The grade indicates that the company's fundamentals are `moderate' relative to other listed equity securities in India. Our fair value of the stock is INR34 per share. At the current market price of INR26 per share, our valuation grade is 5/5 indicating that the market price has strong upside from the current levels. The grades are not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument's future market price or its suitability for a particular investor.
The assigned fundamental grade reflects SRS's established position in the jewellery, retail and multiplex industries, especially in North India. Over the past 15 years, SRS has successfully entered and scaled up new businesses. Going forward, it plans to expand the jewellery retail outlet network, which is expected to be the main growth driver of the jewellery business. Revival in domestic demand for jewellery, owing to softening prices, and higher availability of gold, stemming from easing regulations, are also expected to boost the jewellery business. To grow the multiplex business, SRS plans to launch new screens across tier-II and tier-III cities in North India and to grow the retail business, it plans to launch new retail chain stores.
The grade is constrained by the low return profile of the jewellery wholesale business (which is the largest contributor to revenues), presence in the highly competitive jewellery retailing industry and geographic concentration. Although the jewellery business has witnessed healthy growth in the past, the low-margin wholesale business drags down the overall margins and returns. Since the jewellery business accounts for >90% of consolidated revenues, it also impacts the overall return ratios generated by the company. The domestic jewellery industry is highly fragmented and the aggressive expansion by local and pan-India players is likely to intensify competition further. Moreover, with most of the operations focused in North India, SRS is exposed to geographic and customer concentration risks.
CRISIL Research expects revenues to grow at a two-year CAGR of 14% to INR44.9 bn by FY16, primarily driven by the jewellery retailing and multiplex businesses. EBITDA margin is expected to expand from 3.2% currently to 3.6% in FY16 as a higher share of the high-margin retail business is likely to translate into gross margin expansion for the jewellery business. Driven by higher revenues and expansion in operating margins, adjusted PAT is expected to grow at a CAGR of 25% over FY14-16.
CRISIL Research has used the EV/EBITDA multiple method to value each business and arrived at a fair value of INR34 per share for SRS. The fair value implies P/E multiples of 6.9x FY15E and 6.5x FY16E EPS respectively.