IGIL – Past Perfect Future Uncertain For This Global Duopoly

Stock Discussion / January 2, 2025

IGIL Rs 570

IGIL is a 50 year old company engaged in the business of certification of natural diamonds, lab grown diamonds (LGD), coloured stones and studded jewellery. It is the second largest certification agency in the world with 33% overall global market share and 65% global market share in LGD certification. GIA is the largest peer and competitor, but it is unlisted and a not-for-profit entity, hence figures are not available for comparison.

Its past growth has been very strong with revenues rising at 32% CAGR from CY21 to reach in CY23. Similarly profits grew at 37% CAGR during this period. For 9MCY24, its revenues and profits grew 31% and 37% respectively. Almost the entire growth in IGIL’s business is coming from LGD certification whose contribution in topline has grown from 35% in CY 2021 to 60% in 9MCY24. Natural diamonds and studded jewellery revenues remained almost flat during this period. Since natural diamond’s growth rate has always been in low single digits, high LGD growth is critical for IGIL’s continued success.

Blackstone acquired IGIL in May 2023 at a valuation of USD 570 million. It came out with its IPO in Dec 2024 at over 3x valuation of USD 1.95 billion (priced at Rs 417 consisting of fresh issue of 1475 Cr and OFS of 2750 Cr). After the IPO, Blackstone’s stake will drop to around 76% which it is expected to hold for around 5 years.

The main positive and negative factors affecting IGIL are as follows: –

PROS

  1. Overall global diamond jewellery (both natural and LGD) stood at around USD 103 Bn in CY2023 of which natural diamond jewellery contribution was 89% and 11% from LGD. As per Redseer report in DRHP, LGD growth is estimated to be around 15% for the next 4-5 years. Increased usage of LGD will lead to higher requirements for its certification. IGIL being the market leader in LGD certification with 65% global market share stands to benefit.
  2. In CY 2023, the Indian jewellery market stood at USD 64 Bn with diamond studded jewellery (both natural and LGD) accounting for 15% of sales vs global average of studded jewellery at 33%. Sooner or later, fashions in India converge with global trends. Also, the younger Indian generation views jewellery more as expression of self and fashion statement rather than as investment. Thus, the ratio of studded jewellery in India is expected to move up in coming years leading to higher certification needs. This is expected to benefit IGIL.
  3. About 95% of LGD’s come to Surat, India, for cutting and polishing. This provides IGIL a good opportunity as it has the largest pan India laboratory network among peers.

CONS

  1. Foremost issue of concern is that if LGD prices fall too much, they will lose aspirational appeal and once that happens, LGD will quickly fall out of favor with consumers. IGIL’s past high growth has been possible because of traction in LGD sales. Hence, it is critical that LGD prices remain stable and retain their charm.
  2. Certification charges depend on the price of the stones. LGD prices have fallen steeply in the past few years. Though the Redseer report does not expect prices to fall any further, commoditization of LGD cannot be ruled out. Anything that is manufactured can keep going into cycles of boom and bust. If LGD prices fall further, certification fees will also fall thereby posing risk to IGIL’s margins also.
  3. 35% of the world’s natural diamonds are of Russian origin and any curtailment in their supply will affect certification adversely.

Duopolies working in secular growth markets like CDSL, CAMS, CRISIL, CARE, BSE etc have a stellar track record. IGIL also falls in this category. The only niggle is uncertainty around growth rates. While the past growth rates have been in excess of 30% and the management is confident of maintaining them, the data extracted from its DRHP suggests lower traction. As per Redseer report, LGD demand is expected to increase at around 15%. Hence future growth rate for IGIL should be factored at 15% only.

Going by 9MCY24 results, it could report a PAT of around 450 Cr in CY 2024 translating to PE of @ 55 (current market cap @ 25000 Cr). Assuming 15% growth for 5 years with exit PE of 35 leaves just 5% prospective returns if purchased at CMP of Rs 570. In case growth happens at a higher than assumed rate of 15%, as the management is guiding, it should be taken as a lucky break. Long term investors looking for a high barrier to entry business can consider initiating positions on declines while keeping a sharp eye on LGD prices and its adoption rates.