LOHIA SECURITIES LTD.

Shree Ganesh Jewellery House Limited

Prakash Narayan Sharma prakash.sharma@lohiasecurities.com

Shree Ganesh Jewellery House Ltd.(Update)

Company Background

LOHIA SECURITIES LTD.

Shree Ganesh Jewellery House Ltd. is one of the largest manufacturer and exporter of handcrafted gold Jewellery in India, exporting primarily to countries such as U.A.E., Singapore, and Hong Kong The product portfolio includes handcrafted and hallmarked gold jewellery, gold enameled jewellery, gold jewellery studded with precious stones and Italian fusion jewellery The Company has manufacturing units located in Mondalpara, Manikanchan SEZ at West Bengal, which is presently the only jewellery SEZ in West Bengal and at Domjur (upcoming)

12th September 2011

MARKET DATA Bloomberg Code Reuters Code Price (`) Target Price (`) Time (in Months) Dividend Yield (%) 52 Week High/ Low(`) Equity Capital(` Mn) Face Value (`) Market Cap (` Mn) Avg. Vol.NSE(3M) Beta INDEX Index BSE Small Cap Weightage (%) 0.277% SGJ:IN SHRG.BO 149.05 260 12 4.03% 286/117 606.83 10 9,044 1,64,717 0.91

Investment Rationale Q1FY12 results in line with expectation. Strong order book provides visibility of future earning capacity. Enhanced product portfolio to assist in increasing the customer base and maintaining topline in the present scenario of rising gold prices. Companys plan to add additional retail stores in India to improve topline and bottomline. Companys backward integration plans to improve margins in the long run. Risks & Concerns Deterioration of macro conditions can adversely affect exports and discretionary spending. High concentration risk as revenues are dependent on few major clients. Volatility in gold prices can impact volumes. Seasonal nature of the business.
Financial Highlights Revenue (`Mn) Revenue growth (%) EBDITA (`Mn) EBIT (`Mn) Net Profit (`Mn) EPS (`) EPS growth (%) P/E (x)* P/BV (x)* ROE (%)
* P/E, P/BV computed taking CMP of `149.05 as on 12/09/2011.

SHARE-HOLDING PATTERN (%) Promoters 70.66 DIIs 4.15 FIIs/NRIs/OCBs 11.83 Corporate Bodies 8.95 General Public 4.41 As on 30/06/2011 RELATIVE PERFORMANCE (%) Stock over Nifty Stock Nifty 1 Month -2.5% 2.5% 5% 3 Month -10% -44% -34% 12 Month -12% -13% -1% FY11 52,407 78% 3,393 3,333 2,638 43.48 59% 3.43 0.84 24.57% FY12E 75,000 43% 5,981 5,785 3,957 65.21 50% 2.29 0.62 27.33% FY13E 85,000 13% 6,841 6,606 4,536 74.75 15% 1.99 0.48 24.12%

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Shree Ganesh Jewellery House Ltd.(Update)

Investment Rationale

LOHIA SECURITIES LTD.

Growth visibility: SGHLs quarterly results were in line with our estimates. The company has added about `5,000 Mn of orders during the quarter and has an outstanding order book of `35,000 Mn, which offers visibility for the companys future revenue generating capacity. If the company continues posting good results in the ensuing quarters, it would help in attracting investors and thereby helping the share prices to recover. As per our estimates, the company would clock revenue and PAT of Rs. 75,000 Mn and Rs. 3,957 Mn respectively in FY12. Good demand for Italian fusion jewellery: The Company had traditionally been into the manufacturing of plain jewellery products. Now the company has expanded its product portfolio to include machine made light weight, Italian fusion jewellery which is more affordable. Commercial production of Italian jewellery commenced in Q4FY11. The main brand in this segment is Gaja Lite. The weight range for Gaja Lite jewellery varies between 1 to 20 gms with 18 to 22 Karat gold. With soaring gold prices, the Gaja Lite brand would help the company in attracting the low budget customers. The Italian fusion jewellery has been well received by both domestic as well as overseas customers and has helped the company in diversifying the customer base. This augurs well for the company. Expansion of retail presence in India: SGJHL plans to expand its retail footprint in India. The company has added 3 retail stores during the quarter taking its total to 23 stores across India. Management is confident of meeting its target of adding 30 retail stores during the current financial year through combination of owned stores, franchisee stores and shop-in-shop arrangements through its strategic alliance with Bharti-Walmart. This would help the company in improving its topline as well as bottomline. Backward Integration to assist in margin improvement: SGJHL is in the process of setting up a gold refinery plant with an annual installed capacity of 35,000 kg at Domjur in West Bengal. It is expected to commence trial production at the beginning of Q3FY12. The facility would refine pre-used gold, which would then be used as raw material for jewellery manufacture. Refining old gold in-house would eliminate cost factors such as commissions, import costs and duties and other incidental expenses and reduce the basic raw material input cost. The company intends to source old/ used gold from government agencies, the domestic and international markets as well as through its proposed retail network. Currently, the company procures refined gold from suppliers such as Al-Marhaba Trading FZC, Bank of Nova Scotia, Standard Chartered Bank and the State Trading Corp of India. The Gold refining plant would help in improving the operating margins by 1-1.5%.

Recent Development
Shree Ganesh Jewellery House to foray into gold loan business: SGJHL, which is planning to foray into the gold loan business, has recently acquired a Kolkata-based non-banking financial services company (NBFC), at an undisclosed price. It is looking for the Reserve Bank of India's approval for setting up NBFC outfit. It had applied for an NBFC license to the RBI in February. The company has taken the acquisition route to fast forward its entry in this segment. The acquired company has an existing portfolio of gold loans. The NBFC would function as a subsidiary of SGJHL and would be operational in the next three-to-four months. By this year-end the jewellery major plans to roll out 50 finance outlets across the country through its NBFC arm. Loan against gold would be the primary business of the company.

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Shree Ganesh Jewellery House Ltd.(Update)

Results update (Standalone)
Particulars (` Million) Net Sales Other Operating Income Total Operational Income Total Expenditure EBITDA EBITDA Margin (%) Depreciation EBIT EBIT Margin (%) Other Income Interest & Financial Charges PBT PBT Margin (%) Provision for Taxation Profit After Tax (PAT) Net Profit Margin (%) Q1FY12 23,867 197 24,063 23,088 975 4.09% 41 935 3.92% 2 248 688 2.88% -4 692 2.90% Q1FY11 12,284 97 12,382 11,610 772 6.28% 7 765 6.23% 12 127 650 5.29% 13 637 5.19%

LOHIA SECURITIES LTD.

YoY(%) 94% 102% 94% 99% 26% 497% 22% -86% 95% 6% -127% 9%

Q4FY11 11,173 -98 11,075 10,308 768 6.87% 32 736 6.59% 7 263 480 4.29% 4 476 4.26%

QoQ(%) 114% 302% 117% 124% 27% 28% 27% -75% -6% 43% -197% 45%

Although there were some concerns among the investors about SGJHLs quarterly results and future prospects, especially after some rumors about default by a major Dubai based client came in public, the results posted by the company were in line with our estimates. It shows that the business operations are running as usual at SGJHL and the concerns raised by investors were unwarranted. The major highlights of the result were: Strong revenue growth of around 94% in Q1FY12 as compared to Q1FY11 is primarily an outcome of firm demand across product categories and markets and rising gold prices. The company is seeing strong demand for its newly launched light weight Italian fusion jewellery because of its relatively low cost and affordability. EBITDA increased by 26% YoY to `975Mn mainly because of topline growth; EBITDA Margin declined to 4.09% from 6.28% in Q1FY11 as gold prices moved up during the quarter. Depreciation and interest costs at `41 Mn and `248 Mn were up significantly by 497% YoY and 95% YoY. Profit before Tax was up by 6% YoY at `688 Mn and Net profit at ` 692Mn was up by 9% YoY. Retail contribution, during the quarter, stood at around 14.6% of the total domestic revenues as compared to 10.81% in Q1 FY2011 . In Q1 FY2012, contribution of studded jewellery to the Companys revenue mix increased to 2530% as compared to 15-20% in Q1 FY2011 .

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Shree Ganesh Jewellery House Ltd.(Update)

Net Sales (Rs. Mn)
23,867 17,921 12,284 11,029 11,173 637

LOHIA SECURITIES LTD. PAT (Rs. Mn)

842 683 476 692

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

EPS (Rs./Share)
13.88 10.5 11.25 7.85 11.4

Operating & Net Margins

10% 8% 6% 4% 2% 0%

Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12

OPM

NPM

Financial Highlights Income Statement (Standalone)

Particulars (` Mn) Net sales Other Operating Income Total Operational Income Raw Material Consumed Employee Cost Other Expenditure EBITDA Depreciation EBIT Other Income Interest & Financial Charges Profit Before Tax Provision for Taxation Profit after Tax EPS (`)
*Lohia research estimates

FY10 29,499 52 29,551 26,999 163 347 2,042 23 2,019 4 313 1,710 51 1,659 27.34

FY11 52,407 136 52,543 48,671 247 232 3,393 60 3,333 37 709 2,661 22 2,638 43.48

FY12E 75,000 163 75,163 68,498 384 300 5,981 196 5,785 31 990 4,826 869 3,957 65.21

FY13E 85,000 202 85,202 77,605 417 340 6,841 234 6,606 47 1,122 5,532 996 4,536 74.75

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Shree Ganesh Jewellery House Ltd.(Update)

Balance Sheet (Standalone)
Particulars (` Mn) Net Fixed Asset Investments Current Assets Total Assets Equity Share Capital Reserves & Surplus Secured Loans Unsecured Loans Current Liabilities & Provisions Deferred Tax Liabilities Total Liabilities
*Lohia research estimates

LOHIA SECURITIES LTD.

FY10 Assets 174 54 14,922 15,151 Liabilities 485 4,881 2,890 600 6,370 (76) 15,151

FY11 1,194 1,380 21,760 24,335 607 10,131 4,635 1,100 7,944 (82) 24,335

FY12E 2,440 118 27,564 30,122 607 13,875 4,860 1,080 9,782 (82) 30,122

FY13E 3,317 130 33,775 37,223 607 18,198 5,692 1,308 11,500 (82) 37,223

Financial Ratios
FY10 Profitability Ratios Return on Assets (ROA) Return on Equity (ROE) Return on Capital Employed (ROCE) DuPont Analysis - ROE Decomposition (x) PAT/PBT (Tax Efficiency) PBT/EBIT (Interest Burden) EBIT/Sales (Operating Profit Margin) Sales/Total Assets (Asset Turnover) TA/NW (Financial Leverage) Return on Equity (ROE) (%) Liquidity Ratios Current Ratio Acid Test Ratio Debt-Equity Ratio Margin Ratios EBITDA Margin EBIT Margin PBT Margin Net Profit Margin
*Lohia research estimates

FY11 10.84% 24.57% 20.24%

FY12E 13.14% 27.33% 28.33%

FY13E 12.19% 24.12% 25.60%

10.95% 30.91% 22.80%

0.97 0.85 0.07 1.95 2.82 30.91

0.99 0.80 0.06 2.15 2.27 24.57

0.82 0.83 0.08 2.49 2.08 27.33

0.82 0.84 0.08 2.28 1.98 24.12

2.34 2.04 0.65

2.74 2.31 0.53

2.82 2.32 0.41

2.94 2.45 0.37

6.92% 6.84% 5.80% 5.62%

6.47% 6.36% 5.08% 5.03%

7.97% 7.71% 6.43% 5.28%

8.05% 7.77% 6.51% 5.34%

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Shree Ganesh Jewellery House Ltd.(Update)

Cash Flow Statement
Particulars (` Mn) PAT Add: Depreciation Operating Profit before WC changes Changes in Current Assets (excluding cash) Changes in Current Liabilities Changes in WC Net Cash flow from Operations

LOHIA SECURITIES LTD.

FY11 Cash Flow from Operating Activities 2,638 60 2,698 (6,993) 1,568 (5,424) (2,726)

FY12E 3,957 196 4,154 (5,672) 1,838 (3,834) 320

FY13E 4,536 234 4,770 (3,039) 1,718 (1,321) 3,449

Cash Flow from Investment Activities Capital Expenditure (CAPEX) Increase in Investments Net Cash flow from Investment Activities (1,080) (1,326) (2,406) (1,442) 1,262 (180) (1,112) (12) (1,124)

Cash Flow from Financing Activities Change in Equity Change in Debt Dividends Paid Others Net Cashflow from Financing Activities Net Increase in Cash & Cash Equivalents Cash & cash equivalents at the beginning Cash & cash equivalents at the end
*Lohia research estimates

121 2,245 (426) 3,037 4,977 (155) 6,586 6,431

0 205 (213) (0) (8) 132 6,431 6,563

0 1,060 (213) (0) 847 3,172 6,563 9,735

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Shree Ganesh Jewellery House Ltd.(Update)

Outlook & Valuation

LOHIA SECURITIES LTD.

The scrip is currently trading at ` 149. In the short term there can be some correction in the stock due to overall negative sentiments in the market. The overall market is expected to remain range bound from nifty levels of 4800 to 5100. In such a situation, the stock can come down to `130 levels. But we are very bullish on this scrip from a long term perspective. We expect the scrip to reach `260 within a period of 1 year due to the following reasons: It is among the fastest growing companies in India (Source: Business World Magazine). Even its Q1FY12 results were in similar lines. The Gold refining plant which would be operational by the beginning of Q3FY12 would improve operating margins by 1-1.5%. The company plans to add 30 additional retail stores which would add to topline & bottomline. Reserves are expected to reach `13875 Mn by the end of FY12. The company is known to be a investor friendly company. At the current market price of `149, the stock is trading at P/E of 3.43 with industry P/E hovering around 9.60, the stock is underpriced. Based on discounted cash flow method, we have arrived at a fair price target of `260 for SGJHL. At our target price, the stock offers a potential upside of around 75% from the current level; we initiate a buy rating on the stock with accumulation at every dip.

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Shree Ganesh Jewellery House Ltd.(Update)

LOHIA SECURITIES LTD.

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Investment Rating Buy > 15 %

Hold (5%-15%)

Sell < 5%

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