MOFSL initiates coverage on this new D-Street debutant; gives 'buy' for 25% potential upside

Domestic brokerage Motilal Oswal Financial Services (MOFSL) has intiated coverage on the new D-Street debutant citing strong earnings growth potential. The company as against the issue price of Rs 480 listed at Rs 834 on BSE, a strong premium of 74 per cent over the issue price on September 17.

Here we are talking about the second largest jewellery retailer in Maharashtra -having the second highest number of stores in the region - P N Gadgil Jewellers.In FY24.

The company is aiming to capitalise its strong brand recall in the region and further has plan to double its store count in the next 2-3 years. Also, the company is evaluating plans to foray into key cities of other states too.

Also, shorly after the company's IPO- its execution skills and the spirit of rapid expansion can be known by the fact that it successfully rolled out 12 stores this year so far.

Furthermore, the report said that the proceeds of the issue of Rs 850 crore will be put towards debt reduction ( Rs 250-300 crore), new store openings (Rs 400 crore) and balance on other corporate expenses.

Also, P N Gadgil plans to improve the frequency of customer visits, acquisition of new customers, and average transaction value by focusing on new product launches, higher marketing spending, and various incentive models, added the report.

P N reported a 27 per cent CAGR in footfalls between FY21 and FY24. During the same period, the average transaction value clocked 10 per cent CAGR in gold jewelry, 16 per cent CAGR in diamond jewelry, and 8 oper cent CAGR in silver jewelry. 

Besides, the company is enhancing its studded mix (up 250bp in the last three years) and is actively seeking to further improve this mix in the coming years. With a more favorable product mix, operating leverage and better sourcing, the company is likely to improve its operating margin, noted the brokerage.

Hence it models an EBITDA margin expansion of 100bp over the next three years to 5.4 per cent in FY27. Also the report noted that the jewellery retailer is looking to add gold metal loans, which are likely to enhance its gold hedging strategy. Considering this the brokerage models Rs 300 crore-400 crore loan in FY26-FY27.

Gold metal loans typically carry low interest rates (~3-4%), implying that the interest costs will not experience a spike, remaining lower than the anticipated revenue growth. This strategy is likely to contribute to an expansion of the PBT margin to 4.6 per cent by FY27, compared to 3.4 per cent in FY24, it added.

Thus, the brokerage deems successful execution of store rollouts, gold hedging policy, and an improvement in operating margin as the main catalysts for re-rating of the stock.

Key downside risks:

Nevertheless volatility in gold prices as well the operating performance of new stores and intensified competition can hurt the company's margins going forward.