PC Jeweller Position Size July 31, 2016

PC Jeweller Position Size July 31, 2016

We are decreasing our position size in PC Jeweller to 4.0% from 6.3%. The company continues to perform very well operationally, management is very innovative and entrepreneurial, and the company has a long run way for growth but the expected return under the aggressive base case has fallen to 14.9% per year while a more conservative base case is 9.73% annualized return over the next five years. The company’s competitive position seems to be strong as it was able to maintain strong profitability during the recent industry downturn while all competitors except Titan had an extremely tough time staying profitable and it maintains very strong return on invested capital, but retailing is a very tough business to build a sustainable competitive advantage. Additionally, PC Jeweller’s position size was not altered to reflect our new position sizing philosophy.


The company has raised over INR60 billion in capital to finance future growth. On May 24, 2016, DVI Fund Mauritius received 4,269,984 Compulsory Convertible Debentures with a face value of INR1,000. The convertible bonds are convertible into shares at a conversion price of INR380 within 18 months.


Fidelity received 257.373 million Compulsory Convertible Preferred Shares. The conversion price is INR382.54 per share. Fidelity has 12 months from July 22, 2016 to convert the preferred shares. Until conversion, the preferred shares are paid 13% dividend yield. Assuming full conversion of preferred shares, Fidelity will hold 3.62% of the shares outstanding.


Assuming full conversion from DVI Fund and Fidelity, total dilution would be roughly 11 million new shares equal to 6.14% dilution for existing shareholders leading to total shares outstanding of roughly 190 million shares.


We are only selling if the company’s share price is above INR400 per share.


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