Shree Ganesh(Update)

Shree Ganesh Jewellery House

Limited

Prakash Narayan Sharma [email protected]

LOHIA SECURITIES LTD.

mailto:[email protected]

Shree Ganesh Jewellery House Ltd.(Update)

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MARKET DATA

Bloomberg Code SGJ:IN

Reuters Code SHRG.BO

Price (`) 149.05

Target Price (`) 260

Time (in Months) 12

Dividend Yield (%) 4.03%

52 Week High/ Low(`) 286/117

Equity Capital(` Mn) 606.83

Face Value (`) 10

Market Cap (` Mn) 9,044

Avg. Vol.NSE(3M) 1,64,717

Beta 0.91

INDEX

Index Weightage (%)

BSE Small Cap 0.277%

SHARE-HOLDING PATTERN (%)

Promoters 70.66

DIIs 4.15

FIIs/NRIs/OCBs 11.83

Corporate Bodies 8.95

General Public 4.41

As on 30/06/2011

RELATIVE PERFORMANCE (%)

Nifty Stock Stock over

Nifty

1 Month -2.5% 2.5% 5%

3 Month -10% -44% -34%

12 Month -12% -13% -1%

Company Background Shree Ganesh Jewellery House Ltd. is one of

the largest manufacturer and exporter of handcrafted gold Jewellery in India, exporting primarily to countries such as U.A.E., Singapore, and Hong Kong

The product portfolio includes handcrafted and hallmarked gold jewellery, gold enameled jewellery, gold jewellery studded with precious stones and Italian fusion jewellery

The Company has manufacturing units located in Mondalpara, Manikanchan SEZ at West Bengal, which is presently the only jewellery SEZ in West Bengal and at Domjur (upcoming)

Investment Rationale Q1FY12 results in line with expectation.

Strong order book provides visibility of future earning capacity.

Enhanced product portfolio to assist in increasing the customer base and maintaining topline in the present scenario of rising gold prices.

Company’s plan to add additional retail stores in India to improve topline and bottomline.

Company’s backward integration plans to improve margins in the long run.

Risks & Concerns Deterioration of macro conditions can

adversely affect exports and discretionary spending.

High concentration risk as revenues are dependent on few major clients.

Volatility in gold prices can impact volumes.

Seasonal nature of the business.

Financial Highlights

FY11 FY12E FY13E

Revenue (`Mn)

52,407 75,000 85,000

Revenue growth (%)

78% 43% 13%

EBDITA (`Mn)

3,393 5,981 6,841

EBIT (`Mn)

3,333 5,785 6,606

Net Profit (`Mn)

2,638 3,957 4,536

EPS (`)

43.48 65.21 74.75

EPS growth (%)

59% 50% 15%

P/E (x)*

3.43 2.29 1.99

P/BV (x)*

0.84 0.62 0.48

ROE (%)

24.57% 27.33% 24.12% * P/E, P/BV computed taking CMP of `149.05 as on 12/09/2011.

12th

September 2011




Investment Rationale Growth visibility: SGHL’s quarterly results were in line with our estimates. The company has added

about `5,000 Mn of orders during the quarter and has an outstanding order book of `35,000 Mn, which

offers visibility for the company’s future revenue generating capacity. If the company continues posting

good results in the ensuing quarters, it would help in attracting investors and thereby helping the share

prices to recover. As per our estimates, the company would clock revenue and PAT of Rs. 75,000 Mn

and Rs. 3,957 Mn respectively in FY12.

Good demand for Italian fusion jewellery: The Company had traditionally been into the

manufacturing of plain jewellery products. Now the company has expanded its product portfolio to

include machine made light weight, Italian fusion jewellery which is more affordable. Commercial

production of Italian jewellery commenced in Q4FY11. The main brand in this segment is Gaja Lite. The

weight range for Gaja Lite jewellery varies between 1 to 20 gms with 18 to 22 Karat gold. With soaring

gold prices, the Gaja Lite brand would help the company in attracting the low budget customers. The

Italian fusion jewellery has been well received by both domestic as well as overseas customers and has

helped the company in diversifying the customer base. This augurs well for the company.

Expansion of retail presence in India: SGJHL plans to expand its retail footprint in India. The

company has added 3 retail stores during the quarter taking its total to 23 stores across India.

Management is confident of meeting its target of adding 30 retail stores during the current financial

year through combination of owned stores, franchisee stores and shop-in-shop arrangements through

its strategic alliance with Bharti-Walmart. This would help the company in improving its topline as well

as bottomline.

Backward Integration to assist in margin improvement: SGJHL is in the process of setting up a gold

refinery plant with an annual installed capacity of 35,000 kg at Domjur in West Bengal. It is expected to

commence trial production at the beginning of Q3FY12. The facility would refine pre-used gold, which

would then be used as raw material for jewellery manufacture. Refining old gold in-house would

eliminate cost factors such as commissions, import costs and duties and other incidental expenses and

reduce the basic raw material input cost. The company intends to source old/ used gold from

government agencies, the domestic and international markets as well as through its proposed retail

network. Currently, the company procures refined gold from suppliers such as Al-Marhaba Trading

FZC, Bank of Nova Scotia, Standard Chartered Bank and the State Trading Corp of India. The Gold

refining plant would help in improving the operating margins by 1-1.5%.

Recent Development Shree Ganesh Jewellery House to foray into gold loan business: SGJHL, which is planning to foray

into the gold loan business, has recently acquired a Kolkata-based non-banking financial services

company (NBFC), at an undisclosed price. It is looking for the Reserve Bank of India's approval for

setting up NBFC outfit. It had applied for an NBFC license to the RBI in February. The company has

taken the acquisition route to fast forward its entry in this segment. The acquired company has an

existing portfolio of gold loans. The NBFC would function as a subsidiary of SGJHL and would be

operational in the next three-to-four months. By this year-end the jewellery major plans to roll out 50

finance outlets across the country through its NBFC arm. Loan against gold would be the primary

business of the company.




Results update (Standalone)…

Particulars (` Million) Q1FY12 Q1FY11 YoY(%) Q4FY11 QoQ(%)

Net Sales

23,867 12,284 94% 11,173 114%

Other Operating Income 197 97 102% -98 302%

Total Operational Income 24,063 12,382 94% 11,075 117%

Total Expenditure

23,088 11,610 99% 10,308 124%

EBITDA

975 772 26% 768 27%

EBITDA Margin (%)

4.09% 6.28%

6.87%

Depreciation

41 7 497% 32 28%

EBIT

935 765 22% 736 27%

EBIT Margin (%)

3.92% 6.23%

6.59%

Other Income

2 12 -86% 7 -75%

Interest & Financial Charges 248 127 95% 263 -6%

PBT

688 650 6% 480 43%

PBT Margin (%)

2.88% 5.29%

4.29%

Provision for Taxation -4 13 -127% 4 -197%

Profit After Tax (PAT) 692 637 9% 476 45%

Net Profit Margin (%) 2.90% 5.19%

4.26%

Although there were some concerns among the investors about SGJHL’s quarterly results and future

prospects, especially after some rumors about default by a major Dubai based client came in public, the

results posted by the company were in line with our estimates. It shows that the business operations

are running as usual at SGJHL and the concerns raised by investors were unwarranted. The major

highlights of the result were:

Strong revenue growth of around 94% in Q1FY12 as compared to Q1FY11 is primarily an

outcome of firm demand across product categories and markets and rising gold prices. The

company is seeing strong demand for its newly launched light weight Italian fusion jewellery

because of its relatively low cost and affordability.

EBITDA increased by 26% YoY to `975Mn mainly because of topline growth; EBITDA Margin

declined to 4.09% from 6.28% in Q1FY11 as gold prices moved up during the quarter.

Depreciation and interest costs at `41 Mn and `248 Mn were up significantly by 497% YoY and

95% YoY.

Profit before Tax was up by 6% YoY at `688 Mn and Net profit at ` 692Mn was up by 9% YoY.

Retail contribution, during the quarter, stood at around 14.6% of the total domestic revenues as

compared to 10.81% in Q1 FY2011 .

In Q1 FY2012, contribution of studded jewellery to the Company’s revenue mix increased to 25-

30% as compared to 15-20% in Q1 FY2011 .




Financial Highlights

Income Statement (Standalone) Particulars (` Mn) FY10 FY11 FY12E FY13E

Net sales

29,499 52,407 75,000 85,000

Other Operating Income 52 136 163 202

Total Operational Income 29,551 52,543 75,163 85,202

Raw Material Consumed 26,999 48,671 68,498 77,605

Employee Cost 163 247 384 417

Other Expenditure 347 232 300 340

EBITDA

2,042 3,393 5,981 6,841

Depreciation 23 60 196 234

EBIT

2,019 3,333 5,785 6,606

Other Income 4 37 31 47

Interest & Financial Charges 313 709 990 1,122

Profit Before Tax 1,710 2,661 4,826 5,532

Provision for Taxation 51 22 869 996

Profit after Tax 1,659 2,638 3,957 4,536

EPS (`) 27.34 43.48 65.21 74.75 *Lohia research estimates

12,284

17,921

11,029 11,173

23,867

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

Net Sales (Rs. Mn)

637

842

683

476

692


PAT (Rs. Mn)

10.5

13.88

11.25

7.85

11.4


EPS (Rs./Share)

0%

2%

4%

6%

8%

10%

Operating & Net Margins

OPM NPM




Balance Sheet (Standalone) Particulars (` Mn) FY10 FY11 FY12E FY13E

Assets

Net Fixed Asset 174 1,194 2,440 3,317

Investments 54 1,380 118 130

Current Assets 14,922 21,760 27,564 33,775

Total Assets 15,151 24,335 30,122 37,223

Liabilities

Equity Share Capital 485 607 607 607

Reserves & Surplus 4,881 10,131 13,875 18,198

Secured Loans 2,890 4,635 4,860 5,692

Unsecured Loans 600 1,100 1,080 1,308

Current Liabilities & Provisions 6,370 7,944 9,782 11,500

Deferred Tax Liabilities (76) (82) (82) (82)

Total Liabilities 15,151 24,335 30,122 37,223 *Lohia research estimates

Financial Ratios FY10 FY11 FY12E FY13E

Profitability Ratios

Return on Assets (ROA) 10.95% 10.84% 13.14% 12.19%

Return on Equity (ROE) 30.91% 24.57% 27.33% 24.12%

Return on Capital Employed (ROCE) 22.80% 20.24% 28.33% 25.60%

DuPont Analysis - ROE Decomposition (x)

PAT/PBT (Tax Efficiency) 0.97 0.99 0.82 0.82

PBT/EBIT (Interest Burden) 0.85 0.80 0.83 0.84

EBIT/Sales (Operating Profit Margin) 0.07 0.06 0.08 0.08

Sales/Total Assets (Asset Turnover) 1.95 2.15 2.49 2.28

TA/NW (Financial Leverage) 2.82 2.27 2.08 1.98

Return on Equity (ROE) (%) 30.91 24.57 27.33 24.12

Liquidity Ratios

Current Ratio 2.34 2.74 2.82 2.94

Acid Test Ratio 2.04 2.31 2.32 2.45

Debt-Equity Ratio 0.65 0.53 0.41 0.37

Margin Ratios

EBITDA Margin 6.92% 6.47% 7.97% 8.05%

EBIT Margin 6.84% 6.36% 7.71% 7.77%

PBT Margin 5.80% 5.08% 6.43% 6.51%

Net Profit Margin 5.62% 5.03% 5.28% 5.34% *Lohia research estimates




Cash Flow Statement

Particulars (` Mn) FY11 FY12E FY13E

Cash Flow from Operating Activities

PAT 2,638 3,957 4,536

Add: Depreciation 60 196 234

Operating Profit before WC changes 2,698 4,154 4,770

Changes in Current Assets (excluding cash) (6,993) (5,672) (3,039)

Changes in Current Liabilities 1,568 1,838 1,718

Changes in WC (5,424) (3,834) (1,321)

Net Cash flow from Operations (2,726) 320 3,449

Cash Flow from Investment Activities

Capital Expenditure (CAPEX) (1,080) (1,442) (1,112)

Increase in Investments (1,326) 1,262 (12)

Net Cash flow from Investment Activities (2,406) (180) (1,124)

Cash Flow from Financing Activities

Change in Equity 121 0 0

Change in Debt 2,245 205 1,060

Dividends Paid (426) (213) (213)

Others 3,037 (0) (0)

Net Cashflow from Financing Activities 4,977 (8) 847

Net Increase in Cash & Cash Equivalents (155) 132 3,172

Cash & cash equivalents at the beginning 6,586 6,431 6,563

Cash & cash equivalents at the end 6,431 6,563 9,735 *Lohia research estimates




Outlook & Valuation

The scrip is currently trading at ` 149. In the short term there can be some correction in the stock due

to overall negative sentiments in the market. The overall market is expected to remain range bound

from nifty levels of 4800 to 5100. In such a situation, the stock can come down to `130 levels. But we

are very bullish on this scrip from a long term perspective. We expect the scrip to reach `260 within a

period of 1 year due to the following reasons:

It is among the fastest growing companies in India (Source: Business World Magazine). Even its

Q1FY12 results were in similar lines.

The Gold refining plant which would be operational by the beginning of Q3FY12 would improve

operating margins by 1-1.5%.

The company plans to add 30 additional retail stores which would add to topline & bottomline.

Reserves are expected to reach `13875 Mn by the end of FY12. The company is known to be a

investor friendly company.

At the current market price of `149, the stock is trading at P/E of 3.43 with industry P/E hovering

around 9.60, the stock is underpriced. Based on discounted cash flow method, we have arrived at a fair

price target of `260 for SGJHL. At our target price, the stock offers a potential upside of around 75%

from the current level; we initiate a ‘buy’ rating on the stock with accumulation at every dip.




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Investment Rating

Buy > 15 % Hold (5%-15%) Sell < 5%



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