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9/7/2015 Forbes India Magazine Branded jewellery is the new darling of investors
http://forbesindia.com/article/workinprogress/brandedjewelleryisthenewdarlingofinvestors/39891/1 1/4
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Branded jewellery is the newdarling of investorsby Deepti Chaudhary, Debojyoti Ghosh
Branded jewellery, especially with diamond insets, is attracting the attentionof investors
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In 2014, India was the world’s leading purchaser of gold, consuming about 880 tonnes
ast month, private equity (PE) firm Creador said it has invested Rs 135 crore in aminority stake in publicly listed Delhibased jewellery makers PC Jeweller Ltd. Sofar, consumer services were the sweet spot for Creador; it focuses on longterm
investments in India, Indonesia, Malaysia and Singapore. With this deal—Creador’ssixth in India—the PE firm made its first investment in the jewellery segment.
Private equity investors have traditionally shied away from commodity and commoditypricedriven businesses like gold and silver jewellery because generating margins is noteasy in such sectors; it is not possible to charge more than an accepted amount when thecommodity is traded on a daily basis and customers are aware of the rates.
However, over the past two years, there has been an increase in investor interest in thejewellery business in India: In 2014, there were nine such transactions worth $277million, compared to four deals worth $35 million in 2013.
The reason for this newfound interest lies in the fact that gross margins are higher in
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9/7/2015 Forbes India Magazine Branded jewellery is the new darling of investors
http://forbesindia.com/article/workinprogress/brandedjewelleryisthenewdarlingofinvestors/39891/1 2/4
jewellery businesses that are design led. Also, massive profits can be registered byoffering a mix of gold and diamond jewellery.
“When you add beauty and design to jewellery, it is not a commodity. It becomesaspirational, artistic and branddriven,” says Gaurav Singh Kushwaha, founder and chiefexecutive of online jewellery company BlueStone. “We see jewellery as an ornament andthat’s where high margins come into play; the fundamental value of the business is veryhigh.”
BlueStone, founded in 2011, has been backed by Ratan Tata, chairman emeritus of TataSons, apart from Accel Partners, Kalaari Capital, Saama Capital and Meena Ganesh. Ithas so far raised $15 million over two rounds of investments. In FY2014, the company’srevenues grew four times to Rs 17 crore; it is expected to touch Rs 70 crore for FY15.
According to Kushwaha, margins are not more than 35 percent in gold coins and bars.But for finished branded jewellery, the margins are between 25 and 35 percent. “Internal rate of return [IRR] for companies like us, based on the valuation over a periodof time [the past two to three years], is anywhere between 70 and 80 percent.”
Mridul Arora, vice president of SAIF Partners, which invested in Senco Gold Ltd, saysdesigns are a formidable differentiator and margin creators when it comes to jewellery.In October 2014, SAIF Partners invested Rs 80 crore in Kolkatabased Senco Gold, oneof the largest jewellery retail chains in Eastern India. “It [jewellery] is a very profitableretail format; it’s the most profitable retail business per sq ft from the point of view ofmargins,” says Arora, adding that the demand for jewellery has been steady for the lasttwo decades.
In 2014, India was the world’s leading purchaser of gold, consuming about 880 tonnes,says a report prepared in conjunction with Gold Fields Mineral Services (GFMS)analysts at Thomson Reuters. This was at a time when global demand for gold fell by18.7 percent.
Diamonds: A Jeweller’s Best FriendHowever, even designled jewellery with gold alone cannot give investors the desiredreturns of 2025 percent as daytoday trading prices set the value of the ornament;making charges and design alone cannot generate a premium of more than 18 percent.But add diamonds to gold, and the stones alone can bring in margins of 100 percent to awhopping 8,00,000 percent.
Unlike metals, it is very difficult to put a price on diamonds, even if you get themassessed on caratage, colour and clarity. The value of these stones depends on theirsource, and on the rarity of their colour and size. In the hands of a renowneddiamantaire, the price shoots up to a few crores.
“Diamonds are huge value creators. Pricing of diamonds is based on how one uses it inthe jewellery. If used imaginatively, it can fetch attractive premiums,” says AnandNarayan, senior managing director, Creador Advisors India. “That’s the most attractivepart of these businesses, with margins that can be massive.”
When it comes to diamonds, jewellers typically buy large stones that are then cut intosmaller pieces. All these smaller pieces are then sold at various price points. The wastethat is produced during the cutting of diamonds is also put to use, and is often used inbangles. “You charge the customer for these diamonds [which are actually a waste],”says Narayan.
PC Jeweller has demonstrated a growth of 46 percent compound annual growth rate(CAGR) in profit after tax between fiscal years 2010 and 2014, driven by an increasingproportion of domestic sales and diamond mix. It has an average return on equity (RoE)of 34.7 percent over the last five years.
Brand ValueOnly 20 to 25 percent of the jewellery market in India is organised, including companieslike Tanishq and Gitanjali. Experts say there is a viable opportunity to build branded,designled jewellery businesses here, on both online and offline platforms. Investors tooare bullish about both these formats.
“A capacity to sell intricate, complex designs in gold and diamond can drive the marginsup. Your brand also drives margins. Organised firms have higher margins because of themaking charges,” says Arora of SAIF Partners.
But buying gold is not what it used to be a couple of decades ago. About 1520 years ago,
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9/7/2015 Forbes India Magazine Branded jewellery is the new darling of investors
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jewellery was seen only as investment, but that mindset is changing, says HarminderSahni, founder and managing director, Wazir Advisors, a retail consulting firm.“Customers are now more open to the fashion aspect of jewellery and do not want tospend a lot on pure gold [18 or 22 carat] jewellery,” he says.
In the fashion jewellery space, typically the ticket size is between Rs 1,500 and Rs 2,000.In BlueStone, for example, they are talking about designbased fine jewellery with anaverage ticket price between Rs 15,000 and Rs 20,000. “It is more of a brand that youare creating and people specifically look for your designs and brand and that’s what wewant,” says Meena Ganesh, promoter and investor.
“Gold is now a fashion accessory. Fashion is not dying. It is the customers’ need to lookbeautiful, to flaunt. The nature of the business may change, but requirements for luxury,fashion are not gone,” says Vasudevan of Creador. “Customers in the US are buying 12carat jewellery. It will come to that in India soon.”
This article appeared in the Forbes India magazine issue of 03 April, 2015
Keywords: Branded jewellery, PC Jewller Ltd, Private Equity, Online Jewellery company, BlueStone, RatanTata, Senco Gold Ltd, Diamond jewellery, Gold Fields Mineral Services, Tanishq, Gitanjali, Fashion
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