Gitanjali Gems Ltd: Buy

CMP: Rs.61.90

Book Value: Rs.287.39

Key world markets for Gems and Jewelry

Introduction: Gitanjali Gems is one of the largest integrated diamond and jewelry manufacturers and retailers in India. Its presence across the entire value chain gives it the scale that it enjoys. Founded as a single company, cutting and polishing diamonds for the jewelry trade at Surat, Gujarat, in 1966, the Gitanjali Group became, many times over, a pioneer among major diamond and jewelry houses. Business model now integrates all operations, from rough diamond sourcing, cutting, polishing and distribution, and jewelry manufacture, to jewelry branding and retail, as well as global lifestyle brands, in India and abroad. It is the first to offer diamond studded jewelry at affordable prices, of standardised designs, quality and pricing across locations – progressively precision-producing replicable designs using the latest CAD and CAM processes and equipment. The Group’s  factories  are  strategically located in Surat and Hyderabad where the diamond industry  thrives. It has won over 50 awards from the Ministry of Commerce, India for outstanding exports of diamond and jewelry, is today over $3000 million multinational group, and a publicly listed entity. Its operations span, all the way from USA, UK, Belgium, Italy and the Middle East to Thailand, South East Asia China, and Japan.

Shareholding Pattern: The promoters hold 36.08%, while the general public holds 63.92% of the shares

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of the company. The institutions hold 20.31% shares of the company. The FIIs hold 15.35% while the DIIs hold 4.97% of the shares of the company.

Results: For Q1FY15, the total revenues of the company came as Rs.1534.39 Cr as against Rs.1158.35 Cr in Q4FY14 and Rs.2565.64 Cr in Q1FY14.  The net profit of the company for Q1FY15 came out to be RS.7.97 Cr as against  a loss of Rs.34.97 Cr in Q4FY14 and Rs.5.94 Cr in Q1FY14. On a Y-o-Y, the company's EPS has also improved in Q1FY15. Sequentially speaking the interest cost has come down to Rs.109.89 Cr in Q1FY15 as against Rs.112.78 Cr in Q4FY14, showing initial signs of a turnaround.
On a consolidated basis the net profit of Gitanjali Gems Ltd declined 71.11% to Rs.10.15 crore in the quarter ended June 2014 as against Rs.35.13 crore during the previous quarter ended June 2013. Sales declined 47.11% to Rs.2072.87 crore in the quarter ended June 2014 as against Rs.3919.18 crore during the previous quarter ended June 2013.

Triggers: 

• The company significantly rationalized its operations costs: primarily the manpower and administration

  

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  costs. The company has identified opportunities of growth, by bringing about significant changes in the business model. It has now decided to focus more on studded jewelry which is not only margin accretive but has also been its core competency, while offering better value additions--the focus is also segments like alternative metals and low carat gold. With its strong portfolio, manufacturing capabilities, and wide-spread distribution, the company is very well positioned to undergo this transformation. 
• During FY14, the company also further strengthened and consolidated its international presence in markets like the US, Middle East, Japan and China. The recent regulations attributed to the company, shifting focus to its international market which grew to contribute to around 60% of the group's revenue in FY14.  
• The branded jewelry that Gitanjali manufactures includes: diamond  studded  and other  precious stones studded jewelry. The Group has produced branded jewelry in India for over 20 years. During FY14, Gitanjali upgraded all its diamond and studded  jewelry  manufacturing  facilities  based in Hyderabad, Mumbai, Jaipur, China and has also added the Thailand facility - which is one of the largest of its kind. Gitanjali is looking to further strengthen its manufacturing capabilities to enable it  to constantly  innovate  and  adapt  to  changing consumer trends.
• Gitanjali over the years has graduated through the various stages of the value chain to move from the diamond manufacturing business to jewelry manufacturing and retailing to unlock maximum value which  accrues  through  downstream expansion. Having introduced the first diamond jewelry brand “Gili” in India in 1994, Gitanjali has pioneered the branded jewelry revolution in the country. It has changed the way jewelry was viewed in India. Ever  since  then,  Gitanjali  added a plethora of brands such as Nakshatra, Asmi, Sangini, D’damas to  name  a  few  to cater  to  diverse  age groups, occasions, price points and geographies. Recently Gitanjali made a foray into affordable fine jewelry with its Viola Italia range of jewelry. This  vibrant  new  collection  is  the  company’s endeavour to cater to a wider audience and ensure that need-gaps in the market are addressed. Gitanjali’s brands enjoy  tremendous  recall  and the group has leveraged upon this by extending its brands to include lifestyle categories such as apparels under the Gili and Diya brands which have been reasonably successful ventures. 
• The company intends to increase its international business with complementary categories like platinum, precious stones and silver jewelry. The focus is on capitalizing on the high margin mature markets such as the US and Japan and also on the rapidly growing markets like Middle East. As a step in this direction, the company recently entered into a strategic alliance with Paris Gallery, Dubai to retail its jewelry brands to the Indian diaspora in UAE. The also intends expanding in emerging markets such as Russia, Africa and South East Asia through its distribution channels.
• Currently  the  company  distributes  its  jewelry through around 360 distributors, who cater to more than 3000 retailers. The company also enjoys a significant retail presence through around 239 Own Stores,  305  franchisees  and  640  Shop-in-shops. Gitanjali is also strongly exploring newer channels such as e-commerce and has launched exclusive as well as multi-brand portals and has also created an online market place. The Group’s retail operations are supported by a strong inventory management system.
• As mentioned earlier, the Group is present across in the top five global diamond jewelry markets – USA, Japan, Middle East, China and India. The USA is the largest diamond jewelry market in the world. Gitanjali enjoys a retail presence through over 104 doors of its retail chain Samuels Jewels Inc. The  Samuels  chain  has  exclusive designer jewelry  collections  and  a  large  selection  of loose and mounted diamonds under brands such as  “Samuels Jewelers”,  “Schubach  Jewelers”, “Samuels Diamonds”,  “Rogers  Jewelers”  and “Andrews Jewelers” which are primarily targeted at middle and upper middle class consumers in the United States. Samuels’ retail chain is positioned as a wedding jeweler with category focus on bridal collections in the United States. The Group also distributes its jewelry to other local players in the US. The Group’s US business has been witnessing a steady growth of around 10-12% on year on year basis. The US  being  the largest diamond jewelry market with superior margins, is one of the most ambitious markets for Gitanjali.
• The UAE is another significant market for jewellery in the world. Gitanjali retails its Jewellery from the bouquet  of  Gitanjali’s  Indian  brands  such as  “Nakshatra”, “Gili”, “Asmi”,  as  well  as  the collection  of  Italian  brands  such  as  “Stefan Hafner”,  “Nouvelle  Bague”,  “IO  SI”,  “Porratti” and “Valente”. Gitanjali also recently entered into a tie-up with Paris Gallery to retail its jewelry throughout UAE. The Group currently distributes its jewelry through 4 retail stores and over 50 SIS in local jewellers as well as through duty free stores at Dubai airport.  Japan  is also one of the largest consumers of diamond jewellery in the world. The Group has a minority stake in a listed Japanese entity – Verite and supplies to over 100 stores of Verite in Japan. The Group also has 20% stake in Gems TV which is a jewellery selling TV channel in Japan. The Group incorporated Leading Jewels of Japan KK (LJJ)  which sources jewellery from Gitanjali Group’s manufacturing facilities in India, China and Thailand and distributes this jewellery to some of the largest customers in Japan. The large team of Jewellery designers from India, China and Thailand supports to customize  according  to local  tastes and requirements of Japan. LJJ also distributes the Group’s Italian brands “Stefen Hafner”, Nouvelle Bague”,  “IO  SI”,  “Porrati”  and  “Valente”  to customers in Japan.
• Other  International  Markets-  The  Company distributes  its  jewelry  internationally  through its subsidiaries  in  USA,  Hong  Kong,  Thailand, Belgium, Italy and China. These subsidiaries supply within their local markets as well as other global markets such as Australia, Russia, UK and other parts of Europe. Its customers include jewelry manufacturers, wholesalers and large retailers.
• With INR more or less stabilizing against the USD, adverse effects due to this factor, has been reduced considerably. Moreover, Gold demand will get a boost as festivals such as Diwali approaches. Also, owing to Thanksgiving, Christmas and New Year celebrations in the coming months, the group’s retail arm in the USA, Samuels Jewels Inc  is likely to witness good rise in sales. Besides, the overdue installment of ECB as at of March 31, 2014 was paid in June 2014. The delay was due to liquidity challenges which Company is facing.
• The branded retail jewelry market is growing at a robust rate and going forward, many domestic and international brands would capture substantial market size given number of factors like increased urbanizations and changing demographics. As a matter of on-going practice, the masses still prefer to purchase jewelry from their tried and trusted jewelers but the constant exercise of ‘branding’ through advertising and other sales promotional activities has ensured steady inflow of new customers in this segment of organised retailing. India’s small and independent jewelers are starting to organize themselves and expand in size to share a common brand identity and marketing strategy.
• It has in-house manufacturing capacity of nearly half a million pieces of finished jewelry per month ensures consistent supply, economies of scale and flexibility to adapt to changing consumer needs rapidly.
• Indian diamond jewelry manufacturers and exporters are currently witnessing a rebound on consumer sentiment both India and abroad ahead of the festive seasons. Jewelry sales in the domestic markets are expected to remain robust during the ongoing festive season beginning Dussehra. The festive glitter was added with a decline in food inflation which left more disposable income at the hands of consumers. The upbeat business sentiment is likely to add glitter to the festive jewelry demand. Also, the steep fall in gold and silver prices has made investment in diamond jewelry attractive. The long term fundamental of the diamond industry remains strong and robust despite liquidity squeeze because of the closure of Antwerp Diamond Bank. Diamonds sales are growing in emerging markets including China and India. In fact the Indian diamond processors have seen a robust consumers trend after months of lull sales.Both Domestic and global markets show a positive sign in the coming festive, wedding and thanksgiving season which comprises over a third of annual sales. The economic uptrend in the United States has increased jewelry orders to India. Experts estimate 10-15% jump orders for this festive season which will reflect in October's gems and jewelry export figures..

Caution: The  Company  is  passing  through  difficult  financial conditions due to extraneous factors beyond its control viz, restrictions imposed in revised gold policy and increase in import duty on gold. It is in discussion with LIC for realignment of outstanding debt obligations in respect of non convertible debentures and  the  management  is confident  that  the same will be realigned shortly. Once it is realigned, cash deposit will be created as required by circular 4/2013 dated February 11, 2013 issued by ministry of corporate affairs. LIC currently holds 4.59% of the shares of the company.

Conclusion: Gitanjali has 104 stores of Samuels in the USA, spread across the south-west coast, a minority stake in the 3rd largest chain in Japan (Verite) and a 20% stake in Gems TV (One of Japan’s largest jewelry selling TV channels). Gitanjali also supplies jewelry to 50 retail stores in China and is present via  50 points of sale in the Middle East. Its diversified presence across geographies helps in de-risking its portfolio. The Group is focused on retail expansion. In particular, the major focus for growth is expected to be through the franchise model with a number of flagship stores for support. Gitanjali intends to penetrate Tier 2 and Tier 3 markets in India primarily through franchising. The Group shall continue to increase its online presence through its own portals as well as through strategic tie-ups. In addition, there are plans to further strengthen and consolidate the international presence.
Meanwhile, the luxury jewelry exports from India and demand of luxury jewelry will grow given factors like talented pool of jewelry designers and artisans, low-cost but quality base and understanding the likes and dislikes of end-user market. The Indian luxury market is expected to jump from US$3.5 billion in 2010 to approximately US$30 billion by 2015 and a significant majority of about US$9 billion will be jewelry (Source: Solitaire Magazine - GJEPC, May 2011 issue). In India major driver for luxury jewelry is wedding related primarily bridal jewelry which forms over 50% of jewelry sales. The other major drivers are festivals and special occasions. With festival season continuing and wedding season about to begin, the company is expected to witness a jump in its sales.
Now at the CMP of Rs.61.90, the scrip seems to have formed a bottom of sorts. The investors are suggested to buy the scrip for a target of Rs.72-75, in the short term. The long term target for the scrip is Rs.500, plus. The point is that, when the company is taking all the measures to revamp its operations and the green shoots are already seen, this becomes a MUST BUY for the long term investors at the current price.