Posted on 02 Sep 2015



Executive Summary:

Thangamayil Jewellery Ltd is a play on, one of India’s largest gold jewellery consuming state – Tamil Nadu. The company is aptly placed in Tier-II/-III towns, with 30 stores spread across Tamil Nadu. The consumers in these regions have a distinct liking towards simple gold ornaments. It is for this reason that the company has the highest yield in terms of quantity of gold sold per area and highest inventory churns when compared to all other listed players, albeit at a lower gross margins, given the product profile. Nevertheless, the operating margins are still fairly comparable to other retailers operating out of larger cities, as the company benefits from lower opex in Tier-II/-III towns.

H2-FY-14 and FY-15 was an unfortunate phase in the company’s history as regulatory restrictions on bullion sales had resulted in significant increase in working capital and significant exposure to unhedged inventory. This had severely impacted the company’s operations resulting in inventory write-offs and increase in interest burden. During this period the management undertook several measures to deleverage its balance sheet and strengthen internal control thereby gradually moving its inventory to metal loan. Q1-FY16, was an inflection point as the company reported profits after 6 consecutive quarters of losses, on the back of steady expansion in gross margins and significant reduction in working capital borrowings.

With Tamil Nadu receiving good rainfall for the second consecutive year and pickup in industrial activity led by textiles and automobile, the outlook on the demand front is positive. Plus there is twin benefits of a 250-400 bps expansion in EBITDA margins and 400 bps reduction in the cost of borrowing as the company converts its entire working capital loans to metal loans over the next 6 months and thereby also hedging its inventory. Despite similar business model and earnings profile, the company is trading cheap when compared to other listed players which limits the downside risk.

Inverse Correlation between Gold Prices and Jewellery Demand in India Makes this Industry Very Interesting



  • A close look at the historical gold price and gold jewellery demand indicates that, historically following a period of volatility in the gold price, demand resumes once the prices stabilize, even if the price stabilization happens at higher levels. We saw this phenomena repeat in 2005, 2007, and 2010 as well.
  • This indicates the strong affinity that Indians have towards gold. Gold continues to be an integral part of the India’s culture, be it wedding, religious occasions, or special celebrations.
  • As per world gold council, ~50% of the jewellery demand is from marriages, this demand will certainly not die irrespective of the gold price movement.
  • Further, people, continue to accumulate gold whenever they are left with higher disposable income. This is reflected from the fact that 85-90%of the demand is in the form of new gold. Fall in gold prices often results in consumers accumulating more gold, as seen in the declining mix of recycled gold in the total supplies, over the last 3 years.

Gold Jewelley Retailers have a Robust Business Model~ immune to gold price volatility if prudent inventory hedging policies are followed

The only significant investment that retailers make in this business is on inventory. What distinguishes a player from the competition is its quality of stock, designs, and array of offerings. It hence becomes critical for a retailer to manage the volatility in gold price. Majority of gold jewellery retailers, especially the ones with multiple showroom religiously follow prudent inventory hedging policies. There are 3 ways by which players hedge their inventory –

  1. Gold Loan: Retailer gets to fix the gold price as and when sales are made, within a defined credit period. This method of hedging is usually preferred by players setting new stores.
  2. Inventory Replenishment: Quantity of gold sold on a particular day is purchased on the same day at market price. This is usually preferred for replenishing the inventory at existing store.
  3. Forward Contracts: Larger retailers also take forward contracts on gold, so as to maintain a cushion between average inventory holding price and the market price of gold. This is usually preferred by players who have consistently been expanding new stores.

Hence, none of the retailers play on the gold price volatility. The only source of profit for them is the making charge, wastage charge, (both charged as a % of gold value) and stone studded jewellery, wherein the weight of the stone is also included in the calculation of gold value.

So in the event of raising gold prices, retailers make more money from the making and wastage charge, as both are charged as a % of gold value, which adequate compensates them from the fall in demand for gold. Likewise, in the event of falling gold prices, while the profitability in absolute terms may shrink but the raise in demand/volume compensates for it.

The business model of gold jewellery retailer is hence robust by all means – demand, gold price volatility, and profitability.

South India Accounts for >40% of the Gold Jewellery Demand~ Thanagamayil the only listed player from South, is well placed to benefit from it

  • As per World Gold Council, more than 40% of the gold jewellery demand emanates from South India, largely from Tier-II and –III towns.
  • A close look at the portfolio of CRISIL rated gold jewellery retailers, which together account of ~25% of gold jewellery retailing sales in India, further strengthens this fact. South accounts for 55% of the total sales of these retailers, led by Kerala and followed by Tamil Nadu and Andhra Pradesh.
  • No wonder, that most of the large gold jewellery retailers in the country have their roots in South. These include players like Kalyan, Joyallukas, Malabar, etc.
  • People from South India are relatively more conservative then rest of India, and have lower risk appetite. Hence, when it comes to investments and savings, there are less number of options and hence higher preference to historically perceived safe investments like gold and land.

Company Overview: Thangamayil Jewellery Ltd

Thangamayil Jewellery Ltd is a Madurai-based jewellery manufacturer and retailer. It commenced business in 1984 as a manufacturer and trader of jewellery. In 2001, the company setup its flagship showroom in Madurai. It currently has 30 showrooms spread across Tier-II/-III towns of Tamil Nadu and has manufacturing units near Madurai and Coimbatore.

Thangamayil has a Distinct Competitive Edge Over its Peers~ higher yield per store area, higher inventory churns albeit lower gross margins


*FY14 was a drought year in Tamil Nadu, also power crisis in the state had significantly impacted industrial production. Beside this the textile industry was also severely effected on account of the slowdown in global markets.

^steady state basis, historically much higher at 13%, but has reduced in the last 2 years (details covered later)

  • The average size of Thangamayil store is by far the least when compared to other players, as Thangamayil is present only in Tier-II/-III towns, whereas all the others have a much larger presence in metros.
  • However, in terms of yield (grams sold) per area, Thangamyil ranks far better than others, despite its presence in smaller towns.
  • While this explains the strong rural demand for gold in South, what is also to be noted is the type of gold ornaments preferred in South are quite simple in designs, as people prefer value for money and hence have less liking towards stones and diamonds.
  • It is for this reason that the share of diamond and stone studded jewellery is by far the least for Thangamayil when compared to any other player. This explains why the gross margins for Thangamayil are also the least. Gross margins of diamonds and stone studded jewellery is usually 2-2.5x that of gold jewellery.
  • Still this helps the company churn its inventory 5x as against 2.5x in case of its peers.

Nevertheless, Despite Lower Gross Margins, Lower Operating Cost in Tier-II/-III Towns Still Yields Competitive EBITDA Margins for Thangamayil

Three key operating costs for a gold jewellery retailer are – Rentals, Employee Cost and Advertising Expenditure. The table below gives the comparison of these operating cost –


In case of Thangamayil, despite lower gross margins, the EBITDA margins are fairly comparable to other players in the industry. This is predominantly on account of lower operating costs in Tier-II/-III towns.

Issues in FY14 & FY15 ~unfortunate phase in Thangamayil’s history

  • Beginning June 2013, the quantitative curb or the 80-20 rule imposed by the government on gold imports, had crunched supplies, pushing up sourcing premium. PC Jewellers was still immune to this impact as 25% of its business came from exports and hence complying with the 80-20 rule was not a challenge. However, for other retailers including Thangamayil, this regulation alone had culled operating margins by 2-3%.
  • Beside this regulation, the credit extended on gold on loan scheme was also restricted, because of which the company had to convert the entire gold on loan to working capital debt, resulting in unhedged exposure to gold price, and also a substantial increase in the borrowing.
  • While some banks allowed the jewellery retailers to complete the tenure of existing metal loan then, the same was not granted to Thanagamayil. The company hence had to replace its gold on loan with working capital facilities, resulting in unhedged gold inventory. Subsequent to this the gold prices corrected by 15%. Consequently from the 2nd half of FY14 till the end of FY15, the company was battling with the inventory loss, and higher interest burden, thereby resulting in losses.

Measures Taken during this Period ~ testimony to promoter’s integrity

  • In FY14, directors surrendered 1.26 cr. of remuneration though legally they were entitled to draw this amount from the company
  • Company continued to declare dividends, although lower than previous years, to shareholders, despite PAT losses.
  • SAP implemented to keep track of inventory levels at various stores
  • Management elaborated all the issues at length in the annual reports

Another, important point to be noted here is, if we refer to the IPO prospectus, not a single penny from IPO proceeds was spent on corporate purposes. All the money raised was deployed in the opening of new stores and meeting incremental working capital needs.

Q1-FY16 ~ inflection point; gross margins steadily inching upwards, inventory rationalization continues and debt levels have significantly reduced

  • Gross margins have been steadily inching upwards from 1.3% in Q2-FY15 to 7.7% in Q1-FY16. This helped the company report PAT positive after 6 consecutive quarters of PAT losses.
  • This was largely on account rationalization of inventory levels resulting in lower working capital needs and higher inventory churns resulting in cleanup of unhedged inventory.
  • With the government lifting the restriction on Gold on Loan scheme in FY15, and authorizing other dealers to supply billion, thereby improving the supply in the market, sourcing premiums and ease of availing gold on loan scheme has become lot more easier than what it was in the last 2 years. This has certainly supported the operations of players like Thanagamayil.

Is Every Thing Fine Now? ~ not really, only 30-35% of the inventory is hedged, but the management is gradually moving all its inventory to metal loan

  • As on date only 30-35% of the inventory is hedged with metal loan. With every increase in gold price the management is converting its working capital into metal loan.
  • This not only hedges the inventory to gold price volatility but also helps reduces the cost of borrowing by 4%. Every 1% reduction in interest cost translates into an EPS of Rs.2 on an annual basis.
  • In the most recent earnings release, the management stated its intent of converting the entire working capital into metal loan, but this would most likely get spilled over to Q3-FY16. However, it is clear that in FY16, the company would have set all its internal risk control in place and focus once again on growth.

FY16 Expectations~ improvement in gross margins, albeit lower that the historical levels; second consecutive year of good monsoons and uptick in industrial activity in Tamil Nadu region to drive higher demand; steady rationalization of inventory and working capital borrowings to translate into higher bottom line


  • Most of the South based gold jewellery retailers have now expanded to other Tier-I towns in Tamil Nadu resulting in intensifying competition. The gross margins are hence expected to shrink to 7-8% from the historical average of 11-13%.
  • Thangamayil would hence see pressure on gross margins in the Madurai region, its oldest and largest market. However, the competition would still be limited in the other regions, where the margins would slightly be better off.
  • Hence, on a blended basis the gross margins would work out to ~10%.
  • While the demand outlook still remains bleak, with the company reporting 18% dip in volumes in Q1-FY16, the improvement on the operational front is what will drive earnings in the short term. With gross margins of 7.7% in Q1-FY16, there is still a room to expand this to ~10%.
  • Also on the demand front, in Q2-FY16, Tamil Nadu witnessed good rainfalls for the second consecutive year, which should drive income levels in the rural regions. The textile sector in Madurai and Salem has also picked up well from the slump of 2013-2014. The power situation in the region has also improved considerable driving industrial production (largely pertaining to engineering and automotive sector) in places like Coimbatore
  • The company has steadily reduced its debt levels through inventory rationalization. From 1064 kgs of gold as on March 31, 2014, the gold inventory as on June 30, 2015 stands at 887 kgs. Likewise working capital borrowing has significantly reduced from Rs.213 cr. as on March 31, 2014 to Rs.119 cr. as on June 30, 2015.
  • Beside this interest savings from conversion to metal loan would also add to the bottom line.

Margin of Safety~ with similar earnings profile & business model of all the players, it may not be a bad idea to look at the market-cap to revenue metrics


With all the operational issues being more or less resolved there is far better visibility and comfort on the earnings potential. Since all the players have the same business model and earning profile, the downside, based on the Market Cap/Revenue is limited.

Investment Concerns
~ next 2 quarters would be key to test the sustainability of gross marginsWith all the operational issues being more or less resolved there is far better visibility and comfort on the earnings potential. Since all the players have the same business model and earning profile, the downside, based on the Market Cap/Revenue is limited.

  • High dependence on the rural economy of Tamil Nadu
  • Any significant correction (>10%) in gold prices in the next 6 months will make it difficult for the company to move its inventory to metal loan, resulting in inventory write-offs
  • Gross margins in the next 2 quarters would be key to this thesis

thangamayil6Source : LINK


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