C Mahendra Exports Limited IPO : Analysis

by khalid on 04/01/2011 · 0 comments

Manufacturer and trader of diamonds, precious stones and jewellery, C Mahendra Exports Limited (CMEL) is entering into primary market with an Initial Public Offer (IPO) of 15,000,000 Equity Shares of Rs 10 each. The IPO is opening on 31st Dec 2010 and the shares will be available for subscription up to 6th Jan 2010. The premium of the issue will be decided through a 100% Book Building Process. The price band for the issue has been fixed at Rs 95 – Rs 110 Per Equity Share . C Mahendra Exports Ltd is one of the leading diamantaire and Jewellery Company, engaged in the business of manufacturing and trading of diamonds, precious stones and jewellery. It is a flagship company of C Mahendra Group.

“Ciemme” is the flagship brand of the company. Under this brand several products like rings, earrings, necklace sets, bracelets are available. In overseas market, they sell jewellery only under “Ciemme” brand name. In USA they sell diamond jewellery to retail outlets through Ciemme (NY) LLC. In Middle East they directly sell it to the customers.

Company has two facilities for cutting and polishing of diamonds at Varachha and Udhana in Surat. Further, Ciemme Jewels Limited owns a jewellery manufacturing facility in MIDC, Andheri, Mumbai. The company have capacity of 1,20,000 carats per annum. C Mahendra Exports marketing offices spread across Surat, Mumbai, Delhi, Kolkata, Hong Kong, New York, Los Angeles and Antwerp to market cut & polished diamonds to domestic and international markets.

Promoters of the company are Mahendra C. Shah, Champaklal K. Mehta, Pravin C. Shah, Pravin K. Mehta and Sandeep M. Shah.

The objects of the IPO are to finance setting up of a diamond processing unit at Gujarat Hira Bourse, SEZ, Ichchhapore, Surat, finance setting up a jewellery manufacturing unit at Mumbai, finance setting up retail outlets, finance brand development expenses,
investment in capital of C. Mahendra BVBA, general corporate purposes and achieve the benefits of listing on the Stock Exchanges.

Company Financials:-
(Rs in Crores)

For the year ended 30-Sep-09For the year ended 31-Mar-09For the year ended 31-Mar-08For the year ended 31-Mar-07
Total Income680.551,431.111,415.59314.68
Profit After Tax (PAT)7.5421.0940.2616.34

Risk Factors:-
1. Company’s operating profits were coming down for three years in succession.
2. Procurement cost of rough diamonds is above 90% of the final selling price. And as diamond and diamond jewellery are luxury products forming discretionary purchases by consumers. Thus, any increase in the rough diamond costs could significantly affect revenues of company.
3. Company is dependent on its subsidiaries for sourcing rough diamonds, manufacturing jewellery and for marketing of diamonds.
3. On consolidated basis, the company along with its subsidiaries has negative cash flows from operations.
4. Diamond business is subjected to international market and regulatory risks along with exchange rate fluctuations.

Positive Factors:-
1. The company is an integrated diamond and diamond jewellery group in India.
2. It is also one of the first Surat based entities to receive DTC sight holder recognition in 1991. Direct sourcing of rough diamonds from the primary source suppliers will ensure consistent supply of rough diamonds at competitive rates.
3. Well-established marketing network across different export markets ensures access for export revenues.

Valuation and Recommendation :-
C Mahendra Exports Limited (CMEL) CMEL recorded EPS of mere 0.9 in FY 2009-10, and the offer price band of Rs 95-110 discounts the same by 123.6 times at higher end and 106.7 times at the lower end. But that was an exceptional year. The company reported healthy rebound in the quarter ended June 2010, with an annualized EPS of 26.8. The offer price discounts these annualized earnings for the quarter ended June 2010 by 3.5x – 4.1x in the lower and higher end of the price band. Industry majors like Gitanjali Gems was discounted at 6.9x on TTM net profit, while Shrenuj & Co was trading at TTM PE of 5.5x. TTM PE for large diamond cutting jewellery industry is 9.9. The company has healthy operating margins, relative to many other players in the diamond cutting / polishing sector. But the volatility in performance of the company, with gradual fall in operating profits in the past three years and huge fluctuation in forex impact, is a cause for concern. As the company seeks high premium despite volatile operations so be curious and better ‘AVOID’ this IPO.

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