Tribhovandas Bhimji Zaveri

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1 24 April 2012 Update CMP INR TP INR TRIBHOVANDAS BHIMJI ZAVERI Pure jewellery retail play with strong brand; Execution risks priced in; Subscribe (TBZ) is a pure play on the fast-growing branded jewellery segment in India. The 148-year old company boasts some marquee brands and is in the process of transforming itself into a national retailer. We believe there is tremendous opportunity in the INR1,200b branded jewellery market which is estimated to be growing at 10-12% CAGR. TBZ plans to expand the number of its stores from 14 currently to 57 by FY15. However, we believe this is too optimistic as it managed to open only one more store during the last three years. We factor in addition of 24 new stores in the coming three years. We expect margins to contract from current high levels as the impact of store openings and gold price gains in inventory in FY12 would be felt in FY13. However, we still expect the company to post 20% PAT CAGR over FY TBZ s current sales mix comprises of ~75% gold jewellery and 20% diamond jewellery. The company plans to increase diamond sales through aggressive marketing. Gross margins in diamond jewellery (30%) are 3x those in gold jewellery (11%). However, we have not factored the likely gains from the increased focus on diamond jewellery. TBZ currently has an asset-heavy model (owned gold) compared to Tanishq which follows the gold on lease model. We expect the funds raised from the IPO and its improved balance sheet would enable TBZ transform its model a gold on lease over a period of time. We believe this shift would result in (1) 4-5% savings in finance cost, and (2) improved balance sheet as gold on lease would be reflected as current liabilities. Our estimates have not factored in any gains from the change in model. The IPO is priced at 8.8x FY14E EPS of Rs 14.4, which we believe is attractive, considering huge growth opportunity, strong brand and aggressive growth plans. Although we note that there are several execution risks, they are factored in current valuations. Recommend Subscribe. Valuation Summary 1

2 TBZ IPO at significant discount to Titan Inds factors in some of the execution risks Business Overview; 148-year old brand transforming itself into nationwide jewellery retailer TBZ is 148-year old jewellery brand which is in the process of transforming itself a national jewellery retailer with 14 showrooms in 9 cities across 5 states, and a carpet area of ~ 48,818 sq ft. The flagship showroom is located in Zaveri Bazaar, Mumbai, which accounts for ~15% of revenue. The company operations largely span gold and diamond jewellery. It also sells platinum jewellery, jadau jewellery, and silverware and gold coins. Gold jewellery contributes ~72% of the revenue, while diamond Jewellery contributes ~25% of revenues. TBZ has its own manufacturing facility in Mumbai with an annual gold refining capacity 4,000kg, gold jewellery components capacity of 4,500kg and 100,000cts of diamond jewellery. The diamond jewellery is manufactured in its facility in Mumbai, while gold jewellery is sourced from 150 third-party manufactures. In addition to jewellery designs from different parts of India, TBZ also offers a wide range of jewellery from Italy, Thailand and Turkey. Of the 14 showrooms operated by TBZ, 11 are large format stores with a carpet area of more 3000 sq ft, while 3 stores are small format with area of 1,000-3,000 sq ft. TBZ has set up strong systems and processes with oracle inventory management and team of 25 designers to maintain competitive edge. IPO proceeds to fund new store openings, working capital requirements Post the IPO, TBZ plans to open 43 additional showrooms. Out of these, 25 would be large-format and 18 small-format stores. The company plans to achieve this by the end of FY15 with a carpet area of 1,50,000 sq ft. The company aims at opening 9 new large format stores by the end of FY13, for which it would use ~INR192m from the IPO proceeds. TBZ has identified 8 cities in 4 states to open these showrooms. Store openings post FY13 would be funded from internal accruals TBZ plans to use INR1.6b for working capital requirement. Total working capital requirement is estimated at INR5b by FY13, which would be funded by INR2.5b of bank finance. 24 April

3 INR2b issue to dilute 25% equity Pure jewellery retail play; focus to increase share of higher margin studded share The Indian jewellery market is currently estimated at ~INR1,200b and is expected to grow at 10-12% CAGR. The industry is dominated by unorganized players who still account for 90% of the market. Organized jewellery retailing was started by Titan Industries with its Tanishq brand. This was replicated by family-based regional jewellers like TBZ, Joy Alukkas, Thangamayil Jewellers and Shree Ganesh. The industry is dominated by gold jewellery which accounts for nearly 80% of sales. High-margin studded jewellery accounts for 15% of sales. In the past few years, the industry has been moving towards lighter jewels, and the share of diamond-studded jewellery is also increasing. TBZ is mainly focused on western and southern regions of the country which account for 69% of total demand. We note that most of the expansion is planned is in these regions only. It has plans to increase its presence from 5 states currently to 14 states in another 3 years. TBZ s current sales mix comprises of ~75% gold jewellery and 20% diamond jewellery. Tanishq has ~28% of its sales coming from studded jewellery. TBZ is aggressively marketing diamond jewellery as gross margins here (~30%) are much higher than in gold jewellery (11%). However, the sharp increase in gold prices has prevented any major shift happening in favour of studded jewellery. TBZ is a pure retail play on jewellery demand in India, unlike most other listed players. Listed companies like Rajesh Exports, Shree Ganesh Jewellery and Gitanjali Gems have bulk exports as their major revenue contributor. Among listed jewellers, only Tanishq and Thangamayil Jewellers can be regarded as comparable peers for TBZ. High execution risk given little store openings since 2009, owned gold inventory -TBZ opened 8 new stores since 2006, with 5 stores being added in FY09 and no store addition since FY10. However, it now plans to open an additional 43 stores over the next 3 years. We believe that this target is very ambitious considering 24 April

4 the fact that the company has not entered into any lease agreement for new stores so far. Although the management claims to have done feasibility study, the execution risk remains high given that it plans to take the number 4x in three years. We estimate addition of 6 stores in the current year and 8 stores in FY14 with a total of 38 stores by FY15. TBZ had seen bottom-level margins in FY09 due to overheads on new stores and low demand post the global economic meltdown. However, margins have since recovered by 150bp at gross level and 250bp at the EBIDTA level. During FY12, margins got a further fillip due to inventory gains on gold and diamond and gains from higher in-house production of diamond jewellery. TBZ s facility at Andheri, Mumbai, now caters to 90-95% of its studded jewellery requirements v/s 60-65% earlier. We note that TBZ has owned gold inventory which boosts profitability in times of rising prices, but could impact profitability if prices decline. Tanishq takes gold on lease and is considerably hedged so that gold prices don t boost profits. Most other players are also assuming the inventory risk in their books as the inventory is owned by them. TBZ promoter s salary is INR114m in FY11 which was ~18% of PBT and approximately 28% of the overall staff cost. The promoter salary will increase to INR151m in FY12 and INR181m in FY13, still accounting for 15-16% of PBT. The company has inventory of INR5.1b as on Dec-2011 which will further increase as new stores are opened. Although cash flow from operations was positive from FY10-11, it is unlikely to generate positive cash flow from operations due to new store openings. Estimate lower store estimates due to lack of store tie ups Expect margins to decline sans inventory gains on Gold Diamond jewellery sales contribution inching up 24 April

5 Estimate 20% PAT CAGR over FY12-14; higher store openings and shift from owned to leased gold could provide upsides We are factoring in 24 store openings by FY15 v/s the management s guidance of 43. We estimate 38 stores and a total carpet area of ~109,796 sq ft. While the shift towards studded jewellery and benefits of backward integration helped boost profit margins in FY12. We estimate EBIDTA margin of 7.1% in FY13 and 6.4% in FY14, a decline of 150bp and 70bp, respectively, mainly due to limited inventory gains in FY13, and higher overheads because of new store openings. TBZ would utilise INR1.6b to fund its working capital requirements, which would lower its interest burden from INR319m in FY12 to INR217m in FY14. The company posted robust 39% revenue and 74% PAT CAGR over FY08-FY11 as most of the stores were mature and gold prices soared during this period. We estimate 20% PAT CAGR over FY12-14 with FY14 PAT growth at 25% assuming that margin in FY13 would decline from a high base in FY12. The management has indicated a move towards a gold on lease model from the current owned gold model. We note that the gold on lease model could reduce the company s finance cost by 4-5%, and will provide upside to our estimates. TBZ has not been following the model due to constraints on cash flows, balance sheet size and collaterals in the past. We expect this to get corrected with the proceeds of IPO. However, the move would be gradual and spread over a period of time. Valuation and view Strong brand, pure jewellery retail model; valuations factor in execution risks; subscribe We believe that TBZ has a strong brand which can be leveraged to expand scale of operations in the fast-growing branded jewellery market. We are factoring in little change in sales mix, lower margins to exclude inventory gains and lower store additions in our estimates and arrive at 20% PAT CAGR. TBZ s plan to shift to gold on lease model would reduce the working capital intensity, reduce the cost of funding and make its model asset-light. TBZ is a pure jewellery retailer, unlike most listed companies that are mainly exporters. The IPO is priced at 11xFY13E and 8.8xFY14E EPS, which factors in execution risks like store openings, asset heavy model and bloated margins due to inventory gains. Recommend Subscribe. Move to gold on lease can improve the return ratios PAT Growth to pickup post margin correction in FY13 24 April

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