Missing the Sparkle

Considering that Goenka Diamonds' public issue may not lead to any significant improvement in its growth, investors can give it a miss

Goenka Diamond and Jewels is another company in the gems and jwellery sector to enter the capital market with an initial public offering this year. It intends to use the proceeds of the offer to ramp up its retail activities, set up diamond processing and jewellery manufacturing facilities, invest in its subsidiaries and support the working capital requirement for the jewellery business.

Goenka D & J is offering 10 million shares of face value of Rs 10 each in the price range of Rs 135-145 per share. The issue will constitute about 30.9% of the post-issue paid-up capital.

Businsess: The company has an integrated business model that includes sourcing of rough diamonds through various sources including its Russian subsidiary, MB Diamond. Then it cuts and polishes these diamonds for exports and jewellery manufacturing and markets jewellery through its retail stores.

The company owns diamond-processing units in a SEZ at Surat and Mumbai with a capacity of 60,000 and 15,000 carat per year, respectively. It also has a unit in Mumbai. Exports account for nearly 75% of its revenues with Russia, Malaysia being its major markets. Goenka D & S has also has forayed into retailing of jewelleries through two brands ? G WILD and CERES. It owns five G WILD and one CERES stores.

Expansion Plans: A major portion of the proceeds (about 88%) will be utilised to meet the working capital of the jewellery business and invested in the loss-making Russian arm. A share of the proceeds will be used for increasing the number of G WILD and CERES stores to 22 and 3, respectively by FY12 and FY11. About 6% of its proceeds will be used to set up another jewellery making and diamond processing unit in Mumbai.

Financials: In the past three financial years, standalone revenue and net profit have grown at (CAGR) of 146% and 218%, respectively. While the cash profit has grown on the similar line (CAGR of about 200%), net cash flow from operating activities has remained negative and has expanded by a CAGR of 60% in the period. The consolidated sales doubled in FY09 while profit margins hit by growth in input expense and 90% growth in interest cost. For nine months ended December 2009, profit margins showed a rebound.

Risks: While the sector itself has a high working capital requirement, it has grown by a CAGR of 133% in the past three financial years that is much higher than its peers, such as Renaissance Jewellery and Gitanjali Gems. Moreover, the inventories have also showed a higher CAGR of 110% compared to the industry average of about 30-45%.

Valuation: Post-issue, the company will be valued at 9.8 times its annualised consolidated earnings for the first three quarters of FY10 at the lower end of the prize band and 10.5 times at the higher end. The valuation thus is higher compared to the P/E ratio of established players, such as Su-Raj Diamonds, Renaissance Jewellery and Gitanjali Gems in the range of 5.5-7. Given that the company has a very high working capital requirement for which it is also planning to utilise a major portion of the proceeds, IPO may not lead to any significant improvement in the company's revenue and profit growth. This besides the fact that the company has failed to generate positive operating cash flow in the past three financial years, investors could avoid this issue.

Devangi Joshi