Thangamyil Jewellery: Set to ride a strong second half
Apart from strong growth, we expect margin improvement for TMJL owing to a better product mix as well as operating leverage.
Highlights
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- Demand traction strong; expect accelerated growth in H2FY24
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- Healthy store expansion to continue
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- Organised players to continue to gain market share
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- Margins to improve
(TMJL) (CMP: Rs 1,431; Market Cap: Rs 3,927 crore; Rating: Over-weight) expects the demand momentum to accelerate in H2FY24, given the strong consumer sentiment as well as the upcoming wedding season. TMJL’s FY24 revenue guidance is ahead of our expectations, implying a strong H2 for the company. TMJL is pursuing a healthy store expansion plan in view of the strong demand.
The jewellery business is seeing a shift towards the organised segment, led by regulatory factors as well as increased consumer preference. This enhances the growth visibility for organised players such as TMJL over the medium term.
Apart from strong growth, we expect margin improvement for TMJL owing to a better product mix as well as operating leverage. We expect TMJL to deliver a 48 percent earnings CAGR (compounded annual growth rate) over the FY23-25 period.
Demand environment strong; expect accelerated growth in H2
TMJL indicated that jewellery demand continues to remain strong. TMJL saw strong sales during Akshaya Tritiya as well as Aadi Utsav festivals in H1FY24. The demand traction has sustained in Q3FY24 so far. Consumer sentiments remain strong and there is robust demand for jewellery in rural and semi-urban areas where TMJL has a dominant presence. With the upcoming wedding season, TMJL expects accelerated growth in H2FY24.
TMJL is targeting revenues of Rs 4,000 crore in the current fiscal (indicating a growth of 26 percent (YoY), which is ahead of our expectations. TMJL’s revenue guidance implies a growth of about 30 percent in H2FY24 (TMJL delivered about 20 percent growth in H1FY24).
Healthy store expansion to continue
In order to tap the strong demand, TMJL will continue with healthy store expansion. Over the next three quarters, TMJL aims to open 8 new stores against the current store count of 56. In H2FY25, TMJL is planning to open a large store to enter the metro market of Chennai (capital city of Tamil Nadu).
Apart from opening new stores, TMJL plans to relaunch/upgrade existing stores which would result in increased throughput at the store level.
The company will continue to deepen its presence in Tamil Nadu, which is the largest jewellery market in India. TMJL indicated that the majority of the capex for new store openings (along with the inventory requirement) would be funded via internal accruals.
Organised players continue to gain share
The jewellery segment is seeing an accelerated shift to organised players such as TMJL. Owing to regulatory measures such as the GST and e-invoicing, the price differential between organised and unorganised players has reduced. Moreover, with the phased implementation of hallmarking regulations, which require jewellery to be certified for purity, the price gap will further reduce thus benefitting the organised segment.
Apart from regulatory factors, the increased preference for branded products, especially by the young generation, is also driving the shift towards the organised segment. Branded players offer better transparency, quality, and accuracy.
CRISIL Research expects the share of organised players to increase from 36 percent in FY22 to 45 percent by FY26.
Margins to improve
TMJL is trying to improve the share of the high-margin non-gold jewellery business — silver as well as diamond studded jewellery. The company is opening exclusive silver jewellery stores as well as making provisions in existing stores to sell silver jewellery. TMJL is also aiming to enhance the sale of diamond studded jewellery and increase the share of non-gold jewellery business from 8 percent in H1FY24 to about 12 percent over the medium term.
TMJL is controlling costs such as media and sales promotion expenses, administrative and general expenses, and employee costs. With the enhanced scale of business as well as cost controls, TMJL expects its margins to improve.
We expect TMJL margins to improve by about 70 basis points by FY25 compared with the levels seen in H1FY24.
Valuations
At the CMP, the stock is trading at a P/E of 22 times FY25 projected earnings which is at a 45 percent discount to Kalyan Jewellers, another south-based jewellery player, despite TMJL having better return ratios. Hence, we advise investors to add the stock in the portfolio.
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