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 !