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Wednesday, March 14, 2012

Gitanjali Gems!! - Glittering Gem of a Firm, but at what price you should get in?

Gitanjali Gems is among the pioneers in diamond and jewellery businesses in India and boasts of powerful brands like Gili, Nakshatra, D’Damas, Sangini, Asmi and Diya to name just a few. It’s amazing for most investors to see such plethora of successful brands under one name and business group.

It’s important to note a basic fact in stock market investing and trading. A company and its stock are often two separate entities. A company may be best in its category and can be hugely successful, but it’s important to find out key levels to invest at which it gives you margin of safety and comfort without substantial risks. Another key thing to note is that stock market will always give you opportunities to own great brands at great value prices, if you are a patient and careful observer and investor.

Let’s look at Gitanjali’s share price without getting unduly impressed by this great company. Is it offering us a good value at current prices – which are at Rs 385 as we speak?

Over the course of 4 years the annual revenues for Gitanjali grew from INR 2,219.00 Cr. to INR 5,122.00 Cr., thus its compound annual growth rate (CAGR) is 23.26%.  Over the course of last 4 quarters Dec, 10 to Dec, 11, the company’s revenues grew from INR 1,271.00 Cr. to INR 2,088.00 Cr. This is huge growth and impressive performance. Even on margins front, the firm did well and grew its profits from 81 Cr to 226 Cr in past 4 years, thus growing its EPS (Earning per share) from 13 to 26. Of course, it helped that equity capital hasn’t been diluted significantly, which is again a good thing and hallmark of a great firm.

Net Profit margins, which is again a good fundamental parameter to note, are languishing at 4.38%, though they show a growth in past 4 years. This seems to be a factor from the business they are in, which is primarily a high raw material cost business.

One key factor that I have shared in my past analysis is Book Value (BV). It’s important not to lose sight of BV when we are analyzing firms for investment to make sure that we don’t end up overpaying for ownership of equity. Gitanjali’s Book Value is at INR 265/share. This means that when you buy one share of Gitanjali, you own hard assets of 265 Rs. With Gitanjali’s share price moving in band of 370-380, one is paying about 1.5 X BV, which is not expensive.

In the past one year, there were multiple opportunities to own shares of Gitanjali ar Rs 200 or so, meaning you could have bought the firm with powerful brands at prices lower than Book. Amazing are the ways of myopic Mr. Stock Market.  

One more indicator which provides reasonable comfort to my analysis is total market capitalization of a firm. This means that how much you have to spend in total to buy all shares of a given firm. E.g. Market Cap of Gitanjali Gems today is about Rs. 3500 Cr. This means that an investor can spend Rs 3500 crores to completely buy all shares of Gitanjali from open market. This parameter is calculated by simply multiplying total shares outstanding X price per share.

I like to compare Market Cap to the firm’s Annual revenues to give me a comfort feel of how a given firm is priced at. In this case, one needs to spend 3500 Cr to acquire a company which has annual revenues of about 5000 Cr in FY11 and about 7500 Cr in FY12. I am very comfortable with these ratios. Sometimes investors end up paying more than 3000 Cr for a firm whose Annual revenues may be less than 500 Cr.
I would like to add a word of caution that this in itself is not a complete measure, but is more like a confirmation factor.

More on Gitanjali Gems, its Technical Analysis, and StockFundoo View in next post. 
Happy reading !!

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