Gitanjali Gems Equity Research

Date of Research – 14 January 2016

Price – Rs. 37.30

About the Company

Gitanjali Gems Limited (“Gitanjali Gems” or the “Company”) was incororated in 1986 and today it is one of India’s largest integrated diamond and jewellery manufacturer and retailer. GGL operates in two distinct business segments: Diamond Business and Jewellery Business.

The Diamond business segment includes sourcing of rough diamonds, its cutting and polishing and sales in both international and domestic markets.The Jewellery business segment includes manufacturing and export of plain gold and diamond studded jewellery as well as sale of branded and unbranded jewellery in the local market.

Gitanjali Gems’s well known brands in India include, Nakshatra, Asmi, Gili and D’Damas. In the international markets, the Company sells its products through the retail chain Samuels in the USA which has over 100 stores, in the Middle East, through leading retail chains giving it over 50 distribution outlets in that region. Additionally, the Company sells its products through various distribution networks in China and Japan and owns leading brands in Italy such as Stefan Hafner, Io Si, Nouvelle Bague, Porrati and ValentE which help the Company cater to the European markets.

They are having two modern manufacturing facilities located at Borivali in Mumbai and at the Special Economic Zone in Surat. Further, the company has two modern jewellery manufacturing facilities at MIDC at Andheri, Mumbai and a facility at the Santacruz Electronic Export Processing Zone at Andheri, Mumbai.

Key Financial Figures

Consolidated(Rs. Cr)
ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations16,418.5012,436.0011,481.0613,984.49 16,572.87 
Expenses15,370.6611,732.0110,470.3713,249.04 15,901.13  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit)1,047.83703.991,010.70735.46 671.73  
Depreciation36.6638.2746.8936.70 74.97  
Finance Costs461.32736.32904.16726.37 693.94  
Other income70.81107.5598.53168.77 258.57
Exceptional items(0.098)0.7469.76– – 
PBT620.7736.2288.42141.16 161.40  
Tax25.540.28(1.16)6.03 (5.43) 
Extraordinary items– – 
PAT (before Minority Interest and share of Associates)595.2335.9489.58135.13 166.83  
Profit/ (loss) attributable to Minority Interest3.532.42(8.11)0.90 (0.88) 
Share of profit / (loss) of Associates2.200.99 – 
Consolidated Profit / (Loss) for the year591.6933.5295.50133.24 167.71  

Profitability Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Operating Profit Margin Ratio6.385.668.805.26 4.05 
Net Profit Margin Ratio3.630.290.780.97 1.01 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Share Capital91.1292.0792.0798.12102.44 
Money received against warrants14.0042.6143.68 
Reserves & Surplus3,008.573,676.463,852.134,018.394,223.96 
Net worth (shareholders funds)3,099.693,768.523,944.204,159.124,370.08 
Minority Interest54.6664.0360.9652.8753.76 
Long term borrowings661.34621.42742.69766.73527.81 
Current liabilities6,851.309,385.299,831.5911,633.8313,741.83 
Other long term liabilities and provisions8.8379.44114.83111.70333.20 
Deferred Tax Liabilities1.21
Total Liabilities10,691.0313,918.6914,694.2816,724.2619,026.69 


Application of Funds / Assets(Rs. Cr)
ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
Fixed Assets284.86303.86317.88275.01297.86 
Noncurrent Investments52.97102.2985.9084.4380.41 
Current assets12,879.0713,781.7615,785.6218,141.97
Long term advances and other noncurrent assets10,281.81551.76399.27387.87313.53 
Deferred Tax Assets16.9714.3819.4321.9923.59
Goodwill on consolidation (net)54.4367.3590.02169.33169.33 
Total assets10,691.0313,918.6914,694.2816,724.2619,026.69 

Efficiency Analysis

ParticularsFY 2012FY 2013FY 2014FY 2015FY 2016
ROE / RONW15.6315.700.852.303.09 
Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

ParticularsFY 2013FY 2014FY 2015FY 2016FY 2017
Total Income from Operations (Rs. Cr.)16,418.5012,436.0011,481.0613,984.49 16,572.87 
Growth (%)31.37 %(24.26 %)(7.68 %)21.80 % 18.51 % 
PAT (Rs. Cr.)595.2335.9489.58135.13 166.83  
Growth (%)21.60 %(93.96 %)149.25 %50.85 % 23.46 % 
Earnings Per Share – Basic (Rs. )64.503.649.8413.2614.62 
Earning Per Share – Diluted (Rs. )64.203.409.7313.2614.62 
Price to Earnings9.1823.964.592.45 4.60 

Dividend History

The Company has not declared dividend over the last 3 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Gitanjali Gems’s average current ratio over the last 4 financial years has been 1.24 times which indicates that the Company has been maintaining sufficient cash to meet its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Gitanjali Gems’s average long term debt to equity ratio over the last 4 financial years has been 0.18 which indicate that the Company is operating with a low level of debt.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Gitanjali Gems’s average interest coverage ratio over the last 4 financial years has been 2.63 times which indicates that the Company has been generating enough for the shareholders after servicing its debt obligations.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017 , Gitanjali Gems reported a promoter holding of 31.07 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors.
At the same time, institutional holding in the Company stood at 9.35 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.