Despite good festive sales, Thangamayil Jewellery’s operating profit took a hit due to change in accounting policy

Madurai-based Thangamayil Jewellery Ltd, recommended by Moneylife magazine on 23 August 2012 (http://www.moneylife.in/article/thangamayil-jewellery-is-the-growth-sustainable/28072.html) has reported a 41% year-on-year (y-o-y) increase in net sales to Rs436.96 crore for the quarter ended 31 December 2012. While this is an impressive number, it disappointed on the operations side of the business when its operating profit for the quarter ended 31 December 2012 plummeted 34% y-o-y to Rs22.71 crore when compared to the corresponding period last year. The major culprit was increase in advertising and publicity expenses due to change in accounting treatment, which affected its bottom-line.
 

According to the quarterly release, the statement reflecting change in accounting policy said, “In line with changes in accounting treatment and in accordance with generally accepted accounting standard on advertisement expenses the company opted to write off deferred revenue expenditure of earlier years in three equal quarterly installments in the current year together with fully charging of current year advertisement and publicity expenses in the profit and loss account of the current year. Consequent to this it has resulted in understatement of profit for the quarter and nine month ended 31 December 2012 by Rs6.14 crore and 13.95 crore net of taxes respectively on a comparable basis”
 

Moneylife’s database showed that Thangamayil’s sales lived up to its three-quarter y-o-y growth trend of 43%. Sales were buoyed by the festive season last year which is promising. However, despite the accounting change, its operating profit suffered in the previous quarter as well. Therefore, it has reported negative operating profit of 30% and 34% in the September 2012 and December 2012 quarters respectively. This is a worrying trend. Investors would need to keep an eye on operating profit in the current quarter to see if the trend persists. Leaving this aside, it has reported high return on networth of 33% while its valuation remains somewhat depressed with its market capitalisation just over four times its operating profit.
 

Also, the rise in price of gold to possibly unrealistic levels might deter buyers from buying gold jewelry. With the festive season past us, questions linger whether the price of gold will come down given that it is artificially being propped up by various central bankers world over. However, as far as overall sales are concerned it remains robust. Eyes will be on how its operating profit fares this quarter.
 

We had recommended this stock at Rs200.55, and now up nearly 50% and currently Rs299 on the National Stock Exchange.
 

Read past news on Thangamayil over here.