Classic Diamonds at Rs 16 with Book Value at Rs 56….Should you Buy ? Think Twice….this blog inspired by Response of Dr Sudeep

Dr Sudeep has responded on my recent Sesa Goa blog and requested to throw some light on Classic Diamonds as it’s available for Rs 16 while the Book Value is Rs 56

Well,Dr Sudeep…here’s my take on Classic Diamonds

The Company was set up in 1986 and is run by a Father & Son Bhansali Duo and they own 64% of the Share Capital…The Company plans a preferential allotment of 750000 Share warrants to them…For such a small issue choosing the Warrants route rather than an upfront Shares Issue creates some doubt on promoters liquidity situation 

Most certainly Classic Diamonds has regular market makers…even yesterdays volumes were decent…77000+ on BSE and over a Lakh shares on NSE…The Face Value is Rs 2 and the 52 Week High Low is Rs 62 and Rs 7

It’s been earning between Rs 20 crs and Rs 30 crores annualy for the past five years…FY 08 was good at Rs 31 crs,after an Interest charge of Rs 30 crs,giving an EPS of Rs 8 on an Equity of Rs 7.69 crs.It maintained the Dividend at 25%…that’s 50 Paise per share…that’s a poor 6.25 % payout from the EPS of Rs 8…so it’s not even a Dividend Yeild Scrip and makes you suspect on the quality of earnings when shareholders are not being rewarded well…It paid them just under Rs 2 crs,even though it earned a net of Rs 31 crs 

The full year FY 09 results should be out next week on June 25,2009…but it had earned Rs 9 crs in the first half and then lost Rs 3 crs in the third quarter to net an aggregate of just Rs 6 crs…last quarter may not excite…In FY 08 the last quarter had shown under Rs 6 crs…Jewellery constituted 1/3 rd of the business in FY 08,upfrom 25% in FY 07…so profits are even throughout the year…..Assuming no further loss and a flat quarter,the EPS would probably be around Rs 2…So expect the Company to skip Dividend for FY 09 or reduce it from 25%

March 31,2008 shows the Company is servicing debt of just under Rs 350 crs….The Reserves are Rs 209 crs and that’s why you are getting excited because it computes to a Book Value of Rs 56…The Debt Equity is 1.6

But The Business Model is not secure…The company earned Rs 31 crs in FY 08 on a topline of Rs 710 crs…that’s a net margin of below 5%…It’s Net Block is Rs 50 crs at 31/3/2008 and Capital Employed of Rs 565 crs was blocked in nearly equal ratio in High Inventories and High Debtors….maybe typical of the Diamonds and Jewellery Sector but these areas simply devour working capital and put pressure on interest cover and are prone to manipulation too

Also ,many in this sector have massive Fx loss on their books…Last Year at @ US $ 1=Rs 40,they left their Imports unhedged while hedging their exports…also many speculated in unrelated areas of stocks,oil,currencies and even real estate and have lost heavily…Full Year FY 09 Results will show if Classic Diamonds too suffered Fx losses or they adjusted it in High Cost Inventories  

Clearly FY 09 being a Pressure Year,servicing the Debt will cause some problems…company needs to lower Inventory and Debtors Levels and free the Cash…because scaling up business with such low Returns on both,the Networth and the Total Capital Employed, is foolish….Jewellery Segment contributed one third of the business in Fy 08,up from 25% in FY 07….rest is Diamonds…they were planning High Value Add Big Size Diamond business at Sachin, a Surat SEZ facility…..Whatever….they need to reward the shareholders better…because the returns they have been getting are simply not good enough for the quantum of monies they are employing in the business…but I daresay,the Bhansalis will not rethink their distribution policy…they don’t seem to have the liquidity…and that raises a lot of questions for me,when they should have it ! 

This Sector suffers from Corporate Governance and Transparency Issues and thus scrips in this Sector rarely catch the fancy of Serious Long Term Investors 

I personally would not go for Classic Diamonds for serious Corporate Governance and Quality of Earnings Issues…I would thus ignore this High Book Value of Rs 56 relative to the low share price of Rs 16

However risk takers would expect for a move back towards Rs 30 and above on recovery in this sector…don’t go overboard though…only a small exposure if at all you’re in Classic Love with Classic Diamonds

I’m not too gung-ho on this sector and definitely not in love with Classic Diamonds just because it seems to appear cheap against it’s Book Value…I don’t trust the Book Value…as simple as that…show me where’s the Money !..In Inventories and Debtors !? Not Liquid enough and transperant enough  for me !         

5 thoughts on “Classic Diamonds at Rs 16 with Book Value at Rs 56….Should you Buy ? Think Twice….this blog inspired by Response of Dr Sudeep

  1. thanks for ur serious and very meticulous analysis of classic diamond. it certainly helped me ftom falling prey to a classic mistake.IT also gave me ammunition and insight to analyse a co. on some more points.
    You are very serious and forthcoming in ur opinion .
    thank you very much for responding and that too so lucidly.

  2. HELLO SIR,
    YES IT MAY GO UP , BUT IN MY VIEW IN SAME SECTOR RAJESH EXPORT HAVE LOT TO OFFER , AS IT HAS Rs 800 Cr CASH RESERVE . SO THEY HAVE PROPERTY IN BANGLORE WHICH APPROX VALUED NEAR 450 Cr IN 2007 , ONLY FROM THIS VALUATION SHARE PRICE TO BE AROUND 45 TO 50 , WHERE ITS CORE BUSSINESS AS INDIA`S LARGEST EXPORTER IN JEWELERY RIGHT NOW COMES FREE . WHICH TURNOVER AROUND 7000 TO 8000 Cr OF Rs. ASLO IT HAS AROUND 40 STORES IN THE NAME OF SUBH & LABH EVEN IN LUCKNOW. FINALLY WORLD NO.1 DE BEERS IN 2007 LOOKING TO BUY OUT ITS 51% STAKE BUT THAT TIME DEAL IS NOT HAPPEN AS RAJESH MEHTA LOOK EVEN HIGH PRICE.
    IN SHORT THIS COMPANY HAS EXCELLENT POTENTIAL AS LOW OF 19.55 TO HIGH OF 165.

  3. Sir,
    Your blog id very informative, and you genoursely gives so many scripts clues to purchase your devoted blog readers.Thanks a lot.

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  4. Dear Gautam

    Rajesh Exports is in a different league all together…It’s a Premier Trading House…..It’s sales are Rs 10000 crs ….It’s market cap is over Rs 1100 crs at Rs 46 share price…..It’s book value is Rs 33 as on 31/3/2008…Face Value is Rs 1….In FY 08 it earned Rs 200 crs on a topline of over Rs 8000 crs…that’s a small 2.5 % net margin…and in a tough FY 09,we’ve seen erosion in Profits…It will probably close FY 09 with less than Rs 100 crs Net profit,although topline would be Rs 10000 crs…That’s an EPS of Rs 4,half of FY 08 performance….so a 11 Multiple is fine currently(would include some premium for land assets too) ….Their Fixed Assets show Rs 65 crs…so the land you’re talking about at Rs 450 value crs in 2007 may not be in this Company fully…Even if it is ,the per share Value comes to Rs 18 only at this 2007 Valuation…The Land Valuation has probably dropped 40%….So Adjusted Book Value to current date would be closer to Rs 50 at best….With share Price at Rs 46,there is no real margin of safety here…..Also they show Debt of over Rs 1000 crs as on 31/3/2008 and networth is lower…Opening Cash on 1/4/2009 was Rs 5000 crs,but the current liabilities were also over Rs 4000 crs…Net Current Assets though were over Rs 1500 crs
    Promoter,Rajesh Mehta has recently pledged 1.5 cr shares for personal reasons…Why would he need Rs 50 crs,assuming a hairline to today’s price ?…..52 Week High/Low is Rs 86/Rs 18…market Volumes are quite strong..in lakhs everyday

    At Rs 20 it was clearly a less risky and tempting buy…At Rs 46,the risk goes up,even more in context of declining profits and margins and tight liquidity situation

    On the other hand ,Classic Diamond is small…Market Cap is just above Rs 60 crs..Looks tempting to buy it out…but Enterprise Value shoots up with the High Debt…and there is a question mark on the quality of Earnings,Inventories and Debtors

    But yes,Rajesh Exports has scale of Operations….and is a better bet than Classic Diamonds,if at all you want exposure in this sector.

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