Krishna KarwaMoneycontrol Research
PC Jeweller, with a market cap of Rs 22,945 crore, reported a very good set of numbers in the quarter ended December 2017.
The impressive year on year (YoY) quarterly performance can be attributed to factors such as base effect (demonetisation took place in Q3FY17), healthy traction in domestic business (led by margin-accretive studded jewellery, 25 percent same-store sales growth YoY, festive season, operationalisation of 9 new outlets in H1FY18), and cost control measures.
GST tailwinds
Under the new GST regime, in addition to market share gains due to transition from unorganised entities (currently 70 percent of the industry size) to organised ones, the recently announced tax rate reduction on diamonds and precious stones is expected to reduce working capital strain and boost loose solitaire diamond sales.
Store additions
There were no store additions in Q3FY18 due to an inauspicious period of ‘Mal Maas’. However, in Q4, the company will add 15 outlets (10 franchise-run, 5 company owned and operated). In order to boost brand visibility, store expansion in FY19 and FY20 will be at a faster pace than FY18.
Manufacturing
The company acquired a new manufacturing facility in Jaipur in Q3 and intends to acquire another in the NCR region in the next 2-3 months. Cumulatively, this will entail a capex of Rs 150 crore. Both units are likely to be operational by the end of Q1FY20, thereby strengthening the top-line.
Product mix
Diamond and studded jewellery will continue to remain the core focus areas given their superior realisation and margin profile vis-à-vis gold variants (competitive intensity and price volatility is high in case of the latter). Consequently, the company targets 30 percent growth in domestic turnover in FY18.
Technology and advertisements
The company installed augmented reality screens in five of its showrooms in India to enhance customer experience. The feature will be available in all 100 centres across the nation by March 2018 at a cost of Rs 1 lakh per centre. The percentage of ad spends to domestic sales is likely to increase from 1.25 to 2.
Asset-light expansion
In due course, franchise-run outlets will constitute approximately 80 percent of the company’s annual outlet openings owing to their ability to generate higher asset turns (roughly 4 times for gold jewellery and 2 times for diamond jewellery).
Outlook
Even as PC Jeweller continues to strengthen its foothold in India, the export scenario doesn’t seem equally encouraging in the near future. UAE, that contributes nearly 50 percent to the company’s annual export revenue, has imposed import duty on jewellery, which is an unfavourable development. For other markets, the demand is stable.
Furthermore, the company aims to take total control of manufacturing activities in the next 3-4 fiscals (from the present level of 75 percent of total operating income) to earn higher margins by virtue of better inventory management and lower expenses.
PC Jeweller trades at a steep discount to Titan, as highlighted in our earlier article. Robust fundamentals, coupled with favourable economic moats, may result in the valuation gap between the two market leaders narrowing over a period of time.
Despite the sharp rally in the past three months (69.5 percent), at 23.7x FY20 projected earnings, PC Jeweller is certainly a stock worthy of consideration for the long-run.
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