Stock Idea: Thangamayil Jewellers - The gold edge

Describe the business in a few sentences. What does the company do? Who are its primary customers?

Thangamayil is a gold jewellery retailer based mainly out of Madurai and Tamil Nadu. 92% of sales are from gold jewellery. 30-35% sales are from recycled jewellery. The company currently operates 22 stores and is looking to expand its stores by 3-4 every quarter.

Is the sector that the company is in growing? i.e. Is there a headwind or a tailwind present?

The gold retailing industry is very fragmented mostly with local small retailers. Very few large branded players in the market – Tanishq and TBZ are a few large players. Gold has been a traditional & sentimental asset class for Indians. And with the rise in its price in the last 5 years, the attachment towards it is unlikely to go down in a hurry, unless there is a lon & protracted price decline. That is an unlikely event till there is a long term improvement in global financial markets.

What is the current market share of the company? Can the market share be increased?

Currently, the company has a 25% market share in and around Madurai. It will be difficult for the company to increase market share as newer players are entering their markets. To increase sales, the company is moving into newer territories, smaller cities and towns in Tamil Nadu. The company has seen a rise in customers opting for its gold savings schemes. From 38,000 customers, it has gone up to 80,000 this year and is expected to be close to 125,000 by year end. This provides free funds to the company also provides assured customer sales.

Who are the primary competitors? Why is this company a better investment than them?

Large players like Tanishq, TBZ would not go down to the Tier II cities like Madurai before penetrating the Tier I cities. Similar sized players like Alukkas Jewellers, Bhima Jewellers, Kalyan Jewellers, Lalitha Jewellers, Kirthilal Jewellers are entering Madurai and may take away some market share from the company. An important factor in jewellery retail is “trust”. Women (the main decision makers wile purchasing jewellery) tend to stick to a particular store/brand and since pricing is the same across companies, personal relationships with the retailer are definite plus point. Thangamayil is the only small sized jewellery retailer that is listed on the stock exchanges.

What is the owners’ and managements’ stake in the company?

Promoters hold nearly 70% stock of the company.

Are management's salaries too high?

Management salaries were increased in 2012 to 90 lakhs (9 million p.a.) and 1% of net profits. At a 60 cr profit, 1% commission comes to 60 lakh. So, an annual compensation of 1.5 crores, which is not exorbitant by today’s standards.

How much debt is there in the balance sheet? Is it increasing, decreasing or remaining constant?

Company has a debt of 250.93 cr on its books. Most of the debt is short term working capital debt to finance buying gold and maintaining inventory at store level. Since, the debt is used to purchase gold, the risk associated is limited, unless there is a very sudden and sharp price decline in gold (which is a very low probability event).

Is the debt level normal for the sector the company is operating in (i.e. how much is the debt-equity ratio of its nearest competitors)?

Thangamayil’s D/E is 1.85. It has increased over the last 5 years. This is one area which needs to be carefully watched. Most gold retailers have high D/E ratios with the notable exception of Titan (which is practically debt free). TBZ has a D/E ratio of 1.28.

How much cash is there on the BS? What is the cash per share?

Cash is 9.5 cr as on Mar 31, 2012. Not significant with respect to either equity or debt.

Is the Networth rising over the years?

Networth has gone up from 22.9 in 2008 to 146 cr in 2012 at a growth rate of 59% CAGR.

Is the inventory/sales rising or more-or-less in the same range? [Rising ratio may mean company is not able to sell its products.]

Inventory / Sales is nearly 30% for the last 2 years.

Is the debtors/sales rising or more-or-less in the same range? [Rising ratio may mean company is not able to collect payment.]

Debtors is negligible.

Has the company increased its sale, net profit, operating margins and net margins over the years?

TRENDS: 5Years 3Years 1 Year Sales Growth 54.83% 66.12% 53.84% OPM 8.79% 9.23% Profit growth 80.3% 87.6% 9.64% RoE 41.41% 41.97% 48.35%

Has the company increased it RoE, RoCE, (RoA for financial companies) over the years or atleast maintained it? How does it compare to its competitors?

Due to the extensive use of leverage, ROCE is nearly double that of RoE. Narration Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 RoE 30% 27% 21% 32% 40% RoCE 23% 20% 16% 19% 22%

Is the company operating cash flow positive? Is the operating – investment cashflow positive? Is the company net free cashflow positive? Is the Operating cash flow higher than earnings per share?

Company has negative operating cash flow for the last 5 years.

Does the company pay tax, dividends every year?

Company is paying a standard tax rate. Dividend payout. Div yield is over 2% at CMP. The company has decided to expense out all its advertisement and publicity expenses (written off accumulated deferred revenue expenses) in this year. This will reduce reported net profits for FY13. e.g. In Q2Fy13, profit was under stated by 7.3 cr as a result of expensing deferred advertisement expenses.

Is the Free Cash Flow per share higher than dividends paid?

The company has been consistently running a negative operating cash flow in order to grow. Again, a key monitorable.

Is the business capital intensive?

Gold retailing is very capital intensive. The company maintains around 1,500 kgs of gold as inventory. As the numbers of stores go up, the size of the inventory also needs to go up.

What is the possible valuation or price target?

FY12 EPS is 43.05. Unadjusted EPS for FY13 could be around the same level as last year. FY14E EPS could be around 60-65. A conservative PE of 8-10 could provide a price range of 480 – 650 which is substantially higher from CMP.

Is the PE ratio below 15? Is the PEG above 1.0?

PE is around 8.5 (TTM). PEG is well below 0.5 as the company has been growing well over the last 3-5 years.

Why do you think the stock is under priced? Is there an expectation to double the investment in 2-3 year timeframe? If not, why bother?

The peer group of gold or jewellery companies is all trading at much higher earning multiples. The differential is primarily because Thangamayil operates in Tier-II & Tier-III towns and not the large metro cities.

What has been the share price over the last 5 years? Has it matched the profit growth? If not, why not? Does the market know something I don’t?

The stock has moved from about 70 to 330 in approximately 3 years (a return of 368% vs 20% of the Sensex in the same period.