Tara Jewels IPO Review by KM Global (Avoid)

Review By K.M. Global Financial Services Ltd on November 22, 2012

Issue Details

Issue Period November 21st-23rd
Issue Price (Rs) 225-230
Issue Size (Rs Cr) 180
Mcap (Rs Cr) 555-565
Listing NSE , BSE
Promoters Mr. Rajeev Sheth
Minimum Order Size 50
CARE Rating Grade 3/5
Grey Market Premium Rs 2.5

BRLM

Enam Securities Pvt Ltd
ICICI Securities Ltd

Objects of the issue (Rs Cr)

Offer For Sale (M Fabrikant) 70.0
20 New Retail Stores In 18 Cities 66.4
Repayment of Loans 50.0

Tara Jewels is an integrated player as its operations range from designing to retailing of jewellery . The business can be divided into three divisions namely manufacturing, exporting and retailing. The company has four manufacturing units, one of which is located in Panyu, China while the other three units are located in Mumbai.

Strengths & Expansion Plans

Marquee Global Clients - Exports constitute over 80% of revenues and the company's export income has grown at a CAGR of 13 % from FY08 to FY12. It has large customers such as Walmart which ensures that its products reach a large number of end users. The investment by Swarovski could also lead to strategic developments.

Adding 20 Retail Stores Across India - The retail business was started in 2008 and has quickly ramped up to 30 stores with a turnover of Rs 266 cr in FY12. Tara jewels plans to add another 20 stores in Tier II and Tier III cities across western and northern parts of India with an average store size of around 1,000 sq feet.

Risks

Concentration of Customers - Over 70% of Tara's exports were sourced from its top 10 customers in FY12 as shown in the adjoining table. There are no long-term contracts with any of these customers and the loss of a single customer can significantly affect the top line.

Large Working Capital Requirements - Tara supplies jewellery to customers on credit. It also provides performance guarantees in favour of some customers to secure contractual obligations and bank guarantees to suppliers of gold. Any large order cancellations can severely affect its operations and profitability.

Conclusion / Investment Strategy

We recommend that investors avoid subscribing to Tara Jewel's IPO as its valuation appears expensive compared to its listed peers such as Gitanjali Gems & Renaissance Jewellery. The firm has a solid set of customers but it requires large amounts of working capital which could lead to margin pressures.

Reviewer recommends Avoid to the issue.