Earlier known as DalalStreetBulls

SEBI (Research Analyst) Registration Number: INH200004471

28 May 2018

Thangamayil Jewellery - Fundamental Analysis

About:

Thangamayil Jewellery Ltd. was established in 2000 before which the business was run in the name of "Balu Jewellery" at Madurai. The company is based out of Madurai and primarily caters to the tier 2 and tier 3 cities of Tamil Nadu. In total, the company has 32 branches as on date. The company offers Gold, Silver and Diamond jewellery.

Management and Promoters:

The board of the company is given below


The promoter holding is given below


The promoter holding as reduced from 70.35% to 66.45% while the retail holding has gone up from 29.65% to 33.56% in FY18. The promoters have also pledged some of their holdings for short term loans from IDBI Bank, IndusInd Bank and Yes Bank.


Product:

In FY17, the company sold 1,74,560 Kgs of silver and silver articles and in the same year, the company sold 39,963 Kgs of Gold. In value terms, gold is the highest selling product for the company while silver products enjoy a better margin.


Gold ornaments continue to remain the major source of revenue for the company.

Industry:

Thangamayil Jewellery is predominantly based in the tier 2 and tier 3 cities of Tamil Nadu. The primary factors that affect Thangamayil's business are:
  • Economy of Tamil Nadu
  • Rural economy macros - Crop yield, Monsoon, natural calamities, etc
Roughly 40% of the Gold consumption in India comes from South India and the biggest consumer of Gold is Tamil Nadu. Rural areas of Tamil Nadu are heavily dependent on agriculture and bad monsoon / cyclones can affect farmer incomes and drive down the demand for gold. Further, these regions are more sensitive to the prices of Gold.

More than 50% of the investments in the state are made by the Government which highlights the economy's dependence on Government policies.


Financials:

Figures in Rs. Crores

The company's revenues have shown a decline on a 3 year basis (FY18 vs FY5) and a 5 year basis (FY18 vs FY13). The margins have improved for the last two years but are still below the FY13 margins. The company's sales, profits and growth are highly cyclical as they have a positive correlation with the rural economy of Tamil Nadu. The management has been speaking of a "Pick up in rural economy" since 2011-12 but the expected recovery never came as two years of failed monsoons (FY14, FY15) took a toll on the company's growth and margins.


The company is able to convert it's profits to cash and has significantly reduced dependence on short term loans to build up inventory. The total debt has declined from Rs 257 Crores in FY12 to Rs 118 in FY17; however as per FY18 results, the company's borrowings have risen to Rs 190 Crores and the inventory has risen from Rs 312 Crores (FY17) to Rs 495 Crores (FY18).

Valuations:


At Rs 509 (28th May, 2018 closing price), Thangamyil Jewellery trades at a PE Ratio of 31.22 and a PB Ratio of 4.31. The EV to PBIDT is 13.72 and the M.Cap to sales is 0.50. Thangamayil's profits have been fluctuating and the revenues and profits are dependent on many factors ranging from Gold price to Tamil Nadu's economy and the monsoons. It is a highly cyclical company with a small regional market. The company stands to benefit from the shift in the consumer preference to branded jewellery but this shift will take a lot of time to happen. In a previous article on Jamna Auto, we noted the decline in the sale of commercial vehicles as an indicator of rural economy slowdown caused by bad monsoons.

One cannot only look at the current PE ratio before investing. If the margins improve and the revenues grow by 12% to 15%, then the PE ratio will cool off to mid-teens and the stock will appear cheap. However, we believe that it is next to impossible to pinpoint monsoons, gold prices, etc for an entire year and then forecast the earnings for the next year.

Verdict:

  • Investors who are not willing to take a substantial risk on their portfolios should ignore Thangamayil Jewellery Ltd. The stock is best avoided for low risk appetite portfolios.
  • If an investor is willing to take a position with a view on rural economy revival theme then Thangamayil Jewellery can be added to the portfolio with a low allocation (Low liquidity). In a heated up valuation scenario for most small & midcaps with no scope for high earnings growth, TJL has a scope for increase in turnover coupled with improvement in margins to significantly boost up earnings.


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