Up almost 400% in a year, can this jewellery stock go higher still?

The company, known for its wide range of gold and diamond jewellery, has seen a surge in consumer demand and favourable market conditions.

But after such a rapid ascent, what lies ahead for PC Jeweller's stock? Can it continue its upward momentum, or is a slowdown looming? Let’s find out what’s behind the company’s meteoric rise and what’s in store for the future.

Debt and other issues

PC Jeweller is a classic case of a company that took on too much debt to expand and then couldn’t pay it. Its operations have suffered since FY21, initially because of covid-19 and lockdowns and subsequently on account of liquidity constraints after lenders classified its accounts as non-performing assets (NPAs). The company also became embroiled in various legal cases with its lenders.

In February 2023, banks decided to recall loans they had given the company after it revealed in a filing that it had defaulted on loans worth ₹3,470 crore.

In July 2024, the company approached its lenders with a one-time settlement (OTS) proposal, offering to pay ₹2,250 crore, or about 20% less than the principal amount, estimated at ₹2,900 crore. Twelve of the 14 banks in the consortium accepted the offer.

The same month, the company announced plans to raise up to ₹2,700 crore by issuing warrants on a preferential basis to promoters and investors. Promoters said they would infuse around ₹850 crore into the company through these. This fundraise would take care of the company’s liabilities and also fund its working capital requirements.

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In its latest annual report, management said it was working on rationalising its operations and had taken various measures to reduce costs, including closing less-profitable showrooms and removing redundant staff.

The results of some of these changes were visible in the company’s June quarter earnings, in which it reported a six-fold increase in revenue to ₹400 crore. It also reported a net profit of ₹150 crore as compared to a loss of ₹170 crore in the same period last year.

Lower customs duty

The latest Union budget had positive news for the gems and jewellery sector, with a significant reduction in customs duty on precious metals such as gold, silver and platinum.

The basic customs duty on coins of precious metals, gold and silver findings, and gold and silver bars was reduced from 15% to 6%. The levy on platinum, palladium, osmium, ruthenium and Iridium was cut from 15.4% to 6.4%.

This is expected to reduce input costs for jewellery companies and decrease retail jewellery prices, potentially driving up consumer demand and boosting domestic value addition.

A high import duty encourages gold smuggling, which hinders growth in the organised retail gold sector and leads to revenue losses for the government.

Financials yet to pick up

Over the past year, the diamond and jewellery sector has seen notable growth, with several stocks delivering strong returns and some even becoming multibaggers.

The table below shows seven companies reported double-digit sales growth in FY24. However, PC Jeweller saw a significant drop in sales during FY24, followed by Asian Star Company. Tribhovandas Bhimji Zaveri and Renaissance Global also saw slight declines.

Profit performance varied, with some companies achieving double-digit growth, others posting modest single-digit increases, and a few reporting losses.

Importantly, PC Jeweller is the only company on this list that has reported net losses for three consecutive years.

This has affected the company’s return ratios as well. With no earnings to show, the ratios have been negative.

Now we come to the most crucial part of the company’s financials – leverage.

Its leverage ratios over the past six years paint a picture of rising financial pressure. The total debt-to-equity ratio has surged from 0.55 in FY19 to 1.42 in FY24, highlighting an increasing dependence on debt for growth and operations.

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What’s more alarming is the company’s ability to manage this debt has been weakening, as seen in the interest coverage ratio. After coming in at a relatively stable 1.33 in FY20, it plunged into negative territory at -0.15 by FY22, meaning the company couldn’t even cover its interest payments that year.

Though there was a slight rebound to 0.78 in FY23, the current figure of 0.01 in FY24 suggests the company is still teetering on the edge, barely able to meet its financial obligations. This shows that unless profitability improves, the company could face serious problems in sustaining its debt load.

The recent fundraise is expected to ease some of this pressure, but the company will have to demonstrate improved profitability and effective debt management to regain investor confidence and ensure long-term stability.

The road ahead

The domestic jewellery industry is expected to experience slower growth in FY25, largely due to a sharp rise in gold prices, evolving economic conditions, and potential price volatility.

Despite this, branded jewellery retailers such as PC Jeweller are likely to see strong revenue and volume growth, driven by aggressive store expansions, shifting consumer preferences, rising gold prices, and sustained demand during weddings and festivals.

While revenue growth is projected to remain solid, short-term profitability may be moderate due to upfront costs for new stores, increased advertising to boost foot traffic, and higher discounts.

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The recent surge in gold prices may also create a temporary liquidity crunch due to margin calls on gold metal loans.

In FY24, gold prices rose by 14% year-on-year, with a notable increase in price volatility during the second half of the year, driven by economic uncertainties and geopolitical tensions.

Ongoing conflicts in the Middle East and speculation about possible changes in central bank interest rates are expected to keep gold prices volatile in the near term.

Can the stock go higher?

PC Jeweller's impressive stock price surge is a testament to its effective restructuring and strategic efforts to overcome challenges. The resolution of its debt and its operational turnaround have laid a solid foundation for future growth.

However, while the recent gains are promising, sustaining this momentum will depend on navigating external factors, such as fluctuating gold prices and economic uncertainties.

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While the company is positioned to benefit from favourable industry trends, the road ahead may still have bumps, requiring careful execution and adaptability.

Investors should weigh these risks rather than simply assume the stock will continue its rapid ascent.

Happy investing!

Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com