Tribhovandan Bhimji Zaveri (TBZ) is entering the primary market on 24th April 2012, with a fresh issue of Rs 1.67 crore equity shares of Rs.10 each, in the price band of Rs.120 to Rs.126 per share. The issue, aggregating to Rs. 210 crore at the upper end of price band, represents 25% of the post-issue share capital of the company, and closes on 26th April.

Old habits die hard and even old memories don’t get erased easily. This seems to be the case with the promoters of this company as well. The company is presently operating 14 showrooms and wants to expand it to 57 showrooms, by the end of fiscal 2015. No harm in doing this, but why Rs.19 crore for new showrooms is being asked from the public? Why can’t this get mobilized from internal accruals? (P&L account balance of Rs. 109 crore as of 31-12-11 and 9mFY12 cash profit of over Rs. 54 crore). Also, as usual, a hefty Rs.160 crore is estimated for working capital. So, nothing new in the objects of IPO! Moreover, if all the new showrooms are going to get opened in the next 3 years, why this IPO now?

Presently the working capital situation of the company is not very comforting, with current ratio being as low as 1.08:1, on 31-3-10, which moderately rose to 1.15:1, on 31-3-11. As at 31-12-11, it has moved to 1.24:1. Still, lower than minimum prescribed ratio of 1.33:1 by the bankers. Inspite of high working capital nature of the business, showrooms are now being increased from 14 to 57. This will result in more working capital pressure on the company.

Even the financial performance of the company has not been very encouraging. For FY10, EBITDA margin was meager at 5.36%. This rose to 7.31% for FY11 and to 9.26% for 9 months ending Dec. 11. Something to do with ensuing IPO? For 9 months ending December, 2011, total income was Rs. 1,118 crores, with PAT thereon at Rs. 50.31 crores, resulting in an EPS of Rs. 10 for the period. Due to high equity base of Rs.50 crores, (due to liberal bonus of 1:4 made in October 10) FY11 EPS was only Rs.8. Though one can’t extrapolate results of first 9 months of FY12, EPS for FY 12 can be taken at around Rs.13.50.

This implies that share is issued at a PE multiple of 9.33 in primary market, at the upper band. Adding about 10% gain for prospective investors, post listing, it is issued at a PE of over 10 times, considering price discovery to happen at the upper band.

As against this, Gitanjali Gems having an EPS of about Rs.60 for FY12, is ruling at Rs.330, at a PE of less than 6 times. This is despite Gitanjali Gems having an annual turnover of about Rs.12,000 crores against estimated revenue of Rs.1,500 crores of TBZ. Also, brand portfolio of Gitanjali is much wider and popular, with stronger domestic as well as global presence. In contrast, there are five third-parties who have right to use the words ‘Tribhovandas Bhimji Zaveri’ and are currently using similar names in cities of Mumbai, New Delhi, Bengaluru and Nagpur.

Even Shrenuj, having an annual income of Rs.3,000 crores and EPS of close to Rs.10 for FY12, is ruling at Rs.67, at a PE of less than 7. Shrenuj is into diamond jewellery, where TBZ is trying to increase its share of income, in view of higher margins.

In nutshell, the company has very high equity base, which is now at Rs.50 crores and will rise to Rs.68 crores, post-IPO. Share being issued at a PE of over 10 times (based on secondary market valuations), is valued very expensively. As such, jewellery stocks are not getting good valuation on the bourses (except Titan), as evident from the stock prices of other listed companies.

Hence, issue is not likely to reward anything to the prospective investors and may rule in double digit after a month or so, after its listing. Hence, better to buy gold or diamond instead of shares of this company.