BSE SENSEX
34,592
S&P CNX
10,681
PC Jeweller
CMP: INR549
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
Update
| Sector:
Retail
Buy
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INRm
Free float (%)
PCJL IN
394.2
552/177
20/111/148
216.4
3.3
754
39.5
Financials Snapshot (INR b)
2018E 2019E
Y/E Mar
Net Sales
103.6 123.9
EBITDA
10.2
12.1
PAT
5.9
7.3
EPS (INR)
15.1
18.4
Gr. (%)
41.0
22.3
BV/Sh (INR)
97.7 112.5
RoE (%)
16.5
17.5
RoCE (%)
17.5
18.0
P/E (x)
36.5
29.9
P/BV (x)
5.6
4.9
2020E
149.8
14.7
9.3
23.5
27.8
131.1
19.3
19.5
23.4
4.2
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 (%)
As On
Dec-17 Sep-17 Dec-16
Promoter
60.5
60.5
70.6
DII
3.1
2.4
0.0
FII
30.4
31.0
23.4
Others
6.0
6.1
6.0
FII Includes depository receipts
Stock Performance (1-year)
PC Jeweller
Sensex - Rebased
600
475
350
225
100
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
100
th
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
PCJL.
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.

PC Jeweller
Starting with high-end jewelry initially, virtual reality goggles at stores will enable
viewing of merchandise from other stores in the city, other stores in the state and
stores in different parts of the country as well, which will then be shipped to the
customer. PCJL plans to add virtual stores in airports and malls as well. With the
ability to get guidance from experts on suitability, the company will have facilities
enabling ordering from these stores as well in two months’ time. Expansion through
franchisees and high asset turns will help improve PCJL’s RoCEs substantially over
the next 3-5 years.
Design and manufacturing capabilities to be the key differentiator
PCJL believes that competition from organized players is not an issue today, but will
increase, as the salience of the organized segment goes up (currently 30% of jewelry
in India) 3-5 years down the line. Yet, it believes that its design skills and lower cost
of manufacturing will act as key differentiators. The company has introduced a
range of wedding jewelry (including premium jewelry under the
Azva
brand) as well
as light-weight jewelry to stay ahead of the competition (unorganized and regional
organized players). It has also increased its annual ad spends to support the new
collection and brand image. Its ad campaign introducing new brand ambassadors,
Akshay Kumar and Twinkle Khanna, has received good response. PCJL will have four
campaigns a year – two for gold jewelry and two for diamond jewelry, enabling
increasing proportion of studded sales. It also aims at own manufacturing (75% of
sales) of 100% in 3-4 years, which will help reduce cost of manufacturing and will
also give higher control on execution. PCJL currently has four factories in the NCR.
Valuation and view
Organized players have only ~30% share of the INR2t jewelry market in India, with
the national players having <10% share. However, armed as they are with the
advantages of scale, technology, brand trust, superior hedging policies, wider variety
and huge marketing muscle, nation-wide players like PCJL will continue to take share
away from the unorganized players for whom the pressures of compliance have
whittled away at their ability to offer lower rates to consumers. The value migration
to organized players is so strong that Titan and PCJL are expected to report by far
the highest EPS CAGR over FY17-20 in our Consumer and Retail universe. While PCJL
might not have had the first mover advantage that Tanishq had, it has emerged as
India’s second-largest Jewelry Retailer in little over a decade. We value the company
at 29x December 2019E EPS (implying 40% discount to our target multiple of 49x for
Titan) and get a revised one-year target price of INR645 for PCJL – an upside of 17%.
12 January 2018
2

PC Jeweller
Exhibit 1: Domestic business to grow at a CAGR of 26.9%
over FY17-20..
Domestic sales (INR b)
46.5
34.0
13.4
20.4
FY12
29.9
FY13
40.0
FY14
13.2
3.9
45.4
FY15
51.4
FY16
53.4
69.0
86.4
109.0
29.2
26.3
Domestic sales growth (%)
Exhibit 2: ..while subdued growth in exports will lead to its
mix coming down to 24.6% by FY20 and <20% by FY22
Domestic (% of standalone sales)
Exports (% of standalone sales)
25.2
67.0
74.3
75.2
71.5
71.1
65.9
69.4
72.4
75.4
33.0
FY12
25.7
FY13
24.8
FY14
28.5
FY15
28.9
FY16
34.1
30.6
27.6
24.6
FY17 FY18E FY19E FY20E
Source: Company, MOSL
FY17 FY18E FY19E FY20E
Source: Company, MOSL
Exhibit 3: Franchisee store to be 80% of incremental store
openings
Own stores
Franchisee stores
Exhibit 4: Store level profitability to improve led by mix and
technology
Domestic revenue per sq. ft. (INR '000)
84
52
1
24
30
41
50
59
5
70
20
80
88
96
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company, MOSL
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company, MOSL
Exhibit 5: Asset turns to improve
Asset turnover (x)
Exhibit 6: Resulting in improvement in return ratios
37.3
28.5
21.9 20.1
19.3
19.5
16.9 17.5 18.0
RoCE (%)
2.7
2.5
2.0
2.4
2.2
2.1
2.3
2.5
2.7
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company, MOSL
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company, MOSL
12 January 2018
3

PC Jeweller
Exhibit 7: ‘Azva’ brand lounges and zones
Source: Company, MOSL
Exhibit 8: Brand ambassador for PC Jewellers receiving good initial response
Source: Company, MOSL
Exhibit 9: PC Jeweller
P/E (x)
P/E (x)
Min (x)
33
27
21
15
9
3
7.1
19.6
13.3
3.9
Avg (x)
+1SD
27.6
Max (x)
-1SD
Exhibit 10:
Retail sector P/E (x)
P/E (x)
Min (x)
56.0
27.6
42.0
28.0
14.0
0.0
35.8
26.2
16.5
8.6
Avg (x)
+1SD
Max (x)
-1SD
50.3 50.3
Source: Company, MOSL
Source: Company, MOSL
12 January 2018
4

PC Jeweller
Exhibit 11: Valuation Matrix
Company
Consumer
Asian Paints
Britannia Inds.
Colgate-Palm.
Dabur India
Emami
Godrej Cons.
GlaxoSmith C H L
Hind. Unilever
ITC
Jyothy Lab.
Marico
Nestle India
Neutral
Buy
Buy
Buy
Buy
Neutral
Neutral
Buy
Neutral
Neutral
Neutral
Neutral
1,189
4,721
1,125
360
1,311
984
6,405
1,379
270
370
316
7,856
1,282
6,098
1,357
410
1,655
1,042
5,785
1,497
276
375
355
8,173
8
29
21
14
26
6
-10
9
2
1
12
4
2
24
6
16
12
-10
-29
17
7
1,140
566
306
634
298
670
269
2,984
3,279
67
408
757
302
257
25
462
312
556
127
213
806
17.9
8.9
4.8
10.0
4.7
10.5
4.2
46.9
51.5
1.1
6.4
11.9
4.7
4.0
0.4
7.2
4.9
8.7
2.0
3.3
12.7
2.6
14.7
10.3
6.8
0.2
11.9
3.0
16.2
8.5
-25.0
-1.2
4.0
14.0
24.3
147.7
2.9
68.9
36.5
114.2
41.0
37.7
19.8
26.4
19.8
20.0
25.0
15.8
13.4
21.0
10.2
25.2
24.3
14.2
16.6
39.3
38.7
20.7
22.4
53.5
28.0
22.3
27.7
20.5
25.2
20.2
17.1
16.1
12.0
13.2
17.3
13.3
24.4
20.2
20.9
18.5
31.8
35.6
15.5
24.2
37.3
31.8
27.8
24.9
55.1
55.9
48.0
46.5
49.3
46.5
39.8
60.4
29.6
43.9
50.9
61.1
61.4
77.8
33.2
52.3
80.4
104.9
89.9
36.5
73.0
46.0
44.2
40.1
38.8
39.5
40.1
35.1
50.0
26.9
35.1
41.0
53.5
52.6
55.8
23.9
43.3
65.7
68.3
70.2
29.9
57.1
38.2
35.3
33.4
33.1
34.0
35.8
31.0
42.6
23.7
28.2
34.1
44.2
44.4
42.4
17.6
37.5
52.9
49.8
53.3
23.4
45.7
26.9
34.0
48.8
26.0
31.7
23.8
20.7
75.9
23.2
14.3
32.3
39.1
64.8
39.8
10.8
24.1
15.5
18.9
16.5
16.5
23.2
0.8
0.0
0.9
0.7
0.7
0.6
1.1
1.2
2.1
1.6
0.9
0.8
3.5
0.4
0.0
0.5
0.1
0.0
0.1
0.2
0.4
Reco
CMP
(INR)
Target
Mkt Cap
EPS Gr. YoY (%)
P/E (x)
Price
Upside
(INR)
(INR B) (USD B) FY18E FY19E FY20E FY18E FY19E FY20E
(%)
RoE
(%)
Div.
(%)
FY18E FY18E
P & G Hygiene
Neutral
Page Industries
Buy
Parag Milk
Neutral
Pidilite Inds.
Buy
United Breweries Buy
United Spirits
Neutral
Retail
Jubilant Food.
Sell
PC Jeweller
Buy
Titan Company
Buy
9,297 9,461
23,066 28,650
296
314
900
1,044
1,180 1,320
3,825 3,449
1,927
549
907
1,359
6456
973
Source: Company, MOSL
12 January 2018
5

PC Jeweller
Story in charts
Exhibit 12: Overall revenue to grow at a CAGR of 22.8% over
FY17-20
Total revenue (INR b)
32.1
32.5
22.1
14.8
16.1
20.9
Revenue growth (%)
Exhibit 13: Gross margin to expand 100bp over FY17-20
17.2 16.3
15.9 15.2
Gross margin (%)
14.0
13.4
12.4 13.0 13.2
19.5
19.6
30.4
FY12
40.2
FY13
53.2
FY14
63.6
FY15
73.0
FY16
84.8
103.6 123.9 149.8
FY17 FY18E FY19E FY20E
Source: Company, MOSL
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company, MOSL
Exhibit 14: Ad spends and marketing expenses combined are
expected to increase to 0.9% of sales (currently 0.4%)...
Ad spends+Marketing expense (% of consol. sales)
Exhibit 15: ...which will restrict EBITDA margin expansion
12.0
EBITDA margin (%)
0.9
0.7
0.7
0.9
0.8
0.6
0.4
0.6
0.9
10.9
11.0 11.5
10.4
9.0
9.8
9.8
9.8
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company, MOSL
FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Source: Company, MOSL
Exhibit 16: EBITDA to grow at a CAGR of 24.4% over FY17-20
EBITDA (INR b)
45.3
32.8
22.0
24.2
3.8
3.3
FY12
4.8
FY13
5.9
FY14
7.3
FY15
7.6
FY16
19.0
0.9
7.6
10.2
12.1
14.7
21.8
EBITDA growth (%)
Exhibit 17: Adj PAT to grow 30.1% CAGR over FY17-20
Adj. PAT (INR b)
Adj. PAT growth (%)
41.0
26.0
27.8
22.4
6.2
5.2
4.0
FY16
5.7
4.2
5.9
22.3
2.3
FY12
2.9
FY13
3.6
FY14
3.8
FY15
7.3
9.3
FY17 FY18E FY19E FY20E
Source: Company, MOSL
FY17 FY18E FY19E FY20E
Source: Company, MOSL
12 January 2018
6

PC Jeweller
Financials and Valuations
Consolidated - Income Statement
Y/E March
Total Income from Operations
Change (%)
Raw Materials
Gross Profit
Margin (%)
Employees Cost
Other Expenses
EBITDA
Change (%)
Margin (%)
Depreciation
EBIT
Margin (%)
Int. and Finance Charges
Other Income
PBT after EO Exp.
Total Tax
Tax Rate (%)
Reported PAT
Adjusted PAT
Change (%)
Margin (%)
Consolidated - Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Total Loans
Deferred Tax Liabilities
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Total Investments
Current Investments
Curr. Assets, Loans&Adv.
Inventory
Account Receivables
Cash and Bank Balance
Loans and Advances
Curr. Liability & Prov.
Account Payables
Other Current Liabilities
Provisions
Net Current Assets
Appl. of Funds
E: MOSL Estimates
FY15
63,613
19.5
53,946
9,667
15.2
557
1,808
7,302
24.2
11.5
230
7,072
11.1
2,269
592
5,395
1,611
29.9
3,784
3,784
6.2
5.9
FY15
1,791
18,115
19,906
6,819
-125
26,599
1,474
578
896
0
131
131
46,087
32,299
7,804
2,840
3,144
20,515
18,220
487
1,808
25,572
26,599
0
FY16
73,032
14.8
62,841
10,192
14.0
727
1,883
7,582
3.8
10.4
227
7,355
10.1
2,511
499
5,344
1,362
25.5
3,982
3,982
5.2
5.5
FY16
1,791
22,300
24,091
9,704
-120
33,676
1,138
226
912
0
81
81
56,397
38,672
9,760
3,416
4,549
23,714
21,777
668
1,269
32,683
33,676
0
FY17
84,796
16.1
74,302
10,494
12.4
834
2,010
7,650
0.9
9.0
225
7,425
8.8
2,856
973
5,542
1,331
24.0
4,210
4,210
5.7
5.0
FY17
1,791
31,728
33,519
8,028
-334
41,214
1,333
451
882
0
94
94
72,656
41,874
15,380
11,917
3,485
32,419
29,981
1,746
692
40,238
41,214
0
FY18E
103,577
22.1
90,112
13,465
13.0
932
2,375
10,158
32.8
9.8
289
9,868
9.5
2,425
1,036
8,479
2,544
30.0
5,935
5,935
41.0
5.7
FY18E
3,942
34,559
38,501
7,028
-334
45,196
1,883
740
1,143
550
94
94
80,940
49,909
17,026
9,747
4,257
37,531
34,552
2,133
845
43,409
45,196
0
FY19E
123,902
19.6
107,547
16,355
13.2
1,239
3,026
12,090
19.0
9.8
427
11,663
9.4
1,942
1,115
10,836
3,576
33.0
7,260
7,260
22.3
5.9
FY19E
3,942
40,390
44,332
5,028
-334
49,026
2,863
1,167
1,695
650
94
94
93,036
56,672
21,386
9,886
5,092
46,449
42,887
2,551
1,011
46,587
49,026
0
(INR Million)
FY20E
149,766
20.9
129,697
20,069
13.4
1,647
3,701
14,720
21.8
9.8
611
14,109
9.4
1,459
1,198
13,849
4,570
33.0
9,279
9,279
27.8
6.2
(INR Million)
FY20E
3,942
47,762
51,704
4,028
-334
55,398
3,923
1,778
2,145
670
94
94
108,594
64,748
27,902
9,789
6,155
56,105
51,799
3,084
1,222
52,489
55,398
0
12 January 2018
7

PC Jeweller
Financials and Valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
FCF per share
Return Ratios (%)
RoE
RoCE
RoIC
Working Capital Ratios
Fixed Asset Turnover (x)
Asset Turnover (x)
Inventory (Days)
Debtor (Days)
Creditor (Days)
Leverage Ratio (x)
Current Ratio
Interest Cover Ratio
Net Debt/Equity
Consolidated - Cash Flow Statement
Y/E March
OP/(Loss) before Tax
Depreciation
Interest & Finance Charges
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
Others
CF from Operating incl EO
(Inc)/Dec in FA
Free Cash Flow
(Pur)/Sale of Investments
Others
CF from Investments
Inc/(Dec) in Debt
Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Opening Balance
Closing Balance
FY15
9.6
10.2
50.5
1.5
18.3
FY16
10.1
10.7
61.1
3.4
40.1
FY17
10.7
11.3
85.0
1.0
11.3
51.5
48.9
6.5
2.5
27.8
0.2
18.7
20.6
20.1
21.9
43.1
2.4
161
40
89
2.2
3.1
0.2
18.1
19.3
20.4
64.2
2.2
177
44
100
2.4
2.9
0.3
14.6
16.9
19.0
63.6
2.1
173
54
111
2.2
2.6
-0.1
FY18E
15.1
15.8
97.7
2.0
16.1
36.5
34.8
5.6
2.1
21.1
0.4
3.0
16.5
17.5
21.6
55.0
2.3
162
57
114
2.2
4.1
-0.1
FY19E
18.4
19.5
112.5
3.0
19.7
29.9
28.2
4.9
1.7
17.5
0.5
11.1
17.5
18.0
21.3
43.3
2.5
157
57
114
2.0
6.0
-0.1
FY20E
23.5
25.1
131.2
4.0
20.5
23.4
21.9
4.2
1.4
14.3
0.7
7.8
19.3
19.5
22.7
38.2
2.7
148
60
115
1.9
9.7
-0.1
(INR Million)
FY20E
13,849
611
260
-4,570
-6,000
4,150
0
4,150
-1,080
3,070
0
1,198
118
-1,000
-1,459
-1,906
-4,365
-97
9,886
9,789
FY15
5,395
230
1,986
-1,289
-2,931
3,391
-64
3,327
-289
3,039
1,853
295
1,859
-3,228
-2,105
-314
-5,648
-461
3,301
2,840
FY16
5,344
227
1,978
-1,395
-5,867
286
-126
160
-34
126
71
216
252
2,885
-2,032
-690
163
576
2,840
3,416
FY17
5,542
225
2,132
-1,826
2,066
8,138
-574
7,565
-191
7,373
-1
275
83
4,341
-2,766
-722
853
8,501
3,416
11,917
FY18E
8,479
289
1,389
-2,544
-5,341
2,273
0
2,273
-1,100
1,173
0
1,036
-64
-1,000
-2,425
-953
-4,378
-2,169
11,917
9,747
FY19E
10,836
427
827
-3,576
-3,039
5,475
0
5,475
-1,080
4,395
0
1,115
35
-2,000
-1,942
-1,430
-5,372
139
9,747
9,886
12 January 2018
8

PC Jeweller
NOTES
12 January 2018
9

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PC Jeweller
Disclosure of Interest Statement
Analyst ownership of the stock
PC Jeweller
No
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12 January 2018
10