Viraj Mehta

The area near the south entrance of the famous Meenakshi Amman temple of Madurai is home to over 5,000 large and small jewellery showrooms. Amid this swarm of glitzy facades, lies the distinctive flagship store of Thangamayil Jewellery (TMJL). Spanning 12,000 sq ft, it is one of the largest retail showrooms in the south.

Thangamayil was set up in 2000 by BA Ramesh and his two brothers, who along with their father ran the predecessor, Balu Jewellery. Thangamayil, which means ‘Golden Peacock’ in Tamil, has a deep association with Goddess Lakshmi. Besides signifying royalty and prosperity, Thangamayil associates itself with high quality products and customer service. In fact, it was one of the first to only sell hallmarked jewellery long before it was mandated by the government. On the back of this brand strength, from a single store company in June 2001, TMJL now operates 32 stores across tier–II and tier-III cities of Tamil Nadu.

The perfect storm
Rising from $17 billion in FY08, India’s gold imports crossed 1,000 trillion mark, amounting to $56 billion, in FY12. Along with rising oil imports and depreciating rupee in FY13, the current account deficit (CAD) soared to more than 4.7%, of which gold imports accounts for 2.8%. To keep this in check, the government increased customs duty from 2% to 10%, which did not help much. Later, the RBI restricted credit for gold imports and also implemented the 80:20 rule (importers had to export a minimum of 20% their imports). These measures helped rein in gold imports, bringing down the CAD to 1.7% in FY14. 

While supply was controlled, measures such as 1% excise duty, mandatory furnishing of PAN card for purchases above Rs.2 lakh and mandatory hallmarking were implemented in 2015 and 2016, impacting demand for jewellery. As jewellery demand is primarily wedding-driven, families start planning and saving long time before the actual purchases. A substantial chunk of these savings was in the form of long-term deposits with jewellers through various schemes. With the implementation of the Companies Act 2013, jewellers could no longer accept deposits longer than 12 months, causing disruptions on demand side.

The RBI’s restriction on credit for purchase of yellow metal had another consequence. Inventory is the largest component of a jeweller’s balance sheet. Jewellers used gold-on-lease scheme of banks to procure gold which cost them 3%-5%. With this restriction, jewellers had to use a bank’s working capital facility, at a rate of over 10%, for inventory purchases. The simultaneous disruption of supply and demand, along with the ballooning finance costs destroyed the profitability of the industry.

Light at the end of the tunnel 
Finally, crude oil prices started to moderate and so did the CAD. While some regulatory measures such as the restriction on gold-on-lease scheme and 80:20 rule, were reversed, the industry slowly started adapting itself to the new environment. As confidence was being restored, demonetisation happened and this again impacted the industry. However, it didn’t last for long. But the big kicker came in when GST was implemented with a rate of 3% on gold jewellery. Jewellers could now avail of input tax credit on rents and A&P spends which would, to an extent, help them improve margins. 

GST is now having a much bigger impact on the industry structure. The country has more than 500,000 small and big jewellers, of which 70%-80% are unorganised. With much stringent KYC compliance and GST, local jewellers have started increasing their prices which has blunted their competitive edge versus organised players. This has already started showing in the results of organised jewellers who have reported higher-than-industry growth rate in the first half of the current fiscal year. 

Anti-fragile
According to economist Nassim Taleb, “The resilient resists shocks and stays the same; the anti-fragile gets better.” TMJL displayed anti-fragility by getting better during the regulatory storm. It started working on improving inventory turns by implementing technology systems which was further aided by its cluster-based store network. Designs from any store can be made available to customer within a day’s time. Further, as the long-term deposit schemes were disallowed, it was able to maintain its advances even as other players lost 50%-90% of theirs. TMJL proactively reached out to all its customers for converting their deposits either into purchases or short-term deposits. As of FY17, customer advances financed about 24% of its inventory. With inventory coming down and advances increasing, TMJL was able to reduce its debt-to-equity substantially from 1.9x in FY12 to 0.7x in FY17. A much leaner balance sheet and reinstatement of gold-on-lease scheme helped it reduce interest cost substantially. It is also noteworthy that Thangamayil has never missed paying dividends. 

Changing gears 
TMJL went for an IPO in 2010 to fund its expansion. This was the phase of rapid expansion during which the store count increased from two in FY07 to 31 by FY13. This expansion came to a screeching halt as the industry entered into a regulatory storm. The store count remained stagnant till FY17. However, now TMJL is again entering the expansion phase and plans to open five stores in FY18. Not much capex is required to set up a new store if one is operating in tier-II and tier-III cities and targeting low to middle income segment. The investment in inventory ranges from Rs.5 crore to Rs.15 crore, depending on the store size. TMJL is also setting up small 100 sq ft outlets called TMJL-Plus that would act as customer care centres and also sell silver articles. Expanding branch network and same-store sales growth should lead to high revenue growth, especially in Tamil Nadu. 

As sales growth picks up, operating leverage will kick in along with decreasing interest costs. This should shore up profit margins. In H1FY18, sales grew 17% YoY, while EPS jumped 71%. EBITDA and PBT margins are already looking up at 4.6% and 2.7%, respectively, in H1FY18 compared with about 3.8% and 1.5% in FY17. When the cycle picks up, sales should grow north of 15%. With profitability also likely to expand in the years to come, the return on equity should also reach its historical level of 30%-plus.

At 20 times estimated FY19 earnings, the stock is an attractive bet on India’s love for gold, the shift from unorganised to organised, mean reversion in profitability and an anti-fragile company with a prudent management.

The stock is part of Equirus Long Horizon Fund Strategy