PC Jeweller - Financial Performance vs Share Price movement

PC Jeweller is one of India's larger Jewellers with prominent presence in North & Central India. The company has nearly 90 Showrooms across several cities, nearly 75 of them are company owned and the rest as Franchise stores. Apart from it's domestic business, PC Jeweller also exports it's products to a few countries Dubai and some neighboring places. Earlier nearly 30% of the company's Turnover came from Exports, but from this fiscal the company is curtailing it's Export business due to sudden sharp increase in Cost of Capital and long Credit cycles in Export business. The company has now decided to focus on Domestic business and expand via Franchise stores and use technology platforms to push increased sales.

The year 2018 was really bad for PC Jeweller in terms of it's share price movement & associated rumour mongering. Hence

I think it is fit enough to compare the company's actual Financial Performance with it's share price movement over the recent few years, to get a good idea of what could the future quarters unfold. I have considered Trailing-Twelve-Months numbers at the end of every quarter for this analysis. FY'2017-18 was an excellent one for PC Jeweller in terms of business growth as well as share price movement. The company credited it to the implementation of GST, which helped organised Jewellers to increase their market share at the expense of the unorganised market.

In comparison, FY'2018-19 has been a lacklustre year, primarily because the company had to change it's strategy and sharply curtail it's Export business due to sudden increase in Finance Cost. Also, the company's name got involved with Vakrangee and this lead to a sharp fall it's market valuation. This further lead to Banks tightening their stance towards their exposure to PC Jeweller. Hence during this fiscal, PC Jeweller had to focus on maximising cash flows from existing assets and use it to repay Bank Debts to bring down the same to comfortable levels. Hence the business expansion plans took a back seat this year. Over the last 2-3 quarters, PC Jeweller has done well to reduce it's Debt by over Rs.1000 crores, i.e. a reduction of about 25%. In a couple of quarters, the company will be able to refocus on expanding it's business.

Despite these adverse circumstances, PC Jeweller has not seen a sharp drop in it's Total Income & Net Profit numbers. It's T-T-M Total Income & Net Profit numbers are down by just about 15% from the peak levels it hit in June'18. PC Jeweller's T-T-M EPS still stands at a very

respectable level of over Rs.12/-. Now have a look at the share price chart alongside. The price was around Rs.200 level at the start of year 2017. It rallied all the way to nearly Rs.600 levels by January'2018, after which it soon got involved in rumours of it's association with Vakrangee. Within 6 to 7 months, the share price was in 2-digits and since then it has not yet managed to get back to triple digit figures.

My opinion is that PC Jeweller currently deserves a price of about Rs.150 per share, if not more. The company is likely to start posting some growth in it's Quarterly numbers after June'19, i.e. from Q2-FY'20 onwards. Depending on how much growth the company is able to report from that point, the price target could be scaled up. But as of now it certainly deserves a price of around Rs.150 per share and it is trading at around Rs.66 currently, which is an undervaluation by a big margin.

Sun Pharma - Excellent Opportunity for Long Term Investors!!

Indian Pharmaceutical companies have been through a rough weather over the last 3 to 4 years. It was combination of more than 1 factor, which lead to almost all the Pharma companies to struggle for growth during this period. Before this period, most of the leading Pharma companies were consistently posting comfortable 2-digit growth Y-o-Y for many years, due to their increasing sales in US and other global markets, as well as increasing demand for medicines in India. During the last 3-4 years, all these companies faced substantial USFDA investigations, which was more of a step to protect their own corporations from increasing competitive pressures from companies based in India. Apart from that, the Indian Pharma companies also faced local government pressure to reduce prices of several high-in-demand medicines, which was aimed at benefiting the common public.

Most of the large sized Indian Pharma companies have bravely weathered through the storm created by the above 2 factors. India's largest Pharma company, i.e. Sun Pharmaceutical Industries Ltd, also had to face the same storm. In the year 2014, Sun Pharma acquired Ranbaxy Laboratories to create World's 5th largest Pharma company. During that year, Sun Pharma's

stock price nearly doubled in value as the deal was considered to be a big boost to the company's growth. But as soon as the above mentioned factors started affecting the business of all Pharma companies, including Sun Pharma, the company's stock price started correcting and has lost over 60% in value over the last 3 to 4 years.

(Click here to view Sun Pharma's Quarterly & T-T-M Numbers progress)

Now let's look at Sun Pharma's financial performance to see whether it deserved this kind of value erosion or not. I am using the Trailing-Twelve-Month numbers at the end of each quarter in my study. This helps in eliminating seasonal swings and also helps in building long term perspective. At the end of December'2015, when the Ranbaxy acquisition was fully complete, Sun Pharma's Total Income stood at about Rs.27,700

crores with a Net Profit of Rs.4000 crores and an EPS of Rs.16.70/-. By December'2016, the company's Total Income went on to increase to Rs.32,700 crores with a Net Profit of almost Rs.7900 crores and an EPS of Rs.32.90/-.

By December'17, Sun Pharma's Total Income had again dropped to Rs.27,400 crores with a Net Profit of just over Rs.2400 crores and an EPS of Rs.10/-. CY'2017 was amongst the most dismal years in the company's history. As we can see from the charts alongside, the numbers for Sun Pharma have started improving again over the last 3 to 4 quarters. At the end of December'2018, Sun Pharma's Total Income stands at just over Rs.29,900 crores with a Net Profit of over Rs.3900 crores and an EPS of Rs.16.4/-. This is decent amount of recovery and with all the factors affecting the company's business behind it, the recovery is expected to pick up pace going forward.

I am expecting Sun Pharma to post over 15% growth over the next 4 quarters and take it's Total Income to over Rs.35,000 crores and Net Profit is expected to grow almost 50% to reach somewhere about Rs.6000 crores with an EPS of Rs.25/-. The EBITDA progress chart alongside clearly suggests that the Profitability is improving with recovery in Total Income growth. (EBITDA is basically Profit before Interest, Depreciation, Tax, etc., in other terms EBITDA means Operating Profit) Hence I am expecting Net Profit to grow at almost 50% even with about 15 to 18% growth in Total Income.

Traditionally, Sun Pharma's stock has enjoyed a P/E Ratio of around 30. Even if we assume a P/E Ratio of 25, we could see Sun Pharma's stock to trade at well over Rs.600/- by December'19 or early 2020, if the company's quarterly numbers do perform as per my expectations. Sun Pharma did face a couple of issues on the Corporate Governance front, based on a Whistle Blower complaint. I don't count these issues to be significant and in any case the company has taken corrective actions. Hence after a few months, even the effect of these issues will be history and the stock will perform as per it's quarterly financial performance. It is difficult to predict exactly when & how the price of any stock will perform. But there are high chances that the stock price of Sun Pharma has already bottomed out and unlikely to go much lower than the current level of Rs.430/-. And there are high chances of the stock regaining it's glory, though in small doses, over the next 12 to 18 months. Investors with long term interest should certainly consider investing in Sun Pharma, not just for a 12 to 18 months view, but even longer as the company could progress as per it's historical track record and maintain a healthy growth in business for years to come.