GITANJALI GEMS : JEWEL FOR EVER !!!

Scrip Code: 532715 / GITANJALI

CMP:  Rs. 453.00; Accumulate at every levels. 

Medium to Long term Target – Rs. 510; STOP LOSS – Rs. 415.00; Market Cap: Rs. 4,170.56 Cr; 52 Week High/Low: Rs. 455.65 / Rs. 250.95

Total Shares: 9,20,65,491 shares; Promoters : 5,43,16,116 shares –59.00 %; Total Public holding : 3,77,49,375 shares – 41.00 %; Book Value: Rs. 275.10; Face Value: Rs. 10.00; EPS: Rs. 28.05; Div: 30.00 % ; P/E: 16.11 times; Ind. P/E: 11.10; EV/EBITDA: 10.53.

Total Debt: 2,056.00 Cr; Enterprise Value: Rs. 6,542.72 Cr.

GITANJALI GEMS LTD:  Gitanjali Gems Ltd was incorporated in 1986 and is based in Mumbai, India. The company was started as a partnership in the year 1966, it was the first group company to engage in cutting & polishing of diamonds in Surat, Gujarat. 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 by 2011-2012. 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 $900 million multinational group & one of the largest integrated diamond and jewellery manufacturer and retailer and diamond exporters 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. Gitanjali Gems Ltd has informed that Aston Luxury Group Ltd has acquired 15.3 % stake in Verite Co. Ltd in Japan. This acquisition will provide supply chain synergies to the grou. Verite Co. Ltd is a listed entity on Tokyo Stock Exchange & operates a network of 101 jewellery retail stores in Japan. This stake will also increase the presence of the Gitanjali group in one of the leading diamond jewellery markets of the world. The company launched India’s First unique and innovative Gold & Diamond ATM machines, which is a one stop shop for buying medallions, coins, jewellery etc. Gitanjali opened its first flagship store Stefan Hafner in China. The bouquet of Italian brands is now available in other markets like Russia, Saudi Arabia, the Far East & India. Gitanjali has taken strategic stake of 30 % in the GEMS TV to supply all of its diamond jewellery requirements in Japan. GEMS TV in Japan offers online shopping platform for TV channels in Japan. The Company is also engaged in retailing its diamonds and jewellery. Currently the company markets over 40 brands that are owned and franchised under its retail chain Gitanjali Lifestyle. Gitanjali Gems Ltd allotted 943,396 equity shares of Rs. 10/- each to Bennett Coleman and Company Limited (BCCL), pursuant to conversion of 943,396 warrants held by BCCL in the ratio of 1:1 as agreed upon. Consequent to the aforesaid allotment, the paid up capital of the Company has increased from 91,122,095 equity shares of Rs. 10/- each to 92,065,491 equity shares of Rs. 10/- each.

Gitanjali opens stores at DUBAI - Gitanjali group opened the largest B2B Trade showroom in the Middle East Region at Alms Tower, Dubai-UAE.

GITANJALI JEWELS LLC -
Showroom at Meena Bazaar, Dubai

The store offers extraordinary range of jewellery keeping in with the preferences of international clientele visiting Dubai, the 2,000 sq.ft is poised perfectly to attract Asians with an impressive array of renowned Gitanjali brands. Gitanjali Gems’ net profit jumps to Rs. 151.65 Cr against Rs. 132.24 Cr in the corresponding quarter ending of previous year, an increase of 14.68 %. Revenue for the quarter rose by 24.01 % to Rs. 3928.25 Cr from Rs. 3167.64 Cr, when compared with the prior year period. Reported earnings per share of the company stood at Rs. 16.47 a share during the quarter, registering at 7.52 % increase over previous year period. Profit before interest, depreciation and tax is Rs. 271.25 Cr as against Rs. 221.36 Cr in the corresponding period of the previous year.

Outlook and Valuation:

India possesses world's most competitive gems and jewellery market due to its low cost of production, highly skilled, low-cost and best artisan force for designing and crafting jewellery, along with strong government support in the form of incentives and establishment of Special Economic Zones (SEZs). India is emerging as a huge consumer market for jewellery and other luxury products and thereby appears as a very attractive opportunity for major brands to establish their presence in the Indian market. In fact, the five-day long 29th edition of the Indian International Jewellery Show (IIJS) event organized by GJEPC, witnessed the participation of over 800 companies from India and overseas and received 20,000 pre-registration from national visitors and over 3,000 from international visitors. The event had a congregation of delegations from trade associations across India and from a host of international destinations like Bangladesh, China, Dubai, Hungary, Iran, Japan, Malaysia, Nepal, Poland, Russia, Saudi Arabia, Singapore etc. IIJS displayed the widest range of gems and jewels under the categories of couture, loose diamond, plain gold jewellery, mass produced, allied, machinery and international jewellery and loose diamonds. 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 total exports of gem and jewellery from India during April 2012 to September 2012 stood at $1990.24 Cr including that of cut & polished diamonds at $782.47 Cr, gold at $1071.77 Cr & coloured gemstones at $16.71 Cr. The domestic jewellery market is pegged at $1600 Cr - $1800 Cr. The gems & jewellery industry in India registered a growth in its volume of exports from $2,540 Cr in 2009 to $4,636 cr in 2011 an net growth of 82.5 %. In my view Net Sales and PAT of the company are expected to grow at a CAGR of 26 % and 32 % over 2011 to 2014E respectively. On the basis of EV/EBITDA, the stock trades at 2.98 x for FY13E and 2.42 x for FY14E. The second quarter witnesses a healthy increase in overall sales as well as profitability on account of powerful combination of exciting products, an enhanced store network and robust infrastructural Support system. At the current market price of Rs. 453.00, the stock is trading at a PE of 6.47 x FY13E and 5.10 x FY14E respectively. The company can post Earning per share (EPS) of Rs. 69.98 for FY13E and Rs. 88.68 for FY14E. It is expected that with the company’s surplus scenario is likely to continue for the next three years & will keep its growth story intact for the coming quarters also. One can ‘BUY’ in Gitanjali Gems with a Medium to Long term investment for a price of about Rs. 510.00.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	9,456.40	12,498.27	15,997.80	19,037.37
NET PROFIT (Rs. Crs)	354.81	487.25	637.66	808.03
EPS (Rs.)	41.81	53.47	69.98	88.68
PE (x)	9.66	7.56	5.77	4.56
P/BV (x)	1.36	1.19	0.99	0.81
EV/EBITDA (x)	5.44	3.85	2.98	2.42
ROE (%)	14.16	15.79	17.22	17.95
ROCE (%)	12.34	13.95	16.08	17.49

I would buy GITANJALI GEMS with a price target of Rs. 510 for the 6 month target. 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. 415.00 on your every purchase.

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