Subscribe to Tribhovandas Bhimji Zaveri IPO as valuations attractive

Tribhovandas Bhimji Zaveri (TBZ), a 148-year-old company, boasts of some marquee brands and is in the process of transforming itself into a national retailer. We believe there is tremendous opportunity in the R1,200-billion branded jewellery market, estimated to be growing at 10-12% CAGR.

TBZ plans to expand the number of its stores from the current 14 to 57 by FY15. However, we believe this is too optimistic. We factor in addition of 24 new stores in the coming three years. We expect margins to contract from the current high levels as the impact of store openings and gold price gains in inventory in FY12 would be felt in FY13. However, we still expect the company to post 20% PAT CAGR over FY12-14.

TBZ's current sales mix comprises ~75% gold jewellery and 20% diamond jewellery. The company plans to increase diamond sales through aggressive marketing. Gross margins in diamond jewellery (30%) are 3x those in gold jewellery (11%). However, we have not factored in the likely gains from the increased focus on diamond jewellery.

TBZ currently has an asset-heavy model (owned gold) compared to Tanishq, which follows the 'gold on lease' model. Funds raised from the IPO and its improved balance sheet should enable TBZ to take to the 'gold on lease' model over a period of time.

We believe this shift would result in a 4-5% savings in finance cost, and improved balance sheet as gold on lease would be reflected as current liabilities. Our estimates have not factored in any gains from this.

The IPO is priced at 8.8x FY14E EPS of R14.4, which is attractive, considering the huge growth opportunity, strong brand and aggressive growth plans. We have factored in several execution risks and, so, recommend subscribing to the IPO.

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