Gitanjali Gems Buy Call : FairWealth Institutional Research

Gitanjali Gems Buy Call : FairWealth Institutional ResearchGitanjali Gems Limited (GGL) has realigned its business model and divided the business in three verticals- The Diamond and Jewellery Manufacturing, the Indian Branded Jewellery distribution and retailing and the International branded jewellery distribution and retailing. The move has rendered more transparency and visibility to the business. During the period 2010-12, the company clocked a CAGR of ~38% in Net Revenues while CAGR of 56% in Net Profit. We expect better performance during the second half of the year due to a boost in sales during the festive and marriage seasons.

Change in Lifestyle driving growth of Organised retailers: In India, the trend in the jewellery market is changing rapidly and people are getting inclined towards the organised jewellers. This has helped the jewellery sector to grow at a rate of approximately 20% annually in India.

Well established Market Presence: Gitanjali Gems Ltd is one of the biggest jewellers in the world and is one of the biggest jewellery brands in India. Most of Gitanjali's brands are among the top 10 brands in India and hence it occupies the major share of the organized jewellery market.

Innovation, superior quality and timely product launches: GGL's dominant market status has been achieved through constant innovation, best- in -class design attributes and timeliness in bringing to market the most desirable products.

Aggressive Expansion Plans: The Company has targeted 4200 points of sale by the end of FY13 and a network size of 2 million sq feet by FY2015. It is well on course and has expanded from 1.3 million sq feet to 1.7 million sq feet in the last year. Apart from expansion in India, GGL has set up operations in many big markets such as China, Japan, US and UAE.

Impressive Performances in the Past due to a strong Business model: GGL has clocked 56% CAGR in net profit and 38% CAGR in net sales during 2010-12. With Samuels in the US, now turning profitable, and a strong presence in the largest global jewellery markets, we hope the performance to get better in the future. Along with being present in the largest jewellery markets in the world, Gitanjali also plans to be present in the fastest growing jewellery markets in the world.

Key Risks:

Sudden rises in gold and diamond prices may bring the sales volume down.
Debt to Equity ratio has been under control but it has seen an uptrend and needs to be controlled at the current level.
Fluctuations in USD-INR exchange rate.

Outlook and Valuations: Robust business model and strong margin performance to evoke high valuations. The jewellery sector is one of the fastest growing in the country and is expected to grow at ~20% annually over the next few years. . At CMP of ` 484.3, GGL is trading at 8.4x TTM EPS and at 1.7x BV which is highly discounted when compared to peer companies. Hence we recommend a BUY rating for the stock with a target price of ` 680 in 12 months.

Rating: Buy;    CMP: ` 484.4    Target: ` 680;    Upside: 40%;    Time Horizon: 1 Yr

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