Aston Luxury Group Ltd, a fully owned subsidiary of GGL has acquired a 15.3% stake in Verite Co. Ltd in Japan. Verite Co. has 101 jewellery retail stores in Japan. This acquisition will open the Japanese market to GGL, enabling it to establish itself as one of the major jewellery brands in the world. Last year, GGL acquired a 30% stake in Gems TV which is a Japanese jewellery selling TV Channel.
Innovation in jewellery and expertise in diamond market:
Gitanjali has launched the world's first jewellery automated vending machine in Mumbai, where coins and jewellery can be bought. GGL has always been a pioneer. The company has launched brands with unique characteristics linked to occasions and demographics and has adopted aggressive marketing strategies for effectively positioning each of these brands. The brand visibility of each of Gitanjali's brands is strong and is supported by endorsements by top celebrities. It has employed tools such as Quick response Codes and E-commerce platforms to widen its reach.
Impressive performance across many quarters:
The second quarter result of GGL was quite impressive with net sales soaring up by 32.2% while tax outgo was curtailed by 34%. Net Profit grew 14.7% to `153 cr. The Net sales grew at a CAGR of 38% from FY10 to FY12 while Net profit grew at an impressive 56% over the same time period. Third quarter results are expected to boom as the jewellery sales skyrocket during the festive and marriage seasons. Hence, we can expect even better numbers for the coming quarters which will boost the valuation. Going ahead, we expect performance to get better as international operations achieve scale.
Favourable Policies will keep the sector booming: Government of India allows 100% FDI in the gems and jewellery sector, 74% FDI in mining of diamonds and precious stones and 100% FDI in exploration of gold, silver and other precious items. Foreign Trade Policy has been revised in 2009 and it has made import and transportation clauses more liberal and succinct in an effort to make India an international hub for diamonds and jewellery.
Sound Fundamentals:
Debt to Equity ratio of the company is at a comfortable level of 1.24 and the company plans to keep it below the level of 1.5. RoNW has been on an uptrend over last 4 years and has grown from 7.63% in 2009 to 17.07% in FY12. The employee expenses shot up by 17% while Total Income grew by 32.4% suggesting operational efficiency of the company.
Valuations and Outlook:
Gitanjali Gems has a robust business model and strong margin performance. This expected to stimulate high valuations. The jewellery sector is one of the fastest growing sectors in the country with an annual growth rate of ~20% which is expected to be maintained for the next few years. Gitanjali's brands are among the biggest in the country in terms of market share. The management is focused on aggressively promoting these brands and expanding stores. The company has a strong presence in dominant global jewellery markets resulting in a well balanced diversified geographic presence.
At CMP of ` 484.7, GGL is trading at 8.4x TTM EPS and at 1.7x BV which is highly discounted when compared to Titan Industries (trading at 35.2x EPS and 17.7x BV) and TBZ (28.8xEPS and 5.32x BV).GGL is trading at pretty cheap valuation compared to its peer group and considering the strong fundamentals of the company it should spring up to 12x EPS in the medium term. Hence we recommend a BUY rating for the stock with a target price of ` 680 in 12 months.
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