during FY07-12. EBITDA margins consistently witnessed an improvement
during FY09-12, leading to an improvement of 414bps to 9.0%. The improvement in
profitability has been led by gross margin increase of 312bps to 17.2%. This could be
attributed to higher contribution from the diamond jewellery business and its improving
margins. Gross profits margins in the diamond business rose to 36% during FY12 from
about 26.1% in FY09. During FY09, gross margins had been impacted due to the
global meltdown and the resultant slowdown in the Indian consumption due to
uncertainty.
Exhibit 8: TBZ’s profitability trend Exhibit 9: TBZ’s sales mix trend (%)
10 9.0 80 71.7 73.5 72.5 72.6
68.2
7.3 70
8
6.3 60
6 5.4 5.4 50
4.8
4.1 40
4 3.3 25.4
30 24.4 23.2 22.1
2.4 21.6
1.7 1.9
1.6 20
2
10
0 0
FY07 FY08 FY09 FY10 FY11 FY12e FY08 FY09 FY10 FY11 FY12
EBITDA margin % PAT Margin % Gold Diamond
Source: Company, Antique Source: Company, Antique
Exhibit 10: TBZ’s gross profit margin trend (%) Exhibit 11: Gold price trend (INR per troy ounce)
40 90,000
35.9
35
29.3 75,000
30 28.0
26.1 26.1
25 60,000
20
45,000
15 11.2 10.9 12.2 10.9
10.1
10 30,000
5
15,000
0
FY08 FY09 FY10 FY11 FY12 0
Diamond Gold 4QFY07 4QFY08 4QFY09 4QFY10 4QFY11 4QFY12
Source: Company, Antique Source: World Gold Council
Store expansion to drive growth
TBZ is embarking on a strong expansion plan to drive growth during the next three
years. The company which currently operates about 14 stores across 10 cities in 5
states (Retail showroom carpet area 47,796 sq feet), plans to add 43 more showrooms
(25 large format high street showrooms and 18 small format high street showrooms) by
the end of FY15e, which would take the total to 57 showrooms (with a total carpet
area of approximately 150,000 sq. ft.) in 43 cities across 14 states. Therefore, the
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 9
company plans to grow its retailing space by about 79% CAGR during the next three
years, which would drive sales at a significant level during the next three years. We
estimate sales to grow by 42% CAGR during FY12-14e to INR28.0bn.
Exhibit 12: Plan of expansion
Current FY13e FY14e FY15e
No. of Showrooms 14 26 41 57
Large format 10 19 27 36
Small format 4 7 14 21
Retail carpet area (sq ft) 47,796 79,296 113,796 1,50,000
No. of cities 9 43
No. of states 5 14
Source: Company, Antique
Initial expansion in known geographies would increase the
probability of success
TBZ currently has a presence in Maharashtra, Gujarat, Madhya Pradesh, Andhra Pradesh
and Kerala. Further, majority of the company's retailing space (about 73%) is concentrated
in Western India, particularly in Maharashtra (52% of total retailing space) and Gujarat
(21% of total retailing space). Going ahead, TBZ's first phase of expansion (13 stores)
would be critical for the company during FY13e and would be primarily focused on its
existing geographies like Gujarat and Maharashtra. Therefore, the initial phase of
expansion in a familiar geography with established brand strength increases the probability
of smooth execution of the expansion and success for the company.
TBZ has tasted success in the gold heavy southern markets
Gold consumption in India is skewed towards the west and south regions, together
accounting for almost 70% of the total consumption. TBZ already has a strong presence
in the west (Maharashtra and Gujarat) which accounts for 32% of the overall gold
demand in India. In the largest market in India, South, where the preference for heavy
gold jewellery is higher, TBZ has been able to spread its success in Andhra Pradesh
and Kerala. It has about 19-20% of its retailing space operating successfully in these
two states. Importantly, TBZ’s store in Panjagutta (Hyderabad) figures in the company’s
top 3 contributors to sales. Therefore, TBZ has been able to cater to two different set of
consumers with different tastes and preferences. This in turn shows the ability of the
company to scale up into a strong national jewellery retailer in the coming years.
Exhibit 13: TBZ’s existing retail space composition Exhibit 14: Geographical segmentation - Gold jewellery (India)
Kerala, 6
Andhra North , 18%
Pradesh, 13
West , 32%
Madhya
Pradesh, 8 Maharashtra,
52
South , 37%
Gujarat, 21 East , 13%
Source: Company, Antique Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 10
Strong branding and innovation led designs to aid growth
According to the management, its key strength in penetrating newer markets would be
its strong branding and innovative designs. The company has a dedicated design
team, currently comprising 25 designers, 10 of whom are skilled in computer-aided
design (CAD). The company introduces four innovative designs per annum to drive
sales. TBZ has recently launched a range of wedding jewellery which could be
dismantled and used for smaller occasions as well.
Additionally, TBZ procures ready-made products from over 120 different vendors in
different regions in India, Italy, Turkey and Thailand. Within India, the ready-made
gold jewellery is primarily outsourced from vendors in Jaipur, Kolkata, Ahmedabad,
Rajkot, Amritsar, Cochin and Hyderabad, thereby covering the taste and preferences
of all major jewellery consuming geographies in India. Their ready-made diamond-
studded jewellery is sourced from about 35 vendors within India and from a small
number of vendors in Italy, Turkey and Thailand. The company purchases ready-made
diamond-studded platinum jewellery from three vendors in India.
TBZ has successfully made some inroads in the South-based Hyderabad and Cochin
market through its creative designs, and has been able to achieve a sizable turnover,
particularly in the former market (Hyderabad).
Increasing diamond-studded jewellery sales to aid margins
TBZ plans to increase its overall profit margin by increasing the diamond-studded
jewellery sales. Sales of diamond-studded jewellery has a higher profit margin than
sales of gold jewellery. For example, in FY11 and FY12, TBZ's gross profit margin on
sales of diamond-studded jewellery was 29.3% and 35.9%, respectively, compared
with 12.2% and 10.9%, for sales of gold jewellery. The increase in diamond-studded
jewellery sales would be done through cross-selling diamond-studded jewellery to
gold jewellery buyers, increasing advertising for diamond-studded jewellery, introducing
diamond-studded jewellery promotion schemes such as the Diamond Bangle Mela
and launching new diamond-studded jewellery products at various price points, including
at entry level. In this context, TBZ has launched the Diamond Necklace Collection and
the TBZ Solitaire Collection.
Profitability on a structural uptrend
Structurally, profit margins are expected to witness an improvement going ahead. This
would be primarily driven by rising composition of diamond jewellery and operating
leverage in the coming years. Further, initiatives like higher sourcing of gold from buy
back schemes from existing clients would facilitate margin accretion. In the recent
quarters, the company has saved about 250-300bps of sourcing cost through buy
back of gold. The company has increased its sourcing of gold from existing customers,
from 26% to 32-33% of its gold requirement.
However, during FY13e and FY14e, we have factored in a higher contribution from
gold jewellery in the initial phase of expansion. We estimate gross margins for TBZ at
18.3% and 17.9% during FY13e and FY14e, respectively. Further, we estimate EBITDA
margins to drop to 8.6% during FY13e and 8.8% during FY14e as against 8.9%
during FY12. The drop in EBITDA margin would be due to the ramp of operations
leading to higher initial cost.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 11
Change in gold sourcing policy would enhance cash flows and
profitability
Company is changing its policy with regards to sourcing of gold from outright purchase
and holding of gold inventory to leasing of gold, which we believe would be similar to
Titan's jewellery business. TBZ further plans to consume current gold inventory of about
INR3bn over the next three years.
The company is working on applying the policy to all its expansion plans. This will in
turn lead to an asset light model in the coming years, thereby leading to a reduction in
working capital requirement, higher cash flows, and improvement in RoCE levels.
Additionally, a lower exposure to gold inventory in the balance sheet would mean
lower mark to market losses in a situation of volatility in gold prices. Nevertheless, the
company would be saving about 7% on its working capital loans, with gold lease
involving about 6% cost as against the 13% interest cost associated with the loan
required for outright purchase of gold covered in the interest outgo related to its working
capital loans.
With the application of the gold on lease model, TBZ's interest outgo during FY13e
and FY14e, we estimate would be at INR215m and INR360m, respectively, as against
INR315m in FY12. This in turn would aid net margins of the company during FY13e.
We estimate net margins of the company to expand by 53bps to 4.7% during FY13e
led by the relatively lower interest outgo.
Exhibit 15: PAT margin improvement to be led by lower interest outgo and ramp up in
operations
10 8.9 8.8
8.6
8 7.3
6 4.7
4.7
4.1
4 3.3
2
0
FY11 FY12 FY13e FY14e
EBITDA margin (%) PAT Margin (%)
Source: Company, Antique
Exhibit 16: Interest payout increasing at a lower rate over EBITDA, improving return
ratios
3,000
2,456
2,500
2,000
1,593
1,500 1,236
866
1,000
315 360
500 225 215
0
FY11 FY12 FY13e FY14e
EBITDA Interest pay out
Source: Company, Antique
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 12
Exhibit 17: Asset light model to aid RoCE (%)
45 40.2
36 33.5
32.0
26.1
27
16.3
18
9
0
FY10 FY11 FY12 FY13e FY14e
Source: Company, Antique
Increase in captive production aiding diamond jewellery margins
Tribhovandas Bhimji Zaveri (Bombay) Limited, the Company's 100%-owned subsidiary,
manufactures diamond studded jewellery for sale in their showrooms at two facilities in
Kandivali, Mumbai. The new facility has a carpet area of 17,739 sq. ft. and an
annual production capacity (based on one eight-hour shift per day) of 100,000cts. of
diamond-studded jewellery, 4,000kgs of gold refining and manufacturing 4,500kgs
of gold jewellery components. The old facility has a carpet area of 5,755sqft. TBZ
shifted majority of its production activity from the old to the new facility during 3QFY11.
In the overall process, TBZ increased its captive production of diamond jewellery from
50% in FY10 to about 60-65% in FY11 and about 80-85% in FY12. During FY13e, the
company expects to produce about 90-95% of its diamond jewellery requirement from
its own manufacturing facility. The increase in captive production together with increase
in diamond prices has led to improvement in gross margins of diamond jewellery from
28% in FY10 to 36% in FY12.
The savings due to captive manufacturing of diamond jewellery has been in the form
of reduction in diamond handling charges to 3rd party ( of about INR2,000 per carat),
lower making charges on handmade jewellery and savings in raw material inventory
(raw material sourcing to manufacturing process reduced from about 90 days to 21
days). Additionally, the duplication of diamond jewellery designs has been controlled
with captive production.
Strong procurement policies, standardisation and systems provide an
edge
TBZ is one of the very few jewellers which are consistently improving their procurement,
marketing and selling policies to scale up to a leading national jewellery retailer.
The company has a centralised procurement policy and it generally purchases in large
volumes in order to stock their 14 showrooms. According to the management, by
purchasing in bulk, the company is able to purchase inventory at lower prices than its
competitors in the unorganised sector, which enables them to sell products at competitive
prices. Further, at the store level, all of the company’s showrooms are of standardised
design and follow a standard operating procedure, which focuses on converting footfalls
into customers. Its training programmes are designed to increase the efficiency of the
sales teams and to increase conversion ratios and ticket sizes.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 13
TBZ analyses its sales on a daily basis using Oracle ERP software, and therefore, is
able to track any variances from the targeted sales.
Continuous marketing would aid branding and sales
TBZ's marketing activities mainly focus upon generating footfalls in its showrooms through
above and below the line activities. Above the line activities are those that are
implemented through mass media, such as television, radio, newspapers, magazines,
billboards and the Internet. Below the line activities focus upon customer contact through
localised road shows, customer get-togethers and locally sponsored activities. The
company’s marketing plan aims to capitalise on jewellery buying occasions by combining
product launches and discounts around traditional holidays and new age celebrations.
It also launches new product lines, such as Oodiyanam, its pendant set collections,
and Turkish and Italian collections. The company attempts to create new occasions to
purchase jewellery, such as at the TBZ Bangle and Chain Festival and Mangalsutra
Mela. It holds jewellery sale campaigns centered around Mother's Day, Women's
Day, Valentine's Day, and other occasions appealing to younger generations.
TBZ captures customer data in its showrooms in order to send existing customers invitations
for sales promotions, mailers on auspicious occasions and other communications. It
runs free seminars for consumers to help educate them on purchasing jewellery.
Additionally, TBZ sets up stalls at jewellery exhibitions and social gatherings.
In addition to the normal marketing initiatives, the company has an advance payment
scheme called "Kalpavruksha", which encourages customers to pay advance amounts
throughout a plan period. They offer plan periods of 12, 18 and 24 months and
provide discounts on the purchase price of their products according to the plan length.
They began this scheme in November 2008. As at December 31, 2011, there were
22,924 members of this scheme. In FY11, 5,127 members purchased INR117.84m
worth of jewellery pursuant to the scheme, representing 0.89% of their revenue from
operations on a consolidated basis for the period.
Clear focus on increasing same showroom sales
In order to increase same showroom sales, TBZ is focused on increasing: footfalls,
footfall conversion, and average ticket size of each sale.
In order to increase footfalls, the company plans to continue its marketing activities such
as advertising, organising events, participating in exhibitions, promotions and launching
new product lines (i.e. temple jewellery collection and men's jewellery collection). The
company plans to capitalise on existing jewellery buying occasions by combining product
launches and discounts around traditional occasions as well creating new occasions,
such as the TBZ Bangle and Chain Festival and Mangalsutra Mela.
One of the key focus areas is on the conversion of each footfall into a customer. The
company trains its employees in sales techniques and product knowledge in order to
increase the conversion rate. TBZ attempts to reduce the number of footfalls that walkout
without purchasing by stocking a wide range of jewellery across different price points.
The company plans to increase ticket sizes by training its employees in up-selling and
selling complementary products such as pendants with earrings, and by introducing
new lines of jewellery.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 14
Valuation and outlook
At the CMP of INR110, the stock trades at a PE of 8.5x FY13e and 5.6x FY14e. On
an EV/EBITDA basis, it trades at 4.2x FY13e and 2.7x FY14e. We believe that TBZ
would trade at a premium over its peers like Shree Ganesh Jewellery (which has yet to
create a branding in the domestic jewellery retailing) and Thangamayil Jewellery
(which is more of a regional brand as compared to TBZ which has been able to create
a presence across both the key geographies of west and south India). We therefore
value the stock at a PE of 8x FY14e, providing a target price of INR158 and recommend
a BUY.
Risks
Aggressive expansion during the next three years could be a risk
TBZ took three years to add about 8 stores since FY07, while it is planning to add about
14 stores per annum in the next three years. While the constraint on funds for expansion
and a cautionary step during scaling up operations for the first time is a reasonable
argument, we believe that expanding at such a rapid pace holds some amount of risk.
Volatility in gold prices could lead to slowdown in jewellery sales and impact
expansion plans
Any high volatility in gold prices has normally a negative impact on the volume growth
in the Indian jewellery industry. Therefore, volatility in gold prices going ahead could
impact the volumes of TBZ which is a big risk in a scenario of rapid expansion. In
2009, gold demand in India was severely affected due to global financial crisis,
record high prices of approximately INR18,232/10 grams during November 2009
and high volatility in gold prices. Record gold prices reached during the 3QCY11,
combined with an increase in price volatility and local currency weakness, have impacted
the demand for gold jewellery in India. According to WGC, the price highs may have
encouraged substitution of demand away from jewellery and towards investment
products. Also, consumer preferences may be shifting towards lighter weight gold
jewellery at lower price points. There is anecdotal evidence that during periods of high
gold prices and high volatility, consumers make only necessary basic purchases and
hold on to cash as they wait for opportune buying conditions.
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 14 June 2012 | 15
Financials
Profit and loss account (INRm) Key Assumptions
Year ended 31 Mar 2010 2011 2012e 2013e 2014e Year ended 31 Mar 2010 2011 2012e 2013e 2014e
Revenues 8,849 11,939 13,855 18,592 28,055 Gold jewellery sales growth 35.6 33.2 15.7 35.7 54.0
Expenses 8,365 11,073 12,619 16,999 25,600 Diamond jewellery sales growth 23.2 37.8 33.0 34.4 44.9
EBITDA 484 866 1,236 1,593 2,456 Raw material cost as % of net sales 85.6 84.1 81.4 81.7 82.1
Depreciation & amortisation 30 45 55 70 95
EBIT 453 821 1,181 1,523 2,361 Cash flow statement (INRm)
Interest expense 219 225 315 215 360 Year ended 31 Mar 2010 2011 2012e 2013e 2014e
Other income 4 4 5 6 7 EBIT 453 821 1,181 1,523 2,361
Profit before tax 238 600 871 1,314 2,008 Depreciation & amortisation 30 45 55 70 95
Taxes incl deferred taxation 84 208 299 447 683 Interest expense (219) (225) (315) (215) (360)
Profit after tax 154 392 572 867 1,325 (Inc)/Dec in working capital (329) (321) (551) 1,167 (246)
Adjusted profit after tax 154 392 572 867 1,325 Tax paid (84) (208) (299) (447) (683)
Recurring Diluted EPS (INR) 2.3 5.8 8.5 12.9 19.8 CF from operating activities (148) 113 71 2,098 1,167
Capital expenditure (20) (160) (48) (111) (240)
Balance sheet (INRm) Inc/(Dec) in investments - (1) - (29) -
Year ended 31 Mar 2010 2011 2012e 2013e 2014e Income from investments 4 4 5 6 7
Share Capital 100 500 500 670 670 CF from investing activities (16) (157) (43) (134) (233)
Reserves & Surplus 566 570 1,158 3,695 5,020 Inc/(Dec) in share capital 4 12 15 1,840 -
Networth 666 1,070 1,658 4,365 5,690 Inc/(Dec) in debt 257 17 (32) (1,859) -
Minority Interest 0 4 0 0 0 Dividends paid - - - - -
Debt 2,053 2,070 2,038 179 179 Others (93) 48 (39) - -
Capital Employed 2,719 3,144 3,696 4,544 5,869 CF from financing activities 168 76 (55) (19) -
Gross Fixed Assets 471 631 679 790 1,030 Net cash flow 4 32 (27) 1,945 934
Accumulated Depreciation (70) (124) (169) (239) (334) Opening balance 55 59 91 64 2009
Net Assets 401 507 510 551 696 Closing balance 59 91 64 2,009 2,943
Goodwill on consolidation 0 0 0 0 0
Capital work in progress 42 - 7 7 7 Growth indicators (%)
Investments - 1 1 30 30 Year ended 31 Mar 2010 2011 2012e 2013e 2014e
Current Assets, Loans & Advances Revenue 32.3 34.9 16.0 34.2 50.9
Inventory 2,868 4,254 5,019 7,991 11,045 EBITDA 50.9 79.0 42.7 28.9 54.2
Debtors 31 85 31 112 169 PAT 47.4 154.7 46.1 51.5 52.8
Cash & Bank balance 59 91 64 2,009 2,943 EPS 47.4 154.7 46.1 51.5 52.8
Loans & advances and others 80 166 166 250 350
Current Liabilities & Provisions
Valuation (x)
Creditors 739 1,805 1,938 6,175 8,997
Year ended 31 Mar 2010 2011 2012e 2013e 2014e
PE 47.9 18.8 12.9 8.5 5.6
Other liabilities & provisions 34 174 200 268 410
P/BV 11.1 6.9 4.4 1.7 1.3
Net Current Assets 2,264 2,617 3,142 3,919 5,100
EV/EBITDA 17.6 9.8 6.9 5.4 3.5
Deferred tax assets/(liabilities) 12 19 36 36 36
EV/Sales 1.0 0.7 0.6 0.5 0.3
Application of Funds 2,719 3,144 3,696 4,544 5,869
Dividend Yield (%) 0.0 0.0 0.0 0.0 0.0
Per share data
Year ended 31 Mar 2010 2011 2012e 2013e 2014e
Financial ratios
No. of shares (m) 10.0 50.0 50.0 67.0 67.0
Year ended 31 Mar 2010 2011 2012e 2013e 2014e
RoE 23.1 36.6 34.5 19.9 23.3
BVPS (INR) 9.9 16.0 24.7 65.1 84.9
RoCE 16.7 26.1 32.0 33.5 40.2
CEPS (INR) 2.8 6.5 9.4 14.0 21.2
Debt/Equity (x) 3.1 1.9 1.2 0.0 0.0
Margins (%) EBIT/Interest (x) (2.1) (3.7) (3.7) (7.1) (6.6)
Year ended 31 Mar 2010 2011 2012e 2013e 2014e Source: Company Antique
EBITDA 5.5 7.3 8.9 8.6 8.8
EBIT 5.1 6.9 8.5 8.2 8.4
PAT 1.7 3.3 4.1 4.7 4.7
Source: Company, Antique
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Analyst ownership in stock No
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