P N Gadgil Jewellers’ IPO is open between September 10 and 12. The offer size is ₹1,100 crore, of which ₹850 crore is a fresh issue and ₹250 crore an OFS (Offer for Sale) from the promoter. The promoter stake post issue will be 83 per cent.
According to the company, the funds raised will be used to set up 12 new stores in Maharashtra, repayment of certain borrowings and general corporate purposes.
The offer price band is ₹456-480. The company is valued at a PE of around 22 times its FY24 earnings and the market capitalisation at the upper end of the price band is ₹6,514 crore.
Demand for the IPO is strong, with the issue being subscribed by a little over two times on Day 1 (September 10). Therefore, there is a good chance the stock will return good gains in the short term.
However, if you are a fundamental long-term investor, we recommend that investors wait and watch for the following reasons. At a PE of 22 times, the company is cheaper compared to peers, but its margins are lower, and the company mainly operates in Maharashtra, and has a higher geographic concentration risk. Further, while relative attractiveness versus peers might be a plus in the short term when market sentiment is buoyant, absolute valuation matters from a long-term perspective. On that aspect, while the company is not expensive, it is not cheap either.
Business and growth
The jeweller predominantly operates in the Western region of the country. As on July 31, the company had 39 stores, of which 35 are in Maharashtra. They are the second largest player in the state by number of stores.
Of the 39 stores, 28 are COCO (company owned company operated) stores and 11 are FOCO (franchisee-owned and company operated) outlets. Revenue share of FOCO stores stood at 7.5 per cent in FY2024.
As mentioned earlier, the funds raised in the IPO will be used to deepen their presence in the western state.
Although the company deals in gold, silver, diamond and platinum, around 92 per cent of the revenue in 2024 was generated by selling gold jewellery. Following this, silver jewellery accounted for 3 per cent.
The company also runs an installment scheme named FPP (future purchase plan) through which they can generate futures sales.
The jewellery industry per se is dominated by unorganised players throughout the country. However, there has been a structural shift in recent years – the share of organised players has improved from 30 per cent in FY18 to an estimated 38 per cent in FY24. This is further estimated to grow to 43 per cent by FY28, according to a study by Technopak.
Regulatory developments like HUID (Hallmark Unique Identification) and implementation of GST have helped the organised players. A recent cut in the gold import duty is also a positive for the industry.
Given its geographic concentration, the growth of the company is pinned to how Maharashtra grows.
Apart from the specific factors above, as disposable income increases, demand for jewellery, which contributed 7.3 per cent in the retail consumption basket of the country, can go up. The share of jewellery is forecast to increase to 8.7 per cent of the retail consumption basket in FY27. Also, the Indian domestic jewellery market is expected to grow at 16 per cent CAGR to $145 billion in FY28, versus an estimated $80 billion in FY24.
Financials
Revenue expanded 36 per cent year-on-year in FY24 to ₹6,119 crore in FY24. During this time, gold prices, in terms of dollars, appreciated 13 per cent. Sales growing at over and above the increase in price of gold, is indicative of volume growth.
For the fiscal 2024, EBITDA and PAT stood at ₹277 crore and ₹154 crore, respectively. Thus, EBITDA and PAT margins were at 4.5 per cent and 2.5 per cent respectively.
P N Gadgil Jewellers is also able to churn capital well as their working capital days, at 51 days, in FY24 is one of the lowest. Also, revenue from operations per square feet, at ₹6,02,974 in the financial year 2024 is one of the highest.
Risks
The jewellery industry per se is highly competitive and the margins are usually lower. Particularly for P N Gadgil Jewellers, EBITDA and PAT margins of 4.5 and 2.5 per cent, respectively, are low compared to key listed peers whose net profit margins are above 3 per cent.
In addition, fluctuations in gold price can have an impact on profitability and the business also requires a significant amount of working capital as gold is their raw material.
Importantly, the company mainly operates in Maharashtra and notably, Pune contributed nearly 65 per cent of the revenue in FY24. Therefore, there exists a considerable concentration risk.
The IPO is priced at trailing PE of 22 times as compared to listed peers like Titan Company, Kalyan Jewellers India and Senco Gold and Thangamayil Jewellery trading at 96, 105, 45 and 48 respectively. Peer valuations have got a significant boost from positive sentiment in the markets and their valuations appear stretched. The same positive sentiment may result in possible listing gains and near-term performance also. However, absolute valuation matters when one takes a long-term perspective, and on that basis the IPO is not attractive enough.