HDFC Securities has recommended a high-quality small-cap stock with strong fundamentals. The stock has a potential upside of 80% and can be a multibagger in 2019.
The recommended stock is Thangamayil Jewellery Ltd. Click here to read the research report.
The market price is Rs. 347.
The target price is Rs. 625.
This means that Thangamayil Jewellery Ltd can give a huge gain of 80% to investors in the medium to long-term. It is a multibagger recommendation.
Turnaround story intact
Thangamayil’s (TJL) net revenue grew by 32.5% in-line with our estimate; albeit on a favourable base (13% de-growth in base quarter due to pre-GST preponement of sales in 1QFY18). The bump up in sales is largely SSSG-led (store renovations-led) as gold/silver volume increased by 33/21% despite shift of festive season to 3Q.
In spite of the strong top-line growth, gross margin cracked 37bps to 8.5% (est.: 9.9%) led by change in product mix and higher discounted sales. EBITDA margins expanded 10bps to 4.5% as op lev gains kicked in. EBITDA/APAT grew by 35/71% (a 19/11% miss).
TJL’s aggression on throughput is exceptional given most big-box jewellers grew 10-15% (ex-PCJ) in 2Q. Our broader thesis on TJL remains intact as the renewed vigor in sales velocity coincides with a healing balance sheet (Net Debt/EBITDA at 2.28x for TTM Sept 18 vs 2.90x for FY18).
We upgrade our earnings expectations (EPS est. upgrade by ~20/14% for FY19/20E) to factor in lower-than expected interest outgo. We expect volumes to remain healthy going forward (Oct growth has been healthy) as unlike last fiscal, entire festive season resides in 3Q.
Given the expected growth profile (TJL to clock ~16%/32% revenue/PAT CAGR over FY18-21E), TJL offers significant margin of safety (trading at 10x Sept-20E EPS) for a company with a healing balance sheet, cautious stance on expansion and a predominantly sticky plain gold jewellery customer profile. We reiterate a BUY rating with DCF based TP of Rs 625/sh (implied P/E – 18x Sept-20E EPS).
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Highlights for the quarter
❑ Robust growth despite shift of festive season: After a disappointing 1Q, an SSSG-led 32.5% growth seems commendable; albeit on a favourable base (2QFY18 – post-GST quarter). Gold and silver volume reported strong growth despite shift of festive season to 3Q.
❑ Product mix impacted margins: Gross margins contracted by 37bps led by change in product mix and higher discounted sales. Gross margin loss was offset by op lev gains as EBITDA grew 35% YoY to Rs 162mn (a 19% miss). APAT up 71% YoY to Rs 70mn (an 11% miss).
❑ Near-term outlook: With expectations of 3 store additions in 2H, and entire festive season residing in 3Q, we expect volumes to remain healthy. Proportion of low-cost gold sourcing (Gold on lease) is also expected to increase which should help TJL grow its bottom-line at a faster clip.