High risk, high return

Issue opens: November 19
Issue closes: November 21

The Renaissance Jewellery IPO is reasonably priced but there are short-term concerns.

Renaissance Jewellery plans to raise Rs 66-80 crore in the price band of Rs 125-150. Shareholders will also get a warrant (no extra cost) for every two shares allotted, which will be exercisable into a share commencing in April 2009 at 25 per cent premium over the issue price.

Renaissance Jewellery (RJL) manufactures and exports studded gold, platinum and silver jewellery to large distributors and retail chains like Wal-Mart and Zales in the US.

It will also cater to new markets in Europe, Middle East and Far East. It plans to ramp up its one and a half year old Indian retail operations under the brand ' Lucera' by multiplying its 24 stores ten fold over the next five years.

However, the foreign markets, especially the US, will continue to be the main focus for the next three years. From the IPO proceeds, RJL plans to expand manufacturing capacity by 46 per cent to 3250 kg, invest in its US subsidiary, augment working capital and meet issue expenses. 
 

SPARKING NUMBERS
Rs crore	FY07	FY08E	FY09E
Net sales	438.5	525.0	630.0
% chg	38.7	19.7	20.0
Ebidta	32.6	42.0	50.4
Ebitda margins (%)	7.4	8.0	8.0
Net profit	25.4	31.5	37.8
NPM (%)	5.8	6.0	6.0
P/E at Rs 125*	-	7.1	6.0
P/E at RS 150*	-	8.6	7.1
* Excluding exercise of warrants

In FY07, its consolidated net sales, operating profit and net profit increased at 38.7 per cent, 50 per cent and 73

per cent respectively, which is impressive. Moreover, margins have improved thanks to a change in product mix, and exemptions because of units in tax-free zones.

Its operating margin is likely to improve as it will focus on mid-range retailers in the US, who have 57 per cent market share, and bring better margins than a Wal-Mart.

However, net profit growth may remain constrained as its units may stop getting tax exemptions from FY09, the termination of zero duty status on Indian jewellery to the US, and breakeven period of one year for its retail stores. Icra has assigned a Grade 2 on a scale of 5 indicating below average fundamentals.

The issue is valued at 7-8.5 times and 6-7 times for FY08 and FY09 estimated earnings respectively. This looks reasonable but investors need to remember that there will be dilution on account of warrants in FY10.