Barely six months ago, Mehul C. Choksi’s diamond jewellery company, Gitanjali Gems, was trading at a steady Rs 600 on the BSE, while market capitalisation was close to Rs 6,000 crore. This was somewhere close to the highest the stock had ever climbed—Rs 649, on April 23—and Choksi, whose father, the late Chinubhai Choksi, had founded the company 47 years ago, was one of Mumbai’s most influential jewellers. Though low key and understated according to childhood friends, Choksi would use some of Bollywood’s biggest stars to market his jewellery labels, sponsor big film events, etc. Despite Choksi’s enormous wealth (nearly Rs 3,300 crore when the stock peaked), he didn’t chase the next big car (he drives an old, black Mercedes E 280) or buy jets: His big goal was to make Gitanjali the world’s largest luxury jewellery retailer.

Today, that dream has come unstuck. From being the poster boy of the diamond fraternity, Choksi has become the bad example. The Gitanjali stock has fallen by 90%, evaporating close to Rs 5,000 crore of market capitalisation. In Mumbai’s Zaveri Bazaar, the city’s gold and jewellery hub, all the talk revolves around Gitanjali. A small Mumbai-based family jeweller, who declined to be named, says: “If it’s investments, or doing trade with Gitanjali, or sending them finished goods and waiting for payment, it’s a good idea to delay it for now.”

Some traders say that Choksi is running out of working capital; others claim he is considering entering a corporate debt restructuring scheme. One jeweller tells me confidently that Choksi owes a whopping Rs 9,000 crore to a consortium of banks and Rs 700 crore to the diamond bourses, and has personal debt of Rs 400 crore. There are text messages doing the rounds that claim Choksi, with an overall debt of Rs 30,000 crore, has declared bankruptcy.

While some of this is rumour mongering and exaggeration (according to Gitanjali’s books, the company’s net debt is at Rs 4,335 crore; other creditors are owed Rs 4,400 crore), it’s very clear that Choksi—and Gitanjali—is in trouble. While he may choose to ignore the texts (“I don’t look at them anymore,” he asserts), he can’t ignore credit rating agency CARE, which, this July, put the company on a credit watch with its long-term bank facilities being revised from A- to BBB-.

In a statement, CARE explained that the revision was due to the “stressed liquidity position of Gitanjali Gems as evidenced by the full utilisation of existing working capital limits, which, along with the recent RBI guidelines on gold import for domestic purpose, would further put pressure on its liquidity position. CARE also takes into account the erosion in share price and market capitalisation of the company in the last two weeks of June, which in CARE’s opinion would have a weakening effect on [its] financial flexibility and liquidity.” The agency has since suspended its provision of ratings for Gitanjali, citing that the company did not furnish information required by it for monitoring ratings.

Choksi has also been drawn into a securities scam which is being investigated by the Enforcement Directorate and the Securities and Exchange Board of India (Sebi).

THE CARE ISSUE came after a series of downturns, starting with policy changes, which “jolted” Choksi’s strategy, he says. “If they [the government] have a CAD [current account deficit] problem and ban gold imports by raising the duty to astronomical heights, it hits organised players the hardest,” he gripes. Indeed, the government, at regular intervals, has been jacking up import duties for gold bullion to 10% from 1% since February, crushing margins for anyone in India’s gigantic gold business. Some 860 tonnes were imported in 2012, making India the largest importer in the world.

The flashpoint came on June 4, when the government announced that manufacturers would not be able to avail of gold loan facilities. The RBI allows a select group of banks and agencies such as Scotiabank, Standard Chartered, and Deutsche Bank to import gold. Outfits like Gitanjali pick up bullion on consignment from them and have a six-month window to pay back. So, Gitanjali took physical delivery of, say, 100 tonnes of gold from Scotiabank at interest rates between 3% and 4%, and typically, once it sold the jewellery made from that gold, it would repay the bank at current bullion rates. What that meant was that Gitanjali’s working capital wasn’t stuck in buying raw material (gold).

While this system was in place, in the last three years ending March 2013, Gitanjali’s sales increased from Rs 6,568 crore to Rs 16,489 crore (or 36% annualised). And while the number of debtors rose (Gitanjali offers credit to dealers), its net working capital remained nearly the same at around Rs 730 crore as it did not have to fork out cash for gold. Now, with the gold loan facility struck down, Gitanjali has to buy the metal in the open market, which is usually more expensive. That’s skyrocketed Gitanjali’s working capital requirement effectively by Rs 2,500 crore, taking the wind out of Choksi’s sails. “Remember, almost 60% of our loan facility was used for gold,” says Abhishek Gupta, president of Gitanjali Gems, who confers with Choksi daily on strategy.

In step with regulatory changes, foreign institutional investors unwound their positions. Indeed, outfits such as Goldman Sachs and Macquarie began selling Gitanjali. This triggered another crisis. Confident that his stock would rise further, Choksi had pledged his shares with banks over the last four years to borrow money to increase his holding in Gitanjali from 40% to 60%. But as the value of the shares fell, Choksi had to borrow to make good the difference, and today is left with nearly Rs 200 crore of personal debt. The value of 23% promoter holding (or 12.61% of Gitanjali’s total shareholding) pledged as of June 30, fell from Rs 754 crore to Rs 63 crore in a matter of 110 trading days between April 23 and Sept. 27.

Gitanjali wasn’t the only one feeling the heat. The Tribhovandas Bhimji Zaveri scrip went down from Rs 250 six months ago to less than half that by August end. Tara Jewels, a company with about Rs 1,400 crore in turnover and a key supplier to Wal-Mart’s jewellery division and U.S.-based fine jewellery retailer Zale, has seen its domestic retail business flounder, says chairman and managing director Rajeev Sheth. Tara’s stock price has also halved in the last six months.

Some of Gitanjali’s troubles are symptomatic of what’s happening in the industry. First, every player relies on loans to buy raw material (gold, silver, diamonds, and semi-precious stones). Then, when a large player defaults on loans, banks don’t see it as an individual problem; they see it as a symptom of the industry. The collapse of companies such as Gitanjali and the Jatin Mehta-run Winsome Diamonds & Jewellery (formerly Su-Raj Diamonds) hurt the entire sector. Winsome’s debts are at Rs 8,000 crore, and banks have classified its exposure as a non-performing asset.

Choksi says, today, many jewellers buy gold in the unofficial market, a euphemism for buying the metal under the radar with undeclared ‘black’ money and without paying duties. He adds that when unorganised players import gold by using black money, the entire balance of the industry goes off keel, throwing prices, supply and trading patterns out of whack. Vikram Raizada, executive director and CEO (retail), Tara Jewels, is sympathetic, and says it’s difficult for any corporate jeweller to compete with prices offered by smaller shops that don’t pay that extra 10% in duties. “It’s almost as if we get punished for following the rules,” he says.

But, equally, many of the jewellery stocks (Titan Industries, PC Jewellers) have already begun rebounding, while Gitanjali’s is still in the dumps. And much of that has to do with Gitanjali being drawn into a stock market scam. Sebi and the NSE are investigating the alleged involvement of Choksi in rigging his shares in collusion with a Mumbai brokerage, Prime Securities, and two dozen entities that traded in Gitanjali shares. On July 18, NSE barred Choksi, Prime, and its 24 clients from trading, as part of the investigation. Though NSE officials declined to comment for the story, the exchange is said to have submitted its report to Sebi, which is expected to rule in the case shortly. Prime Securities promoter N. Jayakumar wasn’t available for comment. Choksi says, “This is all humbug. I have nothing to do with that.”

According to people who trade on Mumbai’s bourses, and individuals close to both Jayakumar and Choksi, who asked not to be named, here’s a probable recreation of events. Nearly a year ago, Prime bought 2 million shares (or 2% of floating stock) of Gitanjali at the behest of little-known investment companies, many of which had a paid-up capital of Rs 1 lakh and operated from obscure addresses in downtown Mumbai. These firms were represented by Anand Shah, a little-known Mumbai financial advisor. Prime did its due diligence on these companies, found them to be okay, and proceeded to do business. These companies collectively paid for half the amount of shares, and the rest was arranged by Prime through a loan. Prime later pledged the Gitanjali shares lying with it to the NSE as collateral for its own proprietary and client trades in the derivatives segment.

This February, Prime started having payment problems on account of its bets going wrong. By April, it owed NSE Rs 94 crore and was not allowed to execute new business as a broker. When NSE felt that Prime was in no position to repay, it threatened to recover the money by selling the collateral of Gitanjali shares that were then worth around Rs 120 crore. NSE also did not clear the settlement due to some other clients of Prime, who wanted to adjust the money against receivables. Prime has since appealed to the Securities Appellate Tribunal, saying that its clients should get their dues as they had nothing to do with these trades.

Jewellery being crafted at Gitanjali Gems’ Mumbai plant.
Jewellery being crafted at Gitanjali Gems’ Mumbai plant.

On April 27, two of Prime’s clients, Trusha Investments and Sarvin Mercantile, who had paid up to buy Gitanjali shares, complained to the Economic Offences Wing of the CBI that Prime had fraudulently used the shares they bought as collateral for its own proprietary trading. Since these shares were to be sold by NSE, they wanted them frozen. The Enforcement Directorate then froze the shares, a move considered unprecedented by securities lawyers. NSE has now gone to Bombay High Court against the Enforcement Directorate, claiming that it has taken unencumbered shares as collateral from its owners, and it cannot be stopped from selling them.

While brokers routinely have settlement problems with exchanges, it’s the timing of the trades as well as the rise and fall of Gitanjali’s stock that has made the authorities suspicious. If NSE and Sebi find a nexus between Choksi and the 24 firms, including the two that filed the complaint, the charges could range from insider trading to stock price manipulation. Jayakumar and Choksi know each other. “The truth will prevail,” says Choksi, denying any collusion or knowledge of what Prime may have been up to. “I’ve written to NSE and the BSE indicating that I am not connected to Prime Securities.” At the time of going to press, no charges had been formally brought against either Choksi or Jayakumar, or their companies.

WHILE THE INVESTIGATIONS continue, Choksi realises that he’s got to rejig Gitanjali. After all, not all of its problems can be blamed on the environment or regulations. Choksi’s big idea was to build brands—he counts LVMH Moët Hennessy Louis Vuitton chairman and CEO Bernard Arnault as his role model—and he launched some 30 at last count. Indeed, he is even disdainful of peers who didn’t follow suit, and called them commodity players.
“Brands have no price barrier, my only interest is in building the pull factor for my jewellery,” says Choksi. His overall spend on promotions, ads, events, and marketing add up to Rs 228 crore a year, with brand ambassadors including Bollywood stars Priyanka Chopra, Shah Rukh Khan, Sanjay Dutt, Katrina Kaif, and Kareena Kapoor.

Some jewellers say that paying crores to movie stars does nothing for your brand or sales. Sheth of Tara Jewels, for one, says he’s never done it and “there’s no rub off, as far as the average customer goes”. Rajeshree Naik, former head of marketing for Forevermark (a brand from De Beers) somewhat agrees. “Half the spend and much more focus on the creatives could have driven a resulting brand image/awareness that could have had greater impact.” Her point is that overexposure may have helped build or grow the branded segment, especially in tier II and tier III cities, but at some point it started working against the brands. “Overexposure tends to commoditise the product,” she says. In a category like jewellery, a consumer is buying into an aspiration, an emotion, and a lifestyle; mass appeal works against that aspiration.

Choksi’s strategy, given shape by Gitanjali’s former managing director Shailesh Sangani, was to appeal to both the aspirational class as well as the masses. “There was this entire emerging middle class in India that we could sell to,” says Sangani. Together with Choksi, he built a strategy around multiple designer labels that could co-exist in a high-street mall or shopping centre. Today, Gitanjali sells jewellery that starts at Rs 3,000 and goes up to Rs 25 lakh and 90% of its products are priced below Rs 1 lakh. “At one stage, we were even selling a gold bracelet for Rs 700,” Sangani adds.

The point, says Rahul Vira, CEO of Gitanjali’s Gili brand, is that jewellery is a discretionary spend, so pricing is key to getting repeat business. Choksi’s vision included a shopping environment where a customer could walk around and see 10 different brands positioned at different price levels. “You cannot have a Tanishq store three blocks away from another Tanishq, but an Asmi can co-exist right beside a Gili or a D’damas,” Choksi says. “That was the game.”

That may well have become one of the contradictions that Gitanjali found itself getting bogged down by. On the one hand, Choksi wanted his brands to become aspirational. On the other, he wanted to sell volumes to the masses. His brands were also not segregated sharply enough in terms of price and brand equity to stand out independently.

Right now, Choksi is keeping long hours to turn the ship around. He’s in office by 8 a.m., sometimes earlier, and puts in 15-hour shifts to restructure the business. The focus on diamonds and jewellery abroad will give him better margins and reduce his exposure to gold. Choksi says that in gold jewellery the gross profit, at best, is about 6% to 7%, while in diamonds it can be 40% to 70%. In one of his divisions, he “can sell Rs 2,000 crore worth of gold coins and add it to our top line, but it’s not value adding”.

Then, he aims to reduce the amount of gold he buys by half to about 25% of his total raw materials cost. He plans to introduce semi-precious and coloured stones in products and expand his brand to include accessories such as ladies’ handbags and clothing marketed under Gili and Maya. Right now, 60% of Gitanjali’s business comes from gold and the remaining from diamonds. “We want to do 25% gold, 65% diamonds, and 10% in precious and semi-precious stones,” says Choksi. But that may not be enough as Gitanjali’s debt-to-equity ratio stands at 1.38, the highest in five years.

Local operations will also be trimmed, with “50 to 100 stores” that are more dependent on gold to be shut down, says Choksi. At the same time, retail presence in West Asia and the U.S. will be increased, he says. In addition, employees say that pay cuts of 15% to 30% are underway for those earning Rs 8 lakh and more. Employees that have been with the company for less than two years are being let go. Finally, some, if not most, of his brands may be discontinued.

With debtors breathing down his neck, Choksi has already relinquished the limelight. He’s scaled back on public events and promotional spending. Gitanjali was visibly absent from the International Indian Film Academy Awards in Macau this year.

EVERY TWO OR THREE months, Gitanjali franchisees come together at a Mumbai hotel such as the JW Marriott or The Leela, for what is internally called a ‘buyers meet’. There, they view gold jewellery manufactured by vendors from Zaveri Bazaar and elsewhere. It’s an asset-light model, but comes with its share of problems. “The distribution of goods purchased from these vendors is disorganised,” says one franchisee. “You don’t get goods that you paid for and often there are outstanding balances that are adjusted with inventory you didn’t want.”

With local operations being trimmed, what future awaits skilled workers like these at Gitanjali’s units?
With local operations being trimmed, what future awaits skilled workers like these at Gitanjali’s units?

Krishna Gupta, another franchisee, who has a Gitanjali Jewels store in Noida, near Delhi, says he’s been to five or six buyers’ meets and experienced that problem every time. “I buy 3 kg or 4 kg of jewellery and always end up getting it late.” Gupta also claims that he’s got some Rs 90 lakh of claims pending with the company, and as of now he wants to quit the franchise. No one at the company is talking to him or returning his messages. “It’s like a wall has come up.”

Not every franchisee is unhappy. Digvijay Sinh Jadeja, who runs seven stores across Gujarat and is the largest franchisee, says he plans to open his eighth store in Surat this September, and the stock distribution issue is a small problem. Gitanjali president Gupta seethes when asked about such complaints. “Every single one of our partners has not just made a profit—they’ve made a killing with our brands,” he says. Pankaj Shah, brand head of Asmi and Spectrum, adds that franchisees “extended themselves beyond their credit limits and didn’t make payments on time. That’s why the stock didn’t reach them.”

If it has to regain its position and grow as intended, Gitanjali will have to go back to the consumer and better understand their needs and aspirations. Consumer segmentation will also be key. In Gitanjali’s stable lies one of the most established brands, Nakshatra. In its original glory, Aishwarya Rai (Bachchan) was its brand ambassador, and the creatives made the most of a beautiful face while steeped in a traditional Indian design concept built around the seven- to nine-stone floral design.

That’s the sort of push that Choksi will have to recreate. If he wants to rekindle foreign investor interest in the company, he has to revamp the company’s management structure, moving from a centrally run outfit to a decentralised one, with professional CEOs in place to bring back confidence. Until then, Gitanjali will remain a dulled diamond.

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