Tara Jewels IPO Analysis – Valuation Appears Expensive Compared to Peers

IPO Snapshot

Tara Jewels Limited is coming out with a 100% book-building Initial Public Offering (IPO) of 79,77,778 equity shares of face value ₹10 each, in a price band of ₹225–₹230 per share.

• Issue opens: 21 November 2012

• Issue closes: 23 November 2012

• Listing: Bombay Stock Exchange (BSE) and National Stock Exchange of India (NSE)

Issue Allocation

• Up to 50% – Qualified Institutional Buyers (QIBs), including 5% for mutual funds

• Minimum 15% – Non-Institutional Investors (NIIs)

• 35% – Retail Individual Investors

Key Issue Details

• Lead Managers: Enam Securities, ICICI Securities

• Compliance Officer: Amol Raje

• Face Value: ₹10

• Issue Price Multiple:

  • 22.5x at ₹225

  • 23.0x at ₹230

Company Profile

Tara Jewels is an integrated jewellery company, operating across manufacturing, exports, and retail. The company has been conferred Star Trading House status by the Ministry of Commerce & Industry, Government of India, and has been among the top exporters in the gems and jewellery sector in FY2009 and FY2010.

Product Portfolio

• Gold, platinum, honeydium, pristinium, and silver jewellery

• With or without precious and semi-precious stones

• Caters to high-end, mid-market, and value segments

Manufacturing & Operations

• Manufacturing units: 4

  • 1 in Panyu, China

  • 3 in Mumbai (2 in SEEPZ, 1 in MIDC)

• Total manufacturing area: 84,584 sq. ft.

• Workforce:

  • 35 designers

  • 955 craftsmen (as of 30 September 2012)

Production Volumes

• FY2010: 2,562.91 kg

• FY2011: 4,753.25 kg

• FY2012: 10,616.40 kg

• Two months ended May 31, 2012: 554.77 kg

Export Business Overview

Tara Jewels is primarily an export-driven company.

• Key export markets: USA, Canada, Australia, China, EU, UK, UAE, South Africa

• EU exports span 12 countries, including Germany, Switzerland, and Austria

• Export income CAGR (FY10–FY12): 19.77%

Export Contribution to Total Income

• FY2010: 97.59%

• FY2011: 80.99%

• FY2012: 80.90%

• 2 months ended May 31, 2012: 78.82%

IPO Grading

CARE Ratings has assigned an IPO Grade 3, indicating average fundamentals.

Objects of the Issue

The IPO proceeds will be utilised for:

1. Establishing retail stores

2. Repayment / prepayment of loans

3. General corporate purposes

Industry Overview – Gems & Jewellery

• The US is the largest jewellery market, followed by China, India, and the Middle East

• Global jewellery sales expected to grow at 4.6% CAGR (2010–2015)

• India is the largest consumer of gold and a major exporter of:

  • Cut and polished diamonds

  • Gold jewellery

Key Industry Highlights

• ~95% of imported gold is used for jewellery

• 11 out of 12 diamonds sold globally are cut and polished in India

• Gems & jewellery accounted for ~17.5% of India’s merchandise exports in FY2011

Strengths of Tara Jewels

• Leadership in studded jewellery exports

• Access to advanced manufacturing technology

• Established global client relationships

• Strong sales and distribution network

Risks & Concerns

• Customer concentration risk: Top 10 customers contribute ~70% of export revenue

• Highly competitive Indian retail jewellery market

• No long-term export contracts

• Dependence on key suppliers for gold and diamonds

• Seasonal demand patterns

• Domestic retail contributes only ~20% of revenue

• High working-capital intensity

• Debt-equity ratio remains elevated even post-IPO

Financial Performance (₹ Crore)

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Valuation Analysis

• FY2012 EPS: ₹30

• Book Value (FY12): ₹154 per share

• Implied P/E (Post Issue): ~10.5x

Peer Comparison (Post-Issue P/E)

• Renaissance Jewellery: ~4x

• Rajesh Exports: ~8.8x

• Shree Ganesh Jewellery: ~1.6x

• Gitanjali Gems: ~8.3x

Tara Jewels is seeking a premium valuation relative to peers, despite:

• Lower domestic retail contribution

• High working-capital dependence

• Significant leverage

Investment View

While the jewellery sector is witnessing positive momentum and a short-term listing pop cannot be ruled out, the IPO valuation appears on the higher side compared to listed peers.

Given:

• Intense competition

• Capital-intensive operations

• Elevated receivables and inventory levels

Long-term investors may consider avoiding the IPO and evaluate the stock post-listing if available at more attractive valuations.

Conclusion

Tara Jewels has a strong export presence and operational scale, but valuation comfort is limited at the IPO price band. Selective participation post-listing may offer better risk-reward.

Disclaimer

This article is for educational and informational purposes only. It does not constitute investment advice or a recommendation to buy, sell, or hold any security. Investors should read the Red Herring Prospectus carefully and consult their financial advisor before investing. Capital market investments are subject to market risks.