Direct positive correlation between prosperity and higher discretionary spending is set in stone. Across the world, as incomes grow, expenses on cars, white goods, jewellery, luxury items rise. India is going through this phase of higher per capita income and the above trend can be verified by seeing last 3-5 year sales trends of premium vehicles, air conditioners, jewellery, luxury watches etc.
Investors can benefit from this trend by buying stocks of companies catering to the demand of these goods. The dilemma that arises when trying to select a company for investment is that even in a sunrise sector like discretionary goods, there are companies which fall by the wayside. Case in point is Whirlpool. Once a leading white goods manufacturer, it has given negative returns in the last five and three year time frames even as the industry went through boom times.
With so many companies vying to attract customers with high marketing spends and glitzy showrooms, it is indeed difficult to spot the eventual winner. However, there is one set of companies which is relatively immune to high capex, opex and competition. This comprises B2B players who supply the finished products to the frontline B2C companies. To give an example, in air-conditioners, Amber Ltd is the B2B guy supplying to all the consumer facing brands like Hitachi, Voltas and Bluestar. Despite being a background company, Amber beat all these highly visible brand holders in stock returns as can be seen in the table below.
| Company | 1 Year Return | 3 Year Return | 5 Year Return |
| Hitachi | 7% | -22% | -8% |
| Voltas | 28% | 2% | 14% |
| Bluestar | 78% | 43% | 32% |
| Amber | 141% | 19% | 45% |
Jewellery is another sector witnessing strong growth which is expected to continue for many years due to higher incomes as well as shift of market share from unorganized to organized. In this sector also, there are many well known B2C companies which have given handsome returns to investors. But there is also a B2B player by the name Sky Gold Ltd which has outperformed them as can be seen in the table below.
| Company | 1 Year Return | 3 Year Return | 5 Year Return |
| Titan | 57% | 35% | 30% |
| Kalyan | 202% | NA | NA |
| Thangamayil | 165% | 66% | 51% |
| Sky Gold | 328% | 134% | 67% |
Sky Gold is an 18 year old B2B company supplying lightweight 22k jewellery to brands like Malabar, Kalyan, Joylukkas for several years. It is in talks with Tanishq and Reliance Jewels also and as per unconfirmed reports, agreements with them will be signed soon.
Points in favor of Sky Gold are as follows: –
- Organized jewellers are growing at high rates due to industry tailwinds. Sky Gold is supplying to most major players (with Tanishq and Reliance being in pipeline) which ensures high growth for it irrespective of which front-end brand wins or loses. In fact, management is guiding for the topline to grow from 1150 cr in FY23 to 1700 cr in FY24, to 2500 cr in FY26, to 5000 cr in next 3-4 years.
- Capex for this anticipated growth has already been done. In coming years, only small capex in the range of 50 lacs to 1 cr will be required.
- Management expects margins to improve going forward as the company is shifting its borrowings from cash credit to Gold Metal Loan (GML) which will almost halve the interest cost. Plus, with increased topline, operating leverage will kick in leading to higher margins.
There are a few concerns as well: –
- Like Amber, Sky Gold’s Ebitda and PAT margins are very low at @ 4% and 2% respectively. Even a small variation in costing/pricing can affect profitability disproportionately. Being a B2B player dealing with much bigger customers, it has little pricing power to negotiate better rates.
- Its stock price has gone up 4x in the last four months from Rs 280 to Rs 1150 indicating overheating though some comfort can be drawn from the Rs 1017 price at which promoters are buying warrants to the tune of Rs 20 crores in Jan 2024.
- It has been reporting negative Cash Flow from Operations (CFO) which is a red flag. As per Q3FY24 concall, working capital days have reduced from 60 to 55 and management intends to bring them down to 40 days in coming quarters. This remains a major metric to watch.
- Though the company has been in operation for over 18 years and has been dealing with big corporates for a long time, there is not too much known about promoters. There have been too many cases of malpractices in the jewellery line, and this remains one of the big unknowns in its story.
At current market price of Rs 1150, it is trading at a PE of 46, ROE of @ 20% with tearing growth guidance. It is a tempting but a risky investment requiring close monitoring of topline growth, margin expansion and CFO generation.