Tribhovandas Zaveri IPO opens today, priced at Rs 120-126

Tribhovandas Bhimji Zaveri, a jewellery retailer company, is coming out with its initial public offering (IPO) today. The jeweller plans to raise Rs 200 crore through the IPO and has fixed the price band of each share at Rs 120-126. It plans to offer 1.67 crore shares, equivalent to 25 percent of the post-issue paid-up capital of the company.

KR Choksey has asked investors to avoid the issue as it is priced on the higher side compared to its peers. The report says execution will be a key challenge for the company. Also, prolonged decline in the price of gold and diamonds would mean a fall in the value of inventory, which would be a negative impact on operations and financials. SMC Investments and Advisors, on the otehr hand, feels that long term investors can invest in the IPO.

It’s curious that TBZ, that has been around since 1864 and boasts a rich heritage, has only now got around to tapping the capital markets. No doubt, it speaks of the inherent conservatism of the company whose annual revenues total about Rs 1,200 crore.Having said that, it’s better late than never.

Valuations

TBZ has provided its results for the nine months ending December 2011. On an annualised basis, revenues have come in at Rs 1,490 crore, while net profit totals Rs 67 crore. The net profit margin (NPM) stands at 4.5 percent (OPM), while the operating margin is 9.2 percent.

In comparison, Gitanjali Gems, a rival company, boasts an NPM of 2.76 percent, while Titan has an NPM of 6.72 percent (but it also sells watches, sunglasses and bags).

Moreover, Gitanjali Gems, a retail jeweller, enjoys a price earnings (P/E) multiple of 10. The P/E multiple is a measure of a stock’s valuation, and tells us whether a stock is expensively or cheaply priced. Given that post issue, TBZ’s shares will total 6.7 crore shares (entire paid-up capital sharewise), its earnings per share for 2012 works out to be Rs 12. In that case, with a price of Rs 120-126, the share’s P/E comes to 10, which seems reasonable.

Strength

TBZ currently has 14 showrooms in nine cities across five states, and it primarily sells gold jewellery and diamond-studded jewellery. With the IPO proceeds, the company aims to expand to 43 showrooms in 18 cities across the country in the next two years. The company will use the bulk of the money for working capital requirements in pursuit of that expansion. Divyesh Shah, head-retail, TBZ, said, “The idea is to open more showrooms in large cities, with a population of 15-20 lakh to drive demand for the company.”

The company has a diamond jewellery manufacturing facility in Mumbai and it outsources gold jewellery manufacturing to various craftsmen across the country. Right now, 71 percent of the company’s revenues come from gold, while the balance comes from the diamond segment.

Prem Hinduja, chief financial officer, TBZ, told Firstpost, “The ratio of contribution between diamond and gold has improved over the years as margins for diamonds are three times that for gold. The idea is to take the contribution ratio to about 60:40 over the next few years.That will improve our profit margins from here on.”

Given the traditional importance of gold in Indian society, the company expects demand to remain strong. Gold is traditionally bought during weddings and festivals in the country. However, organised players like TBZ make up just 10 percent of the Rs 1 lakh crore gold market.

While that number shows the immense scope of growth, will customers actually switch to brands? Girish Nadkarni of Avendus Capital (book running lead manager for the issue) thinks so.“As people get more income, and aspirations grow, people are bound to turn to branded names especially in instances like weddings,” he said.

Weakness

The name Tribhovandas Bhimji Zaveri can be used by some other family members who have been part of the company in the past and have gained rights to the brand as part of their retirement contracts. That has the potential to harm the brand recall value for the soon-to-be-listed TBZ.

Crisil has graded the IPO 3 out of a possible 5, citing reasons related more to the industry than company-specific reasons. “The grade is restrained by intense competition in the jewellery retailing market, which is poised to see planned expansions by regional/traditional players,” it says.

Certainly, it’s very likely that TBZ’s plans to expand could face significant challenges even though its execution strategies (with respect to store location, size, format, human resource requirement and schedule) are in place. TBZ could also face pressure on profitability due to its higher marketing expenses on opening new stores.