Monday, August 9, 2010

Joyalukkas IPO - Will it be a Good Investment Opportunity?

Seasonal Magazine interviews Joy Alukkas, Founder & Chairman, Joyalukkas Group, and Rolf W Schneebeli Chief Executive Officer of the Group, in connection with their planned IPO.

Close your eyes and imagine the most profitable business you have seen. Readily, gold and diamonds come to your mind. Now, if you are an investor, close your eyes and imagine the most profitable business to invest into. Why are gold and diamonds not turning up now? Because, the country’s capital markets still doesn’t have a listed large cap jeweller that is into pure retail. Now Joyalukkas aims to fill this precious gap, with an IPO of its branded and value-added Indian operations. Recently, Joyalukkas has been selected as a Superbrand in UAE. Founder & Chairman Joy Alukkas is planning the IPO much like his larger-than-life showrooms, but on reasonable valuations that will leave money on the table for its investors, as it aims to double itself from 21 to 40 showrooms and from Rs. 1825 to Rs. 3000 crore sales in a year’s time.

India’s listed universe has over 110 sectors officially, everything from ‘Abrasives’ to ‘Vanaspati’. Still, it is not enough to contain an upcoming IPO. That is what is riddling Joy Alukkas, the entrepreneur behind Joyalukkas, one of the largest jewellery retail chains in the world with 80 showrooms now. One look at BSE’s concerned sector – ‘Diamond Cutting / Precious Metals / Jewellery’ – is enough to convince any one of this problem. While meeting Joy Alukkas for this story at his Indian headquarters in Kochi – a scenic affair from where he can watch the sea always so that he never forgets the need to think big - we suggest alternative sectors. How about the catch-all ‘Miscellaneous’ sector that is home to Tanishq? “No Joyalukkas is quite different from Tanishq”, says Joy. “Titan is into so many things other than jewellery like watches, eyewear, gifts etc and besides that, theirs is a pure franchise model.”

Then we point him to the recently listed Thangamayil Jewellery which comes under the sector ‘Diamond Cutting / Precious Metals / Jewellery’ itself and his face lights up, signaling that this is something that had already crossed his mind. “True, they run a pure retail operation, but the problem is that there is no comparison with us on scale.” He seems to have a point, because in FY’10, Thangamayil did around 500 crore, which is not bad at all, occupying the 10th spot among the 26 listed players, but still it is not comparable to Joyalukkas’ worldwide sale of around Rs. 3700 core.

But, of course, all of the Group is not being offered under the planned IPO. Only the Group’s flagship company in India, Joyalukkas India Pvt. Ltd., that is responsible for all of the Indian operations, will be going for the IPO now. But even this company is estimated to have an annual turnover of Rs. 2500 to 3000 crore. At such a scale, Joyalukkas when listed will be ahead of most of the listed players, that is, ahead of even heavyweights like Asian Star, Shrenuj, Suashish, & Renaissance.

But Joy Alukkas is not concerned with comparisons, as much as he is about the basis of comparisons. “It is like the proverbial apples-with-oranges comparison. Where is the brand in these smaller or bigger companies that you mention? All of them are large-sized but unbranded bulk operators for whom gold is a commodity business.” Indeed, the listed jewellery space is now dominated by exporters to US & Europe, and investors are really spoilt for choices if export business is what they are looking at.

But gold exports, especially to Western markets have a problem. Business booms when gold is affordable, and withers when gold booms. Americans and Europeans turn to silver in a big way when gold prices go through the roof. Even diamonds can be crafted in silver for Westerners. That is why 17 out of the 25 jewellery scrips lost money for investors during the last six months, with top player Rajesh Exports losing more than 11% of investors’ money, and the next bigger player Suraj barely scraping through to make a tiny profit for its investors.

And know what these biggies are planning to tackle the export slump? For some, the strategy is beefing up domestic sales, and for others it is planning to begin domestic sales for the first time. That is where Joyalukkas already has a reasonable edge. Almost all of their turnover is coming from the 21 showrooms spread across the country. The Group recently opened its first showroom in Bangalore, and in the inimitable Joyalukkas style, it is a four-floor 40,000 sq ft affair which is Karnataka’s biggest and the Group’s second-biggest, after their Chennai Showroom which is also the country’s largest jewellery showroom.

With a sharp focus now on the resurgent diamond sector, Joyalukkas tries not to miss the pulse of the customers, as, for many of them diamonds are now more attractive due to the gold boom.

Group Founder and Chairman Joy Alukkas, is a dynamic second-generation jewellery entrepreneur who successfully spun off this company from the family concern, Thrissur-based Alukkas Jewellery. Under his leadership, the Group has won the coveted Dubai Quality Award from Sheikh Mohammed, Ruler of Dubai. Joyalukkas was recently conferred the coveted Superbrand status in UAE, with Chairman Joy receiving the status from Mike English, Director of Superbrands Middle East.

Joy has recently turned around the company into a more professionally managed setup with former World Gold Council Chief Executive Rolf W Schneebeli inducted as CEO, and Nandakumar T joining as CFO. But Chairman Joy Alukkas remains a hands-on leader scripting the next stage that will see apart from this IPO and possible PE deals, three new large-format showrooms and around 17 smaller format ones, making their Indian network a 40 showroom one. If Joy Alukkas can get his game right in the IPO space with right pricing and right valuation, there is no reason why this shouldn’t be worth considering.

Chairman Joy Alukkas in conversation with Seasonal Magazine:

Joyalukkas is finally planning for an IPO. Can you explain your main motivations?

Well, first of all, let me clarify one point – it is not definite that we will be going for an IPO. What we have announced is that we are looking to raise money from investors, and yes, IPO would be a preferred mode for that. But we will also be open to other modes like PE funds and the like. Now, coming to your question, there are several common motivations for all companies going for an IPO – like finding money for further expansion, expanding visibility in the capital markets and the like. All such motivations are there for Joyalukkas too, plus a few of our own. Prime among them is to take this transparently governed business and brand to the next stage of corporate governance and excellence. We also want to be the first jewellery brand to go public.

But servicing debt has also been one prime motivator these days for IPOs. As a brand that has expanded rapidly, is correcting the debt-equity ratio a motivation for Joyalukkas?

Not really. We may service a part of our debt using IPO proceeds, but that is not the main thing, as we have not run up such a debt in the first place. Some people might mistake that our rapid expansion was being powered solely by debt, but it is not true at all. Our core edge is that despite such expansion, we remain lightweight as we don’t buy showroom properties and we don’t have much manufacturing facilities of our own. Because of these unique factors, our book is very conservative.

How can you be the first jewellery brand, when we have listed players like Rajesh Exports, Gitanjali, or Tanishq?

Well, what I meant was the first retail jewellery brand. Today, if you look at the listed players, almost all of them are mainly exporters or manufacturers, with little or no domestic retail operations. The only exception is Tanishq, but it should be treated separately for three reasons – one, it is a pure franchise operation; two, they do not just jewellery; and three, they are part of the Tata enterprise. I can find only the recently listed Thangamayil Jewellery as a retail player, but then you can’t really compare us with them, size-wise. We will be the first major jewellery brand to go public, and in all probability the only one to go public for a long time.

Why are you not expecting the other players to join in?

It is just a feeling, of course, but it is pretty difficult for a conventional jeweller to go for IPO. The traditional jewellery business, by convention, is not done very transparently with the public or with the taxman. In contrast, we had always done things in black & white with world-class auditing by firms like KPMG for the most part of our existence. This is one edge that our competitors just can’t create overnight.

How do you see the ongoing gold boom? Is this going to last or are we set for a correction?

No boom goes on like that endlessly. We have seen both real estate and stocks correct drastically. Maybe gold may not fall that much due to its current safe haven status. There are several studies that show that gold boom may extend at least for another two years. But all of us – jewellers and customers – must be prepared for minor corrections. The only major risk that can happen is China succeeding in producing massive quantities from its new mines, which is something nobody can predict at this stage.

No manufacturing, no real estate, and no exports mean Joyalukkas is a pure retail operation. How will it translate to a better investment proposition?

Yes, we are pure retail, and we are all about value addition. We have precise design specifications and we have stringent quality controls, and we custom-source from hundreds of manufacturers – big and small – from all over India. Since we are a high-volume buyer, we are able to buy at excellent prices, and sell at attractive prices for our customers. Secondly, all our showrooms are on long-term leases, meaning that we can pay for them from our cash flow, with no high-risk capital investment involved. Being India focused, Joyalukkas is also shielded from downturns in Western markets due to the high gold prices. The end result of all these is that our margins are industry leading, and honestly speaking, I was surprised when I came to know that no player can match our EBITDA margins.

But isn’t Joyalukkas employee intensive? You have one of the largest workforces in the industry.

True, Joyalukkas is home to around 2300 employees. But they are not a liability but an asset as they are dominated by sales professionals who deliver the brand to our customers through our world-class showrooms. Because of such an outlook, I am considering many among them for ESOP, though it is not customary for a pure retail operation. Joyalukkas has excellent HR practices, and pays above average salaries, but still, the cash flow can accommodate all that.

Being a pure retail play, are you planning to diversify into retailing more products, maybe like apparels as you have done in Kerala?

Textiles is definitely something we are bullish about, and we want to take it to the next level by launching the unique concept of Wedding Malls, where everything for the Great Indian Wedding will be available. Initially we are planning three such Malls in Kerala, one each in Kozhikode, Thrissur, & Ernakulam. We also have a target of around 8 textile showrooms in Kerala, and if the going is good will expand it to a pan-India operation with 100 shops. But having said all these, let me also clarify that our mainstay will remain jewellery. As of now, textiles accounts for only Rs. 150 crore in sales.

Recently you launched your Bangalore showroom, which is a large-format one. Is this going to be the practice from now on?

For the metros and big cities, yes, large format is the way to go I think. But we will also launch medium and small format shops in the tier-2 cities in each state, especially in South India. Out of the 20 showrooms we have planned with the IPO proceeds, three will be of large format. But large or small, the brand is such that the footfalls are quite high, which is something that still riddles our competitors.

Organizationally, how are the preparations for IPO going on?

Well, we do things well in advance, and have already reconstituted the Board to have management and stock market experts like KP Padmakumar and CJ George with us. The induction of banker, economist, and former World Gold Council Chief Executive Rolf W Schneebeli as our CEO, and finance professional Nandakumar who has handled an IPO as our CFO was also done well in advance.

Despite having operations in 8 countries, why are you opting for the IPO of only the Indian operations?

Yes, as of now, we will go only for the IPO of Joyalukkas India Pvt. Ltd. Showroom wise and turnover wise this company is roughly half of the Group, but, of course, it comprises the full India operations. We decided on such a strategy as both structurally and execution wise, this is the right way for the Group, the brand, as well as its prospective investors. Our overseas operations, headquartered in Dubai, has diverse means of raising funds on its own.

Though it is difficult to pin down a figure now, can you provide some approximations on the issue size, dilution, pricing, and valuation?

Yes, it is quite difficult for figures to come by at this stage, as we have just now only initiated talks with merchant bankers. Still, we hope to have an IPO of around Rs. 600 crore. About the pricing I think I can’t tell anything much at this stage as it will depend on so many factors still to be decided. On the valuation front, we don’t intend to price it on a hefty P/E, but only reasonably, something that befits our industry status. I want our IPO investors to definitely make money within the first year itself. It is very much possible as we are planning to double our showrooms from 21 to 40, as also double our turnover from around 1825 crore to 3000 crore.

If you were to name one USP of the brand that it shares with you the founder, what will it be?

Without doubt, it is thinking big. Our Chennai showroom is India’s largest, and our Bangalore showroom is Karnataka’s largest. We run the largest and fastest growing branded retail jewellery chain. It is an ethos the brand learned from me. I believe in sourcing jewellery at the best-possible prices for our customers, as much as I believe in the larger-than-life shopping experience our showrooms deliver. Even our CSR initiatives like ‘My0.50’ tries to stretch the limits, to go beyond the usual CSR activities, and my personal philanthropic ambition is to build a charitable cancer hospital.

CEO Rolf W Schneebeli in conversation with Seasonal Magazine:

Can you tell us something about your background and how it came to your current role?

Well, I hail from Switzerland, was trained as an economist, worked as a banker for many years, before assuming charge in 1995 as the Chief Executive of World Gold Council’s Middle East & South East Asia operations. That stint continued till 2000, and this was the time that I really got familiar with India. Relationship with Joyalukkas dates back to this stage.

How do you assess the gold market in India?

The way gold industry has flourished in India is nothing but spectacular. When I assumed charge of WGC in 1995 the annual imports was around 300 tonnes, and by the time I left office, it was around 900 tonnes. In other words, gold business just tripled in this country within those five years. And ever since that, and even now, gold business is still growing at an amazing pace.

Do you mean to say that the ongoing gold boom has not much had an impact on consumption? To what do you attribute that?

Exactly, not in this country. This is the phenomenon that makes India a special gold country, and operations like Joyalukkas a high-growth one, going forward. I would attribute this Indian bullishness for gold, irrespective of the prices, to the event driven model of buying gold. Most Indian family events involve gold as ornaments or gift. Coming from Europe, I had trouble realizing this factor during my early years with India. But now I know the power of the Great Indian Wedding on this industry.

Why did you choose to associate with Joyalukkas?

There are several reasons. First of all, despite being an economist, I had fallen in love with gold business during my stint with WGC. Secondly, Joyalukkas has always had a unique business model in this industry, which I had discovered while in WGC. I don’t know whether even the Kerala market realizes this strength of Joyalukkas. To put it in a nutshell, this Group’s strengths are value addition, branding, rapid expansion, and focusing only on retail. There is no reinventing the wheel by dabbling in manufacturing or non-value additive concerns like bulk exports.

How do you view the ongoing gold boom? Will there be corrections in the short-term or long-term?

The boom is going to continue at least for a few years, but not for the reasons that are often portrayed like gold’s safe haven status. The real driver behind gold prices is the quantum of money supply that has hit the world market post 2008. Western governments solved the Lehman crisis and its aftermath in the only possible way, that is by pumping in excessive liquidity. Unfortunately, that was not the best of ways, and now they are struggling to remove a part of it. But sucking out that excess liquidity is practically impossible, and inflationary trends is going to reign, which will also drive up the gold prices. Of course, the rapid rise also gives room for minor corrections in the short-term. But the long trend for gold is definitely up.

How do you view the Indian situation then, and prospects for stocks like Joyalukkas when it is listed?

India is going to be a handful of exceptions to the world scenario, one of the nations that is expected to tame the inflation healthily in the coming quarters and years. You have to thank Dr. Manmohan Singh for that vision. On such a healthy platform, India will again lead in growth, driven by domestic consumption rather than exports. That is why we are bullish on a stock like Joyalukkas. It fits perfectly with the India growth story.

According to you, what are Chairman Joy Alukkas’s strengths?

He is a visionary in this business, so much so that while I was in WGC, the Joyalukkas model of expansion was presented as a case study in India as well as in other emerging markets. Early on, he understood the importance of value addition and rapid expansion. While value addition by way of custom-sourcing from all over India and the world helped in developing the brand, his focus on high volumes ensured that the business is consistently healthy with good cash flow and margins, even while satisfying the widest range of customers.

Are you enjoying your India visits? Where are you based these days?

Definitely. I am impressed with all the progress India has made over the last years. I am now a resident and tax payer in India, but I visit Dubai frequently as my family stays there.

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