value pick : VAIBHAV GEMS

Vaibhav Gems (Vaibhav) is arguably the largest and among the lowest cost
producers of gemstone-studded jewelry.

Advantage Vaibhav Gems:

1.In the jewelry business, vertically integrated companies that control all segments of
the value chain enjoy a distinct competitive advantage compared to resellers. Thus,
with a view to achieve complete integration, Vaibhav Gems acquired the STS Group
for Rs3.1bn . The acquisition brings to Vaibhav’s fold expertise in raw material sourcing, manufacturing capabilities in Thailand & China, marketing network in USA, Canada and UK, and access to new markets like Japanwhile simultaneously adding capabilities in retailing.

2.Direct sale is another emerging trend in the jewelry industry. In select locations, the jewelry industry has been very successful in selling through alternative channels. To take advantage of this emerging opportunity, Vaibhav has set up a TV channel in the UK called The Jewelry
Channel (TJC). Through this vehicle, the company plans to tap into the US $10bn
jewelry market in the UK. Currently, it is estimated that only ~6% of jewelry sales
in UK are conducted through TV; the market is growing at a rapid pace (45%
CAGR over FY03-06).

3. Vaibhav Gems is foraying into diamond jewelry by leveraging on existing relationships. The toughest part of growing in the business is establishing credibility given that Vaibhav is already a well-established player in the gemstones segment, it would be easier for the company to penetrate into large retailers for diamond-studded jewelry. Also presence of Warburg Pincus which holds 27% direct investment in the co would go a long way improving its image and help it access business channels . The market is significantly bigger for diamonds 70% of the US market compared to 11% for gemstone jewelry,
and therefore will offer scale.

4.The price of allottment to Warburg Pincus was in the range of Rs 280 or less than Rs 275 apiece, it added. These shares or warrants convertible into equity shares will represent up to 27.29 per cent of the total post-issue paid-up capital of the company on a fully diluted basis.Since this developemnt in late 2005 we have not seen the current price levels and we think there would not be a huge downside from these levels.
Also the volumes have dries up indicating lack of interest for investors to sell out.

5.Also with festive season around the corner Diwali , Christmas the sales should zoom owing to the seasonality effect.

Considering these factors Vaibhav Gems @ 280 levels is an accumulate on dips.