Avoid Tribhovandas Bhimji Zaveri IPO - Valuation on higher side - KR Choksey

Rising gold demand vs rising prices-correction can impact profitability

Demand for gold remained strong during 2010-11 despite rising gold prices. The year 2010 saw all time high in terms of demand while declined marginally by 3% in 2011 although gold prices rose 28% during the period. Rise in gold prices has lead to strong growth in net revenues to the tune of 32% and 35% YoY for FY10 and FY11 respectively.

Scalable business model - execution a challenge

TBZ plans to open additional 43 showrooms (25 large format and 18 small format) by the end of FY15 which would total 57 showrooms (with a carpet area of ~150,000sft) across 14 states. The company plans to open 9 new large format stores during FY13. The working capital to the tune of Rs 588 crs (FY13E) will be funded through Rs 160 crs IPO proceeds, Rs 249 crs bank loan and balance from internal accruals. We believe the expansion lays significant onus on management to encounter working capital issues, higher liquidity to finance purchase of inventory, establishment of new showrooms and hiring and training of additional employees.

Intensifying competitive environment

The Indian jewellery market is highly competitive and fragmented. Organized market accounts for a mere 10% while there are over 3,00,000 jewellery retail outlets. Recognizing the large untapped potential, players like Tanishq (Titan industries, Tata group company), TBZ, Shree Ganesh, Joy Alukkas, Gitanjali, etc have been expanding their presence through setting up similar format stores. We believe the competition to intensify further and may lay pressure in terms of increasing operating efficiencies for the players in order to sustain better EBITDA margins.

Focus on diamond studded jewellery

TBZ has increased share of sales from diamond studded jewellery (dsj) from 22% in FY11 to 25% in 9MFY12. Dsj has higher gross profit margin (36.2% in 9MFY12). Further, the company plans to increase dsj sales through cross selling of gold jewellery buyers, higher advertising and promotion and launch of new products at various price points. Higher sales of dsj augurs well for the company having higher profit margin than sales of gold jewellery.

Key risks

a) The brand name "Tribhovandas Bhimji Zaveri" is used by other Zaveri family members and if they experience any negative publicity can have an adverse impact on the business of the company.

b) The company has not identified exact locations for the proposed expansion in stores which could delay or increase cost and consequently the business of the company.

c) A pro-longed Decline in the price of gold and diamonds would have an adverse effect on the value of inventory, which in turn would lead to negative impact on the results of operations and financial condition.

Valuation & Outlook:

The annualized earnings on diluted equity for FY12E is Rs 10.1 valued at a P/E of 11.9-12.5x. We believe the company is priced on higher side with peers trading at P/E of 4-7x FY12E earnings. Hence we recommend to "AVOID" the issue.

Source : Equity Bulls

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