Goldiam International Limited (526729) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to Goldiam International Q4 FY '23 Conference Call hosted by Monarch Networth Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Rahul Dani from Monarch Networth Capital. Thank you, and over to you, sir.

Thank you, Kelvin, and good afternoon to everyone. We're delighted to host the senior management of Goldiam International with us. And we have with us Mr. Rashesh Bhansali, Executive Chairman; and Mr. Anmol Bhansali, Whole-Time Director of the company. I would now like to invite Mr. Rashesh Bhansali to make his opening remarks. Post this, we'll open the floor for Q&A. Thank you, and over to you, sir.

Thank you, Rahul. Good afternoon, everyone. Thank you all very much for joining Goldiam's Earning Call for Q4 & FY '23. I hope everyone is keeping well. Let me give you a perspective on the industry. As you know, US is our largest market where we supply fine jewellery to large US retailers. USA has been witnessing a record high of inflation, coupled with high-interest rates. These factors have resulted in a multifold increase in mortgage payments, lending to a squeeze on discretionary, spending among mid-income segments in the United States. This, along with other geopolitical headwinds affected sales of fine jewellery in FY '23. The second half of FY '23 and Q4 particularly saw US retailers undertaking a large-scale destocking. Goldiam had to partner with key retailers and inventory realignment exercises by running strategic discount programs. This impacted margins during Q4 FY '23. Goldiam was early to respond to the demand headwinds and rework its strategies to minimize any major impact on operations. A few factors that help us protect and enhance the margins, include the Company's ability to source natural diamonds. Strategically, the increased focus on lab-grown diamonds and our omnichannel business model. The combination, these helps us achieve 36% gross margins for FY '23 as against 31% in FY '22 with the Company's FY '23 EBITDA margin remaining healthy, growing to 22.5%. Lab-grown diamond jewellery sales have also sizably added, enhancing our Company's overall profile as an integrated jewellery source amongst large retailers. The share of lab-grown jewellery and overall mix stands at 23% in FY '23. We are seeing an increasing traction and demand transition to this category with FY '24 slated to be a year of specific significance due to strong consumer adaption. While this category has faced some price erosion in FY '23, we believe this has bottomed out as of date with Goldiam being well placed to raise growth due to its integrated nature of operation. Talking about Goldiam’'s digital business, the online deliveries which helped us in quick working capital days turn around with the advantages of our rapid delivery allowing us to be competitively intense in this category. Our strong delivery mechanism resulted into 100% fulfilment of its On-Time deliveries within 7 days of all its e-commerce orders. The company's balance sheet continues to remain healthy with current consolidated liquidity position, cash plus investments, of course, stands at INR 256 crores, sizably growing in the year. As you know, FY '23, we have already distributed dividends to the tune of INR 21.5 crores and has now -- and we have now proposed a buyback of INR 32.5 crores for 2% of the equity of the company to be brought back -- to be bought back. As for the outlook, although the economic situation in the U.S.A. hasn't completely stabilized, some green shoots are visible. We are looking forward to the upcoming festive season with optimism with current open orders of close to INR 100 crores. Goldiam is on a transformational journey. The company's focus is in transition further into lab-grown diamonds and e-commerce sales, which are healthier and more profitable business models with consumer tailwinds. We remain buoyant on journey of lab-grown and it's becoming more popular among young consumers, and the management is evaluating various omnichannel strategies to make an early breakthrough in the domestic market as well. With this, I would like to raise -- open the floor for questions. I now would look forward to have an active interaction with all of you all. Thank you for listening.

[Operator Instructions] The first question is from the line of Harsh Shah from Dimensional Securities. Please go ahead sir.

My first question is more on the bookkeeping side. What will be the ticket size for natural and lab-grown diamonds for full year FY '23?

So FY '23, we believe that we will continue to do 23% to 25% of lab-grown diamond jewellery sales.

No, I mean ticket size per order for LGD and natural diamonds.

You mean the order book?

Ticket size, is that the [indiscernible]. Ticket size of 1 unit. Average ticket size of 1 unit.

The value for lab-grown diamond jewellery as per last year was about $1,100 and for natural diamond jewellery, it was $530.

So LGD is almost twice that of natural diamonds?

That's correct.

A follow-up on this. And as you mentioned that we are seeing these macro headwinds which are impacting discretionary spend, then what is it that people are still preferring LGDs worth almost twice that of natural diamonds. I mean you are seeing strong growth there, but not on the natural diamond side?

So I'll tell you what is happening in the industry. People are preferring to buy lab-grown diamonds jewellery right now because the natural diamond price of the jewellery for the same styling is 10 times more price. So they are preferring to spend less money. But even if they're spending double the amount of natural diamonds in that scenario of the look, they are actually getting a lot of strong savings. So that is why they're preferring lab-grown diamond jewellery.

If I could also add on this is also a phenomenon of Goldiam strategy within lab-grown diamond space where we are growing our own centers. So we are able to focus on jewellery that is higher end within the lab-grown space on the bridal market as well. This segment was not addressed by us in the natural diamond jewellery space. So for us, in particular, for Goldiam, lab-grown is actually a higher ticket item than natural diamond jewellery.

Okay. Got it. Got it. That's helpful. And on the competition side, I mean, there is this entire Surat and the South Gujarat belt, which are involved in growing LGDs and a lot of new players are coming up in the market. So what kind of competitive scenario are you seeing? This year, we saw a good sort of 30%, 35% price erosion in LGDs. So going ahead, what is the outlook on both competition as well as the pricing part?

Anmol, do you want to take this?

Sure. I can answer that. There is definitely a lot of capacity that come up in the growing side of the business in terms of lab-grown growing within the Gujarat and Rajasthan areas. For us, we have always historically seen distribution to be the main factor that will determine success in the lab-grown field. In our industry, we think that distribution really is the only, only sustainable and long-term key to creating additional value and additional margins within our industry. So if you see even in our operations, we have focused on doing 100% captive consumption so that we can gain the benefit of additional margin in jewellery. Not just that, we have focused selling lab-grown diamond jewellery, where all the centers are grown in-house at Goldiam itself. We are focused on selling this not to wholesalers, but directly to large retailers in America. This has allowed us to gain prominence, visibility among these retailers who now believe that Goldiam is offering an end-to-end product suite within the category of lab-grown diamond and lab-grown diamond jewellery. And it also helps us from the perspective of additional margins on the lab-grown side of the business. So we are able to capture every margin component in the supply chain from growing right up until jewellery distribution to retailers. So that is what is going to be the long-term sustainable differentiator for all companies in our industry. And I think that we have always focused on distribution rather than just growing capacities without locked in sales.

Okay. And one more bookkeeping question. Our operating expenses, this line item has grown from INR 10 crores to almost INR 19 crores during the quarter. I mean, is there any one-off? Or what would be the reason behind that?

Harsh, let me get back to you on that.

Sure. And just one small request. It would be really help if you could give the split of natural LGD and raw LGD on a quarterly basis. You are giving it on an annual basis. It would be helpful if you can give it on a quarterly basis as well.

We will keep that in mind going forward.

Yes. From Q1 of the next financial year, we'll be giving a quarterly split on lab-grown jewellery versus natural jewelry.

[Operator Instructions] Next question comes from the line of Dixit Doshi from Whitestone Financial Advisors Private Limited.

My first question is regarding the demand scenario in U.S. So as you have mentioned that over last quarter, we have seen some of the retailers are looking at discounting the product. So do you expect it's more or less over or still 1 or 2 quarters, this phenomena will continue, and we can expect some pressure on the margins over the next couple of quarters as well?

Mr. Dixit, I think more or less, our partnership with all these retailers is on a continuous -- continuous basis. We believe that the economy in America is not favoring the sales of diamond jewellery because of all the issues that are there in terms of what I just said in my speech. So in case if we do have to partner with them for another quarter or 2 quarters, we will -- we prefer to do so looking at the future post that. We don't believe this is impacting margins dramatically going forward because we've already realigned margins, and now we are working towards it. So I think margins will improve from what you have seen in the last quarter.

Okay. And your discussion with your clients, do you foresee that some demand to come back by the time the season starts, say, around from September to December?

Yes, that's always the busiest time for Christmas sales and Thanksgiving sales. So we definitely believe that a good order book and a healthier order book position, right, will be received by the company very soon. Currently, we are sitting on a INR 100 crore open order book, which we'll be delivering in the next 3 to 4 months.

Okay. And just regarding this order book, so we do give the notices of we have received the order and all -- what I understand is we sell to the retailers and it remains on our inventory. And whenever end customer purchase from the retailer, we record the sales. So how does this then orders pay out?

Okay. So that is not what the order book is all about. The order book is all about asset sales as well as new test memos that we are doing, which is exactly what you've told us. But that is only on 20% to 25% of the order book where new tests are happening. The rest of the INR 75 crores of that order book is absolutely on 100% buyout.

Okay. Okay. 75% is 100% sell?

Yes.

So even if the -- it does not get sold at their end, it's recorded in the sales for ours?

Because it is sold by us.

Okay. Okay. Okay. Now second question is regarding the -- as you mentioned that we are evaluating options for lab grown in India. So first thing, are we going to look at the fashion jewellery or more focused towards the high-value bridal wear? And secondly, can we expect something in FY '24 or it may take some more time for studying the market and may happen in FY '25?

I think market studies are currently going on. And I think we are looking at FY '24 or the end of FY '23 to give you clear information and some concrete showcase on this thing. Anmol, do you want to take this further?

No, I think that's fine.

Okay. And it will be more of a fashion jewellery or [indiscernible] high ticket bridal wear type of?

So the interesting thing about lab grown is that we will be using solitaires in our presentation to the Indian consumers because the cost of solitaires with our fully backward integration, right, we will be enhancing our own margins when we sell domestically. So I think we'll be looking from mid to -- mid-market jewellery segment anywhere from the price point of INR 25,000 retail all the way to INR 4 lakh retail should be our price point.

Okay. Okay. And one last question. We are reading articles on some sanctions on Russia or any like that. So are we facing any availability issue for the rough diamond on the natural side?

Yes, absolutely. That has been another important reason with the geopolitical risk, right, and sanctions of Russia and dollar payments to Russia. So the ALROSA, which is the largest trading and mining company, will distribute rough diamonds to all Indian cutters and pipe holders are unable to sell their rough to India or anywhere else in the world coming to India due to these dollar payment issues. So because of this, there has been not availability of enough rough diamonds for the market, right, which has increased prices of natural diamond polishes. And because of this also retailers have slowed down their order -- issuing orders because they believe that this pricing is not sustainable.

The next question comes from the line of [ Kaustav Das ], an individual investor.

So I just wanted to know, so what do you think would be the growth approximately 1 year down the line from the U.S. And my second question would be, so I just joined a bit late. So for the Indian market, are you trying to go through like your own stores? Or would you be partnering with the big brands of India? So yes, I just wanted to know on these two lines.

Currently, Mr. Kaustav, the business is in a consolidation phase, right? So we are looking to consolidate margins and improve that even with a temporary slowdown in business. But next year onwards, I believe that once the directional -- direction of lab-grown diamond jewellery versus natural diamond jewellery and the geopolitical risk is down, we believe that business will go back on its growth trajectory post next year onwards.

So you mean around 20% revenue growth?

So right now, it's too early to predict what will be the revenue growth. I only firmly believe that we'll get back on our growth trajectory.

Got it. And on the India front, if you could just answer that.

Anmol, do you want to take the India front?

Sure. We're still in discussions. So it's a little preliminary in what to answer. I think we'll be able to get back to all analysts and all investors maybe in our Q2 conference call. But in terms of specifically to your question, we're considering setting up retail ourselves.

[Operator Instructions] The next question comes from Nikhil from Perpetual Investment Advisors. Please go ahead.

So I have 2 questions. See, while U.S. is witnessing some slowdown and it might last for a while and India -- looking at India signing trade agreements with a lot of countries now, are we looking at other geographies which can be equally sizable or quite sizable for Goldiam going forward?

Mr. Nikhil, we are -- understand the slowdown, business consolidation, and we understand the need to increase geographies for the company. We are looking right now at a couple of new geographies. One is UAE and the other one to be Australia.

Got it. Are these markets, I mean in terms of consumption equal to U.S. per capita or this would be more of natural versus lab grown?

No. So the UAE market is completely natural diamond jewellery market. Lab-grown has yet to get stronger in that area. While Australia, the lab-grown has started kicking in. And we will have to go there and get some clients and start that business very soon.

Okay. Okay. And like a lot of participants asked earlier, while there are several manufacturers of lab-grown diamond within India and outside India, is there a way to differentiate in terms of the process of manufacturing?

I can answer that. So there are two processes of manufacturing lab-grown diamonds. Most large diamonds, which when I say large, I mean 1 carat and larger. Most diamonds of that size are grown via the CVD process, which is the same process that we use at Goldiam. Within that, there is no way to differentiate diamonds in terms of the formula for growing or any such thing. Some manufacturers may have -- maybe grown poorer quality and may not have great consistency with their production. We have reached a stage where we are growing to very well commercialized U.S. quality diamonds, and we're very happy with our production at Goldiam in terms of diamond growth.

Got it. So I actually meant in terms of what yield per machine and whatever way you calculate maybe carats per month or...

Sure, sure, absolutely. So not really. I think it all works out to the same levels. Some people may be growing faster, but that comes at a cost of weaker colors and weaker production growth. For us, we focus on a consistent high quality of diamond growth and trying experiments to push the yield per machine per month upwards as much as we can. So at the moment, I think there is no major difference in terms of yield per machine.

And so see the inventory days have moved up quite significantly, and you've sort of answered that in some of the earlier questions. But when do we see them normalizing again, like over what period just for the sake of modeling?

I think we look at next year to be a stronger year for the company and because it will take 2 to 3 quarters to play out the consolidation phase.

Okay. So we see inventory moving back to somewhere between 2 to 3 months over the next 1 year?

Yes. I think the focus that we personally have to do this year is to reduce inventory and then move forward. But also, you see the company's lab-grown diamond business has been relatively a newer business in the last 2 years, right? It has impacting and it's been showing in the balance sheet that it's a stronger and a better business to come in. Now when you see the inventory numbers, you have to also understand that when we are growing our own stores and when we are doing e-commerce businesses, we have to have inventory ready in the company to deliver between 5 to 7 working days. And as Mr. Anmol pointed out to one of the answers to the earlier question that our ticket price -- ticket size in natural diamond jewellery was $500 and lab-grown is $1,100. Also, that's another reason why inventory seems to be increased because your ticket sizes have increased as well.

Got it. Got it. And so currently or maybe last year, the breakup in sales was -- no, sorry, for the current order book, the breakup is 20%, 25% is maybe test sales and 75% would be pure buyout. How was this -- I mean, how has this trended historically?

It's been on similar lines historically.

Okay. Okay. And one last question is on tax rate. So it has varied from 30% to -- we are close to 28% now. Any guidance on what can it be going forward?

The tax rate, I mean, the taxes -- corporate tax of the country is what we are...

So it's 25% and 25.2% or 25.4% for the last few years, it has been higher. That's primarily why I'm asking that what can we expect going forward?

No, I think you see around 25% going forward.

Okay. Okay. So another question is, while the plans for domestic market, it may be in the works yet, but anything on the size of investment that would be required for this?

Anmol, do you want to take that?

So I think similarly on the same lines, we will be evaluating and getting back to you on that, maybe in the Q2 call. For us, at the moment, it's -- we're considering the mode of entry. And I think beyond that, we will have to get back to you after a quarter or two.

Okay, okay. No problem.

The next question comes from the line of Dixit Doshi from Whitestone Financial Advisors Private Limited.

Can you elaborate slightly on the response on the Jewel fleet?

Sorry, could you repeat that?