Gaining Sheen

Shree Ganesh Jewellery House's IPO looks to be a good bet for investors with higher risk appetite considering the cyclic nature of its business and significant growth in revenues

SHREE Ganesh Jewellery House is the second company from the gems and jewellery space to enter the primary market with an initial public offering in the past two months. The Kolkata based company plans to utilise the proceeds of the issue to expand its manufacturing capacities as well as retail presence in the domestic market. The company plans an initial public offer of 1.43 crore shares in the price range of Rs 260-270 which would comprise fresh issue of 1.21 crore shares and sale of 0.22 crore shares by Credit Suisse PE Asia Investments. The net issue will constitute 23.5% of the post issue capital while the fresh issue will represent about 20% of the same.

Business: Shree Ganesh, a manufacturer and exporter of the handcrafted plain and studded gold jewellery, was incorporated in 2002. In March 2008, PE firm Credit Suisse invested Rs 80 crore in the company for a 10.99% stake at a price of Rs 300 per equity share. The company has four manufacturing units located in Manikanchan SEZ in West Bengal with a cumulative capacity to produce 30,500 kg of gold jewellery per year. For the FY09, the company utilised about 73% of its installed capacity. It has currently employs about 562 craftsmen (karigars) and also takes outsourcing orders from third parties. The company earns more than 95% of its revenue from exports to UAE, Singapore and Hong Kong. Shree Ganesh has a presence in the domestic market through 13 retail outlets, of which nearly half are on franchisee mode while four are owned or leased-in by the company. It has three outlets through shop-in-shop arrangements with Vishal Retail. Barring New Delhi and Kolkata, all these outlets are spread over tier II & tier III cities. The company markets products in the domestic market through the brand name ?Gaja'.

Expansion Plans: Shree Ganesh plans to set up new manufacturing units at Mondalpara and Domjur and also expand its manufacturing capacities at the Manikanchan SEZ. The new facility at Mondalpara will comprise a unit to manufacture plane and studded gold jewellery with annual capacity of 450 kg, a bangle manufacturing unit with an annual capacity of 600 kg and two units with a total capacity of 1,500 kg for manufacturing machine made Italian jewellery. The new facility at Domjur will have an annual installed capacity of 2,000 kg of diamond studded jewellery along with an electroforming and a gold refinery plant. The company also plans to expand its presence in the domestic market by opening another 46 outlets over the next three years. It also plans to own 14 of these outlets while others will be operated by shop-in-shop and franchisee basis.

Financials: The company's standalone topline grew at a compounded growth rate of (CAGR) of 61% in the past three financial years. Net profit and cash profit experienced similar growth while the cash from operating activities grew by about 150% during the period. The consolidated revenue in FY09 grew by 96% compared to the previous year while the profit margins experienced a decline for the period due to a 180% jump in the interest cost. Inventories during the past three financial years have grown by 45% when compounded annually which is a bit higher than that of other competitors like Rajesh Exports (35%) and Su-Raj Diamond & Jewellery (32%) and Gitanjali Gems (42%).

Risks: The company's current operations are export driven while it intends to use close to 25% of the expansion capex on the retail business. Moreover, its current exports are concentrated towards UAE (50%) while more than 60% its revenues come from its top five customers.

Valuation : Post issue, the company will be valued at 9.6 times its annualised H1 FY 10 earnings at the higher end of the prize band and 10 times at the lower end. Hence, the valuation is a tad higher compared to the P/E ratio of established players, such as Su-Raj Diamond and Gitanjali Gems in the range of 8-9.5. The company operates in the niche handcrafted jewellery market and has demonstrated significant revenue growth. However, given the cyclic nature of the business, the concentrated exports revenues and the working capital requirement of the industry, the issue looks to be an attractive bet for investors with higher risk appetite.

Devangi Joshi