PC Jeweller has been in the news for all the wrong reasons. Last October it defaulted on a massive ₹3,400 crore loan. And now, SBI one of its lead lenders wants it declared insolvent.

So in today’s Finshots, we dive into where it all went wrong for the jeweller.

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The Story

Half a decade ago, PC Jeweller was the darling of stock market investors. Its shares had galloped from a mere ₹50 to ₹500 between 2014 and 2018 — a whopping 1000% return. Padam Chand Gupta and Balram Garg, the brothers who’d started it all with a single store in Delhi in 2005 had transformed the jeweller into a pan-India player with over 84 stores. And brokerages were singing praises about it and publishing reports titled “Shining Bright” and “Wedding Glory”.

But on one fine January morning in 2018, everything changed. A single piece of news nearly destroyed the company.

At first glance, the news was pretty innocuous. Apparently, a software company called Vakrangee had picked up a 0.51% stake in the jeweller. And it’s not unusual because companies do park excess cash in safe bonds, mutual funds, or even pick up shares directly in other companies if they're feeling adventurous. Vakrangee even said that the two companies were business partners. And so the investment made sense.

Nothing wrong, no?

But here’s the thing. Vakrangee was actually in the spotlight for all the wrong reasons. It was being probed by market regulator SEBI for manipulating its shares. And that was enough to spook investors who feared the worst. Many believed that the software company was perhaps cozy with the jeweller. They rushed to the exit and PC Jeweller's shares tanked.

And then another story hit the papers.

This time the reports noted that Padam Chand Gupta, the founder, had quietly gifted some shares to his relatives. It was an off-market transaction which meant it wasn’t executed on the stock exchanges. And investors began to worry more about corporate governance issues at the company. They began to fear “What else were the jewellers hiding”?

Meanwhile, the company came out and said that it hadn’t done anything wrong. It claimed it was disclosing all the relevant information. It said that the promoters weren’t selling shares. And to assuage fears, it even announced a share buyback. It told investors that it would pay them a premium and take a few shares off of their hands to inspire confidence. It wanted to let the world know that its founders believed in the company.

But just two short months after this grand announcement, it backtracked. It said that the bankers weren’t comfortable with splurging over ₹400 crores on something like this. And the banks wanted PC Jeweller to focus on growth to cut down its debt obligation. Yup, debt was mounting and we’ll talk about that in a bit.

Meanwhile, SEBI launched an investigation to see if there was any insider trading happening at the company. The regulator had reason to believe that the family had indulged in some dubious trades to make a little bit of extra money for themselves.

And you know this already — jewellery businesses are built on trust. So with all this happening, PC Jeweller was no longer deemed a trustworthy company. It suffered from a serious reputational crisis.

You might say, “But Finshots, this is a stock market thing. Only investors care about it. Not the folks who’re buying jewellery from the stores.”

But what if you’re a customer who sees front-page news saying that the company’s MD may be arrested? Oh yeah, that happened too! You’ll think twice about stepping into the store, no? You might fear that the jewellery they’re selling isn’t as pure as they claim. And don’t forget that around the same time, the diamond merchant Nirav Modi had perpetrated one of the biggest scams ever. He allegedly fleeced the Punjab National Bank of a staggering ₹11,000 crores. So banks pulled back the reins too — they began demanding higher interest rates and weren’t generous in sanctioning loans.

PC Jeweller was caught in a perfect storm.

And that’s when people started taking a closer look at something else — the debt on its books. Now the thing with debt is that it creeps up slowly. One minute, things are okay. And the very next, you’re left floundering.

For instance, running a jewellery business is quite capital-intensive. You need a lot of money on a daily basis. You have to first import the gold, maintain high levels of inventory and it could take months to turn the inventory into cash.

So over the years, PC Jeweller kept borrowing to keep its business chugging.

Not to forget it was also expanding at a rapid pace with several new stores. And that called for even more money.

Needless to say, the debt figures inched up and the interest burden rose in tandem.

This is all fine when sales are rising too. But in this case, sales had cratered with all the allegations floating around. From nearly ₹10,000 crores in FY18 to a mere ₹3,000 in FY21. PC Jeweller began struggling to turn over its gold inventory. From an average of 200 days in FY18, Days Sales of Inventory (DSI) soared to over 900 days in FY20. The cash simply stopped coming in.

And it was also having trouble with its export side of things too. Now this was a Business-to-Business (B2B) affair and a lot of the transactions were on credit. But these businesses were in no hurry to pay PC Jeweller. They took nearly 9 months on average to settle dues. At one point, the company had to write off hundreds of crores of money due as a ‘discount’.

And that pretty much sealed the fate of PC Jeweller.

It eventually ran out of cash. It defaulted on its ₹3,400 crore bank loan in 2022. And that forced SBI to take action. The bank wants its money back. And it is prepared to fight the battle in bankruptcy court.

So, will the 18-year-old firm finally be forced to declare itself bankrupt? Or is another outcome on the cards? We’ll have to wait till the 21st of August to hear what the court has to say now.

Until then…

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