Rising gold prices, possible US economic slowdown and forex volatility are major concerns

Promoted by Niranjan Shah and his family, Renaissance Jewellery manufactures and sells studded gold, platinum and silver jewellery and is primarily focused on international markets with 96% of revenue accruing from the US. The company also markets studded jewellery products through retail stores operated through its 100% subsidiary Renaissance Retail Venture Pvt Ltd (RRVPL). RRVPL has eight retail outlets (five in Mumbai, one in Pune, one in Lucknow and one in Gurgaon) and 16 shops in shops. The retail products are sold under the brand name, Lucera. It also commenced exports of loose diamonds from its facility situated at Opera House in Mumbai in July 2007.

Two of its three manufacturing units are located at the Santacruz Electronics Processing Zone’s (Seepz) special economic zone (SEZ) in Mumbai. The other is a 100% export-oriented unit (EOU) at Bhavnagar in Gujarat. The 100% subsidiary RRVPL has a manufacturing facility at MIDC, Andheri, Mumbai, to cater to the domestic retail market. Another 100% subsidiary Verigold Fine Jewellery Pvt Ltd (VFJPL) has a manufacturing facility for studded jewellery at Seepz-SEZ in Mumbai.

Renaissance Jewelry New York Inc. (RJNY), another 100% subsidiary, caters to independent mid-range retailers in the US, accounting for 56.9% of the US market.

A talent base of about 40 designers develops about 500 new designs every month, resulting in over 30,000 designs. There were about 2,000 employees at the manufacturing facilities end September 2007.

Strengths

• The installed capacity will increase to 3,250 kg in the year ending March 2008 (FY 2008) from 2,250 kg in FY 2007. Capacity utilization is increasing: from 64.07% in FY 2004 to 81.33% in FY 2007. The consolidated capacity would increase to 4,000 kg in FY 2010.

• RRVPL plans to increase the number of retail outlets in India from eight to more than 250 in the coming five years after examining the performance of the existing outlets.

Weaknesses

• Dependent on a few customers. Top customer accounted for 40.93% and 42.35% of consolidated revenue in FY 2006 and FY 2007, respectively. Top five customers accounted for 99.03% and 95.98% of consolidated revenue, respectively. Top two customers and top five customers accounted for 82.62% and 99.68% of consolidated revenue, respectively, in the three months ended June 2007.

• A substantial portion of total turnover is from exports in US dollars. Any fluctuation in the exchange rate will impact profit. Though imports and working capital funding in US dollars is a natural hedge, this may not be able to effectively mitigate the adverse impact of currency fluctuations on operating results.

• Rising gold prices could impact demand for ornaments. Also, the dependence on US may affect demand if there is slowdown in that country’s economy.

Valuation

Sales grew at a CAGR of 37.6% and profit after tax (PAT) at a CAGR of 94.7% between FY 2003 and FY 2007. At the price band of Rs 125 – Rs 150 on post-issue equity (of Rs 21.02 crore) including conversion of warrants, consolidated FY 2007 EPS works out to Rs 12.1 and P/E 10.3-12.4. On quarterly annualised EPS of Rs 13.8, P/E is 9.1 – 10.9. However, of the PAT of Rs 7.23 crore in Q1 (ending June 2007) of FY 2008, translation gain on forex fluctuation stood at Rs 5.14 crore. One detachable warrant will be issued along with two equity shares which can be optionally converted at 25% premium to the IPO price between 16^th to 18^th month from date of allotment.