Back from a 2month Sabbatical! Working at fund-raising for underprivileged rural children was truly fulfilling! Hope to have enough good fortune to repeat this every year:)
Meanwhile there are many more opportunities to explore before ValuePickr members. The first one worth presenting to you for serious study is Rajesh Exports.
1). Largest manufacturer of Gold Jewellery @125 T annually. Company claims installed capacity is 250 Tpa and the largest gold manufacturing capacity in the world.
2). The only player importing Gold for refining (attracts half the duty than Gold Bars) as DORE bars at its Uttaranchal Refinery. Reportedly this is the largest Gold Refinery ~400 Tpa. Gold being a restricted commodity only about 12 players in the country are allowed to import Gold
3). Completely automated the process of Indian Gold Jewellery manufacturing (proprietary indegenous hybrid tech) ensuring standardisation, consistency, design, colours and durability. We visited the factory, and this is something to be seen to be believed - how complex handcrafted designs - can be automated - truly amazing!
4). Reportedly the lowest cost manufacturer of Gold Jewellery. The lowest wastage norms at 0.3% vs Industry norms of ~3%
5). Largest Exporter of Gold from India - Exports to 20 countries. Bulk Exports to Middle East, Europe and US.
6). Distributes gold jewellery to more than 6000 retail outlets across India
Interesting Stats there, and they have built up this business from scratch from the 1980s, a lot of credit that the business does ~20000 Cr in Annual Revenues (FY11). But at less than 2-3% margins, it probably doesn’t excite you much - looks more like a Gold Processor - at first glance
However, what gets me interested in Rajesh Exports is the unfolding retail story
1). It has established 75 retail outlets in Karnataka by Sep 2011- branded SHUBH. It offers Gold Jewellery at 9-13% less than market rates. The only gold jewellery retailer NOT charging any manufacturing overheads. Pick any item, weigh, and multiply by prevailing Gold Rates. All BIS hallmarked.
2). No wonder, the company did 40 crs of business last year on a single day - on Akshaya Tritiya day - an auspicious day in South for buying Gold - from 25 stores - on launch of SHUBH outlets in Bangalore in May 2011.
3). Company plans to establish 125 stores by Mar 2012, cover the 4southernstates of TN, Karnataka, AP, Kerala whichconstitutes~45% of Gold buyers in India, and then go onto cover rest of the country…500 stores by 2014
4). The store expansion is based on a unique franchise model - Local GoldJewelersare roped in to invest about 12-15 lakhs in upgrading the stores as per SHUBH brand outlet designs and manage running costs. The inventory and carrying costs are on Rajesh Exports.Rajesh Exports doesnat keep gold positions open and hedges it fully, earning the forward premium on gold -2% which takes care of Inventory carrying cost. It funds inventory through ECB against gold.
5). The company claims it has 1200 applications pending from localjewelersall over Karnataka, and are progressing as per plans.
1). Perceptions about the Industry are mostly negative. if you ask old-hands in the market, they will advise you to stay away saying thisindustry is prominent for money laundering and black moneytransactions. You can never trust the books. Case studies of companies like Shree Ganesh Jewellery also doesn’t help.
2). The Retail Excitement is NOT NEW. The company has made several noises about the retail expansion before in 2005-2006. They first tried a hand at retail expansion in an organised way in 2008 by acquiring Oyzterbay (started by some ex-Tanishq guys)a retail Gold Jewellery chain selling jewellery across the country in 35 locations. That attempt was a failure and the retail foray went nowhere.
3). Earlier models enunciated by the company for the retail foray was getting about 4500 Cr of Suppliers credit (with 1300 Cr cash from company) has not fructified.
4). Though the company now claims no SPECULATION on Gold.Gold Bought = Gold Jewellery Sold. We do not trade in Gold as a commodity and 100% of our Gold buying and selling of jewellery is hedged. The company has reportedly incurred 40 Cr loss trading MCX Gold Derivatives!
5). Earlier models enunciated by the company for the retail foray of getting about 4500 Cr of Suppliers credit (with 1300 Cr cash from company) has not fructified.
6). The company has been fined Rs 3,00,00 by SEBI for engaging in circular trading of its shares in 2002-3.
The last point above is pretty damaging, and most participants would be well-advised to stay away.
Speaking for myself, I would like to take the investigation further and understand the real market opportunity vis-a-vis the strengths of the company. I would also like to comb through the books of accounts with help from everyone ( I am not an accountant) to establish anything that does not add-up.
We had the benefit of afactory visit at their sprawling 12 acre campus in Whitefield, Bangalore. The operations are for real, their manufacturing strengths cannot be matched (I am convinced of that), Their retail model works (a visit to any SHUBH outlet in Bangalore will convince you). We also interacted at length with Management - but without any prior homework - didn’t manage to ask any of the difficult questions:(
So let’s get cracking in picking HOLES in this story. What do we want to understand more? what does not add-up? Where are the tough questions?
I must re-iterate that this is a High-Risk, High Gain kind of opportunity, certainly not for everyone. Please do your own homework.
Disc: Not invested. Only when we know enough of the unknowns, can odds be laid out, and any calls taken