Gems & jewellery stocks: Separate the men from boys, say experts; bet on Titan

Investors in jewellery stocks have not been a happy bunch ever since the big bang scam involving Nirav Modi, Gitanjali Gems as well as Punjab National Bank (PNB) broke out in early February.

While the news regarding ongoing investigations has kept a stock like Gitanjali Gems under extreme pressure of late, the sector overall is bearing the brunt of weak sentiment.

For instance, take a look at this data.

There have been stocks which delivered stellar returns in the massive bull-run in 2017. Thangamayil Jewellery, which rose 265 percent in 2017, has now given up all of those gains within the first three months, while trading around 20 percent lower in 2018 (YTD). In fact, the stock in the eye of the storm, Gitanjali Gems, fell from highs of 23 percent to a loss of 72 percent on a year to date basis. Almost 12 out of 13 major stocks have given up their gains and trading in the red.

Interestingly, a largely unknown name, has bucked the trend and rather turned tables. Goenka Diamond and Jewels, which gave out negative returns of 64 percent is now trading around 90 percent higher.

Having said that, the market capitalisation of these companies have shown a steady rise in the past one year. Barring the obvious names such as Gitanjali Gems, frontline names like Titan, PC Jeweller, Tribhovandas Bhimji Zaveri, among others, have all added to their market cap.

A look at the valuation metrics for these stocks also throws up some interesting facts. Despite the steep cuts seen this year, several of these stocks are trading at higher than the 5-year average PE ratios. In fact, in majority of these cases in the past three years, many of them have trailed the 5-year average PE.

“There were grey areas with respect to these companies back in 2015-16 as well. But in 2017, these aspects, especially on corporate governance side, were ignored completely. With the Nirav Modi issue, it has brought back these issues in the spotlight and that has led to the fall in other stocks,” Ambareesh Baliga, an independent market analyst, told Moneycontrol.

So, what should an investor do in such cases? “This is when men are separated from boys. After this scam, interest will be more concentrated in a select few big names such as Titan,” AK Prabhakar, Head of Research, IDBI Capital, told Moneycontrol.

In gold, important thing is the element of trust.

Stressing on the importance of trust element in gems and jewellery business, he said that it is this aspect that will help in getting more investors to big and trustworthy names. “Once the dust has settled, in the next few quarters, one will know whether such firms have earned higher revenues and that will confirm this shifting pattern going ahead,” he added.

Meanwhile, Baliga recommends using any pullback in these stocks to exit it, barring a big name such as Titan.

Big Call

Both Prabhakar and Baliga were very upbeat on Titan as a stock, calling it a league of its own. With a good track record, professional management and a good brand value, the stock could fetch a premium value and take a major share in the market, Prabhakar said.

“What was being suspected in other stocks is not applicable to Titan. End of the day, Titan could be one of the gainers and a case of one stock against the whole sector,” Baliga added.

Global brokerage house Bank of America Merrill Lynch is also betting big on Titan. It has maintained its buy call on the stock and raised the target to Rs 920 from Rs 770. It indicates an upside of 19 percent.

It expects the banking scam to hasten jewellery industry’s consolidation along with tighter credit norms. Having said that, Titan will be the key beneficiary of recent events and has over 14 percent of organised market up for grabs. A strong brand, national presence and debt-free balance sheet along with robust corporate governance seems to be working for Titan.

Case File

The Rs 12,000-crore scam’s investigations reveal that fraudulent transactions likely to have been going on for the last seven years and were unearthed by PNB at one of its Mumbai branches.

Foreign branches of at least two Indian banks, including Axis Bank and Allahabad Bank, are likely to have been caught in the fraud with an alleged credit offering given based on letters of undertaking (LOUs) issued by PNB allegedly towards group companies of Nirav Modi and Gitanjali Gems.

These banks are said to have recalled the loans given based on the LoUs/FLCs (foreign letters of credit) issued on behalf of group companies of Gitanjali Gems — Gitanjali Gems, Gili India, Nakshatra — and to Nirav Modi Group firms, which include Solar Exports, Stellar Diamonds & Diamonds DU.

Heads have begun to roll as investigations are underway into the case. The men in the centre of the scam, Modi and Choksi, have fled the country and have not returned despite repeated summons to them by Enforcement Directorate (ED) and other agencies. Their stocks have plummeted and have also hit the likes of PSU banks.