Thangamayil Jewellery's (Thangamayil's) Q1FY14 results were above CRISIL Research's expectations due to higher sales and better profitability. The company reported higher-than-expected gross margin despite a decline in gold prices. It opened four new stores in Q1FY14 (total: 30 stores). Revenue growth was supported by higher sales volume and addition of new stores. We maintain our fundamental grade of 3/5.
Higher volume and addition of new stores boost revenues
The demand for jewellery went up during the quarter due to 9 percent q-o-q decline in average gold price. With the increase in demand, Thangamayil achieved ~1,500 kg volume this quarter; up 54 percent q-o-q and 68 percent y-o-y. It added four stores in this quarter, taking the total number of stores to 30 as of Q1FY14. Overall, addition of four new stores and higher volume helped the company to register 19.3 percent revenue growth q-o-q (18.6 percent y-o-y). Further, the Reserve Bank of India (RBI) has put curbs on gold import, mandating that banks and nominated agencies should retain 20 percent (or one-fifth) of every lot of gold import in the customs bonded warehouses. They can import more gold if at least 75 percent of the gold under export quota has been exported. Domestic jewellers could be impacted by this as it can lead to shortage of gold supply, leading to higher gold premiums.
Gross margin expanded; higher EBITDA boosted PAT margin
Gross margin improved by 310 bps q-o-q to 10.7 percent despite inventory loss due to the decline in average gold price. We believe the improvement in gross margin is due to a better product mix as volumes increased in Q1FY14.
EBITDA increased by 308 percent q-o-q to Rs 284 mn due to better operating leverage driven by higher volumes and revenues. EBITDA margin improved by 473 bps q-o-q to 6.7 percent.
PAT increased to Rs 138 mn in this quarter against a loss of Rs 57mn in Q4FY13. Higher EBITDA margin led to an improvement in adjusted PAT margin by 373 bps q-o-q to 3.2 percent. The company reported EPS of Rs 10.
Earnings estimates maintained
During the first two months of the quarter, the company received very strong customer response due to the sharp drop in price of gold. We expect demand to moderate in the upcoming quarter with gold price stabilisation. We maintain our earnings estimates for FY14 and FY15.
Valuations: Current market price has an upside
We continue to assign a P/B multiple of 1.4x to Thangamayil's FY15E book value and maintain the fair value of Rs 227. At the CMP of Rs 186, the stock merits a valuation grade of 4/5.
Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report. The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.
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