Su-Raj Diamonds and Jewellery is one of the country’s largest diamond manufacturers and exporters, and also a leading player in the international fine gold jewellery market. A consistent performer over the years, the company is a good play on the burgeoning and expanding jewellery market. On the valuation front, the company is a steal at a market cap / sales ratio of 0.18 and price to book of 0.37 and a forward P/E of 4.48x against an industry P/Es of 8x which leaves significant scope for upside. With ample liquidity, stable margins and strong growth prospects a re-rating is on the cards.

Company background

Su-Raj Diamonds and Jewellery is one of the country’s largest diamond manufacturers and exporters, and also a leading player in the international fine gold jewellery market. The company is a one stop shop for all kinds of jewellery due to its uniqueness in designs, craftsmanship and a host of other capabilities. The company has nine manufacturing facilities across the country and its operation encompasses all facets of gold, silver, diamond and platinum jewellery manufacturing. The company has a global footprint and a marketing network spanning New York , Antwerp , Bangkok , Hong Kong and Los Angeles .

Investment Rationale

Explosive industry growth ahead

According to a study by consulting firm McKinsey, the branded jewellery market in India would grow by 40 per cent per annum to Rs 10,000 crore by 2010. During calendar year 2004, the demand for branded jewellery grew around 30 per cent while the growth of regular gold jewellery was in single digits. The export business, too, has been shining. Exports of gems and jewellery touched $14 billion during 2004 - a 38 per cent growth over last year's $10.39 billion. There has been growth in the jewellery sector, too, with exports growing 78 per cent growth y-o-y in 2004. Indian-made jewellery is gaining fast momentum in the US markets in the recent past with several global retail giants like Wal-Mart and JC Penney likely to source jewellery from India . Besides, Indian players are likely to get more foot-hold in newer markets like EU countries and South East Asian markets where Indian jewellery is more lucrative than those from other countries. India is likely to sustain the growth momentum as it has significant cost advantage apart from skilled and cheaper labour force which makes it an attractive outsourcing option for global players.

Positive outlook

The jewellery industry is the country in is undergoing through a period of transition with more players scaling up operations and increasing their global footprint to meet the booming export & domestic jewellery business. Su-Raj Diamond is likely to post a topline growth of 35-40 per cent per annum over the next three-four years driven by growth in jewellery business. The diamond business has already reached a plateau and would grow only marginally. The company is likely to achieve a topline of Rs 1398 crore in FY06 and Rs 1873 crore in FY07 representing growth of 36% & 34% respectively. The net profit of the company is set to jump to Rs 41.94 crore in FY05 & Rs 56.20 crore in FY 06 as the margins levels are likely to be sustained.

Volumes to drive numbers

Su-Raj Diamond is expanding its facilities in Goa with an additional Rs 25 crore investment to meet the growing export demand. It already has nine manufacturing facilities in the country and the current expansion would help the company focus on export markets such as West Asia and the US since both are strategically located. In addition, the acquisition of Forever Precious Jewellery & Diamonds would further add to the volume growth with domestic jewellery business in focus. The margins in this business are not high and would continue to be stable. However, the company would make up for it through volume growth.

Shifting focus

Su-Raj is now focusing on the jewellery business in the B2B segment. The $1.6 million deal with Forever will help it to move further into India 's fast-growing domestic jewellery market. The jewellery from Su-Raj will be catering to large international B2B clients while Forever will tap the domestic B2B market. As part of the deal Su-Raj will have a share in 300,000 jewellery outlets across India .

Recent acquisition is synergistic

The company’s recent acquisition of a 49 per cent stake in Forever is complementary to its existing business and would help the company emerge as a one-stop-shop for the B2B segment for meeting requirements for diamond, gold, gem, platinum and silver jewellery. Forever, with a turnover of Rs 45 crore last year, would aid the company in tapping the high growth domestic gold and diamonds jewellery segment. Forever's merchandise offerings include jewellery and accessories in diamond and gold and are currently sold to all major domestic retailers like Tanishq, TBZ, Alukkas, Vummidiars and Chintamani.

Financials

Su-Raj Diamonds posted a 34.22 per cent growth in net income at Rs 267.13 crore for the quarter ended March 2005. The jump in sales was attributed to the revenues from jewellery division, which rose 114 per cent to Rs 137.01 crore (Rs 64.04 crore). The jewellery export rose to a high of Rs 482 crore in FY05 and is likely to sustain the growth momentum in the coming years as the company would continue to penetrate globally in the jewellery segment. The net profit of the company however rose 14.33 per cent to Rs 8.22 crore (Rs 7.19 crore) due to lower margins following jump in raw material cost.