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Add Gitanjali Gems + Pioneer Distilleries – HDFC

December 3, 2007

On the 17th of November, we initiated coverage on Gitanjali Gems Ltd. Now, HDFC Securities has initiated coverage on Gitanjali Gems and Pioneer Distilleries with a BUY rating.Gitanjali Gems Ltd [GGL] is an integrated diamond and jewellery manufacturing company with a leading position in India. The Indian gems and jewellery market was Rs 602 bn [2006] with organized retail at 2.9% at Rs 16.8 bn. The organized jewellery market is expected to grow at CAGR of 40% to Rs 64.5 bn in 2010.

GGL has 12 branded jewellery verticals including sub-brands positioned across various segments. Strong retail and distribution networks support the jewellery brands and products across India. GGL has 112 distributors across the country with approximately 1,250 outlets. Some of the well known brands of GGL include Asmi, Gili, Nakshatra, D’damass etc. The company also approvals for 4 jewellery export SEZs and 2 Multi-Product SEZs. It has also comissioned a 80,000 sft export processing unit in SEEPZ Mumbai.

As a part of diversification, GGL is also focusing on Lifestyle products. GGL is expected to report a fully diluted EPS of Rs 18 and Rs 29 for FY08 and 09 respectively. HDFC puts a BUY recommendation with a 12 month target price of Rs 521. Morgan Stanley has a target price of Rs 550.

Pioneer Distilleries:
PDL started to set up a stand-alone distillery with the main objective to manufacture Extra Neutral Alc*hol (ENA), Rectified Spirit (RS) and Special Denatured Spirit (SDS) with a total capacity of 150 lakh litres per annum. Recent increase in plant capacity from 50KLPD to 100 KLPD (Kilo Litres Per Day) has brought benefits for PDL as it is experiencing higher volumes/capacity utilization after this expansion. PDL has obtained State Excise approval for expanding the capacity further from 1 lakh litres per day to 2 lakh litres per day. It is also contemplating an increase in capacity of ethanol plant from 30,000 litres to 1,30,000 litres per day.

Further, capex by way of 5 MW biogas based power plant and effluent treatment plant to be set-up by PDL to make use of the waste in the process of manufacturing its various products will add to the growing topline of the company and can help maintain / increase EBIDTA margins. The Government’s mandatory direction of 5% blending of ethanol with petrol could improve the revenue visibility of PDL and further proposed 10% mandatory doping by October 2008 could add to PDL’s topline.

PDL could grow its sales by 37% CAGR over FY07-FY09, Operating Profit by 61% and PAT by 83% over the same period. BUY in small lots at the CMP (Rs.90.5) and added on falls to Rs.77. The stock could reach a price of Rs.136 in the next 3 quarters.

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