Tender in the buyback

Good deal, but acceptance ratio may be low

PC Jeweller has announced a buyback to lift stock sentiment.

From our ‘buy’ at ₹372 in August 2017, the stock rallied to ₹600 in January. But since then, it has nose-dived on the bourses. The problems began with the news of one of the company’s promoters gifting shares to undisclosed relatives that stoked market fears of governance issues in the company.

Then followed speculation of business ties with Vakrangee, which was in trouble following its auditor flagging concerns over irregularities in its business and misstatements in the books of accounts. Though the PC Jeweller’s management denied any business relationships with Vakrangee, the stock failed to recover to its original levels.

PC Jeweller is now offering to buyback the shares at significantly higher price to the market. While the stock trades at ₹201 in the bourses, the buyback price is ₹350.

The company’s buyback is through the tender offer route where shares from investors will be accepted on a proportionate basis.

Investors holding shares in the company can tender it in the buyback. Small shareholders who do not get a chance to cash out fully may sell in the open market. Those eyeing an exposure in gold companies can look at Titan Industries.

Traders are warned not to buy the stock now with the view to benefit from the arbitrage opportunity in the offer as the acceptance ratio is low.

Acceptance ratio

PC Jeweller has announced buyback of 1.21 crore shares. Public shareholders together hold 16.7 crore shares in the company. So only seven of every 100 shares offered will be accepted by the company. But small shareholders may get a somewhat better deal. As per the SEBI’s buyback regulations, for small shareholders there has to be a reservation of 15 per cent in the number of shares which a company proposes to buyback. Thus, of the 1.21 crore shares, 15 per cent, that is, 18.17 lakh shares will be set aside for small shareholders.

But given that the company has a large retail investor base — they together hold about 135.6 lakh shares — the final acceptance ratio may not be high, for the small shareholder category.

A small shareholder is one who holds equity shares of market value not more than ₹2 lakh on the basis of closing price of the stock on the record date.

PC Jeweller is yet to announce the record date for buyback and, at this point, the number of small shareholders is not known.

Sell in the market

Investors can sell the remaining holding in the market as concerns over governance issues persist. On Friday, after the announcement of the buyback, though, the stock price moved higher initially, it ended in red, closing down by 3.7 per cent for the day. It is hard to predict if the worst is over or yet to come, for the stock.

PC Jeweller’s March quarter numbers are expected on May 25.

In recent media interviews, the management has stated that business has been growing as usual. The company had a total of 84 showrooms as of January across 67 cities.

For the first nine months of 2017-18, the company recorded a revenue of ₹7,386 crore, up by 24 per cent, y-o-y. Profit growth was 40 per cent, helped by higher operating profit margins from the domestic business.

Switch to Titan

Investors looking to bet on the insatiable gold jewellery demand in the country can consider Titan, which owns Tanishq, India’s leading jewellery brand. The company’s growing market share in jewellery is being helped by penetration into new markets, sales from its branded wedding collections, attractive exchange scheme, and it’s new acquisition — CaratLane, an online jewellery brand.

The company drives about 15 per cent of revenue from watches and eyewear. In the March 2018 quarter, the company achieved 12 per cent revenue growth.

For the full year 2017-18, while the revenue growth was 20 per cent, net profit growth was 58 per cent helped by expansion in profit margin, thanks to a better product mix (higher sales of studded jewellery). In 2017-18, the company added 114 stores. As of end-March 2018, the company had 1480 stores, with over 1.9 million sq ft of retail space. Caratlane's revenue growth was 60 per cent, y-o-y.

At the market price of ₹957 a share, the stock trades at a price-earnings multiple of 57 times its estimated earnings for 2018-19.

Though, the valuation is at the higher end of its three-year average, it is justified, given the strong prospects. The company has guided for a revenue growth of 2.5 times in its jewellery business in the next five years.

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