Over the years, gold has always been considered a precious metal whether we recall its use case as a currency in the older times to its more contemporary use case of being a hedge against inflation. Today, gold is either used for crafting jewellery or as an investment (Coins, Bars, Physical Gold, SGBs, etc.).
India and China together drive over 50% of global gold demand. However, in India, gold transcends its status as merely an ornamental or investment asset; rather it is deeply ingrained in our cultural traditions. Purchasing gold is considered auspicious during festivals, weddings, and births, with Diwali and Akshaya Tritiya being particularly significant times for acquiring gold.
The jewellery retail market in India has traditionally been dominated by the unorganised sector, comprised of small-scale jewellery retailers spread across the country. However, factors such as a wider variety of products, transparent pricing, standardized making charges, hallmarking, and assured exchange value drive organised players to gain market share.
As of FY01, only 10% of India’s retail jewellery market was captured by organised players, but this figure rose to 33% by FY22 and is expected to increase even further in the coming years.
*Source: Sky Gold’s Q4 FY24 Investor Presentation.
Additional factors such as India’s expanding economy, rising disposable incomes, and increased interest in categories like diamonds and other precious stones are collectively acting as tailwinds for the Indian jewellery retail sector.
Estimates suggest that around 500 new stores will be established by just the top 5 jewellery retailers in the country over the next 3 to 5 years.
As of FY23, the Indian jewellery retail sector is valued at approximately Rs 6.3 lakh crores ($76.3 billion) and is expected to grow at a CAGR of ~5.5% till 2027, reaching a market size of around Rs 7.8 lakh crores ($94.7 billion).
*Source: Sky Gold’s FY23 Annual Report.
Gold near all-time high!
Gold prices have soared to record levels in the last few months, hitting an all-time high in mid-May. Consequently, gold has emerged as one of the top-performing asset classes, delivering a 12% return YTD as of June.
Domestic gold prices have closely mirrored the movement of international gold prices, largely due to the steady USD/INR exchange rate.
*Source: World Gold Council – Indian Market Update.
Gold demand gained traction in the domestic markets around the Akshaya Tritiya festival on May 10th, a day traditionally seen as auspicious for purchasing gold. However, demand, especially for jewellery, slowed down afterwards.
This subdued demand is expected to pick up again with the arrival of the festival and wedding seasons. The trend of buying wedding jewellery remains strong, with many people advancing their purchases in anticipation of further gold price increases.
RBI boosting its gold reserves.
The RBI is on a gold purchasing spree, with its gold holdings reaching a new peak of 834.2 tons, making up 8.7% of total forex reserves—a level last seen in April 2013.
The RBI acquired 3.7 tons of gold in May and an additional 2.8 tons in the first week of June, bringing its 2024 tally to 30.6 tons so far. If this trend continues throughout the year, the RBI’s gold acquisition could be comparable to the 2021 levels of 77.5 tons.
Such rampant gold acquisition by the central bank is usually anticipated to boost overall demand in the domestic markets.
*Source: World Gold Council – Indian Market Update.
Now that we have captured the significance of gold in India and the recent trends in the domestic market, let’s shift our focus to a gold manufacturer whose products you might be wearing but never knew that it made them.
Sky Gold Ltd. – A B2B Jewellery Player.
Sky Gold is in the business of designing, manufacturing, and marketing jewellery. But not how we are used to it, it does not sell its products to the end users like you and me, but rather to the jewellery retailers we all know about. The company specializes in 22 Karat gold jewellery and has recently expanded its product line to include lightweight, diamond-studded pieces.
What sets Sky Gold apart is its specialization in lightweight jewellery. 90% of Sky Gold’s inventory is priced between Rs 5,000 to 1 lakh, with the remaining inventory in the Rs 1-2 lakh range. They plan a similar pricing strategy for their new line of diamond jewellery, which will range from Rs 20,000 up to a maximum of 2.5 lakhs.
With a team of over 500 employees, Sky Gold’s products are available in more than 2000 retail outlets across India and over 500 outlets globally. Currently, its portfolio features 18 distinct sub-brands, each unique in its design and appeal.
*Source: Sky Gold’s Q4 FY24 Investor Presentation.
The company boasts a diverse client base. According to the management in its recent concall, 65% of the company’s business comes from top-tier jewellery retail chains (corporates) in India. However, its clientele also includes smaller jewellery retail chains spread across the country. Reputable names in its portfolio include Malabar Gold, Kalyan Jewellers, Joyalukkas, Senco Gold, etc.
*Source: Sky Gold’s Q4 FY24 Investor Presentation.
The management is keen on increasing its business from corporates to 100% in the next three years.
Sky Gold is also looking forward to onboard Tanishq, one of the biggest jewellery retailers in our country. In its recent concall, the management notified that all their product meetings with Tanishq are done and are currently awaiting their confirmation.
Who are the Promoters?
Sky Gold was established in 2005 by the three Chauhan brothers and is still run by them, each with at least a decade of experience in the gems and jewellery industry.
- Currently, Mr. Mangesh Chauhan serves as the Managing Director and Chief Financial Officer of the company.
- Mr. Mahendra Chauhan manages brand production, design, quality control, and machinery.
- Lastly, Mr. Darshan Chauhan is responsible for product enhancement, pricing strategies, and overall commercial development.
The promoter holding in Sky Gold currently stands at 61.32%. In the previous fiscal, the promoters sold some of their stake, raising Rs 108 Cr for further expansion, reducing their holding from 73.55% in Q2 FY24.
The stake sale included notable investor Ashish Kacholia, who currently holds 3.05% of the company. Other investors include Bengal Finance and Investments, Acron Consultants LLP, and Narayana Trading and Investments.
Two New Acquisitions!
Sky Gold has recently acquired two new businesses: Sparkling Chains Pvt Ltd. and Starmangalsutra Pvt Ltd.
Both entities are involved in manufacturing jewellery made of gold, silver, and other precious metals or stones. Specifically, Sparkling Chains specializes in chains, while Starmangalsutra focuses on mangalsutras.
Interestingly, both these companies were promoter-owned and privately held. They were initially kept separate due to different design and manufacturing capabilities. However, aligning with their long-term strategy, Sky Gold decided to acquire these companies—a move we support and will discuss in depth later.
The total acquisition cost is Rs 87.5 Cr. Out of this, Rs 49.98 Cr is allocated for stocks, while Rs 37.5 Cr consists of repayable loans. These loans are interest-free and will be repaid based on Sky Gold’s liquidity position.
The combined revenue for Sparkling Chains and Starmangalsutra totals ~Rs 371 Cr as of FY24. Both companies are expected to generate revenues of Rs 500-600 Cr in FY25. This acquisition also boosts Sky Gold’s manufacturing capacity from 750 kg/month to 1050 kg/month.*Source: Sky Gold’s Q4 FY24 Investor Presentation.
In its Q4 FY24 concall, the management highlighted that 40% of a jewellery store’s sales come from casting jewellery products, which Sky Gold already specializes in. Mangalsutras account for 15% of store sales, while chains make up another 25%.
With these acquisitions, Sky Gold can now contribute to around 80% of the products sold in a jewellery store.
Why do we like the acquisition?
We see Sky Gold’s acquisition as a strategic and timely move, aligning with the expected growth in the jewellery retail market as it shifts from unorganized to organized players. This acquisition doubles Sky Gold’s addressable market to 80% of the products sold in a jewellery store, significantly enhancing its market presence.
Moreover, both acquired entities are in similar businesses to Sky Gold and are operationally and financially mature. Sky Gold’s acquisition, by integrating similar businesses under one umbrella, eliminates such conflicts, making it a more appealing investment. Additionally factors like no cash transaction, no excess dilution, zero interest loan gives us confidence on the deal.
Eyeing Exports For The Next Leg of Growth!
India’s jewellery exports have risen significantly in the last year, jumping from ~Rs 34,600 Cr in FY23 to ~Rs 55,200 Cr in FY24, marking an impressive 62% growth. Consequently, Sky Gold is very keen to capture a share of this growing export market.
Currently, exports account for only 6% of Sky Gold’s revenues, but the management aims to increase this figure to 30% by FY27 and they fairly look on track too. Their share of exports rose to 11% in Q1 FY25, the company is already supplying to the markets of UAE, Singapore, and Malaysia, which share similar jewellery preferences with India. To tap into the larger markets of the USA and Europe, Sky Gold plans to conduct R&D over the next two quarters to develop products tailored for these regions.
In the USA and European markets, there is a higher demand for 14-carat or 18-carat studded jewellery compared to the 22-carat jewellery popular in India. To facilitate this expansion, the company has onboarded a new operations head with over 25 years of experience in the western markets.
Roadmap For Improving Margins.
As of FY24, Sky Gold made Rs 40 Cr of PAT at a PAT margin of ~2.3%. Going forward the company aims to improve its PAT margin to over 3%.
Currently, the company majorly finances its inventory via working capital loans that have an interest cost of ~9-10%. The management wishes to move 100% of this to gold metal loans (GML) by Q3 FY25, this would lead to a reduction in interest cost and subsequently aid its margins.
Additionally, Sky Gold holds shares of HDFC Bank worth around Rs 70 Cr. The management intends to liquidate these shares and invest the same amount in fixed deposits, which will further enhance its interest income.
Another factor is that the company is focused on increasing its exports in the coming years. The management expressed that a better product mix and a higher share of exports will help them achieve gross margins of 7-8%, compared to the current gross margin of 6% in FY24, as exports typically offer better margins in their business.
Financial Overview
Let us peek into Sky Gold’s financial performance over the past few years.
*Click on the image to enlarge.
Sky Gold’s revenues have consistently grown at a 25% CAGR, rising from Rs 722 Cr in FY20 to Rs 1,745 Cr in FY24. In FY24, revenues surged by an impressive ~51% YoY, following ~47% growth in the preceding year as well. This rapid growth has more than doubled the company’s revenues compared to two years ago.
Going ahead, the management’s vision is to achieve revenues of ~Rs 6,300 Cr by FY27, with its two new acquisitions. But how?
As stated previously, the company’s existing capacity stands at 1,050 Kg/month, with 750 Kg/month from Sky Gold’s Navi Mumbai facility and the remaining 300 Kg/month from the new acquisitions.
In FY24, Sky Gold’s Navi Mumbai facility operated at a capacity of 300 Kg/month. According to the management’s recent concall, production has already increased to 350-400 Kg/month this year. The two newly acquired firms, which were producing ~50 Kg/month last year, have the potential to scale up to 200 Kg/month in day shifts and 300 Kg/month in night shifts. Combined, Sky Gold can easily achieve a capacity of 950 Kg/month, more than doubling its capacity from FY24.
*Click on the image to enlarge.
Sky Gold’s EBITDA has also seen substantial growth, soaring at a 56% CAGR from FY20 to FY24. In FY24, its EBITDA more than doubled in absolute terms, rising to Rs 77 Cr from Rs 36 Cr in FY23, driven by both revenue growth and improved margins.
Its margins have incrementally improved from 1.8% in FY20 to 4.4% in FY24. The company aims to maintain its EBITDA margin at 5-5.5% over the long term, expecting that increased sales will help reduce costs as its overheads will spread over a larger base.
*Click on the image to enlarge.
Sky Gold’s PAT growth follows a similar impressive trajectory, increasing at a ~61% CAGR from FY20 to FY24, with FY24 witnessing a significant jump of over 100% to Rs 40 Cr.
PAT margins have also improved, reaching 2.3% in the last fiscal. The management aims to maintain PAT margins in the range of 3-4% over the long term. Strategies such as reducing interest costs by financing working capital with gold metal loans and converting investments to fixed deposits, as previously discussed, are expected to help achieve this target.
Let us now see how its cash conversion looks like.
*Click on the image to enlarge.
Sky Gold’s cash conversion cycle has consistently ranged between 40 to 50 days, as highlighted in the table. The numbers stand out compared to other gems and jewellery businesses due to the sheer nature of Sky Gold’s business.
The company purchases bullion and sells its products wholesale to retailers, resulting in shorter payable days and higher debtor days, which is usually the opposite in the case of jewellery retailers.
However, in FY24, its cash conversion cycle extended to around 79 days, primarily due to higher inventory days. Its Inventory levels in FY24 also rose significantly to Rs 266 Cr from Rs 85 Cr in FY23.
The management addressed this in their recent concall, explaining that the elevated inventory was due to corporate orders received close to the end of Q4 FY24. Moving forward, they aim to maintain inventory days below 35 and reduce the cash conversion cycle to 45 days.
Sky Gold’s focus has always been on maintaining a high inventory churn rate, with the shortest lead time of 15 days, meaning it takes only 15 days for an order to be delivered from the day it is placed.
How Does The Recent Custom Duty Rejig Affect Sky Gold?
Union Budget 2024, presented on July 23 came with a series of surprises from the removal of indexation benefits to higher capital gains tax, but what interests us right now is the custom duty on gold and silver being slashed from 15% to 6%.
Gold futures declined by about 6% on the day the news was announced, having an direct impact on the inventories held by jewellery manufacturers.
Interestingly, Sky Gold is less affected by this shift. In its Q1 FY25 concall, the management clarified that the recent duty cut had no impact on its inventory, thanks to its strategy of hedging positions on the MCX. This hedging effectively shields the company from potential losses due to price fluctuations.
Current Outlook and Valuation
Here is a snapshot of Sky Gold’s performance in Q1 FY25:
- Sky Gold’s revenues grew by ~92% YoY to Rs 723Cr.
- Its EBITDA also showed robust growth, soaring by ~95% to Rs 37 Cr from Rs 19 Cr a year ago.
- EBITDA margins remained stable at ~5%.
- PAT grew significantly by around 90% YoY to Rs 21Cr, with a PAT margin of 2.9%.
The management is also looking to raise a QIP of ~270 Cr to expand into 18 carat gold & diamond jewellery, investing in subsidiaries, as well as some R&D.
As discussed above, the company is eyeing to hit the revenue mark of ~Rs 6,300 Cr by FY27. And, the two new acquisitions give them even more confidence, as now they have a bigger target market (80% of the products sold in jewellery stores) and also more capacity.
Other factors like the rising disposable income, the shift from unorganized to organized players, changing customer preferences and the growing export markets also place them in a favourable spot.
As far as FY25 is concerned, the management has guided for revenues to the tune of ~Rs3,300 Cr, out of which Rs500-600Cr should come from the two new acquired businesses.
As of the day of writing, Sky Gold is trading at a Market Cap of Rs 3,124 Cr, which gives us an Enterprise Value of Rs 3,255 Cr (Market Cap: Rs 3,124 Cr + Debt: 298 Cr – Cash: 167 Cr). Its FY24 EBITDA stands at Rs 77 Cr, translating to an EV/EBITDA of ~42 times.
Now, if the company achieves the Rs 6,300 Cr revenue mark by FY27 and maintains an EBITDA margin of 5%, it would result in an EBITDA of Rs 315 Cr, translating to a fairly attractive EV multiple of ~10 times FY27E.
These numbers look very attractive and the stock looks like a promising bet considering the story and expected growth materializes into results, which only time will tell!
Disclosure: Sky Gold Ltd. is a part of our Capitalmind Premium Portfolio. This article is intended solely for informational purposes and should not be considered as an investment recommendation.