PC Jeweller is entering the capital market on 10^th December 2012 through a fresh issue of 4.51 crore equity shares of Rs.10 each, priced in the band of Rs. 125 to Rs. 135 per share. A discount of Rs. 5 per share will be offered to the retail investors. Company will raise Rs. 556 crore and Rs. 601 crore, at the lower and upper end of the price band, respectively. Representing 25.20% of the fully diluted post issue paid-up capital of the company, the issue closes on 12^th December 2012.

PC Jeweller, promoted in 2005 by brothers Balram Garg and Padam Chand Gupta, manufactures, retails and exports gold and diamond jewellery, through 30 showrooms under the ‘PC Jeweller’ brand across 23 cities in North and Central India, spanning 1.64 lakh sq. ft. of showroom space. Company owns 5 tax-efficient manufacturing facilities in North India – 3 catering to domestic and 2 to export markets. Exports, mainly to Hong Kong and Dubai, account for about one-third of company’s revenues. Of the balance two-thirds domestic sales, high-margin diamond jewellery business accounts for approximately 30%.  

For FY12, company’s revenues stood at Rs. 3,042 crore with net profit of Rs. 230 crore, resulting in net margin of 7.6% and EPS of Rs. 17.17. For 6 months ended 30^th September 2012, company’s revenue was Rs. 1,855 crore with net profit of Rs. 142 crore, resulting in net margin of 7.7% and EPS of Rs. 10.60. However, the company’s equity base is high at Rs. 134 crore, thanks to the 2:1 bonus issue in September 2011. Post IPO, it will only expand further to Rs. 179.10 crore,.  

As of 30^th September 2012, its networth stood at Rs. 698 crore, resulting in BVPS of Rs. 52. Company has debt of Rs. 377 crore, while it has availed non-fund based credit of Rs. 1,267 crore for purchase of gold. Promoter shareholding is currently at 93.61%, which will reduce to 70.02%, post-listing.

Funds raised via IPO will be used to open 20 stores across the country, mainly in west and south, till FY14, at an investment of Rs. 517 crore. This translates into capex of Rs. 26 crore per store, including Rs. 23 crore towards store inventory. However, currently company has inventory of Rs. 1,396 crore, as of 30^th September 2012, with 30 stores in operation, which leads to Rs. 47 crore worth inventory per store. Thus, there is likelihood that additional funds may be required to meet inventory needs of new stores in the future, which may strain debt levels further.  

As of 30^th September 2012, company’s debtors stood at Rs. 703 crore, representing 68 days of sales. If the company earns over 65% of its revenues from retail domestic sales, on which, as per industry practice, negligible credit period is extended, why are the debtors days so high? Retail focused peers such as Titan Industries and TBZ have these days at 6 and 1 respectively, as of 30^th September 2012. Even historically, debtor days have been very high for PC Jeweller, at 81, 77 and 91 days for FY12, FY11 and FY10 respectively. 

Company’s MD Balram Garg’s remuneration has been increased to Rs. 6 crore per annum prior to the IPO, which was Rs. 16.3 lakh in FY10, Rs. 1.3 lakh in FY11, Rs. 4.5 crore in FY12! This hike over the years is not commensurate with company’s annual profits (PAT for FY10, FY11 and FY12 was Rs. 78 crore, Rs. 148 crore and Rs. 230 crore respectively). Company is justifying such hike in remuneration prior to the IPO by giving range of salaries of MDs and CEOs of Nifty companies. However, such comparison is both ridiculous and futile. Firstly, all of the 50 Nifty companies have market cap of Rs. 10,000 crore plus. Moreover, as pointed out on Pg 15 of the RHP, only 20 Nifty companies had their MDs/CEOs earn remuneration higher than Mr. Balram Garg. Thus, the comparison, besides being alarming, is quite superfluous!

Below is the comparison of listed peers in the jewellery sector:

Estimating Rs. 310 crore as net profit for FY13, leading to EPS of close to Rs. 21.25, shares are being issued to the public at a PE multiple of 5.9x and 6.4x, at lower and upper end of the price band respectively, which is reasonable in relationship to peers, given the company’s healthy net margins and strong brand recall.

Titan Industries (debt free and 75-80% topline from jewellery business) and TBZ are ruling in PE multiples of 25 times and plus, while Gitanjali Gems is trading at PE multiple of 7x, making the current IPO attractively priced for retail investors (PE of 6x after retail discount of Rs. 5 per share). Only Shree Ganesh Jewellery House, which has 80% of its topline earned from exports, is ruling at PE multiple of 2 times.

Investors can apply in the issue.