SKYGOLD Rs 1650
It is an 18 year old B2B jewellery maker mainly supplying 22k light weight jewellery to brands like Malabar, Kalyan, Joylukkas, Senco, Thangamayil etc. Company is in talks with Tanishq for supplies. If successful, it could be a big positive trigger.
Its business model is quite interesting. It is similar to what Amber and PG Electroplast are doing in AC’s. Skygold is supplying to 15 out of 20 organized players. It will grow at the pace of the organized sector irrespective of who the front end B2C winner is.
It has tripled its capacity to 1050 kg per month with utilization of only 30% at present giving viability to high growth with minimal capex. As per Q4FY24 concall, the company is targeting over 6000 cr sales by FY27 (translating to over 50% CAGR) with 3-4% PAT margins.
The main drivers for topline growth are:-
- Structural and inevitable shift of market share from unorganized to organized players.
- 500 new stores planned by these players in the next 5 years will all require inventory stocking which Skygold aspires to supply.
- Exports at present are 6% of topline which it plans to ramp up to 30% in a few years. It may acquire an export oriented company for this purpose.
- It has recently acquired two companies making gold chains and mangalsutras which increases its TAM to 80% from 40% at present.
- Hitherto it was only into gold jewellery, now it plans to enter lightweight diamond jewellery which is witnessing better demand than plain gold jewellery.
Main drivers for margin expansion are:-
- So far it was using cash credit limits at 9-10% interest rates. Now it plans to replace it with gold metal loans in a few quarters which are at 3-4% rate. This is expected to reduce interest cost by half.
- It has 70 cr worth shares of HDFC Bank which it plans to sell and book FDs which will earn it interest while being placed as collateral for gold metal loans.
- It has sufficient capacity up to 5000 cr revenue with minimal capex. Hence operating leverage will kick in as the topline grows.
- It is entering the diamond jewellery space which has higher margins.
- It is focusing on exports which are a higher margin vertical than domestic sales.
There are a few concerns also:-
- Like Amber, its margins are thin and it has low pricing power since its buyers are large chains with high bargaining muscle. A small variation in pricing can affect profitability disproportionately.
- In the last nine months, it has gone up 6x from Rs 280 to Rs 1650. This makes it risky.
- It has been reporting negative CFO which the management is trying to fix.
- Finally, there is little information about the promoters’ integrity.
Assuming the company is able to achieve its targeted 6000 cr topline with 3% PAT margins in FY27, it means PAT of 180 cr. At a reasonable terminal PE of 30 it would mean Market Cap of 5400 cr versus current cap of 2200 cr translating to CAGR returns of 35%. At FY24 PE of 53 it is priced for continued high growth. It will deliver decent returns only if all pieces fall the way management desires them to.