TP: INR645 (+17%)
Demand outlook robust; growth opportunity massive
Domestic jewelry retail business to grow at a CAGR of 25-30% over the
next five years
We recently met the management of PC Jeweller (PCJL). Our key takeaways:
PCJL remains confident of 25-30% CAGR in the domestic jewelry retail business over
the next five years.
The franchisee model is working well so far; going forward, franchisee stores will be
~80% of incremental annual store openings.
PCJL has massive opportunity to grow at the cost of unorganized players. Though
competition from organized players will increase as the salience of the organized
segment goes up 3-4 years down the line, the company believes its strengths on
design (craft) and low cost manufacturing will serve it well in the long term.
We have a BUY rating on the stock, with a target price of INR645, valuing the
company at 29x December 2018E EPS, 40% discount to Titan. We believe that the
valuation gap vis-à-vis Titan will shrink further, once PCJL demonstrates its ability to
maintain its revenue and earnings trajectory.
12 January 2018
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
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M.Cap. (USD b)
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Financials Snapshot (INR b)
Domestic business can easily grow 25-30% over next five years
Growth momentum continues to be strong in the domestic business, as organized
players are gaining share sharply. Earlier, unorganized players were able to evade
both direct and indirect taxes and had practices like under-caratage, which is no
longer possible. The management expects 25-30% CAGR in domestic business over
the next five years, led by 10-15% SSSG and 15% growth through new store
additions. Proportion of cash sales has declined from 60% earlier to 35-40%.
Another 40% of sales now come from credit cards and 20-25% from gold exchange,
indicating changing customer practices. Near-term growth in the exports business
is likely to be subdued due to introduction of 5% VAT from January 01, 2018 in UAE
(one of the major buyers of Indian jewelry) on the back of 5% customs duty
imposed in January 2017. Jewelers are still awaiting clarity on whether VAT will be
applicable on re-exported gold jewelry. We believe that sharp growth in the
domestic business along with 5-8% growth in the exports business over next five
years will lead to the share exports declining down below 20% of the standalone
business (34% in FY17 and 32% in 1HFY18).
Shareholding pattern (%)
Dec-17 Sep-17 Dec-16
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
Franchisee model doing well; will help improve RoCE substantially
The franchisee model is working well so far for PCJL. It is confident of opening its
overall store by the end of the current fiscal. It has already done market
studies and is ready with the expansion plans for the next two years. Going
forward, franchisee stores will be ~80% of annual store openings. Robust systems
for control are also in place to support the backend. Franchisees are able to turn
over gold jewelry 4x a year and diamond jewelry 2x a year. With RoCEs of 20%, the
business is attractive to potential franchisees, who also get gold on lease from
banks. Use of technology helps to further lower working capital requirements for
Krishnan Sambamoorthy – Research Analyst
(Krishnan.Sambamoorthy@MotilalOswal.com); +91 22 6129 1545
Vishal Punmiya – Research Analyst
(Vishal.Punmiya@MotilalOswal.com); +91 22 6129 1547
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.