CRISIL Assigns ‘Average’ Grade to TBZ’s IPO

CRISIL has assigned an ”average” grade to the proposed initial public offering (IPO) of Tribhovandas Bhimji Zaveri Ltd. (TBZ).

TBZCRISIL stated that the grade reflects TBZ’s century-old presence in jewelry retail and the company’s resultant strong brand recall. The researchers factored in the resilience of gold jewelry demand in India despite a 28 percent rise in gold prices in 2011. Compared with other gold jewelry players, the company’s revenue mix leans towards higher-margin diamond jewelry, which bodes well for TBZ in the wake of increasing acceptance of diamond jewelry in India, CRISIL noted.

CRISIL also considered the expected increase of organized retail into the jewelry sector versus the single-store format, which will benefit established players. The company has steadily expanded from one store to 14 stores in 10 cities across five states in the past decade, CRISIL noted.

However, the researchers cautioned that TBZ is restrained by competition, which will likely intensify following planned expansions by regional and traditional players. TBZ plans to expand to 22 stores by the end of fiscal year 2013, which could introduce execution challenges even though its strategies regarding store location, size, format, personnel and schedule are in place, CRISIL added.

CRISIL stated that the opening of new stores will also put pressure on profitability due to higher marketing expenses and working capital requirement. Further, with the Tribhovandas Bhimji Zaveri brand being used by other Zaveri family members, the risk of brand dilution cannot be ignored, especially if they underperform on quality, it said.

TBZ, which has a diamond-studded jewelry manufacturing unit in Mumbai, plans to use the IPO proceeds to set up eight new large-format, high street showrooms each with an average of 3,500-square-feet of space and to finance the incremental working capital requirement, CRISIL said. The company derives 74 percent of revenue from the sale of gold jewelry and 23 percent from the sale of diamond-studded jewelry.

TBZ’s revenue increased at compound annual growth rate (CAGR) of 40 percent between fiscal 2008 and fiscal 2011 to $243 million (INR 11.9 billion), largely driven by branch store additions and a steady increase in gold prices, CRISIL said. A higher proportion of diamond-studded jewelry has supported 6 percent to 7 percent earnings before interest, taxes, depreciation and amortization (EBITDA) margin in a competitive market, it added. During those fiscal years, EBITDA increased at a CAGR of 52 percent, while profit after tax rose at a CAGR of 74 percent and was at $8 million (INR 394 million) in fiscal 2011, CRISIL stated.

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