The company is
operating in the field of branded jewellery in the southern part of Tamil Nadu.
It has been in the field since around 60 years and has a dominant market share
of around 20% in Madurai. Since past few years the company has been expanding
its reach in other Tier 2/3 cities in TN and currently has 9 show rooms. It
plans to reach a goal of 15 stores by end of FY 12.
FINANCIALS
Equity is 13.72
crores with 1.372 shares outstanding of Rs 10 each.
Promoter holding is
at 65%. 6% of total promoter holding is pledged.
Debt as on March 11
was at 134 crores most of which is short term borrowing and working capital
debt.
LAST FEW YEARS
RESULTS
YEAR
07
08
09
10
11
Q1FY12
Q1FY11
SALES
127
224
247
451
658
223
126
EBIDTA
7.8
12.7
18.7
30.9
58.4
19.6
11.5
PAT
4
6.86
8.87
16
31.33
10.64
6.5
ROCE
21
25
32
21
30
ROE
59
53
38
33
40
BV
22
22
30
50
66
EPS
13.25
13
10
16.46
22.84
FUTURE PLANS AND
PROSPECTS
1. The company plans to open commercial grade
branches in and around major cities/towns of TN state.
2. Setting up of high value fasion oriented
jewellery made out of jewellery and precious stones to cater to the needs of the
upcountry market.
3. Extension of franchisee model for marketing
of the products in identified area
within the ambit of the overall operations of the company.
4. The company plans to replicate the success
of the current business model by expanding to other tier 2/3 and other cities
of TN state.
RISKS
1. Changing preference of customersâThe tastes
of various populace is likely to be different in terms of jewellery preference.
2. Competition
-- Recently Madurai has seen the entry of bigger local players like Joy
Alukkas, Lalitha jewellers, Bhima jewellers, Kalyan Jewellers, etc which can
impact the market share of the company.
3. Demand for gold jewellery â With sustained increase
in the prices of gold and higher inflation, the demand of gold jewellery which
is a discretionary spend is likely to witness some pressure.
4. Commodity price sensitivity â Most of the
raw material price is pass through but sudden spikes in the prices of gold,
precious stones etc could impact margins.
5. Inventory management â This remains a key
area of concern for the business and needs constant monitoring by the
management.
INVESTMENT THESIS:
INVESTMENT IN
THANGMAYIL IS A PLAY ON THE DISCRETIONARY SPENDING BOOM SEEN ESPECIALLY IN GOLD
JEWELLERY. THE COMPANY IS A STRONG
PLAYER IN TAMILNADU AND HAS A STRONG BRAND IN THE LOCAL MARKETS OF TAMILNADU
STATE.
IT IS A FAST GROWING RETAIL PLAY
AVAILABLE AT ATTRACTIVE VALUATIONS FOR A COMPANY LIKELY TO GROW STRONGLY OVER
THE NEXT FEW YEARS.
Hitesh - Thanks for identfying the company, however, there are a number of players like THANGAMAYIL JEWELLERY LTD which trade at very attractive valuations(Gitanjali, Ganesh jewelry)specially when you compare it to Titan. However, even though you see sales increase, cash flow from operations has not increased. You wonder why? The question that needs to be answered is do you trust the management - typically busiess like jewelry do not have the right books and the income statement is prone to a lot of manipulations by the company. Just my 2 cnts.
First of all there is a subtle difference between gitanjali and ganesh as compared to thangmayil. Ganesh as far as I know is into bulk manufacturing of jewellery and then supplying to others. They have made a start at retail foray but it is just the beginning. Ganesh jewellery has the risk of customer default. Which Thangmayil does not have as it sells only to retail customers in lieu of cash.
Regarding promoters integrity, I look at the level of promoter holding and dividend payouts which seems to be good with thangamayil. Pledging is there but is very marginal and can be neglected.
Hitesh - yes, Thangmayil cannot be compared to Ganesh, but my experience with Gitanjali and others who do have a retail presence is the lack of cash flows with increasing revenues. Typically in this kind of business, as you said as this is cash business, why would you not have + ve cash flows (unless you have a lot of things tied up in inventory).Inventory is very imp in a jewelery business as it is like a retail business, they make money on turningover inventory fast. Business like this tend to stay at low PE’s because the margins are low and a lot of money is tied in working capital. I would compare Titan and Thangmayil ( have not done a detailed analysis yet) but will post my findings soon. It would be nice to be proven wrong :)-
Couple of comparision points between Titan and Thangmayil -
1). It seems Thangmayil takes the risk ofgold price fluctuations (as it’s payable days is just 11 days) compared to Titan which uses leased gold frombanks to produce jewelry (payables is morethan the inventory, hence + Working capital days). Taking on gold price riskby itself might not mean anything, except that in a rising gold price scenario, i would expect Thangmayil to have better margins than Titan - that is not the case.
2). Thangmayil has high debt vs Titan, i guess the company’s rationale is expansion. However, something to bear in mind.
3). The more alarming point for me is the company has -ve operating cash flow. In the last 5 years the company has not seen any cash from operations, wonder how they pay their dividends (through raising debt?)
My view is that companies such as Thangmayil remain “undervalued” as they are net users of capital and do not generate cash as most of it is tied is in working capital needs (inventory in this case). This is a great business for the promoters, as they still own assets in terms of gold, however not so good for investors as we might never see unlocking of these assets (increase in sales, better working capital and eventual net cash from operations). Also, another reason to get worried would be if the companybuys inventory at higher prices and gold prices start falling or stagnating, this company could see profits turning into losses (selling at lower price than cost, holding cost of inventory)
Company had 7 branches in FY2010. Two more branches were added in FY 2011 (Tuticorin branch opened in Aug 2010 and Madurai Annanagar Branch opened in March 2011). They have also renovated and modernized their main branch at Madurai.
Opening of Madurai Annanagar Branch is a deviation to their original plan (Original announced plan was to open branches in Tirunelveli and Tiruchi in FY 2011 in addition to Tuticorin. In FY 2012, branch in salem was proposed).
Company has confirmed that they have already acquired land in Tiruchy and Salem for the proposed branches.
They have added one more branch in Cumbam (a III tier city near Madurai) in June 2011.
It has been gathered that three more branches are expected to be opened in FY 2012. The tentative location of branches are at Aruppukkottai, Thengasi & Erode (Tier III & Tier II cities of TN).
The change of plan on opening of branches in other locations may be mainly due to their difficulties at Tuticorin Branch. Earlier, they expanded very fast in Tier II & III cities (Rajapalayam, Karaikudi,Ramanathapuram, Dindugul, Theni & Sivakasi) where they had to compete only with local players. In Tuticorin, the Jewellery market was different. Already two large reputed local players (AVM Jewellers & Alagar Jewellers) were doing roaring business. 2 to 3 years back, Kalyan Jewellers opened their branch with similar business model of Thangamayil (Hallmark, price assurance, Chit schemes, FD scheme, gold loan etc). The branch of Kalyan took some time for brake even. Now, more or less established. The same problems are being faced by Thangamayil branch at Tuticorin. So, local sources say that Thangamayil has changed their plan to small towns such as Aruppukkottai, Thengasi & Erode where competition of large players do not exist.
Major cities of Tamil Nadu have branches of large groups such as Joy Allukkas, GR Thanga Maligai, Bhima Jewellers, Kalyan Jewellers, Lalitha Jewellers which has great financial muscle. Competing with them is really difficult for Thangamayil which has negative cash flow.
In Tamil Nadu, around 90% of the Jewellery business is still with unorganized sector. Branded jewellery with hallmark is slowly getting popular in Tier II & Tier III cities.
Tailors were doing good business in the past. Now, the life style has changed to âbranded apparelsâ . Same way, this Jewellery business will change to âBrandedâ soon. Players like Thangamayil can do roaring business in Tier II & III cities soon.
The business model of the company is similar to one which Peter Lynch explained in âOne up on Wall streetâ. Success of business at one place and duplicating the same in other places.
I have invested in the shares of the company about a year back on an average price of Rs.100. I feel that medium term (1 to 3 years) prospects appears to be bright.
Coming to the negative cash flow point…the cash flow is required to grow… if business does not grow then u can hav very good positive cash flows from Thangamayil… unlike other businesses where growth investments appear in “Cash flow from Investment activities”… incase of Thangamayil only investment is Inventory which appears in “Cash flow from operation”…otherwise the business economics are same as any other growing company… Pls dont give undue importance to CFO… Lets assume Talwalkar wants to open a new gym Vs Thangamayil opening a new showroom… for Talwalkar, gym equipments will be cash flow from investments… & Thangamayil it is inventory & hurt CFO…considering their very high ROE, I want them to have a negative CFO for considerable anount of time as this means they are reinvesting their earnings at 40% + ROE…
Thought the story is looking good but worrisome point is constantly increasing inventory as a % of turnover. And the same is being funded by way of long term debt. Its now at 32-34%
I had a good meeting with Mr. Ba Ramesh, co-founder and joint MD at Thangamayil on Thursday. Overall, I am very impressed with the gentleman and the company as well. Notes below:
The management has a good understanding of jewelry business and know what they want to do in the next few years. Store expansion plan on track, with the 20th store to be inaugrated coming Sunday. Few more stores lined up for coming years. They might open a few stores outside Tamil Nadu as well, but that will take some time and before that they would like to build a strong position in Tamil Nadu itself;
They understand and love gold jewelry business, and as such, the focus is on retail of gold jewelry, with little revenues coming from diamond, and others. The management understands the taste of the local customers very well and are prepared to deliver. When I asked him what they aspire to become, Mr. Ramesh said, "I want every person to have some quantity of gold. These days there is lots of cheating and unfair practices happening in the jewelry industry. We want to provide high quality stuff, not for free of course, but at a reasonable rate. In hindi you say, “roti, kapda aur makaan”. I say, “roti, kapda, sona aur makaan”. He referred to how idli is popular among Tamil and across the world, and how it continues to sell globally at a large scale - similarly, they want to keep things simple and sell gold jewelry. They believe there is a lot of potential in this. “agar tum itne ko hi theek se kar loge to accha khasa vyapar ho jayega”;
“Just as investing in stocks is popular in Mumbai and Gujarat, just as you love to invest in stocks, similarly, people in our areas invest in gold and gold jewlery. Its like, uncle/dad, what should i buy and the answer would be gold. Diamond and diamond jewelry is not popular here, and people dont want it much. Also, diamond is not that liquid as compared to gold and there are other issues such with it as well”;
“Just as you said blue and white are popular colors among boys/men, similarly, we know the taste of our customers”;
The company has been increasing market share via opening new stores and increasing sales in the same stores as well. Yes, there are competitors coming in the market, but the company is fairly confident about the growth. They believe that the quality of products provided by them, including designs, price, attractive offers, gifts to customers, advertising and marketing, etc. gives them a strong hold;
There is a clear shift happening from unbranded to branded jewelry stores and Thangamayil continues to build a strong position here;
Hub and spoke model: Establish a main store in a big city and then a few stores in small towns or rural areas around that city. They can supply the required products from hub to spoke within 4 hours. The supply chain is impeccable;
The company has made investments in IT and infrastructure to keep a track and better address consumer preferences, inventory stock, security, airconditioning, etc. This has helped them stay ahead of the market and deliver what the customer needs;
I was highly impressed to learn that the company provides one time meal to all the employees every day! This, along with other incentives including bonus, travel and accomodation brings in loyalty from the employees side. Additionally, the company spends a fair bit of time training the employees;
High current liabilities? Well, look at inventories - all of it is gold and jewelry, and as such, liquid. They have to keep inventory level high so as to make sure they have proper stock and can meet customer demands;
“competition kisse hai? Humse hai. If we can not provide the quality, designs, price etc. the customer seeks, naturally we will lose the market. But, as long as we keep on delivering, we will be fine”;
The management (including brothers, their sons, son-in-laws) seems to be competent, experienced and prepared for whats coming in the future - they have the bandwidth to manage the growth including expansion by opening more stores;
The management is ethical and believes in doing business in fair way. They are God believing as well. As such, they are very down to earth people with simple living and high thinking. They do believe in creating wealth for shareholders and sharing wealth via dividends;
Last but not the least, when I asked him the question I love to ask every business owner I come across, “what keeps you awake at night?”, he answered, “nothing. I sleep peacefully. I keep all the worries and business matters outside my bedroom. However, if at all some tension comesmup, I go take a shower and then go back to sleep”. While he was answering this quesition, I saw the shining in his eyes which I look for in people - good at heart and have the zeal to perform backed by their talent.
Ok…so thats more or less. I am sure there were more things that we discussed but I have covered almost everything that is of relevance here.
Please dont ask me about revenue, PAT, price targets etc. I believe that as long as this company continues to deliver in terms of growth without stressing the balance sheet too much, we have a high grower available at very attractive valuations today. One can always have concerns by looking at numbers only, but whatever concerns I had about the company are gone now after having met Mr. Ramesh
Discl: Invested. Will continue to add more
P.S. I know this company since their IPO and invested in it and again studied it while doing an industry wide study earlier this year. However, the conviction I was looking for came only after meeting Mr. Ramesh. I sincerely thank Mr. Manish Dave for not only helping me in organizing the meeting but for being so kind enough in sharing his understanding about the company and management with me as well.
There has been a very sharp margin drop in the march 12 quarter as compared to dec 11 qtr.
sales for dec 11 qtr was 309 cr, op profit was 34 crores and net profit was 17 crores.
sales for march 12 qtr was 306 cr, op pr was 23.5 crores and net profit was 9.11 crores.
Part of net profit decline was explained by higher interest cost but the dip in margins at operating profit level is something which I cant decipher.
long term debt has increased from 9 crores to 19 crores and short term borrowing has gone up from 121 crores to 251 crores. This looks like an area of concern.
The usual argument would be that this is working capital but then you have to pay interest on working capital as well and thats going to eat up into margins.
barring these concerns the company looks a good bet on retail sector.
I will not read too much into quarterly figures, especially whenthey have opened 10 stores in the past one year (including the one that will beinauguratedtomorrow) and there has been fluctuation in gold price - as such, sometimes, the cost of materials will go up, sometimes it would be employee costs, or interest costs or a mix of all at the same time.
For example, one of the reasons why Q4FY12 EBITDA% took a hit compared to Q3FY12 and Q2FY12 was high raw material costs as % of sales (89%.0, 86.1% and 83.6% for Q4FY12, Q3FY12 and Q2FY12 respectively). But for Q1FY12 and Q4FY11, raw material costs as % of sales was 88.3% and 87.4% respectively. Then there is a factor of seasonality in jewelry sales in India (Q2 and Q3 tend to be higher than other quarters because of festivals etc.)
Yes, if the loans shoot up, interest costs will shoot up as well, but as long as they keep on growing without stressing the balance sheet too much, I think they will do fine.
Rohit, are you suggesting their brand is not yet strong enough to pass on raw material cost customers since they have lot of new stores? and you think as they consolidate, their margins will be stable and better?
whenthey beinauguratedtomorrow)
There has been a very sharp margin drop in the march 12 quarter as compared to dec 11 qtr.
sales for dec 11 qtr was 309 cr, op profit was 34 crores and net profit was 17 crores.
sales for march 12 qtr was 306 cr, op pr was 23.5 crores and net profit was 9.11 crores.
Part of net profit decline was explained by higher interest cost but the dip in margins at operating profit level is something which I cant decipher.
long term debt has increased from 9 crores to 19 crores and short term borrowing has gone up from 121 crores to 251 crores. This looks like an area of concern.
The usual argument would be that this is working capital but then you have to pay interest on working capital as well and thats going to eat up into margins.
barring these concerns the company looks a good bet on retail sector.
Of course I am not suggesting that. Would like to add that the sales in Q4 were slightly lower than what it could have been because of a strike for a few days (about a week). Sorry, I dont know how margins are going to look like in the future and that’s for us to wait and see…but, even if they maintain the current margins and continue to grow at the rate they have been growing in the past one year, I will be happy.
Hi Hitesh,
I will not read too much into quarterly figures, especially whenthey have opened 10 stores in the past one year (including the one that will beinauguratedtomorrow) and there has been fluctuation in gold price - as such, sometimes, the cost of materials will go up, sometimes it would be employee costs, or interest costs or a mix of all at the same time.
For example, one of the reasons why Q4FY12 EBITDA% took a hit compared to Q3FY12 and Q2FY12 was high raw material costs as % of sales (89%.0, 86.1% and 83.6% for Q4FY12, Q3FY12 and Q2FY12 respectively). But for Q1FY12 and Q4FY11, raw material costs as % of sales was 88.3% and 87.4% respectively. Then there is a factor of seasonality in jewelry sales in India (Q2 and Q3 tend to be higher than other quarters because of festivals etc.)
Yes, if the loans shoot up, interest costs will shoot up as well, but as long as they keep on growing without stressing the balance sheet too much, I think they will do fine.
If you go to website, they publish daily gold price for 22k. If you click on products, they mention weight and cost. Then there are some gift offers and some small cash discount authorized to store managers. But it basically gives idea about margin.
Cost of retail, manufacturing, administrative and selling operation compared to sales is < 3.5%. Finance is about 2%. It is simple business to understand.
They flip gold about 3.5/4 times in a year on average. If Gold price drops 10% in a year, margin will be 2.5% lower not 10% lower.
Last Q they participated in strike and to make up sale there was heavy promotion. Plus new stores have to give better offer initially like any retail business.
this analysis on gold inventory gains could be of help
the average price per ounce was for FY 2011 was 58974.29 and the same for FY 2012 was 79058.89 that is an increase of 34.05%
but this does not present the entire picture as this inventory is rolled over 3 times in a year (sales/inventory) that is every 4 months
to calculate the average gains made I took the rolling 4 months returns made everyday for the year some days are gain days some days are loss days the average of the rolling "4 months returns made everyday" for FY 2012 is 14.7%
now the inventory for FY 2011 was 207.75 and for FY 2012 was 369.23 therefore the average inventory for FY 2012 which I assume if average for two years is 288.49
now a 14.7% gain on 288.49 crores is 42.31 crores
therefore to calculate the real profit of Thangamayil one will have to deduct an assumed inventory gains of 42.31 crores out of the EBITDA?
the above calculation would not be true if they are hedging their exposure?
if you wish I can post my calculations here
this should also stand true for Titan as well as for TBZ
In sunday edition of businessline,co gave ad for FD for 3 years @ 12.5./.,payable monthly,even 1 year FD rate is 10 again payable monthly.Seems will remain high risk co.
