Friday, February 18, 2011

TBZ IPO - Can the Valuation be Attractive?

It is raining jewellery IPOs. Never mind that 26 out of 30 listed jewellers in India have melted the money of investors during the last three months. Ranging from a disappointing 10% to a serious 45%, the losses from this sector have been troubling.

Compared with the losses, the gaining counters have been quite modest in the sector. If you set aside the recently listed C Mahendra Exports, the gains have ranged only from a meagre 4% to a modest 15%. What this simply means is that, the sector is not doing very well.

But that is not preventing players like TBZ, Tara Jewels, Joyalukkas, and Ratanchand Jewellers from creating an impressive line-up of IPOs. Two reasons might be making them bat for it now - the first being C Mahendra Exports Ltd's (BSE: 533304, NSE: CMAHENDRA) 67% gain within weeks after its IPO, and the other reason obviously being the now-or-never thinking due to the newfound bear-market-inside-bull-market.

Among these players, TBZ (Tribhovandas Bhimji Zaveri) is noteworthy for many reasons, if not for the simple fact that they have been around as an unlisted player for long - since 1864 in fact, if their brand tagline is taken seriously.

TBZ’s IPO is fully a new issue of 1.67 crore shares of face-value Rs. 10, which will add up to the existing paid up equity base of 5 crore shares of FV Rs. 10, to create a new paid-up equity base of Rs. 66.67 crore. That this is a fully new issue of shares should be taken as a positive, as the IPO money is coming into the company.

The post-issue promoter holding will come down only to around 74% (from the current holding of around 99%), which also can be taken as a positive.

TBZ’s fundamental performance has also been good, with a consolidated FY’10 RoE of 24.67%, even though for the year ending September 2010, the return on equity has dropped to 20.76% due to a bonus issue to distribute the earlier share premium.

The consolidated EPS for the year ended September 2010 stands at Rs. 3.59, and if the issue is priced at the industry average P/E of 13, it should have a smooth sail. The price then would have to be around Rs. 47 only, and on a book-value (pre-issue) of Rs. 17.30, this will translate to a P/BV of around 3 times.

Industry leader by sales, profits, and market cap, Rajesh Exports Ltd. (BSE: 531500, NSE: RAJESHEXPO) trades at a P/E of 15.42 and P/BV of 3.55. But TBZ being a retail player, is comparing itself with the only listed retail players in the sector like Titan Industries Limited (BSE: 500114, NSE: TITAN) and Thangamayil Jewellery Ltd (BSE: 533158, NSE: THANGAMAYL), and here is where all the valuation risks will arise for potential investors.

Getting Titan / Tanishq's valuations is out of question as it is trading too high, at 35 P/E and 20 P/BV due to its powerful sales and diversified offerings like watches and other accessories. Thangamayil, of course is too small a player compared with TBZ.

Between these two extremes, Tribhovandas Bhimji Zaveri might pitch for a closed-group industry average P/E of 28, but then the Issue becomes expensive at around Rs. 100 with a P/BV of around 6 times, for an industry that is expected to grow only at 10-12% CAGR for the next 4-5 years.  

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