Monday, 10 December 2012

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?
1 Year
Sales Growth

Profit growth
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.


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.


  1. Hi Abshishek

    There is no doubt this company is very attractively priced and has demonstrated good growth in the past. Below are my main concerns (more from philosophy perpective and for most of the people it might not be big concerns):

    1) Past growth might not be reflective of future growth, because of lot of one-off events and possibly accounting management:
    a) The past growth in jewellery sales might have been triggered more by steep increase in gold prices itself, which attracts more people to buy jewellery. Even if gold prices remain constant from here onwards, there is every possibility than growth in sales might be considerably less than in the past.
    b) There were reports in the newspaper some time back of farm credit being diverted to buy jewellery. Now its difficult to quantify the impact, but nevertheless it should be considered. -
    c) One of my friend is a wholesale supplier to companies like Thangamayil. According to him, these companies’ gives bill in various sister concerns to manage sales. I am not suggesting this is happening with Thangamayil too, but there is more possibility going by trend in such firms.
    d) I think off late retail jewellery firms have been boosted by easy availability of equity funding for such companies. Now we are against two things a) possible bubble in gold b) easy availability of equity for retail jewellery which is boosting their rapid expansion. In an informal chat one of my other friend who also supplies to such firms said, easy equity funding and charm of listing is luring many firm to expand rapidly to be able to raise equity in near future.

    2) Continuous increase in gold price itself must have boosted the operating profit, so profit should be discounted to that extent to reflect normalised levels.
    3) The entry barrier in this segment work against the company itself. It will be very difficult for Thangamayil to attract customers from other family owned stores, when it expands in new geography. With cash profit margin varying between 3-5% in the last few years, any pressure on margins or profitability due to decline in gold prices will result in steep decline in profits. Not just gold prices in international market, but even the adverse movement in rupee will impact the gold prices in INR.
    4) Lastly, significant drop though is a black swan event, but with existing leverage (operating and financial) can result in steep losses.

  2. Hi Anil,

    Your arguments are good. I also suspect that a lot of farm credit or MNREGA money is getting diverted to gold. Where I differ from you is that it will continue. Also, even if gold price stabilizes here, Indians are unlikely to stop or delay buying. More because middle class India does not have a more stable/emotional asset class to invest in. Additionally, wedding season buying is probably never going to go away in India.
    Rise in gold prices have definitely helped profits going up, but also we need to remember that high prices has reduced volume growth a great deal. So, over a 3-4 year period I suspect it evens out. Also, the valuations at the current level are reasonable.

    The company is expanding in mostly very small towns and cities, so they are taking away customers from unorganized players.

  3. Hi Abhishek,

    Good analysis as always. I see few problems with this company though it appears a value buy at current valuation, so here are my 2 cents.

    1. Rapid expansion in a bid to grow manifold overnight. The announcements on BSE show they have added at least 10 stores in last 6-9 months. As each stores requires huge amount of working capital, this leads to even higher debt and that comes with higher interest rates. We have seen this with Subhiksha, Coutons and Cantabil.
    2. The sales growth will likely be tepid in future as they move out of their traditional stronghold of Madurai. This is a trust based business and it takes a long time to establish it in new places where existing players will give it a tough time. I think this is evident to some extent in numbers where in spite of expansion, the growth is slowing down.
    3. While the jury is still out on gold price trend, the risks are definitely higher at this point and any adverse shock in gold prices will take its toll on Thangamayil due to huge inventory. Agreed that the stock is very liquid, however, they will need to retain this inventory as nobody likes to visit an empty store.
    4. There is no real brand differentiation of this chain with many others operating throughout India so pricing will always be competitive unlike Titan or TBZ where they have successfully built a premium image and demand a premium price in a commodity market.
    5. The rapid expansion by all players, listed or unlisted, is indicative of a bubble. Any demand shock will take its toll on a highly leveraged player like Thangamayil.


    1. Good points Tarun. Here is what I think. Let me know your thoughts...

      1. The difference between a gold retailer and a grocer or apparel retailer is in the merchandise inventory. There is no market for old clothes, so the inventory is marked down heavily for people like Subhiksha, Coutons and Cantabil.GOld, on the other hand, does not lose its value that quickly.
      2. Its focus in more on moving to smaller towns and cities. Out of its total branch network, only a handful (Madurai, Tuticorin, Salem and Coimbatore branches) are in municipal corporations. The rest are in medium-sized towns and some in the rural areas, in places such as
      Dharapuram, Cumbum, Theni, Krishnagiri and Vallakoil.
      3.Gold price is not going down in a hurry till the external economy improves. My take (and I reserve the right to be wrong!!) is that economic recovery is a long way off. So, no immediate threat of gold price collapsing. But it is a key monitorable risk.
      4. Titan, TBZ are targetting urban upper middle class or rich people. These guys are targetting semi-urban/rural middle class and rich. When do you think Titan is going to open a store in rural Tami Nadu? Maybe 10/15 years to go for that. Till then what the people have got is players like Thangamayil and their brethren. Also, what is the brand difference between Titan and TBZ? Nothing to my mind.
      5.The rapid expansion and regular IPO absolutely looks like it will end up in trouble :-) Bubble will form only when the valuation goes through the roof. Bubbles form at 50-60-100 PE. At 8-9 PE, a lot of the risks may be there in the price.

      The point is if I want Titan I have to pay 40 times earnings. Here I have to pay 8 times. Sure there are problems, otherwise this would also be 40 times. Question is, is the possible reward more than the risk. I think it is; for atleast the next 12-15 months. After that will need to reassess.

  4. Sourced from Equitymaster's 5 minute wrap - a email newsletter:-

    The new set of rules by the Basel Committee (Basel III), which mandates capital and regulatory standards for global banks, has re-designated gold. In other words gold has been reclassified as a Tier I asset for commercial banks from a Tier III capital under Basel I and II. Now, for capital adequacy purposes, banks need to assign weights to Tier I, II and II capital. As Tier III capital, gold was earlier given a weightage of 50%. So, Rs 100 worth of gold was valued at Rs 50 earlier. But under Basel III, gold is treated as Tier I capital and accounted at full value. So instead of buying perpetual bonds or government debt, banks have every reason to buy gold. Basel III comes into effect from 1st January 2013. And needless to say that the demand from commercial banks worldwide is certain to drive up prices. In the past too, demand for gold from central banks has been a major boost for gold prices.

  5. Dear Abhishek, I have been following TJL for a few months and trying to read as much as possible about the company, i feel this company is having a better growth strategy than others and chances of it getting into a very big problem is less compared to others like TBZ due to low fixed working cost compared to others.

    As the gold prices are suddenly going doing and so is the price of this stock, as the net profit for this year will probably be affected. Do you think its a right time to start accumulating this stock.


  6. I truly like to reading your post. Thank you so much for taking the time to share such a nice information.

    Jewellers in Mohali

  7. indian gold jewellery price is getting fluctuated these days, but still it is hard to miss, as it attract the hoards of people towards itself.


Learning from Security Analysis - Part 1

I have started re-reading Security Analysis, 6th edition, (also will add on things from the 5th ed). I have been putting it on the backburn...