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Shree Ganesh Jewellery House IPO review and analysis by Keynote Capitals

Contributed by Keynote Capitals

By Keynote Capitals

Highlights

Price Band : Rs 260 - 270 per share

IPO open during : March 19 - 23, 2010

Book Running Lead Managers : Axis Bank, ICICI Securities, Avendus Capital

To list on : NSE & BSE

IPO Grading : 3 / 5 (CARE)

Market Cap post-listing : Rs16.38bn or $360mn (based on the cap price)

Market Cap of Free-float : Rs4.81bn or $105mn (based on the cap price)

Executive Summary

-  Shree Ganesh Jewellery House Ltd. (SGJHL) is a manufacturer and exporter of jewellery with 4 manufacturing units located at Manikanchan SEZ in West Bengal with a capacity of 29,500 Kgs of gold jewellery as of February 2010. It markets its jewellery in stores branded ‘Gaja’ and has in all 13 outlets. It intends to open 46 new retail outlets by FY13E.

-  PE investors Credit Suisse PE Asia Investments (Mauritius) Ltd. and Bennett, Coleman & Co Ltd. entered the company in March 2008 and August 2009 respectively, at an effective price of Rs150 per share (discount of 44.4% to the cap price). Credit Suisse PE is partly exiting the company via the offer for sale in the IPO, generating a return of 80% on its investment.

-  According to the World Gold Council, Indian jewellery market is worth Rs700bn, dominated by the unorganized sector; organized sector players have market share of a meagre 4%. Gold jewellery forms 80% of Indian jewellery market. Gold jewellery exports from India grew at 26.53% CAGR over the last 5 years. UAE, US and Singapore are the major export destinations, together constituting ~80% of gold jewellery exports from India in FY09.

-  SGJHL’s top line and bottom line grew at CAGR of 167.2% & 310.5% respectively during FY05-09 on back of growth in both volumes and realizations. EBITDA margin and Net Profit margin expanded from 2.7% and 0.8% in FY05 to 4.7% and 4.5% respectively in FY09. Gold jewellery forms the largest segment with rising pie of studded precious / non-precious stones.

-  Of the IPO proceeds, a sum of Rs328Cr constituting fresh issue will come into the company’s books. This will be utilized in setting up 2 new manufacturing units, expanding the unit at Manikanchan SEZ, setting up retail outlets and for working capital requirements. This will lead to expansion of manufacturing capacity to 30,500 Kg by FY10E, 37,300 Kg by FY11E and further to 43,000 Kg by FY12E. The setting up of new units and expansion of existing units is expected to be completed during FY11, and the rollout of retail stores, during FY11E-13E.

-  Based on the company’s guidance on production numbers, we expect top line and bottom line to grow at CAGR of 32.6% and 27.4% respectively during FY10-12E.

-  Key concerns:
Low margin business, with low value-addition
Working capital intensive nature of operations
Arrangement with Vishal Retail may pose an operational risk
High client and geographical concentration
IPO size exceeds funds requirement for capex, stores rollout and working capital

-  The IPO has been priced at 9.1x FY11E EPS and 7.1x FY12E EPS. This is higher than Gitanjali Gems (which is primarily into diamond jewellery) which trades at 4.0x FY11E and 3.3x FY12E respectively. Since Gitanjali Gems is not only a larger player, but also has a more diversified business model, with large manufacturing operations, good brands and sizeable retail presence, SGJHL’s premium to Gitanjali Gems is difficult to justify.