PC Jeweller up 5%; Motilal Oswal initiates buy, sees 36% upside on strong earnings growth hope

November 23
14:05 2017
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PC Jeweller share price rallied more than 5 percent intraday Thursday after Motilal Oswal has initiated coverage with buy rating on PC Jeweller, citing strong earnings growth hope on value migration to organised players.

The research house sees 36 percent potential upside in the stock at a target price of Rs 490 per share.

PC Jeweller, India’s second-largest Jewelry Retailer with a strong presence in the North and wedding jewellery, is expanding aggressively to leverage the ongoing value migration.

Motilal Oswal sees an enormous opportunity unfolding in Indian jewellery as a result of value migration towards organised players. Among all consumer categories, jewellery has the largest share of the unorganised segment, both in absolute terms (at Rs 1.4 trillion) and percentage terms (at 70 percent).

It feels the value migration to organised players is so strong that Titan and PC Jeweller are expected to report by far the highest EPS CAGR over FY17-20 in consumer and retail universe.

Organised players have only around 30 percent share of the Rs 2 trillion Jewelry market in India, with the national players having less than 10 percent share.

However, armed as they are with the advantages of scale, technology, brand trust, superior hedging policies, wider variety and huge marketing muscle, nation-wide players like PC Jeweller will continue to take share away from the unorganised players for whom the pressures of compliance have whittled away at their ability to offer lower rates to consumers, Motilal Oswal said.

A spate of regulatory changes in the last few years has driven a tectonic shift in the jewellery sector in India. The industry was already witnessing a gradual shift towards the organised segment, which now constitutes about 30 percent of the Rs 2 trillion domestic jewellery market.

The government’s initiatives, aimed at protecting customers and clamping down on black money, have added momentum to this shift. Actions such as the levy of 1 percent excise duty on gold jewellery, requirement of PAN for jewellery purchases of over Rs 2 lakh, demonetisation, and implementation of 3 percent GST have permanently dented the advantages that unorganised, unbranded and local players had.

Large nation-wide players like Tanishq and PC Jeweller have been taking steps to leverage the enormous opportunity unfolding in Indian jewellery. Among the initiatives they have taken over the last few years are increased focus on store addition, increasing use of franchisees (particularly true for PC Jewellers), greater focus on studded jewellery (currently around 30 percent of sales), developing jewellery attuned to regional tastes, higher investments in brand building, and increasing launches of new collections.

PC Jeweller has grown from a small player in 2006 to the second-largest jewellery retailer in India. Significant store expansion, opening of large-format destination stores, superior gold hedging policies compared to unorganised players, dedicated focus on Wedding jewellery and diamond jewellery, banking on the trust factor built through best practices and brand investments, wide range to cater to diverse customers have all played a major role in driving rapid sales growth of 22.8 percent CAGR over FY12-17.

For PC Jeweller, Motilal Oswal expects strong 27 percent CAGR over FY17-20 in the domestic business (64 percent of consolidated sales in FY17) resulting in more than doubling of the segment sales over FY17-20. This results in 21 percent consolidated sales CAGR, 24 percent EBITDA CAGR and 30 percent adjusted PAT CAGR over the next three years.

According to the research house, return on capital employed is likely to improve from 16.9 percent in FY17 to 19.5 percent in FY20, mainly led by increasing store-level sales and profitability as well as higher use of franchisees, making the business asset-light.

Faster growth in domestic business will also marginalise the lower-margin exports business to 24 percent of sales by FY20, it said.

Motilal Oswal said in case of its bull case price target of Rs 550, it expects revenue and net profit to grow at a compound annual growth rate of 23 percent and 36 percent respectively over till March 2020.

At 12:12 hours IST, the stock price was quoting at Rs 371.25, up Rs 10.20, or 2.83 percent on the BSE.

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