IPO Size: Rs. 1,100 cr

• Rs. 850 cr is Fresh Issue to (i) fund capex of Rs. 393 cr for 12 new stores (ii) repay Rs. 300 cr of total Rs. 397 cr debt
• Rs. 250 cr is Offer For Sale (OFS) by the promoter (100% stake to drop to 83%)

Price band: Rs. 456-480 per share

M cap: Rs.6,514 cr, implying 17% dilution

IPO Date: Tue 10^th Sep to Thu 12^th Sep 2024, Listing Wed 18^th Sep 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Pune based Regional Jeweller  

P N Gadgil Jewellers is a 192 year old jeweller operating 39 retail stores, as of July 2024, under the well-established ‘PNG’ brand, of which, 32 are located in Maharashtra. 2/3^rd of company’s Rs. 6,100 cr revenue is generated from Pune, with top 3 stores accounting for 25% of total revenue.

28 of the 39 stores are company owned company operated (COCO), accounting for 93% revenue. Franchise stores, though accounting for 30% in number, contribute only 7% to revenue.

Fresh Issue for Growth

3 new COCO stores have been opened in Q1FY25. Company plans 12 new COCO stores in Maharashtra (4 each in Pune and Mumbai, 1 each in Nashik, Aurangabad, Solapur and Satara). Of these, 9 in FY25E and 3 in FY26E. Average inventory of Rs. 31 cr per store for new stores will be funded from IPO proceeds. New store addition provides healthy growth visibility, as revenue per COCO store is ~Rs. 225 cr per annum.

Growing Financials

Revenue grew 36% YoY in FY24 to Rs. 6,111 cr, due to 4 new COCO stores and online sales jumping to Rs. 112 cr, from Rs. 6 cr YoY. Gross margin however slipped from 9.8% in FY23 to 8.4% in FY24, due to competitive pressure on making charges and change in product mix (higher bullion, share of gold up 140 bps to 92.2% and higher-margin diamond down 67 bps YoY to 3.7%). Nevertheless, PAT rose 65% YoY to Rs. 154 cr, resulting in a net margin of 2.5% and an EPS of Rs. 13.

High Inventory Turnover but Low Net Margin

PN Gadgil operates at a superior inventory turnover ratio, a vital business matrix for retailing, of ~6x, against 2.1x for Senco, 2.6x for Kalyan, 3.1x for Titan and 3.2x for Thangamayil, leading to 29% RoE. However, it has the lowest net margin of 2.5%, as against 3.5% for Senco, 3.2% for Kalyan and Thangamayil and 6.8% for Titan. Thus, despite a high inventory turnover ratio, net margin is low, due to an unfavourable product mix (92% from lower-margin gold, against 88-89% for Senco and Thangamyil).

Customs Duty Cut

On 23^rd Jul 2024, Government of India cut customs duty on gold from 15% to 6%, leading to inventory loss for all jewellers. Jewellery retailer Titan, Senco and Thangamayil have quantified this loss at Rs. 500 cr, Rs. 50 cr and Rs. 29 cr on Rs. 16,000 cr, Rs. 2,400 cr and Rs. 1,200 cr inventory on books respectively. PN Gadgil carried inventory of about Rs.950 cr and it may also incur inventory loss of about 2% in the coming quarters, similar to the industry.  

Valued Lower than Peers

New store addition leads to a healthy earnings outlook for FY25E, EPS for which is estimated at over Rs. 16 per share. This leads to a PE multiple of 30x, on current year basis, lower than regional players Thangamayil (42x) and Senco (49x). Thus, even if lower margins are pencilled in, growth outlook makes the IPO valuation attractive.

Just a Thought: With a long-term credit rating of A-, company banks with Saraswat Co-op and Janata Sahakari Bank. After Punjab and Maharashtra Co-operative Bank fiasco, one wonders which corporate still does business with co-operative banks?