TBZ IPO Review by KM Global (Avoid)

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Review By K.M. Global Financial Services Ltd on April 25, 2012

Issue Period: Apr 24 - Apr 26
Price Band (Rs): 120-126
Issue Size (Rs Cr): 200-210
Mcap (Rs Cr): 800-840
Grading: CRISIL Grade 3
Promoter: Shrikant Zaveri
Listing: NSE, BSE
Grey Market: Rs 3-4
BRLM: IDFC Capital, Avendus Capital
Anchor Invetsors (At Rs 120/s): HSBC Global Investment Funds, Credit Suisse (Singapore) ltd, HSBC India Alpha (Mauritius) ltd

TBZ is a gold and diamond studded jewellery retailer with 14 showrooms (totaling ~49,000 sq ft) in 10 cities across five states. The company has a manufacturing unit for diamond-studded jewellery in Kandivli, Mumbai. It has an annual production capacity of approximately 100,000 cts. of diamond-studded jewellery, 4,000 kgs of gold refining and manufacturing 4,500 kgs of gold jewellery components.

The company plans to add 43 showrooms by fiscal 2015. Post expansion the total number of showrooms would be 57 in 43 cities across 14 states.

Shrikant Zaveri is the Chairman and Managing Director of the company, has an experience of over 30 years in the jewellery retail sector.

• Robust Growth - TBZ's total income grew at a CAGR of 41% during FY07-FY11E to Rs 1,194 Cr while bottomline grew by 52% to Rs 40 Cr during the same period. The robust growth was due to addition of new showrooms. During 9MFY12, 72% of the revenues was from the sale of gold jewellery, 25% from the sale of diamond studded jewellery and rest from other products.
• Subdued margins - Company's operating margins improved from 5% in FY10 to 7% in FY11 on the back of improvement in revenue share of diamond jewellery business which is a high margin business compared to sale of gold jewellery. PAT margins also witnessed the same trend which expanded by 100 bps to 3% in FY11.
• Stretched working capital position - TBZ's working capital days are in line with its peers, Joyalukkas and Thangamayil, at ~75 days (FY09-FY11 average). TBZ's inventory days are higher at 79 days due to higher proportion of diamond-studded jewellery, which has lower inventory churn as compared to gold jewellery, and also because of its own diamond manufacturing facility.
• Improving return ratios - With improvement in earnings RoE improved to 36% in FY11 from 25% in FY10. In 9mFY11, TBZ did an RoE of 37% on an unannualized basis. Leverage is quite high, 2 times its equity on a pre issue basis. Post issue it will fall to 0.9. Considering the working captal intensive nature of the business and its expansion plans leverage will be on the higher side going forward.

Concerns

• Highly Competitive Industry - The Indian retail jewellery industry is highly fragmented and dominated by the unorganized sector, from which the organized retail jewellery sector faces intense competition. The players in the unorganized sector offer their products at highly competitive prices and many of them are well established in their local sectors. High competition will lead to higher spending on advertising, lower volumes and realisations and/or suppressed margins on gold jewellery.
• Working Capital Intensive - Due to working capital intensive nature of the business, the net margins are strained because of high leverage. Going forward as the company plans to add new showrooms, margins will continue to be under pressure.
• Brand Dilution - Some of the retiring partners have the right to use the brand name Tribhovandas Bhimji Zaveri with modifications - through prefixes and suffixes. Currently, there are other players sharing the brand name Tribhovandas Bhimji Zaveri. Hence, the company faces the risk of brand dilution if any player underperforms on quality terms.