Diamonds are aspirational. Diamonds are forever. Diamonds are a girl’s best friend.
Diamonds are also expensive. Diamonds are a poor investment. Diamonds are not ESG friendly.
Enter LGD (lab grown diamonds) which have the same characteristics except that they are produced in labs within a few days which takes nature thousands of years to do.
LGD are 40-50% cheaper, they are exactly the same as natural diamonds, they are totally ESG friendly. And they are gaining acceptability very fast.
In fact, Gemmology Institute of America has predicted LGD sales to grow 5x in the next few years to $100 Bn vs 3-4% growth in natural diamonds. LGD share in world consumption is expected to increase from 3-4% at present to 10%.
Big players who were earlier dealing only in natural diamonds have also jumped in.
De Beers has launched its LGD brand Lighthouse.
Titan made an equity investment of $20 Mn in Clearorigin, a US based LGD manufacturer.
Breitling, the iconic watchmaker, plans to completely shift to LGD in its watches by 2024.
Governments are not far behind. In Jun 2023, Indian Prime Minister Narendra Modi gifted 7.5 carat LGD to the First Lady Jill Biden on his official visit to the USA.
One Indian company which is at the forefront of the LGD phenomenon is listed on the bourses by the name Goldiam International Ltd (GIL). It is a supplier of bridal and fashion jewelry to renowned global retailers based in the US. GIL manufactures LGD inhouse and has a patent on the process also. In FY23, 95% of its sales came from the USA. The company is trying to diversify in RoW and India to mitigate this geographical risk. It received INR 300 Mn order in Q1FY24 from the Middle East for its efforts.
Company management is very investor friendly which is a huge plus. It has been rewarding shareholders liberally in the past and is committed to paying out 50% of PAT as dividends/buybacks. Ace investors Ramesh Damani and Ashish Kacholia own over 1% stake in the company which provides additional comfort.
While FY23 was weak with Sales, EBITDA, PAT all down 20-22% due to the slowdown in the US, H1FY24 was better with Sales up 11%, PAT up 2%, EPS up 2% at @ Rs 4.
At FY24 estimated EPS of Rs 8, it is trading at reasonable PE of @ 20, ROE of @ 15% and is debt free with 2780 Mn cash in hand.
So far so good but as always there are some dice rolls which will decide the future of LGD industry in general and GIL in particular: –
- LGD are gaining popularity because they are 40-50% cheaper than natural diamonds while having the same characteristics. But this price advantage can become its Achilles Heel also. If the price falls further to say just 10% of natural diamond, then LGD will no longer remain diamond in eyes of the customer, it will just become glass.
- While natural diamonds have low resale value, LGD gets almost nil money on return. This makes it an even poorer investment than natural diamond. It simply has aesthetic value like semi-precious studded jewellery.
- GIL with 95% dependence on the US is bearing the brunt of low consumer demand there. Its growth is intertwined with the resurgence of the US economy which may take its own time to recover.
- In conference call post Q2FY24 results, management sounded confident about maintaining EBITDA margins between 20-22% but it refrained from giving any topline guidance due to geopolitical uncertainties and inflation.
With so many potentially negative unknowns, why should GIL even be on investors’ radar? As per management, distribution, not manufacturing is the key USP of its business. GIL enjoys long association with the global retailers which gives it an edge over other diamond (both natural and LGD) jewellery makers.
GIL is a diamond jewellery maker. If natural diamond rules, it will use that. If LGD comes in vogue, it will also use LGD. Its fortunes are not really that much linked to LGD as they are to the recovery of the US economy. LGD opportunity is an interesting side story because backward integration generates higher margins for GIL than natural diamond jewellery.
Whenever US consumers’ purchasing power starts normalizing, and hopefully it is a matter of few quarters, demand will come back. Also, if GIL’s geographical diversification gains traction, then also it could become a good story.
Company did a buyback of 2% equity at Rs 150 in Q2FY24. At current market price of around Rs 160, there is not too much downward risk though upside will require time and luck.