Resurgent Jewellery Companies – Performance Overview: Part 1

Since the elections verdict came out on May 16, the Indian stock markets have been going from strength to strength. On the results day, the front-line indices touched record highs, and after a brief correction, resumed their upward climb registering new highs almost every day. While some experts advise caution in making new investments at this stage, many others are echoing that this is just beginning of a multi-year bull market!

This rally has been primarily led by interest rate and government policy sensitive companies like public sector units (PSUs), autos, infrastructure, construction and real estate. Many of these companies have justified their price appreciation with strong operational performances in Q4’14 and FY’14.

Along with the broader market, jewellery stocks too have appreciated in the last few weeks, as they too are considered to be very sensitive to government policies. In a bid to control the current account deficit (CAD), the previous government had imposed import duties of up to 15 percent on gold and also the notorious 80:20 rule, which required gold importers to export back 20 percent of their total gold imports. This had caused a sharp increase in input costs for jewellery manufacturers. With the CAD now well under control and a decisive change in regime at the Centre, the jewellery industry expects a roll back on the measures, which will hopefully help in reducing costs and end user prices, which in turn will help to stoke up demand. It is this expectation that is making the jewellery stocks attractive again to the investors. Over the last 3 months, the stocks of top 10 companies in terms of market cap in this segment are have gained 17.7 percent, and that of top 5 by a whopping 35.3 percent!

The question now is whether these companies have done enough on the ground to deserve such higher valuations, or is this just market euphoria? And if the said policy reversals come through as expected, will the industry pass on the benefits of lower costs to the consumers in order to push sales? If yes, to what extent? Let us review the Q4’14 and FY’14 financial results of some of these companies to see if we can see any indication of an uptick in operational performance.

Rajesh Exports:

Rajesh Exports Limited (REL) is engaged in the business of gold and gold products. The Company manufactures gold and diamond jewellery. REL exports its products globally and distributes them within India to the wholesale jewellery market. REL also retails its products through its own network of retail jewellery showrooms Shubh Jewellers spread across India. REL specializes in Asian jewellery and manufactures all types of Asian Jewellery.

Net Sales for the quarter were at Rs. 12,230 Cr, a sharp increase of over 140 percent over the previous quarter (Q-o-Q, Q3’14). However, as compared to the corresponding quarter last year (Y-o-Y, Q4’13), sales actually declined marginally by 1 percent. Like other companies in this sector, REL too seems to be recovering from a downturn, and hence was able to improve sales, but profits remained under pressure due to higher costs and taxes. Net profits for Q4’14 were at Rs. 59.9 Cr., lower by 35 percent and 46 percent on a Q-o-Q and Y-o-Y basis respectively. On an annual basis too, REL’s performance has slipped, as revenue for the year stood at Rs. 23,535.4 Cr., lower by over 26 percent. Profit after tax (PAT) also declined by almost half (Rs. 229.1 Cr. vs Rs. 453.1 Cr.). Going forward, sales growth is likely to remain under pressure due an appreciating Indian Rupee. However, with international gold prices on the decline, the Company may be able to lower input costs leading to higher profit margins.

Stock advice: If you had entered this stock at its earlier highs of 2013, be rest assured that the worst is behind us. Hopefully you had average at lower levels of Rs. 70-80 in January 2014. If not, conservative investors can look to exit the stock and look at better options, while the risk taker can hold on.

PC Jeweller:

pcjThe Company is engaged in manufacture, retail and export of jewellery and has approximately 35 showrooms under the PC Jeweller brand located across 23 cities in north and central India. The Company also exports gold and diamond jewellery on a wholesale basis to international distributors in Dubai and Hong Kong.

PC Jeweller has been one of the few companies in this sector who have displayed consistent track record of growth with profitability. Sales for Q4’14 stood at Rs. 1,536.1 Cr., a growth of 18.4 percent Q-o-Q and 34.3 percent Y-o-Y. At the same time, PAT for the quarter was reported at Rs. 83.6 Cr. vs. Rs. 80 Cr. in the previous quarter and Rs. 82.5 Cr. in Q4’13.

Stock advice: Quite simply, buy! Although the price appreciation in this stock has been close to 65 percent since the start of this calendar year, at a price to earnings (P/E) multiple of close 6x for a profitable company (and that too, a dividend paying one!), we still feel this stock is a steal.

C Mahendra Expo:

C_Mahendra_Exports_190The Company along with its subsidiaries is engaged in sourcing of rough diamonds, trading of rough and polished diamonds, processing of diamonds, diamond jewellery, precious stones and pearls. The operation of manufacturing is done from its Surat office. The Company has overseas sales and distribution associates in five countries at China, India, United Arab Emirates, Belgium and United States of America. It operates in diamond studded jewellery business. Its jewellery is retailed under the brand name Ciemme.

For the quarter ended 31st March 2014, Company’s revenue was Rs. 361 Cr. vs. Rs. 397.9 Cr. for the previous quarter (Q3’13), a decline of 9.2 percent. On a Q-o-Q basis, decline in sales was even steeper; 53.8 percent. Over the last few quarters, the Company’s sales have seen a steady decline, along with inconsistent profitability. For Q4’14, the Company incurred a net loss of Rs. 10 Cr. vs. a profit of Rs. 1 Cr. in Q3’14 and profit of Rs. 14.1 Cr. in Q4’13.

Stock advice: The Company seems to be going through a rough patch in recent times and it would need some drastic cost cutting and revenue growth efforts for the performance to come back on track. From investment perspective, the valuation seems too expensive at this stage.

DCPosted by Dhawal Chotai
The author is a Mumbai-based Chartered Accountant and Financial Adviser with an experience of over 8 years in the financial services industry. His experience includes equity research, business valuations, and investment advisory.