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Thangamayil Jewellery Ltd (TJL) CMP: Rs. 153.

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Management Interaction Note August 23, 2010

HDFC Sec Scrip ID Industry CMP Recommended action Entry Price Band Target Time horizon
THAJEWEQNR Gold Jewellery Rs. 153.35 Buy at CMP and add on declines CMP & Rs. 125-136 Rs. 174 & Rs. 200 2-3 quarters

Company Background
Thangamayil Jewellery Ltd (TJL) is one of the leading jewellery retailers in Madurai. Prior to the formation of Thangamayil Jewellery
Private Limited in the year 2000 the business was carried on by the promoters of the company in the name of Balu Jewellery
(Partnership concern). Since 1984 the company is in the business of manufacturing and trading of jewellery. TJL trades in Gold
Jewellery, Diamond and Platinum jewels. The ornaments are also made to order as per specific requirements by the customer and the
same are manufactured at the company’s units near Madurai and Coimbatore. Further gold jewellery is bought readymade from various
dealers in the states of Andhra Pradesh, Gujarat, Kerala and West Bengal, according to the designs, models and current fashions and
demand in the market for sale at the counters.

TJL introduced the Hallmarking practice for the first time in Madurai and also conducted an awareness campaign introducing this
concept to the customers in the market serviced by the company. The company has its flagship showroom at Netaji Road, Madurai.
This showroom was set up in the year 2001. The showroom is housed in a three storied set up in total area of 11,416 sq. ft. TJL is
currently present across 7 other locations and intends to take the total number of retail showrooms to 9 by the end of FY11 and 15 by
the end of FY12.

TJL is a customer centric company, which provides products catering to varying customer needs regarding price points and product
categories like design, quality and purity. The company is also engaged in active research of the retail market and provides latest
trends to its customers. This has helped the company in securing repeat orders from its customers year on year and has also helped
the company to increase the customer base to over 1,25,000 in a decade. TJL mainly has a presence in gold and gold sales constitute
over 95% of the company’s turnover. TJL has a small presence in silver and currently does sales of about Rs. 10 cr per quarter of
silver. About 25-27% of TJL’s sales come from recycled jewellery.

TJL recently came out with its IPO and was listed on the bourses on 19 Feb 2010. The company issued close to 4 mn shares at Rs 75
each and raised Rs. 28.75 cr to fund its expansion plans and inventory requirements. The IPO proceeds will form about 60% of the total
cost of these two objectives while the rest of the funding requirement is to be met through internal accruals and pre-IPO placement to
the promoters.
Locations
The company currently has seven retail outlets across the state of Tamilnadu. While the company started its biggest showroom at
Madurai in 2001, the remaining four showrooms (branches) were opened in the last two years. TJL’s head office and manufacturing
facility is also located at Madurai, Tamil Nadu. TJL mainly has a presence in Tamil Nadu. TJL currently has 6 other branches, one each
at Rajapalayam, Karaikudi, Ramnathpuram, Dindigul, Theni and Sivakasi. One more branch at Tuticorin is scheduled to be opened on
Aug 2010. TJL also has a workshop at Coimbatore. TJL intends to take the total number of retail showrooms to 9 by the end of FY11
and 15 by the end of FY12. In FY12, TJL plans to open one showroom at Trichy and one at Salem and the other 4 locations are yet to
be finalized. Details of the same have been summarized in the table given below. TJL also buys gold jewels readymade from various
dealers in the states of Andhra Pradesh, Gujarat, Kerala and West Bengal. As the volume purchased is large, TJL saves on costs like
labor charges etc.
Stores Location Year of commencement Area (sq ft) Sales per day (grams)
Flagship Store Madurai (owned) 2001 11,416 4,000-4,500
Branches Rajapalayam FY09 1,200 700
Karaikudi FY09 2,500 300-350
Ramnad (owned) FY09 6,700 800-850
Dindigul FY10 5,400 1,200-1,500
Theni FY10 2,000 1,250
Sivakasi FY10 2,570 700
Plan for FY11 Tuticorin (owned) Q2FY11 16,000 -
Tirunveli (leased) Q3FY11 8,000 -
Plan for FY12 Trichy (owned) Q1FY12 16,500 -
(Source: Company, HDFC Sec)

Shareholding pattern
Given below is the shareholding pattern of the company as of 30 June 2010.

Particulars June-10 Mar-10


Promoter & Group 65.09 65.07
Domestic Institutions 0.48 0.60
Non-Institutions 34.43 34.33
Total 100.00 100.00
(Source: Company, HDFC Sec)

Retail Research 1
Triggers
TJL is a regional niche player with a focused strategy and growing brand loyalty
TJL has been conducting business under the house name "Thangamayil Jewellery". The house name has been established and
promoted in Madurai and the areas surrounding Madurai for over a decade. This brand value has accrued through consistent efforts
that have included quality and price assurance, advertisement and promotion and the retail experience. Currently, TJL enjoys a market
share in excess of 15% in the sale of Gold and Diamond Jewellery in the city of Madurai and surroundings and this share has been
increasing steadily as a polarization effect is taking place in the market. While the customers are being drawn from areas including
Theni, Dindigul, Sivakasi etc the company expanded its business and established retail outlets at each of these locations in order to
service these locations better. Further, the company has also attracted customers from the smaller regional / local players as
consumers shift focus from only price to other factors like quality, purity, ambience and design. One of the key differences between
Tamil Nadu and other parts of India, is that here the rural population buys gold as an investment and not just as an accessory /
ornament. Gold is hence perceived as a store of value (easy to liquidate during adverse times) for the people rather than its use as
jewellery.

Further, the brand building efforts of the company in the past have helped the company establish comfort with the customers of Madurai
and surrounding areas on certain factors such as price assurance, variety, quality etc., which until such time unique in the Madurai
market. The money spent on brand building over the past 6-7 years is translating into higher sales for the company today. Smaller
players with sales of about 200 grams a day are getting marginalized, as they cannot afford to spend on branding. TJL spends about
Rs. 20-25 per gram of gold sales on advertising. Hence there has been a shift (albeit gradual) from the unorganized to the organized
sector in Tamil Nadu.

TJL introduced the Hallmarking practice for the first time in Madurai and also conducted an awareness campaign introducing this
concept to the customers. A large-scale television campaign was conducted to educate the customers on the need for and the benefits
in purchasing hallmarked jewellery. As a pioneer of this Hallmarking, TJL has also been able to build an image of superior quality to its
House Name. The jewellery trade, especially in Tier II cities, is largely unorganized and customers seldom have comfort on the grade
and quality of the gold jewellery being purchased. TJL started Hallmarking its jewellery and over time increased the percentage of
jewellery hallmarked to greater than 95% of the jewellery sold through its outlet.

In its next leg of the brand building exercise the company's intends to focus on (1) Building Thangamayil's image as one with the best in
the trade in Tamilnadu; (2) Extend Thangamayil's footprint to other districts of Tamil Nadu. As per the world gold council, the per capita
consumption of gold by Tamil Nadu and Kerala is the highest in the world. The region, as a centre, is the single largest consumer than
any other centre or region in the world. In India, 30 per cent of the demand for new consumption is from this region and TJL does not
even have a 2% market share and hence there is a lot of scope within the state itself. (3) Fill in the gaps in its geographical presence in
Tamil Nadu by entering into a franchisee model (4) Create an aura of exclusivity around the brand name while at the same time
retaining Thangamayil's unique contact with the culture and tradition of the people in Madurai, Tirunelveli, Ramnathpuram,
Rajapalayam, Karaikudi etc (5) Target the correct audience and maximize impact on this targeted segment and create a strong and
long lasting bond between the customer and the brand image created for Thangamayil and lastly (6) leverage on costs like print and
local media spend across locations.

TJL has a clear strategy of focusing on Tamil Nadu and tapping the rural population over there. As of now, the company does not
intend to expand to other parts of India, as it believes that there is enough potential in Tamil Nadu for the next few years. Further, it
understands the tastes and preferences of this region well and can leverage on various costs like advertising and admin expenses.
While players from Kerala etc have set shop in Tamil Nadu, being a local brand TJL enjoys customer loyalty. The company intends to
strengthen its product development effort by creating customer/ product-range/ market-specific teams, helping them focus and create
innovative and acceptable designs that will help to increase the sales and ensure brand loyalty.

TJL is capitalizing on the shift in consumer preferences from unorganized to organized players in the jewellery business
According to World Gold Council (WGC), the Indian jewellery market currently is worth about Rs. 700 bn ($14.58 bn). Of this, the urban
jewellery market is valued at Rs. 280 bn ($5.83 bn) and the rural & semi rural market is valued at Rs. 420 bn ($8.75 bn). The two major
segments of the Gem & Jewellery sector in India are gold jewellery and diamonds. Gold jewellery forms around 80% of the Indian
jewellery market, with the balance comprising fabricated studded jewellery that includes diamonds as well as gemstone studded
jewellery. India is also the largest consumer of gold in the world, followed by China and Japan. It consumes nearly 800 tonnes of gold
that accounts for 20% of world gold consumption, of which nearly 600 tonnes go into making jewellery. India is also emerging as the
world's largest trading centre for gold targeting US $16 billion by 2010. The industry has the best skilled manpower for designing and
producing high volumes of exquisite jewellery at low labour costs. Branded jewellery is likely to be the fastest-growing segment in
domestic sales. The sector is expected to grow at 40% annually to touch US$ 2.2 billion by 2010.

The Indian gems and jewellery industry is competitive in the world market due to its low cost of production and availability of skilled
labour. The industry employs over 1.40 mn people directly and indirectly. The Indian gems and jewellery sector is largely unorganized
at present. There are over 120,000 Jewellery manufacturing units throughout India. Family jewellers, who constitute nearly 95% of the
market, dominate the industry. Organized players have, however, been growing steadily carving a 5% market share. As India's market
matures, it is expected to get more organized and the share of family jewellers is expected to decline by the process of effective retail
marketing and polarization factors.

Retail Research 2
Disposable income in India increased at a CAGR of 11% since 1997. The median age of Indians is 25 years, one of the lowest in the
world compared to 35 in US and 33.6 in China. The urban population, which currently accounts for 30% of the total population, is
expected to increase to 40% by the year 2020. With rising young population, the jewellery industry has significant potential for growth. A
well-integrated rural India believes in gold more as securing by investment item and it will continue to be backbone of the Indian
economy and particularly for influencing gold Jewellery demand. In order to increase the demand during recession, jewellers are
concentrating on newer designs in light weight jewellery. Increasing urbanisation, higher percentage of younger population, more
working women and easy availability of credit cards have all led to impulse buying and preference for a better lifestyle. As per the
National Sample Survey data, in urban India the share of essential items like food, clothing, electricity & fuel and footwear in the total
average annual per capita consumption expenditure has reduced whereas the share of durable goods has increased, which reflects the
changing preferences of consumers. However, in spite of the increasing preference for luxury items, the per capita spending by an
Indian is lowest in the world.

Branded Jewellery
Branded jewellery has been a relatively recent phenomenon in India, with most jewellery retailed in the unorganized sector. The
majority of traditional jewelers cater to the local population and most purchases are made on trust and on the basis of the reputation of
the local jeweller. There are broadly three retail formats followed by branded jewelers in India: (1) Exclusive outlets at malls and other
key shopping centers in major cities showcasing various models of the brand; (2) Kiosks/ displays in departmental stores and malls;
and (3) Display of branded jewellery in shops of local jewelers. Jewellery retailing in India is undergoing a slow transformation from a
largely unorganised sector to a more organised one. While the family owned jewellery store remains the predominant retail format, new
formats such as boutiques, supermarkets and gold souks are emerging for jewellery retail. Branded jewellery has been a relatively
recent phenomenon in India.

An analysis of retailing patterns in other Southeast Asian countries reveals that they too had similar retailing patterns where upto 80%
of the trade was unorganized. But even in such countries there has been a large shift in retail sales from unorganized outlets. This
affords a huge opportunity for retailers in India given that the growth of the Indian market has largely mirrored the Southeast Asian
experience albeit with a lag of 5-10 years. TJL, with its established brand name and increasing retail presence, is well positioned to
capitalize on this change in consumption preference as it takes place over time.

Increasing its captive consumer base – loyalty cards, chit schemes, exchange of old jewellery and fixed deposit schemes
TJL has been in the business of trading in gold and jewellery for the past 60 years. Over the years due to the consistent quality of the
company’s products, the company has been able to retain its customers and get repeat orders from them. TJL’s strength lies in
understanding the requirement of the customer and its execution capabilities. Brand and customer loyalty along with TJL’s intricate
deigns and quality of products enables it to enjoy better margins as well.

To attract customers, the company also holds different Melas at different time such as Chain Mela, Bangle Mela, Old Gold Exchange
Mela and offers special discounts on festive occasions like Akshaya Thiruthi, Aadi Attara, Pongal, Dhanteras, etc. TJL also offers a
loyalty card (discount card) to its customers and hence tends to retain a sizeable captive consumer base. These customers can avail of
a discount of about 1% on future purchases depending on the points collected. Next, TJL has also floated chit schemes to retain and
attract customers. Under these schemes, the company on a monthly basis, collects certain fixed amount of money from its customers
for a maximum period of 15 months and on maturity the customers are entitled to use the entire amount so deposited with the company
along with bonus (customer also earns about 6-7% p.a on the monies deposited) as given by the company for purchase of gold jewels/
diamond/ ornaments as per their choice. The money cannot be withdrawn or used for any other purpose and thus results into
incremental sales for the company. Currently, TJL has about 24,000 such customers that contribute about Rs. 500 per month. Thirdly,
the company has a policy of price assurance with respect to returns of the product subject only to changes in underlying metal prices.
Again, the company has very transparent practices when it comes to exchange of jewellery. Customers often bring in jewels purchased
from other retailers for exchange and remaking into new jewellery. The company has acquired sophisticated machinery to measure the
quality and carat value of the gold brought in. The measurements are scientific and tamper proof, thereby giving the customer an
assurance on the exchange value that they receive in return for their jewellery. These initiatives have gone to build a sound reputation
for the company in the minds of the customers. In case of its own product, TJL does not earn any extra margin by buying back the
jewelry, but on outside jewels purchased it earns an incremental margin of about 2%. About 25-27% of TJL’s sales come from recycled
jewellery. Lastly, TJL has introduced one, two and three-year fixed deposit schemes at interest rates of 10, 11 and 12.5% respectively.
This too helps in attracting people to its outlets, which could also lead to incremental sales for the company.

TJL believes in adding a personal touch to all its relationships with its customers. TJL gives all its customers a gift on their birthday.
These gifts are generally imported from China in bulk and does not cost the company a large amount. However, in the eyes of the
customer this gift is worth more than it actually is and hence increases customer loyalty. Such initiatives taken by TJL help in attracting
customers and increasing its customer base.

Rollout of showrooms to drive growth on a low base and result in synergistic optimization
Sustained performance over the last few years in Madurai and surrounding towns provides a platform for growth for TJL into other class
B cities in Tamil Nadu with similar customer profile. Growing acceptance and preference of customers for Hallmarked and high quality
products presents an opportunity for TJL to distinguish itself from unorganized companies. TJL mainly has a presence in Tamil Nadu.
TJL is currently present at 7 locations, viz. Madurai, Rajapalayam, Karaikudi, Ramnathpuram, Dindigul, Theni and Sivakasi (the details
of each location and daily sales have been provided in the table given along with Locations). TJL is the No 1 or No 2 player in each of
the locations and is confident of attaining this position at all new locations as well. The new locations have been chosen in such a

Retail Research 3
manner that TJL can attain dominant market share in the organized segment. A number of the new locations are too small for bigger
players to enter and TJL has a much deeper understanding of he local rural population residing in those areas. TJL intends to take the
total number of retail showrooms to 9 by the end of FY11 and 15 by the end of FY12. In FY12, TJL plans to open one showroom at
Salem, one at Trichy (Q1FY12) and the other 4 locations are yet to be finalized. In FY11, TJL is adding retail outlets at Tuticorin
(Q2FY11) and Tiruneveli (Q3FY1). The total capex for the same is estimated at about Rs. 18-20 cr to be funded via internal accruals
and IPO proceeds. One of the main costs is the land cost at Trichy, which is on the higher side, and this will be wholly owned by TJL
(not leased) and is scheduled to come on stream by Q1FY12. As per the company’s internal estimates sales at Tuticorin could be in the
range of 2-3 kgs per day while Trichy could be as big as Madurai and give sales of about 4 kgs per day. The sustained growth in the
Indian economy and growing employment levels, income levels and availability of credit in India is resulting in greater consumer
spending and disposable income, together with the strong growth in retail operations in India provides significant opportunities for
business of the company. These factors are expected to result in increased demand for TJL’s products. The company also intends to
capitalize on the gradual shift of consumer preferences in India from traditional unbranded gold jewellery to diamond studded and other
hallmarked jewellery. As a result, we expect the company to grow rapidly on a low base.

Next, the company will continue branding its products through local language advertising through newspapers, radio and television
networks in order to increase recognition of Thangamayil brand to consolidate their position in Tamil Nadu. Given the similarity in taste,
preference and language across the region and concentrated advertising in a limited area, TJL could benefit from optimization of
advertising expenditure resulting in synergies for the company at the EBIDTA level. Further the taste of people in this area is broadly
similar and hence TJL saves on inventory holding costs to an extent.

TJL is suitably placed to fully exploit the Rural India Growth Story by penetrating deeper into rural towns particularly in the districts of
Tamil Nadu where significant gold jewellery business takes place. TJL is considering a proposal of opening up of customer care centers
in smaller towns attached to its main branches and is also seriously considering a proposal of appointment of 'Franchise dealer' model
in unrepresented areas in order to fully optimize the various synergies already established. The customer care centers would provide
basic repair services to clients and could also act as a Chit collection and deposit collection center. Franchisees will be positioned at all
locations in order to fill in geographical gaps in Tamil Nadu. TJL is planning set up 30-40 such outlets under this model. To begin with,
TJL intends to add about 20 such franchisees over Q3 and Q4 of FY11. TJL intends to provide all the products, advertising and
promotional material to the franchisee in exchange for a bank guarantee. The franchisee will have a share in the profits of the company
but will also bear all overhead costs etc. TJL will ensure that at all franchisee locations one employee of TJL is also stationed to ensure
smooth operations and ethical dealing. All these 'Retail area expansion plans' evolved would bear fruits in the years to come and
enable the company to maintain the leadership position in districts of the State of Tamil Nadu. Overall, as a result the bottomline of the
company could grow faster than the topline.

Moving on, the United Arab Emirates (UAE) was the largest importer of gems and jewellery from India in FY09, with a share of 31%.
This was followed by Hong Kong with 25% and the US with 20%. The gem and jewellery sector accounted for 13% of India’s total
merchandise exports. The export industry mainly comprises of small-to-large units based in various special economic zones (SEZs)
supplying primarily diamond-studded jewellery. Gold export is limited due to the robust demand in the domestic market. However, a
number of players have ventured overseas and opened retail outlets in the Gulf to cater to the Diaspora settled there. For eg. Joy
Alukkas has 3-4 branches in the Gulf. TJL is planning to open a branch in Dubai to cater to the TN population settled over there.
However, this venture is still in the initial stages of planning.

As TJL opens more branches in Tamil Nadu it can derive operational synergies on a number of counts (1) After operations at a
particular branch have stabilized, TJL can maintain optimum level of inventories on books. In the initial stages, inventory levels are
higher to understand the style, preference and off take from the customer at a particular location. (2) Madurai will serve as a hub and
any additional / special orders can be delivered from Madurai within the same day to any branch given the proximity of location. This
could result in 15-20% lower inventory levels and TJL could touch an inventory turnover ratio of about 5.5x from the current 3.9x. (3)
TJL has implemented ERP programme under the name of "SAP Business 1" in August 2008. At present, all its retail counters are
equipped with ERP oriented programs. In the ERP program, TJL has a supply chain module and a financial module. TJL intends to
implement some other modules to minimize the workload at its offices and retail counters. This could result in savings on administration
and other associated costs. (4) As TJL focuses on Tamil Nadu as its main market, it can also optimize expenses such as advertising
(print or electronic media) as the local population is similar across districts. Increase in branches could result in increase in sales
volume while costs like inventory, advertising and administration are optimized.

Going forward, the business model as demonstrated by TJL can easily be replicated in various selected towns. With the consumer
awareness improving year after year, for the quality parameters on the one hand, and the effective polarization taking place in the
supply side on the other hand the future prospects of the company look bright. Though operating in a competitive environment, the
uniqueness of the model ensures a comfortable level of net margin availability as demonstrated by its historical performance.

Optimization of costs like advertising and administration along with lower interest costs to boost bottomline growth
TJL put up a decent performance in FY10. It reported a topline of Rs. 451.4 cr, up 82.9% y-o-y, operating margins of 6.9% (down in
comparison to 7.6% reported in FY09 due to a change in accounting policy for advertising expenses which resulted in an incremental
write off to the tune of Rs. 2.78 cr in FY10) and a PAT of Rs. 16.1 cr, up 85.2% y-o-y. There were certain structural changes and
strategies taken by the management that helped the company to post a good set of numbers. These include (1) A better product mix
consisting of improved varieties and ranges. (2) Gold price stability in the major part of the year enabled the company to improve the
operating profits at gross level. (3) Successful implementation of cost effective initiatives undertaken by the management in all areas of

Retail Research 4
operations. Significant improvement was made in the synergy optimization in cost/efforts and opportunities, and other areas of
operations. (4) The decision to expand in the Tier II and Tier III class towns enabled the company to maintain the operating profit
margin at EBITDA level, inspite of competition that prevailed in the retail market place.

The company was following the accounting policy upto last year (FY09) of deferring the cost incurred on advertisement/publicity to be
amortized over a five-year period commencing from the succeeding financial year. It is decided to change the accounting policy of
Deferred Revenue expense to amortize the cost incurred on advertisement/publicity as 20% in both of the year in which it is incurred
and in the ensuing year and the balance to be amortized equally in next two years, (i.e. in the ratio of 20:20:30:30). Consequent to this
change, the selling expenses in FY10 is overstated by Rs.2.78 cr resulting in understatement of Net Profit by Rs.1.84 cr. However,
even with this change in policy, which in our view is more conservative that the previous one and reflects prudent financial
management, TJL has managed to post good bottomline growth.

In Q1FY11, TJL posted strong topline growth of 43.3% y-o-y to Rs. 125.6 cr (12.6% q-o-q growth). Operating margins expanded to
9.4% in Q1FY11 from 7.6% in Q1FY10 and 6.5% in Q4FY10. This was primarily on account of higher realizations enjoyed by the
company on low cost inventory (inventory gains). On a yearly basis, this impact can be expected to get nullified as gold prices fluctuate
from quarter to quarter. Interest costs were up 42.5% y-o-y but down 28.5% q-o-q at Rs. 1.7 cr. TJL’s interest cost could remain at
similar levels of FY10 if not lower due to a number of factors (1) FNCR loan availed which has a much lower interest rate (~6.5-7%
range) compared to term loans from Indian banks. (2) TJL intends to increase its exposure to metal loans from banks such as SBI as
these loans are not only available at a lower rate of interest (about 5.5%), they also provide a means of hedging against fluctuating gold
prices. In FY10, TJL availed of short-term loans as a result of which its effective interest cost was about 11-12%. However, in FY11 as
per the company this could be in the 7.5-8% range due to higher usage of FCNR and metal loans. On a conservative basis, we have
assumed an increase in absolute interest costs while maintaining a lower effective interest rate for FY11 (E). TJL reported a PAT of Rs.
6.5 cr, up 86.8% y-o-y and 73.8% q-o-q.

So far, as per the management, Q2FY11 is turning out to be a very strong quarter for the company. Gold sales had increased during
the start of the quarter due to a fall in gold prices. Volume growth is expected to be strong, north of 40%. TJL normally tries to maintain
gross margins of about 12% and net profit margins of 4.5%. In FY11 and FY12, the company expects growth to be driven by rollout of
new branches and incremental growth of about 10-15% from existing branches. The implementation of the franchisee model could add
a fillip to growth. The company expects near doubling of topline and bottomline to grow at an even faster pace due to rationalization of
costs like administration, advertising and lower interest outflow. Manpower is also expected to increase in line with sales growth; TJL
currently employs about 500 people, which is slated to go upto 1,000 people by the year-end. TJL employs about 60-80 people in each
branch varying with the branch size.

We expect TJL to report a topline of Rs. 710 cr and Rs. 905 cr in FY11 and FY12, up 57.3% and 27.5% y-o-y respectively. Operating
margins could be in the 7.7-7.8% range. Bottomline is expected to grow faster due to higher EBIDTA margins and lower interest costs.
PAT in FY11 (E) is expected to grow by 84.6% y-o-y to Rs. 29.7 cr and 23.6% y-o-y in FY12 (E) to Rs. 36.7 cr.

Trend in Sales & PAT Trend in EBIDTA% & NPM


1000.0 100.0 5.0
7.6 7.8
900.0
7.7
800.0 80.0 7.0
700.0 6.9 4.0
600.0 60.0 4.2 4.1
Rs cr

EBIDTA%

500.0
%

NPM
4.8
400.0 40.0 5.0 3.5 3.6
300.0 5.0 3.0
200.0 20.0
100.0 2.4 2.5
0.0 0.0 3.0 2.0
FY08 FY09 FY10 FY11 (E) FY12 (E) FY07 FY08 FY09 FY10 FY11 (E) FY12 (E)
Sales PAT Growth in PAT EBIDTA % NPM %

(Source: Company, HDFC Sec)

Favorable dividend policy


TJL has decided to payout one third of its profits every year as dividend to reward its shareholders. In FY10, TJL declared and paid an
interim dividend of 30% on equity shares (Rs. 3 per share) in March 2010. The Board of Directors of the company recommended a final
dividend of 10% (Rs. 1 per share) on the paid up share capital as on 31st March 2010. With this the total dividend for FY10 works out to
40% on the paid up capital (Rs.4 per share) involving an aggregate of Rs. 6.42 cr inclusive of dividend tax payable (tax free in the
hands of shareholders). This works out to be 34% of the PAT (Rs. 16.1 cr) of FY10. In FY11 (E) we expect TJL to report a bottomline of
Rs. 29.7 cr that is slated to increase to Rs. 36.7 cr in FY12 (E). On a conservative basis, the dividend in FY11 (E) could increase to Rs.
6 and in FY12 (E) it could increase to Rs. 8. Based on FY11 (E) dividend of Rs. 6, the stock is available at a current dividend yield of
3.9%. We believe this policy is an investor friendly policy and can lead to increased interest in the stock.

Retail Research 5
Concerns
Geographical risk: TJL currently operates in Madurai, Ramnathpuram, Rajapalayam, Karaikudi, Dindigul, Theni and Sivakasi. While
the company has plans to establish a presence across the State, currently the geographical presence is limited. As it expands
geographically, the company's ability to keep a close pulse on the customers' tastes and preferences is extremely important.

Increased leverage: TJL’s debt to equity at the end of FY11 could increase to more than 1.5x (from 0.9x in FY10) to fund working
capital requirements. This could be strain on the company’s balance sheet and profitability during market downturns. Fluctuations in
market interest rates may affect the cost of borrowings, as most of its indebtedness is at variable interest rates.

Competition: The Jewellery business is a highly competitive industry. Off late, many large retailers have been setting up chains across
metros and in class B cities as well. Competition from other retailers could drive down margins. Recently, Madurai has seen the entry of
Alukkas Jewellers, Bhima Jewellers and Kalyan Jewellers, which are retailers who have a presence in 10 other cities. Such new
entrants come in with the financial muscle that comes out of managing 10 - 15 outlets and hence have the ability to spend heavily on
advertising and on maintaining higher levels of inventory. Similar entry by other players in Madurai as well as other locations targeted
by Thangamayil could make business difficult and affect profitability in the long run. The company faces threat from unorganized
players operating at the local level since the gems and Jewellery industry is largely dominated by unorganized sector. The relatively
small size of the company means that there is a threat from larger players who have significantly higher

Execution risk: TJL intends to open about 2 showrooms in FY11 and another 6 in FY12; the successful rollout of these capex plans
and thereafter stabilization of operations remains key to TJL’s growth strategy. TJL can face delays due to government and regulatory
issues as well.

Commodity risk: A rise or fall in gold prices could impact TJL’s profitability. When gold prices rise, TJL could gain from low cost
inventory, however sales volumes could dip as the metal has become more expensive for the common man. When gold prices fall, TJL
could be stuck with high cost inventory that has to be sold at lower realizations and hence could take a hit. However, as per the
company this is compensated by increased volume of sales. As a result a 10-15% movement is gold prices over the medium term is
manageable and may not impact profit margins to a great extent.

Poor monsoon risk: Luxury products, such as gold jewellery, diamonds and fine jewellery, form part of the discretionary purchases for
consumers. The volume and value of such purchases may significantly decrease during economic downturns. As TJL mainly caters to
the rural population a poor monsoon could impact its sales volumes. However, as per the management, during this time the rural
population comes in to trade in old jewellery and as a result the impact is mitigated to some extent.

Tastes & Preferences: The Jewellery offerings must reflect the tastes and preferences of a wide range of consumers whose
preferences may change regularly. Should prevailing consumer tastes for jewellery change often, demand for TJL’s products could
decline and its business and results of operations would be adversely affected.

Working capital cycle: TJL’s working capital is set to increase mainly due to an increase in inventories. The increase is primarily on
account of an increase in gold ornaments necessitated by increase in the number of branches. This increases commodity risk and
interest costs (to fund working capital). As TJL expands further and branches stabilize (spending and demand patterns are identified at
every location) the management has indicated that inventory levels could be optimized. While branches would maintain minimal levels
of stock, any special order or delivery could be ordered and serviced from Maduria (hub) within a day due to its proximity and hence
result in inventory optimization.

Seasonality in business: As per the company, the first half of the year Q1 and Q2, account for about 60% of its sales while the
balance 40% takes place in Q3 and Q4 of the financial year. As a result, there could be variability in revenue and profitability from
quarter top quarter. Also, during the week sales on Tuesdays and Fridays tend to be much lower than on other days due to religious
reasons.

Expenditure on sales, marketing and advertising: TJL has to continuously spend on advertising and other such promotional material
to maintain and build on its relationship with its customers. Further, with its plan to rollout showroom in other districts of Tamil Nadu
where the competition could be stiff, marketing could be a critical success factor for the company. During dull periods this could put
additional pressure on operating margins.

Conclusion:
TJL is well placed to capitalize on the shift in the gold jewellery market from the unorganized to the organized players. Change in
customer preferences (no longer focused only on price) could translate into higher demand for TJL’s products that have presence
across the value chain (purity, quality, ambience, price and design). TJL offers a wide range of products and is able to source from
diverse regions like the states of Andhra Pradesh, Gujarat, Kerala, and West Bengal. Further, the longevity of the House name in Tamil
Nadu and the promoters' experience and the fact they bring with them 60 year's history augurs well for TJL.

TJL is able to obtain competitive terms of supply from suppliers given the volumes procured. Further, it is more focused quality which is
evidenced by the efforts and expenditure incurred towards Hallmarking as well as the promotional efforts incurred in creating
awareness amongst the public about the need for and benefits of Hallmarking. This leads to an increase in its customer base as it
recycles jewellery. We believe that TJL’s strategy to focus on Tamil Nadu and open more retail outlets could lead to strong growth for

Retail Research 6
the company in the next few years. The rising prosperity of the rural population, favorable monsoon and increase in MSP of crops could
result in an increase in discretionary spending.

So far, as per the management, Q2FY11 is turning out to be a very strong quarter for the company. Gold sales had increased during
the start of the quarter due to a fall in gold prices. Volume growth is expected to be strong, north of 40%. TJL normally tries to maintain
gross margins of about 12% and net profit margins of 4.5%. In FY11 and FY12, the company expects growth to be driven by rollout of
new branches and incremental growth of about 10-15% from existing branches. The implementation of the franchisee model could add
a fillip to growth. The company expects near doubling of topline and bottomline to grow at an even faster pace due to rationalization of
costs like administration, advertising and lower interest outflow. Manpower is also expected to increase in line with sales growth; TJL
currently employs about 500 people, which is slated to go upto 1,000 people by the year end. TJL employs about 60-80 people in each
branch varying with the branch size.

We expect TJL to report a topline of Rs. 710 cr and Rs. 905 cr in FY11 and FY12, up 57.3% and 27.5% y-o-y respectively. Operating
margins could be in the 7.7-7.8% range. Bottomline is expected to grow faster due to higher EBIDTA margins and lower interest costs.
PAT in FY11 (E) is expected to grow by 84.6% y-o-y to Rs. 29.7 cr and 23.6% y-o-y in FY12 (E) to Rs. 36.7 cr

As per the world gold council, the per capita consumption of gold by Tamil Nadu and Kerala is the highest in the world. The region, as a
centre, is the single largest consumer than any other centre or region in the world. In India, 30% of the demand for new consumption is
from this region and TJL does not even have a 2% market share and hence there is a lot of scope within the state itself for TJL.

TJL is expensive compared to broad peers like Shree Ganesh Jewellery and Gitanjali Gems in terms of P/E ratio and Marketcap to
sales. However the business model of TJL is simpler, its base is smaller (and hence the growth potential higher), has no exposure to
wholesale trade, diamonds or exports/imports unlike the other two (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) and TJL has the highest OPM/NPM,
comparatively lower D/E ratio and offers a higher dividend yield at the CMP.

Titan, a large peer in the Jewellery, Watches and eyewear segment quotes at ~36 times its FY11 (E) street estimates. Jewellery sales
constitute 75% of sales in June 2010 quarter and 61% of its PBIT (Jewellery PBIT margins are 7.18% compared to 9.1% for TJL).
Though Titan is strictly not comparable as it is present also in watches and eyewear segments, has a much bigger brand value, is from
the house of Tata and has much wider retail presence (including international operations), it still gives an indication of valuations that
could be given to a company in Jewellery retailing business. Next, Joyalukkas (a large peer of TJL – annual sales Rs. 1,800 cr from 21
showrooms) is planning to come out with an IPO of Rs. 600 cr.

At the current market price of Rs. 153.35, TJL is trading at 5.7x its FY12 (E) EPS of Rs. 26.7. TJL could be bought at the current market
price and added on declines to the Rs. 125-136 band for sequential price targets of Rs.174 (6.5x FY12 (E) EPS) and Rs. 200 (7.5x
FY12 (E) EPS) over the next 2-3 quarters.

Financials
Quarterly Results
(Rs cr) Q1FY11 Q1FY10 % Chg y-o-y Q4FY10 % Chg q-o-q Q3FY10 Q2FY10
Net Sales 125.6 87.6 43.3% 111.5 12.6% 130.5 121.8
Other Income & other op income 0.0 0.0 NA 0.0 NA 0.0 0.0
Total Income 125.6 87.6 43.3% 111.5 12.6% 130.5 121.8
Total Expenditure 113.8 81.0 40.5% 104.2 9.2% 122.3 113.0
Raw Material 109.9 78.5 40.0% 98.0 12.1% 118.4 110.3
Employee Costs 1.4 1.0 44.3% 1.8 -21.8% 1.2 1.2
Other Expenditure 2.5 1.6 61.9% 4.4 -42.8% 2.7 1.5
EBIDTA 11.8 6.6 77.1% 7.3 61.5% 8.2 8.9
Interest 1.7 1.2 42.5% 2.4 -28.5% 1.7 1.2
PBDT 10.1 5.4 84.7% 4.9 105.5% 6.5 7.6
Depreciation 0.3 0.2 72.2% 0.3 -8.8% 0.2 0.2
PBT 9.7 5.3 85.2% 4.5 114.1% 6.3 7.4
Exceptional Items 0.0 0.0 NA 0.0 NA 0.0 0.0
Tax 3.2 1.8 82.0% 0.8 NA 2.3 2.5
PAT 6.5 3.5 86.8% 3.7 73.8% 4.0 4.9
EPS 4.7 2.5 86.8% 2.7 73.8% 2.9 3.6
OPM % 9.4% 7.6% 6.5% 6.3% 7.3%
NPM % 5.2% 4.0% 3.4% 3.1% 4.0%
(Source: Company, HDFC Sec)

Retail Research 7
Profit & Loss A/c
(Rs in cr) FY07 FY08 FY09 FY10 FY11 (E) FY12 (E)
Net Sales 127.2 224.5 246.8 451.4 710.0 905.0
Other income 0.1 0.1 0.0 0.0 0.0 0.0
Total Income 127.2 224.6 246.9 451.4 710.0 905.0
Total Operating Expenditure 120.8 213.8 228.1 420.5 655.5 834.5
EBITDA 6.5 10.8 18.8 30.9 54.5 70.5
Margins % (without other income) 5.0 4.8 7.6 6.9 7.7 7.8
Interest 1.5 2.0 4.6 6.5 8.5 12.9
Depreciation & Non cash charges 0.2 0.3 0.6 0.9 1.5 2.6
PBT 4.7 8.5 13.6 23.5 44.5 55.0
Taxation 1.6 2.9 4.9 7.4 14.8 18.3
Net Profit 3.1 5.6 8.7 16.1 29.7 36.7
(Source: Company, HDFC Sec)

Balance Sheet
(Rs. in cr) FY07 FY08 FY09 FY10 FY11 (E) FY12 (E)
Share Capital 3.0 8.7 9.1 13.7 13.7 13.7
Reserves & Surplus 4.5 20.2 24.0 61.2 81.2 105.1
Total Shareholder’s Fund 7.5 28.9 33.0 74.9 94.9 118.8
Total Loans 16.3 20.2 43.4 70.0 154.8 194.8
Net Deferred Tax Liability 0.3 1.6 2.5 2.6 2.6 2.6
Total 24.1 50.7 78.9 147.5 252.4 316.3
Net Block 4.4 11.2 8.8 13.7 31.5 46.4
Capital WIP 0.2 0.8 1.3 1.3 2.0 2.6
Net Current Assets 19.4 34.8 62.8 126.9 213.3 261.7
Miscellaneous Expenses not written off 0.0 4.0 6.0 5.6 5.6 5.6
Total 24.1 50.7 78.9 147.5 252.4 316.3
(Source: Company, HDFC Sec)

Cash Flow Statement


(Rs. in cr) FY07 FY08 FY09 FY10 FY11 (E) FY12 (E)
Profit Before Tax 4.7 8.5 13.6 23.5 44.5 55.0
Net Operating Cash Flow -3.5 -6.8 -16.0 -34.5 -47.0 -0.6
Net Cash from Investing Activity -1.0 -1.7 -4.8 -5.8 -20.0 -18.1
Net Cash from Financing Activity 3.8 8.9 21.1 47.5 66.7 14.3
Cash & Cash Equivalents 0.2 0.6 0.8 8.0 7.8 3.4
Net Inc / (Dec) in Cash -0.7 0.4 0.3 7.2 -0.2 -4.4
(Source: Company, HDFC Sec)

Ratio Analysis
Key Ratios FY07 FY08 FY09 FY10 FY11 (E) FY12 (E)
Profitability Ratios (%)
EBITDA 5.0 4.8 7.6 6.9 7.7 7.8
Net profit 2.4 2.5 3.5 3.6 4.2 4.1
RoCE 17.0 18.5 18.0 18.1 17.7 15.9
RoA 12.9 15.0 13.4 14.2 14.9 12.9
RoE 41.4 19.4 26.3 21.5 31.3 30.9
Growth Ratios (%)
Net sales 76.5 10.0 82.9 57.3 27.5
EBITDA 67.2 73.8 64.7 76.2 29.4
PBT 80.2 58.8 73.6 89.2 23.6
PAT 80.7 54.9 85.2 84.6 23.6
EPS 80.7 54.9 85.2 84.6 23.6

Retail Research 8
Valuation Ratios (X)
PE 67.8 37.5 24.2 13.1 7.1 5.7
CPE 63.5 35.6 22.6 12.4 6.7 5.4
Price/BV 28.1 7.3 6.4 2.8 2.2 1.8
EV/EBITDA NA NA NA 5.6 6.6 5.7
EV/Sales NA NA NA 0.4 0.5 0.4
EV/Mcap NA NA NA 1.6 1.7 1.9
D/E 2.2 0.7 1.3 0.9 1.6 1.6
Per share data (Rs)
Earnings 2.3 4.1 6.3 11.7 21.6 26.7
Cash Earnings 2.4 4.3 6.8 12.4 22.7 28.6
Book Value 5.5 21.1 24.1 54.6 69.2 86.6
Turnover Ratios
Inventory (days) 57.4 45.2 73.9 73.2 82.7 93.4
Debtors (days) 2.5 1.0 0.7 0.3 0.2 0.3
Creditors (days) 3.1 2.2 6.1 5.1 4.2 4.7
(Source: Company, HDFC Sec)

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Retail Research 9