9 June 2014

PC Jeweller Ltd - Long term view

PC Jeweller Limited is a jewellery company engaged in the manufacture, retail and export of gold and diamond jewellery. The company had 41 showrooms as on 31st March, 2014. The company's presence is strong in the North and Eastern parts of India though as per CARE report, 64% of Gold demand of the country comes from the South and the Western regions.

The jewellery business in India is mostly unorganised with people opting to purchase jewllery from their family jewllers and till recent times, branded jewellers were a rare breed. But the young generation of India has become brand conscious even in the case of gold and diamond jewelleries with rising awareness in matters of purity, rate etc. The organised market taking into account big regional players accounts for 15%-16% of the retail jewellery industry. As per CARE, it is expected to cross 30% by 2016. This gives the big brands a good chance to expand rapidly in the coming years. With the real estate prices sky rocketing in tier-I cities, there is ample opportunity in tier-II and tier-III cities where a large chunk of the Indian population resides. The management of PCJ has on many occasions stressed on the same. PCJ has also spoken about the ambition of expanding into south and west . The crowd in south and west prefers gold over diamond in their jewellery, the margins for PCJ is high in diamond (30%) and low in gold (9%-10%). Gold jewellery sales account for near 68.5% of the sales of the company whereas diamond jewellery sales accounts for 30% of the sales. The company wants to increase the mix of diamond jewellery sale as it has a higher margin. The share of diamond jewellery has already increased from roughly 17% in 2010 to 30% in 2014 and the company expects it touch 35% in the coming years despite the share falling to 26% in 2014. The price at which PCJ procures gold is fixed on basis of the rate of gold at the time of sale to the customer thus protecting the company from volatility in gold rates.

Balance Sheet:
As on 31st March, 2014 the equity of the company stands at Rs. 179.1 Crores and Reserves of the company stand at Rs. 1,503 Crores in comparision to Rs. 1,209 Crores in FY 2013. The debt of the company stands at around Rs. 1,045 Crores in comparision to Rs. 350 Crores for FY 2013 with short term debt amounting to Rs. 1,000 Crores. The company's debt-equity ratio works out to 0.7.

Profit and Loss:
The company's revenues have increased from Rs. 402 Crores in FY 2013 to Rs. 5,324 Crores in FY 2014. The revenues are growing at a 5 year CAGR of 65% (It stood at Rs. 984 Crores in FY 2010).  The net profits have increased from Rs. 78 Crores to Rs. 356 Crores in the same period giving a 5 year CAGR of 35%. The PAT margin stands at 6.6% in FY 2014. Finance cost has seen a rise over the years due to increasing debts which are being utilised for expansion. If derive the PAT per store, in FY 2014 the same stood at roughly Rs. 8.86 Crores per store, down from Rs. 9.70 Crores per store in FY 2013. The Noida unit of the company is in a SEZ and over the years the tax benefits will diminish thereby increasing it's tax expenses.

The EPS for FY 2014 stood at 19.90 when compared to 16.23 in FY 2013. At Current levels of Rs. 113, the stock is trading at  P/E of 5.69 and a dividend yield of 0.88%. The promoter holding in the company stands at 70%. FII holding stands at 13%. The increasing share of diamond business will help maintain higher margins. PCJ is a stock for the long term (5 Year+ View). The challenges for the company are lower margins, falling gold prices might keep the yellow metal the preference of the consumers. Also, the company's strategy of penetrating the south and west markets could face tough competition from the local players. We see the economy boosting up in the coming years and the spending by the people increasing on branded jewelleries and the growing demand of Diamond jewellery from the urban middle-class crowd. This is an opportunity for PCJ to exploit. The stock could prove to be a multi-bagger in the coming years.

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