GITANJALI GEMS LTD : Add Glitter to your Portfolio !!!

Scrip Code: 532715 / GITANJALI

CMP:  Rs. 311.05; Buy at Rs.305 & on dips.
Short term Target: Rs. 350, 6 month Target – Rs. 415; STOP LOSS – Rs. 280.60; Market Cap: Rs. 2,834.35 cr; 52 Week High/Low: Rs. 386.90 / Rs. 171.40

Total Shares: 9,11,22,095 shares; Promoters : 4,95,35,019 shares –54.37 %; Total Public holding : 4,15,87,076 shares – 45.63 %; Book Value: Rs. 246.98; Face Value: Rs. 10.00; EPS: Rs. 29.62; Div: 30.00 % ; P/E: 10.50 times; Ind. P/E: 10.11; EV/EBITDA: 13.26.

Total Debt: 1881.91 Cr; Enterprise Value: Rs. 5,080.05 Cr.

GITANJALI GEMS LTD:  Gitanjali Gems Ltd was incorporated in 1966 and is based in Mumbai, India. The company was started as a partnership. It came with an IPO in the year 2006 with 1.70 cr shares at the price band of Rs. 170 – Rs. 195. Gitanjali Gems has got two-diamond manufacturing facilities located at Borivali in Mumbai and at the Special Economic Zone in Surat. It has also got a 100 % export oriented unit in SEEPZ Mumbai, which produces gold and platinum studded jewellery. There are also jewellery-manufacturing facilities at MIDC, Andheri, which produces branded jewellery for the retail operations in India. The company has a workforce of over 2300 employees. Company sells its jewellery under the brand - Asmi - Premium work wear collection & has 104 outlets, 2 exclusive stores; Sangini - Entire product range including bridal jewelry; Nakshatra - Entire product range including bridal jewelry available with 374 retailers and 1 franchisee. More franchisees are being added; Gilli - Diamond jewelry at reasonable prices having 256 outlets of which 3 are exclusive stores; Vivvaha - Wedding jewelry; Maya - Gold jewelry for wedding and other similar events; D’Damas - International quality designs combined with Indian values sells through 380 retailers, 2 exclusive outlets, 3 shop-in-malls and 21 franchisees; Hoop - Fashion Silver Jewelry. The Gitanjali Group has acquired Lucera for Rs 25 crores in 2008. In October 2009, the UK-based Brand Finance, valued the four leading brands of the company at Rs.514 crores (Nakshatra), Rs.468 crores (Gili), Rs.309 cr. (D'Damas) and Rs.210 cr. (Asmi), respectively. GGL is not only gearing towards improving sales but is also looking at multiplying the value of these brands by 1.5 to 2 times year on year. With a manufacturing presence in India, its operations span the globe from the U.S., the U.K., Belgium, Italy, the Middle East, Thailand, South East Asia, and Japan. The company’s retail and distribution network comprised approximately 2,000 outlets, including 200 distributors, 94 exclusive stores, and 63 franchised stores. In December 2010, it acquired 90 % interest in Glantti Italia S.R.L. On March 17, 2011, it acquired 100% stake in N & J Finstocks Private Limited. In July 2011, it incorporated a wholly owned subsidiary Italian Jewels S.r. In August 2011, it incorporated a subsidiary Aston Luxury Group Limited. On December 2, 2011, its subsidiary Aston Luxury Group Ltd., acquired Crown Aim Limited. Gitanjali Gems Ltd is globally compared to Lao Feng Xiang Company Limited, Bulgari Societa per Azioni and Surana Corporation Limited in India.

Investment Rationale:

Gitanjali Gems is one of the largest integrated diamond and jewellery manufacturer and retailer in India. The demand for diamond and jewellery products are largely depends on higher employment and economic levels, which leave higher disposable income in the hands of the consumers. In downturn consumers can quite easily scale down their consumption of jewellery and diamonds. During the quarter ended the robust growth of Net Profit increased by 65.25 % Rs. 132.24 Cr. The value of four leading diamond jewellary brands of Gitanjali Gems - Gili, Nakshatra, Asmi and D’Damas rose 84 % i.e. Rs. 2,769 cr in the last two years. Net Sales and PAT of the company are expected to grow at a CAGR of 30 % and 46 % over 2010 to 2013E respectively. Gitanjali Gems Ltd has acquired 100 % stake of 'Crown Aim Limited' ('Crown Aim') and so has become step down subsidiary of the Company. Crown Aim is a Hong Kong based Company engaged in the business of distribution of Jewellery to China, Japan, USA, Middle East and Europe. In Addition, Crown Aim has a Jewellery manufacturing unit in China and plans to setup retailing of Jewellery in China. Crown Aim also has a 100 % subsidiary with the name Alfred Terry Holding Limited and a step down subsidiary named Alfred Terry Limited in London, for distribution of Jewellery in UK. Gitanjali Gems Ltd has incorporated a Wholly Owned Subsidiary in the name of Leading Italian Jewels S.r.l in Italy with a view to expand its business in Italy and adjoining region. The main activity of the newly incorporated wholly owned subsidiary is trading in precious stones, diamonds jewellery, pearls, etc. Gitanjali Gems Ltd has incorporated GGL Diamond, LLC in United States of America, through its wholly owned subsidiary Gitanjali USA, Inc. The main object of GGL Diamond LLC is to source and distribute diamond and jewellery. Gitanjali Gems Ltd has also incorporated a Wholly Owned Subsidiary in the name of 'Aston Luxury Group Limited' in Hong Kong with a view to explore and expand the International business of the Company in Asia Pacific.

Outlook and Valuation:

Gitanjali has increasingly undertaken retail expansion through the organic, inorganic and partnership routes. The retail space is around 1 million sq ft from 65,000 sq ft a year ago. The company has over 3000 Point of sales (POS). Gitanjali occupies nearly 60 % of the India’s entire organized mall space belonging to the jewellery category; it has aggressive retail expansion plans. Gitanjali expects to increase its retail presence to 2 million square feet, primarily in the domestic outlets in the next three years. All this features helps one to get that extra comfort in the stock. The enormous growth of the Indian gems and jewellery industry has seen the arrival of many new branded jewellery shops in various metros of this country. Brands such as, Damas Jewellery, Reliance Retail, Swarovski, and Joy Alukkas are either opening or have already opened their new branches. The availability of cheap labour and presence of well skilled people in various states of India is helping in the growth of diamond polishing and gold jewellery markets. According to experts in the jewellery industry the growing demand for expensive jewellery in India is a result of the strengthening Indian economy. India will soon overtake the US in the not so distant future, as per a statement given by Rapaport Group, the well known keeper of global diamond related data. India is the largest market for gold jewellery in the world, representing an amazingly 746 tonnes of gold in 2010. The net exports of gem and jewellery grew from US$ 22,616.35 in April-October 2010 to US$ 26,160.04 in April-October 2011. At the current market price of Rs. 310.00, the stock is trading at a PE of 5.20 x FY12E and 4.25 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 59.61 in FY12E and Rs. 73.03 in FY13E. One can buy Gitanjali Gems Ltd with a target price of Rs. 350.00 for Medium to Long term investment. Also one should add on Gitanjali Gems on dips !!!

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	6,527.63	9,456.40	12,198.75	14,394.53
NET PROFIT (Rs. Crs)	200.17	354.81	505.88	619.78
EPS (Rs.)	23.75	41.81	59.61	73.03
PE (x)	13.05	7.42	5.20	4.25
P/BV (x)	1.20	1.05	0.87	0.72
EV/EBITDA (x)	5.91	4.17	3.16	2.67
ROE (%)	9.23	14.16	16.79	17.06
ROCE (%)	10.17	12.34	13.84	14.50

I would buy Gitanjali Gems Ltd with a price target of Rs. 350 for Medium to Long term. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 280.06 on every purchase.

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