What's wrong with PC Jeweller?

PC Jeweller is a name synonymous with gold and jewellery in Indian households. On a broader level, the jewellery business as a whole has been flourishing but the challenges faced by PC Jeweller don't seem to be slowing down.

A brand that once used to be one of the most prominent names in India's jewellery retail market is now battling significant challenges driven by poor results and declining margins. This has lead to questions about their operational sustainability. Allegations of financial irregularity and mismanagement have tarnished the brand's reputation further.

Last Friday i.e. on January 24th, PC Jewellers paid a sum of ?7.2 crore to SEBI to settle a matter of alleged failure to disclose defaults on payment of interest or repayment of principal amount on loans. As per SEBI (LODR) Regulations all listed companies are required to file timely disclosures on loan agreements.

We'll get back to this later since high debt and liquidity issues is on of the major reasons of the current crisis the retailer is in.

According, to my understanding following are the reasons for the gloomy clouds casting a doubt on the long-term growth and sustainability of PC Jeweller's:

Declining Sales

Historically, the company's topline has witnessed fluctuations and has been on a constant downward spiral over the past 5 years.

On the contrary, it's peer Kalyan Jewellers has done remarkably well.

This decline in Sales can to attributed to various factors such as:

• Intense Competition -The retail jewellery market in India is highly competitive with intense competition between well established brands and regional players. It is worth noting that about 60% of the retail sector is still dominated by unorganised players like local goldsmiths and jewellers. Additionally, the increase in popularity of online retail stores namely Bluestone has adversely impacted the footfall in traditional jewellery stores.
• Store closures - To battle the declining sales and plunge in margins, the company has been constantly shutting down stores as a part of their cost-cutting measures. In the FY 2024 alone, the company shut down 21 owned & franchisee stores.

• Loss of Brand Reputation - The constant allegations and corporate litigations have caused irreparable damage to the brand, leading to shift in consumer preference towards other reputed brands like Tanishq from house of TATA.

High Debt and Liquidity issues

As on March 2024, the company's Balance Sheet is carrying total borrowings to the tune of 4150 crores. Over the past few years, the company had accumulated massive debt due to rapid expansion strategies.

At the same time, company's margins were shrinking due to declining sales and poor financial results, which made it difficult for the company to meet it's debt obligations.

The operating inefficiencies ultimately lead to the company defaulting it's debt obligations and it being classified as "Non Performing Asset" by various lenders including the lead bank SBI. This is severely impacted the company's goodwill, leading to decline in sales and restricted access to further credit.

A huge part of it should be accredited to mismanagement and poor capital allocation, which lead to the company being caught in this downward spiral.

However, as per publically available data, all 14 consortium lenders have approved the company's OTS proposal of repayment by party cash and equity components. This is a significant first step towards the company trying to clean this mess, stabilize it's operations and gain back investor confidence.

Financial Irregularities and Mismanagement

Qualified Audit Report has been issued by the auditor's repeatedly since FY19 due to non-compliance with Ind-AS and inappropriate accounting practices. The 2 major issues highlighted are:

• The company has extended unapproved discounts of ?183 crores to its export customers. This issue has remain unresolved for years and has been continuously pointed out by the auditors.
• The company has huge outstanding from export customers amounting to ?1467 crores, which are due for more than 9 months. The company has created a provision for Expected Credit Loss amounting to ?263 crores which is not adequate as per the auditor's judgement considering the ongoing delay in payments.

Moreover, material uncertainty related to Going Concern has been highlighted by the auditors, owing due to the various litigations.

AKA & Associates, who were the previous auditors of the company resigned on 14th August, 2023 due to delay in payment of remuneration.

Operational Inefficiencies

The Inventory days and Debtor days of PC Jewellers has been notoriously high, indicating stock mismanagement and inability to collect payments timely.

The Industry median of Inventory and Debtor days is 6 and 176 respectively. So it won't be too presumptuous to conclude that PC has breached the acceptable standards.

A continuous increase in inventory amidst declining sales could signal a potential RED FLAG for investors as it leads to capital lock-in and cash flow problems, which the company is already struggling with. If the company is unable to achieve the forecasted sales in the upcoming years, this inventory pill up strategy could turn disastrous and hurt their margins further.

When I started working on this article, I was considering covering the company from a Top-Down approach but as I went deeper, more red flags started to unravel. Rationally, I could not cover them all but tried to highlight the key issues.

But things appear to have started turning around as per the Q2 reports which can be attributed to increasing investor confidence and improvement in margins. The company is yet to announce it's Q3 results. I would make sure to cover it as soon as it is announced.

As the great Warren Buffet said - "Risk comes from not knowing what you are doing". The key to navigating debt is not avoiding it but ensuring it is used to drive value not drain resources.

Stay tuned!