In Issue #011, I examine Sky Gold Limited - a designer & manufacturer of gold jewellery. Aided by capacity expansion & acquisitions, Sky Gold is targeting a 260% rise in revenue & profits over 2 years
Hello Harish, thank you! Madurai has some prominent jewellers incl. Thangamayil -- which, unlike Sky Gold's proposition -- manufactures most of it's gold, silver & diamond work in-house. I'm glad you found this analysis informative 🙌
Hi Shankar, Thanks for yet another powerful Newsletter. Congratulations to Priyam for your efforts. What running in my mind is that, their competitor working on half of their margins, which means they will be able to sell the jewellery better to the clients of SKY Line, I such a scenario will they not clients towards them ? Any research on USP of SKY Line which makes them distinct from their clients? Please share your views, if my thoughts are right?
Thank you! Yes, this is an important point. Here's what I have:
1. Their biggest competitor Emerald was at 1.7% PAT in FY22 and 1.4% in FY23 per the ICRA ratings document I shared in the newsletter. So firstly, we don't have FY24 numbers. Secondly, PAT is a bit fungible i.e. a depreciation number or interest cost can lopside the numbers. I don't have specifics
2. With re: competitiveness, I don't see any differentiation here between players. This is a cut-throat industry but I think scale is important. In the latest transcript, there's mention of Sky Gold not qualifying for Titan's standards because they were too small until early 2023. I think, this will become a 10 horse race over the years -- vying for a major chunk of the 500-600 tonnes of jewellery (mainly gold) that Indian households consume each year
Most welcome. PNGS Gargi is in a different business -- silver and fashion jewellery, very low-ticket size. I had read their transcript last week, very low on profitability. It felt expensive.
Now on a TTM basis, you've been using screener information and the PE of 47.3 is ₹867 (CMP) divided by trailing 4 quarter EPS of ₹18.32. This is wrong because in one of the quarters, this exceptional PAT has been factored that won't be available again. So recalibrating the EPS (and again, I respect the management for giving an estimate of ₹2.91 crores of PAT in Q1FY25) -- this comes to a quarter EPS of ₹3.02.
To put this together, the TTM EPS (after excluding exceptions) is ₹10.48 -- which means the TTM PE ratio of PNGS Gargi is actually 81.7 (and not 47.3)
Back to your point, I don't see how PNGS Gargi can be compared to Sky Gold. Very different businesses -- ek Sona, ek Chaandi (quite literally)
Hey, a bit out of topic question, I like your researches and I invest small amount on the stocks that convinces me. Now I was thinking of creating a smallcase (And name it Shankar's shamless Copy clown portfolio ;p) and whenever I liked any stock I will just add it in the smallcase.
But I already have other smallcases and my own core portfolio in which I do SIP.
So the questions are: 1. Is it a good idea for creating a smallcase
2. Is it a fact or myth that we should not have more than 25 stocks in our portfolio.
3. Reason most people say not to have more than 25 stocks is because of managing them, but as my smallcases are managed by the experts, does it make sense to have more number of stocks.
Most welcome, glad you like my work 🙌 With re: your queries
1. It's unreliable to take someone else's advice; what might be good for you might not be others (and vice-versa)
2. An index fund has upto 750 stocks in it; limiting exposure to around 25 stocks is more of a guideline to ensure better trackability, effective management with sufficient diversification
3. One person managing 25 stocks but most smallcase providers have multiple managers/analysts working on that portfolio. Having more than 25 will not be a stretch for them
what a timely article... I have been investing in gold and silver etfs given the rising risks to the economy due to spillover effects from geopolitical tensions, will perfectly supplement my portfolio given the upcoming wedding season and spike in volatility post US elections.
Thanks for the nice article. Few questions in case its feasible to address
- i didn't understand how is the company a better investment than simply investing in gold itself (i.e. through a etf or something like that). for ex. if gold prices fall tomorrow , will we be holding just a more sensitive stock to gold? Seems like a leveraged bet on gold in the worst case.
- given they are b2b, unclear if what their purchasing power is in a down market
Thanks for the article, it was super interesting indeed!
Most welcome! I don't have the context, so answering your questions the way it's jelling in my head:
1. Between gold and gold jewellery - there is a lot of value-add. For example - we don't wear a gold nugget around a neck but we do wear a gold chain. Businesses like Titan, Kalyan, Emerald, Sky Gold are in the value-addition business and hence have to prices/viewed differently from a commodity business. A crude example from everyday life is rice. 250 grams of basmati rice is priced at 50 rupees but 250 gms of pulao (veggies, cooked, served) is priced a lot higher at say, 200 rupees.
2. B2B models entirely depends on orders from their clients (gold jewellery retailers in this case like Titan, Malabar, Reliance Jewels, Kalyan etc.). With most of them outsourcing, the demand for gold from Indian consumers is the production levels of our B2B players. Now, with regards to your point on purchasing power -- like every industry, gold too goes through ups and downs. However, unlike other sectors, the demand for jewellery in India (mostly gold) is quite stable. Here are the stats:
2016: 504.5 tonnes
2017: 562.7 tonnes
2018: 598.0 tonnes
2019: 544.6 tonnes
2020: 315.9 tonnes (Covid impact)
2021: 610.9 tonnes
2022: 600.4 tonnes
2023: 562.3 tonnes
Seeing this, I'll say assessing the demand for gold is a safer bet than many other products. It's almost a commodity. Additionally, the recent drop in gold prices (due to duty cuts) has increased the demand for gold amongst us Indians. This should augur well for gold jewellery manufacturers and gold jewellery retailers
thanks again for the clarification. As you can tell from my Q, i am new to this company but this was great to get started and understand it quickly! thanks so much for the efforts!
on 1 - got it , i think i was skeptical of their pulav margins. If i break down the pulav margins, i think retailers would take the cake and leave some crumbs to players like Sky. ( i could be wrong here but this is the impression i got).
2- i see that makes sense. i think their working capital cycle and the cost of gold purchase will likely determine their pricing power in a down market.
I am very new to this space but this article really helped me a lot. thanks for this content!
No problem. I could assess that the questions were framed w/o much of a readout. Going forward, appreciate if you can support your questions with numericals/evidence/supportings. It's a lot easier to decipher the information that way and the quality of discussion improves by many multiples.
It's pretty much how the management explained it (I pasted an image in the post). I'll try to simplify it here:
1. When a Sky Gold client places an order (say 20 kilos of jewellery), the final price of the gold is not fixed between SG & the client. However, SG needs to start the production process
2. To make the jewellery, SG buys gold bullion from a bank or a licensed importer at the prevailing market price
3. To protect oneself from the risk of gold prices falling or rising while producing the order, SG sells an equivalent amount of gold on MCX via a futures contract thereby locking the price of gold (pls read more on Futures contract on Varsity)
4. When the order is complete and ready to be dispatched, SG fixes the final price with the client. At this stage, SG hedges again in the MCX by reversing the earlier transaction i.e. SG buys back the futures contract it previously sold. This cancels out any market price movement that happened during the production process.
This system is commonly used by large corporates across industries to manage price risk esp. when executing large orders
Hello Shankar, this stock is a retail play (38.5% stake with Retail), with no DII and almost no FIIs. There could be operator involved also for such steep rise in PE ratio. Even though company is showing fast growth the Balance sheet shows Receivables and Inventory are growing, which is not a good sign. The PE ratio can come down to original level if there is a sudden big market fall, which would trigger mass retail exits
Absolutely, anything is possible -- it's a case of what one weighs more:
a) the growth side of the business (currently 90% but will taper to 30% as scale increases)
b) or the valuation side (currently 70 PE but will taper to 35 as EPS growth shows)
c) or the growth-related pangs (high inventory, receivables, negative cashflows etc.)
Weights are important as it's next to impossible to identify a company where everything is perfect -- some weakness & cracks can always be found. One needs to work out their premise which is what this newsletter aims to encourage.
Sir on checking cashflow as of march 2024 , inventory has raised drastically from py to 180crores ...why nobody talking about this even in concall...isnt it alarming?
Hello. Well, an increase in production requires an increase in inventory -- there's no two ways about it. For instance, 31-Mar-2024 closing sales are ₹1,745 crores while 31-Mar-2023 is ₹1,153 -- a 51% increase.
But you have a point -- inventories are higher than usual in FY24.
1. In the Q4FY24 concall, the management explained the rise in inventory on account of corporate orders received close to the end of the quarter. As a rectification, the company is implementing an ERP system
2. In the Q1FY25 concall, the management alluded that the inventories have come down from ₹266 crores in Q4FY24 to ~₹250 crores in Q1FY25
Other than this, I found no new information. Will have to wait for a couple of quarters to see the inventory status
Very insightful, sir, so I have a small doubt I am new to this company, so you have mentioned that the company has a negative cash flow. So how can the management reverse it by the end of FY 26.
I'm assuming you use screener from where this declining promoter stake % was revealed. Personally, I feel this is problem because it can corrupt investing decisions but one easy way to understand such a scenario is to look at the "equity capital" entry in the balance sheet. You might notice the value has gone up from 10.8 crores to 13 crores -- that represents some sort of raise & then it's a matter of seeing if this was via a QIP, preferential allotment, rights issue or some other mode.
Coming back to your question, no -- I'm not worried on this part. The promoter group continues to have a lion's share of the ownership & voting rights and the dilution was a result of an infusion in capital & not a sale of shares
Hi, I like your article and mostly love your content. We are also from jewellery business in madurai can be able to relate the business model. Thanks
Hello Harish, thank you! Madurai has some prominent jewellers incl. Thangamayil -- which, unlike Sky Gold's proposition -- manufactures most of it's gold, silver & diamond work in-house. I'm glad you found this analysis informative 🙌
Hi Shankar, Thanks for yet another powerful Newsletter. Congratulations to Priyam for your efforts. What running in my mind is that, their competitor working on half of their margins, which means they will be able to sell the jewellery better to the clients of SKY Line, I such a scenario will they not clients towards them ? Any research on USP of SKY Line which makes them distinct from their clients? Please share your views, if my thoughts are right?
Thanks in advance!!!
Thank you! Yes, this is an important point. Here's what I have:
1. Their biggest competitor Emerald was at 1.7% PAT in FY22 and 1.4% in FY23 per the ICRA ratings document I shared in the newsletter. So firstly, we don't have FY24 numbers. Secondly, PAT is a bit fungible i.e. a depreciation number or interest cost can lopside the numbers. I don't have specifics
2. With re: competitiveness, I don't see any differentiation here between players. This is a cut-throat industry but I think scale is important. In the latest transcript, there's mention of Sky Gold not qualifying for Titan's standards because they were too small until early 2023. I think, this will become a 10 horse race over the years -- vying for a major chunk of the 500-600 tonnes of jewellery (mainly gold) that Indian households consume each year
Thank you Sweth!
Thank You Shankar. How is PNGS Gargi compared to Sky Gold.? PNGS Gargi PE is 47
Most welcome. PNGS Gargi is in a different business -- silver and fashion jewellery, very low-ticket size. I had read their transcript last week, very low on profitability. It felt expensive.
The PE of 47 is an illusion and I respect the management of that company to highlight that in their earnings call (pls see page 4 of https://www.bseindia.com/xml-data/corpfiling/AttachLive/0fc760d8-6b45-4fe7-bd5d-706c757c8aa2.pdf -- start reading from "I want to clarify"). The point is simple -- in Q1 there was abnormal sale of ₹44 crores and an abnormal PAT of ₹8 crores.
Now on a TTM basis, you've been using screener information and the PE of 47.3 is ₹867 (CMP) divided by trailing 4 quarter EPS of ₹18.32. This is wrong because in one of the quarters, this exceptional PAT has been factored that won't be available again. So recalibrating the EPS (and again, I respect the management for giving an estimate of ₹2.91 crores of PAT in Q1FY25) -- this comes to a quarter EPS of ₹3.02.
To put this together, the TTM EPS (after excluding exceptions) is ₹10.48 -- which means the TTM PE ratio of PNGS Gargi is actually 81.7 (and not 47.3)
Back to your point, I don't see how PNGS Gargi can be compared to Sky Gold. Very different businesses -- ek Sona, ek Chaandi (quite literally)
Hey, a bit out of topic question, I like your researches and I invest small amount on the stocks that convinces me. Now I was thinking of creating a smallcase (And name it Shankar's shamless Copy clown portfolio ;p) and whenever I liked any stock I will just add it in the smallcase.
But I already have other smallcases and my own core portfolio in which I do SIP.
So the questions are: 1. Is it a good idea for creating a smallcase
2. Is it a fact or myth that we should not have more than 25 stocks in our portfolio.
3. Reason most people say not to have more than 25 stocks is because of managing them, but as my smallcases are managed by the experts, does it make sense to have more number of stocks.
Thank you, you are doing an amazing job.
Most welcome, glad you like my work 🙌 With re: your queries
1. It's unreliable to take someone else's advice; what might be good for you might not be others (and vice-versa)
2. An index fund has upto 750 stocks in it; limiting exposure to around 25 stocks is more of a guideline to ensure better trackability, effective management with sufficient diversification
3. One person managing 25 stocks but most smallcase providers have multiple managers/analysts working on that portfolio. Having more than 25 will not be a stretch for them
Thanks a lot for reply
what a timely article... I have been investing in gold and silver etfs given the rising risks to the economy due to spillover effects from geopolitical tensions, will perfectly supplement my portfolio given the upcoming wedding season and spike in volatility post US elections.
Glad you found it useful
Kudos to Priyam. Nice article.
Will have this stock on my radar and study more about jewellery businesses firstly.
Thank you Shantanu, glad you liked it.
Thanks for the nice article. Few questions in case its feasible to address
- i didn't understand how is the company a better investment than simply investing in gold itself (i.e. through a etf or something like that). for ex. if gold prices fall tomorrow , will we be holding just a more sensitive stock to gold? Seems like a leveraged bet on gold in the worst case.
- given they are b2b, unclear if what their purchasing power is in a down market
Thanks for the article, it was super interesting indeed!
Most welcome! I don't have the context, so answering your questions the way it's jelling in my head:
1. Between gold and gold jewellery - there is a lot of value-add. For example - we don't wear a gold nugget around a neck but we do wear a gold chain. Businesses like Titan, Kalyan, Emerald, Sky Gold are in the value-addition business and hence have to prices/viewed differently from a commodity business. A crude example from everyday life is rice. 250 grams of basmati rice is priced at 50 rupees but 250 gms of pulao (veggies, cooked, served) is priced a lot higher at say, 200 rupees.
2. B2B models entirely depends on orders from their clients (gold jewellery retailers in this case like Titan, Malabar, Reliance Jewels, Kalyan etc.). With most of them outsourcing, the demand for gold from Indian consumers is the production levels of our B2B players. Now, with regards to your point on purchasing power -- like every industry, gold too goes through ups and downs. However, unlike other sectors, the demand for jewellery in India (mostly gold) is quite stable. Here are the stats:
2016: 504.5 tonnes
2017: 562.7 tonnes
2018: 598.0 tonnes
2019: 544.6 tonnes
2020: 315.9 tonnes (Covid impact)
2021: 610.9 tonnes
2022: 600.4 tonnes
2023: 562.3 tonnes
Seeing this, I'll say assessing the demand for gold is a safer bet than many other products. It's almost a commodity. Additionally, the recent drop in gold prices (due to duty cuts) has increased the demand for gold amongst us Indians. This should augur well for gold jewellery manufacturers and gold jewellery retailers
Hope this helps.
thanks again for the clarification. As you can tell from my Q, i am new to this company but this was great to get started and understand it quickly! thanks so much for the efforts!
on 1 - got it , i think i was skeptical of their pulav margins. If i break down the pulav margins, i think retailers would take the cake and leave some crumbs to players like Sky. ( i could be wrong here but this is the impression i got).
2- i see that makes sense. i think their working capital cycle and the cost of gold purchase will likely determine their pricing power in a down market.
I am very new to this space but this article really helped me a lot. thanks for this content!
No problem. I could assess that the questions were framed w/o much of a readout. Going forward, appreciate if you can support your questions with numericals/evidence/supportings. It's a lot easier to decipher the information that way and the quality of discussion improves by many multiples.
Hi! This feels like a very basic question, but, could you please explain how their hedging works? Absolutely did not understand that part. Thanks!
It's pretty much how the management explained it (I pasted an image in the post). I'll try to simplify it here:
1. When a Sky Gold client places an order (say 20 kilos of jewellery), the final price of the gold is not fixed between SG & the client. However, SG needs to start the production process
2. To make the jewellery, SG buys gold bullion from a bank or a licensed importer at the prevailing market price
3. To protect oneself from the risk of gold prices falling or rising while producing the order, SG sells an equivalent amount of gold on MCX via a futures contract thereby locking the price of gold (pls read more on Futures contract on Varsity)
4. When the order is complete and ready to be dispatched, SG fixes the final price with the client. At this stage, SG hedges again in the MCX by reversing the earlier transaction i.e. SG buys back the futures contract it previously sold. This cancels out any market price movement that happened during the production process.
This system is commonly used by large corporates across industries to manage price risk esp. when executing large orders
Hello Shankar, this stock is a retail play (38.5% stake with Retail), with no DII and almost no FIIs. There could be operator involved also for such steep rise in PE ratio. Even though company is showing fast growth the Balance sheet shows Receivables and Inventory are growing, which is not a good sign. The PE ratio can come down to original level if there is a sudden big market fall, which would trigger mass retail exits
Absolutely, anything is possible -- it's a case of what one weighs more:
a) the growth side of the business (currently 90% but will taper to 30% as scale increases)
b) or the valuation side (currently 70 PE but will taper to 35 as EPS growth shows)
c) or the growth-related pangs (high inventory, receivables, negative cashflows etc.)
Weights are important as it's next to impossible to identify a company where everything is perfect -- some weakness & cracks can always be found. One needs to work out their premise which is what this newsletter aims to encourage.
Sir on checking cashflow as of march 2024 , inventory has raised drastically from py to 180crores ...why nobody talking about this even in concall...isnt it alarming?
Hello. Well, an increase in production requires an increase in inventory -- there's no two ways about it. For instance, 31-Mar-2024 closing sales are ₹1,745 crores while 31-Mar-2023 is ₹1,153 -- a 51% increase.
But you have a point -- inventories are higher than usual in FY24.
1. In the Q4FY24 concall, the management explained the rise in inventory on account of corporate orders received close to the end of the quarter. As a rectification, the company is implementing an ERP system
2. In the Q1FY25 concall, the management alluded that the inventories have come down from ₹266 crores in Q4FY24 to ~₹250 crores in Q1FY25
Other than this, I found no new information. Will have to wait for a couple of quarters to see the inventory status
And also promoters stake decreased in last year.
Very insightful, sir, so I have a small doubt I am new to this company, so you have mentioned that the company has a negative cash flow. So how can the management reverse it by the end of FY 26.
Thank you! The management has offered no roadmap to this
This don't have moat like the previous articles
Thanks priyam and Shankar sir...
How are you ? Shankar sir n how is your health ?
I'm very well, thank you for asking!
Thnks sir...
Hi Shankar, The promoter holding has decreased by a massive 11% in the past 3 years . Shouldnt this be a cause of worry?
Hi. That might not be the right way to look at it. Sky Gold is a growing company and it needs funds to finance this growth. Ergo, it raised ₹106 crores from non-promoters in December 2023. More specifics are available here -- https://www.thehindubusinessline.com/companies/sky-gold-raises-106-cr-for-expansion/article67618595.ece
I'm detailing this part a bit now
As of Sep 2023 shareholding pattern, the promoters had 79 lakh equity shares while non-promoters had 28 lakh shares (see https://skygold.co.in/wp-content/uploads/2023/10/output-9.pdf). Then on 7th December (the day the board approved the pref allotment), the shareholding pattern changed and now promoters had 81 lakh shares while non-promoters had 49 lakh shares (https://skygold.co.in/wp-content/uploads/2024/04/SHP_07.12.2023.pdf)
I'm assuming you use screener from where this declining promoter stake % was revealed. Personally, I feel this is problem because it can corrupt investing decisions but one easy way to understand such a scenario is to look at the "equity capital" entry in the balance sheet. You might notice the value has gone up from 10.8 crores to 13 crores -- that represents some sort of raise & then it's a matter of seeing if this was via a QIP, preferential allotment, rights issue or some other mode.
Coming back to your question, no -- I'm not worried on this part. The promoter group continues to have a lion's share of the ownership & voting rights and the dilution was a result of an infusion in capital & not a sale of shares
Hope this helps