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Post IPO news dated 23-Nov-2012

• The news is that Tara Jewels IPO got subscribed 1.9 times.
• The Retail and Qualified Institutional Investor portions got fully subscribed, while the HNI quota went over 3 times
• Happy to note that my prediction yesterday turned out right :-)

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Investment Report dated 22-Nov-2012. 

Offering:  IPO is of Price Range Rs 225-230, open from Nov 21-23. 

Tara Jewels is a small cap Gems and Jewellery firm with a blended export plus domestic business plan. Tara has average financials, but is in a good industry. Offer is Fairly priced. Invest for a listing pop or for longer term of 3+ years. 

Tara Jewels – Description and Profile

• Tara Jewels is a Mumbai based jewellery manufacturer with domestic and exports revenues.
• Revenues in FY12 were Rs 1399 crores with PAT 56 cr. Operating and profit margins are 9.6% and 4%.
• And growth figures of Revenues, EBITDA and PAT are 23%, 34% and 27% resp. CAGR for 5 years.
• They employ 1738 staff. Manufacturing units are at Seepz Mumbai (3) and Panyu, China (1), while in India Tara has 30 retail outlets in West, North & Central regions.
• Products include gold, platinum, and silver jewellery with studded precious (diamond) and semi-precious stones.
• Exports are to well known retailers like Walmart, Zale, Sterling, Matsumoto, Signet, JKB, Dicia, JC Penny, etc. where products are sometimes co-branded; distribution is to 12,000 stores globally.
• Tara promoter is Rajeev Sheth, a 31 year veteran of gems and jewellery.

Why Is Tara going for an IPO?

• Repay expensive debt of Rs 50 cr. With the repayment, D/E will fall from current 2.14 to 1.3 times
• Invest 67 cr. to extend domestic showroom strength from 30 to 50. The focus is on domestic market.
• Exit route for an early investor Fabrikant H.K., which will net them Rs 70 cr.
• Tara will also meet the listing norms where promoters can hold a maximum of 75% of shares.

Industry

• The overall size of domestic Gems and Jewellery sector is pegged at $30 billion (Rs 1,50,000 cr). The unorganised sector accounts for 90% of retail market in India, according to (CRISIL Research).
• According to a FICCI-Technopak study this market is expected to grow up to Rs 183,200 crore by 2014-15, a CAGR of 10-12%.
• Quick calculations give Tara a Market share of 1.2% of the organized Indian jewellery market.
• Organized sector competition to Tara is from Titan, TBZ, Shree Ganesh, Joy Alukkas, Thangamayil and Kirtilal Kalidas, Reliance Jewels and Big Bazaar.

Key Strengths of Tara and IPO offer

• Tara exports to a well known and prestigious group of Retailers.
• Good industry experience from the first generation entrepreneur promoter.
• The price volatility in this sector due to commodity inputs like gold and diamonds appears to be well managed by Tara in terms of their procurement systems.
• IT systems appear to be strong, with a SAP implementation in place.
• Integrated business model extending from manufacturing to exports to retailing.

 Key Weaknesses/ Issues/ Challenges of Tara and IPO offer

• Domestic retail area is of approx 29,900 sqft, indicating sales of Rs 0.6 lakh per sqft per year. This compares unfavourably with Tribhovandas Bhimji Zaveri (Rs 2.35L), Tanishq (1.67L) and Gold Plus (1.05L). These chains are of a different scale nationally, but this is a negative for Tara.
• Cash Flow negative due to investments in Retail operations and manufacturing. High debt that is going to reduce due to IPO, then increase again over next 2 years per business plans
• Intense competition from both current organized and unorganized sector.
• In exports, margins may be capped due to business to business nature of sales.
• Capital intensive manufacturing and retail operations.
• Government recently raised the duties on Gold imports, this raises cost of gold Jewellery. Another new rule is on the requirement of PAN number of buyer for purchases of more than Rs 5 lakh.

Strategic Thoughts around this IPO

• The Tara IPO offer straddles a key trend – the transition of Indian Gems and Jewellery retail from unorganized to organized sector in India. This is expected to accelerate over the years.
• This sector is part of the India consumption story. As India becomes both more populous and affluent, Gems and Jewellery sales are bound to multiply.
• Exports have massive potential but margins may be restricted due to BtoB nature of sales. Volumes can be increased, but market conditions (except China) look poor.

IPO Offering Outline and Valuations:

• Offer is of 180 lakh shares in price range Rs 225-230 available from Nov 21-23^rd.
• This 32% dilution will collect Rs 184 crores, and value the firm at 575 crores market cap.

Valuations\ Firm	Tara (Post IPO)	Titan	TBZ	Gitanjali Gems	Rajesh Exports
P/E multiple	7.5	45.6	29.6	7.7	8.6

• Tara valuation (PE) will be at 7.5 times trailing twelve months (TTM). It’s obvious that the domestic focused firms are awarded a steep valuation by the market, while the export focused are not that fortunate!!
• CARE graded the IPO 3/5
• The D/E ratio of the company will fall post IPO.
• Ahead of the IPO, the company has allotted shares worth over Rs 26 cr. to two anchor investors at a reported Rs 225 per share.

Opinion, Outlook and Recommendation

• The business model is export focused and here the prospects are good only in the long term. Domestic business is fair now, and requires investments and time to mature.
• This is a Medium investment opportunity. There may be pop on listing due to a paucity of IPO offerings, Retail interest and a brave promoter.
• Investors for the longer term 3+ years, will be rewarded once the domestic plans fructify and the exports markets emerge from recession.
• A 16% subscription by EoD 22nd does not mean this IPO will not do well. There is very often a last day surge. I expect oversubscription.

 JainMatrix Knowledge Base:

• TBZ: A Glittering IPO Offer – Invest  – LINK
• MCX – 800 pound Gorilla of Commodities; Invest – LINK
• Titan Industries – The Jewel in the Crown

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Disclaimer:

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