Goldiam International Limited

Goldiam has fully backward integration capabilities, with an in-house design team that identifies the emerging fashion trends for manufacturing jewellery, and it sources diamonds with pre-requisite norms in terms of cut, clarity, colour and carat. The company manufactures jewellery in-house and is among the few players with a patent for the laboratory-manufacturing process.

Goldiam is focusing on the e-commerce platform to enable it to reach a more extensive section of retailers and reduce its dependence on wholesalers. Besides the enhanced reach, e-commerce has higher margins and lower working capital days (10-30 days compared to 120-150 days for traditional sales channels).

Goldiam has also scaled up its online business in the last few years, contributing almost 20% of the top line. In this business, the company caters to orders received via the e-commerce portals of large retailers. These orders are directly shipped to the end client by Goldiam, reducing the retailer’s lead time and helping them optimise their inventory. The transaction’s just-in-time nature and the handling of shipments help yield better margins versus bulk supply to physical stores. This is a negative working capital business as the payment terms are better than supply to physical stores.

In times of COVID-19, people preferred to buy online, and the company is witnessing traction in e-commerce sales. Goldiam has managed to take the digital channel to about 20% of sales in a short period and aims to increase this to 30-40% of revenue.

Online orders are processed and shipped faster than traditional brick & mortar orders, enabling the improvement of cash & cash equivalent. This leads to adverse working capital requirements due to favourable payment terms and allows higher returns. E-commerce reach empowers the company to cater to customers in regions with limited physical footprints.

The US jewellery market comprises prominent, organised players, accounting for nearly 60% of the market; the rest contains independent Mom & Pop jewellery stores. While the penetration across large retailers is quite suitable for Goldiam, it has a limited presence across independent jewellers. To address this market, the company has recently commissioned an e-commerce portal called JewelFleet. This portal will let small jewellers order existing/custom designs (1000+ SKUs) which will be manufactured and shipped within seven days to the jeweller.

India majorly exports cut & polished diamonds, lab-grown synthetic diamonds, coloured gemstones, synthetic stone, plain and studded gold jewellery, silver & platinum jewellery, imitation jewellery and articles of gold, silver and others. Western Region is a critical exporting hub for the gems and jewellery industry, contributing almost 77% of the total exports in 2021-22.

India’s gems and jewellery exports account for about 3.5% of the world’s total exports, making it the seventh-highest exporter globally. The country is ranked first in diamonds jewellery, silver jewellery and lab-grown diamonds & Synthetic stones with 29.0%, 22.0% and 32.7% share of the world’s exports, respectively. India’s gems and jewellery exports stood at US$ 39.31 billion in the year 2021-22, which is higher than the pre-covid exports of US$ 35.60 billion in 2019-20, recording a growth of 10.44%.

India exports gems and jewellery to the USA, Hong Kong, UAE, Belgium, Israel, Thailand, Singapore, the UK, Netherlands, Japan, etc. The USA is the largest importer of Indian jewellery, with 2021-22 imports valued at US$ 14.5 billion, growing from US$ 8.7 billion of exports in 2020-21.

The US gets most of its diamonds from relatively few countries. According to diamond trade statistics published by the United States International Trade Commission, more than half of the polished diamonds imported into the US in 2021 were from India.

Israel was the second largest source of polished diamonds imported into the US. It accounted for a quarter of diamond imports by value. Belgium was the third largest source, with another 9% of polished diamond imports in 2021.

Collectively, these three countries supplied 87% of US diamond imports. Together with South Africa and Switzerland, five countries were the source of 92% of the diamond imports.

Exports of polished lab-grown diamonds from India jumped about 70% in the April-July period to $622.7 million, while those of cut and polished mined diamonds fell around 3% to $8.2 billion during the same period.

Lab-grown diamonds are diamonds that were grown by scientists in a lab. They share the same chemical makeup as natural diamonds and are optically identical. The most significant differences between natural and lab-created diamonds are how they’re made and how rare they are.

Laboratory-grown diamonds share an identical chemical makeup to natural diamonds, consisting of pure carbon in a cubic crystalline form. The difference between lab-grown diamonds and natural diamonds is how they are formed. Natural diamonds form below the earth's surface over millions of years, whereas lab-grown diamonds can be created in a lab for a few weeks.

Initially, the acceptance of lab-grown diamonds was low as large diamond miners opposed it. But in 2018, in a ruling by the Federal Trade Commission in the US, lab-grown diamonds earned the status of being called diamonds, making them officially optically, physically and chemically equivalent to natural diamonds; however, to make it easier to distinguish between the two and avoid deceptive advertisement – the origin of the diamond had to be mentioned (why they are termed Lab-grown diamonds)

There are a few methods used to create lab-grown diamonds. Typically, lab-grown diamonds start with a tiny lab diamond, like a seed. The seeds are placed in a chamber called a plasma reactor (in the case of CVD synthesis) or a large mechanical press (if manufactured by HPHT). Then, depending on the technology used, some combination of heat, pressure and a carbon source is used to make the crystals grow, layer by layer

• The CVD Method- CVD stands for chemical vapour deposition Lab-grown diamond seeds are loaded into a CVD reactor. Then, a mix of gasses containing carbon is added at very low pressure. Microwave energy is used to heat the gases and generate plasma. When the temperatures climb over several thousand degrees, the gas molecules break apart and carbon atoms bond to the seeds, growing them one layer at a time.
• The HPHT Method-HPHT stands for high-pressure high temperature This method mimics the conditions under which diamonds naturally form. Large mechanical presses are used to apply extreme pressure and high temperature to carbon in the presence of a diamond seed. The seeds act as a template for a lattice of carbon to grow layer by layer over the course of a few days.

LGDs are currently perceived as a distinct territory in the jewellery market, not a direct competition to natural diamonds. They offer a great entry point for customers aspiring to own natural diamonds..

At first, the American consumer market considered lab-grown an odd novelty at best. And often, a knockoff. But those common perceptions, widespread just five years ago, are changing.

Today, many believe lab-grown represents a reasonable alternative, a full materialization of the natural diamond industry’s fears. This view has been normalized by a growing number of mainstream retailers who added lab grown to their offerings after years of resistance and repeated claims that lab-grown is more ethical.

After a sluggish start in 2016-2018, the market share of lab-grown has constantly been growing. In 2020, it stood at 3% of combined diamond sales at US speciality jewellers. It grew to 5% in 2021 and currently exceeds 7%.

The introduction of lab-grown diamonds has expanded the diamond jewellery market as now retailers can now sell larger caratage jewellery (earrings, necklaces and bracelets) which were considered price prohibitive (too expensive). Although there might be some cannibalization of sales, markets for both lab-grown and naturally mined would operate side-by-side and continue to grow. However, lab-grown is expected to grow faster.

Going forward, we mainly see the share of lab-grown diamonds and lab-grown diamond jewellery improving further (~ 50% of topline in 4-5 years), while JewelFleet is difficult to guess (but quick scale-up here would change how financials look significantly).

In a nutshell, expecting further margin improvement and, in effect, RoCE improvement. While broader adoption of lab-grown diamonds may reduce the cost of diamonds further (earlier lab-grown used to be at 50-60% of the price of diamonds to now at 30-40%), it will surely increase its volumes (in terms of caratage)

Goldiam has a strong balance sheet with near-zero borrowings. It has cash and cash equivalents worth ~Rs 3000mn as of date. Goldiam strongly believes in remaining debt-free and carries on its business expansion through internal accruals.

The objective of the Divided Distribution Policy: To ensure an equitable balance between the quantum of dividends paid out and the profits preserved for future growth. The company aim to maintain a ratio of 50% of the annual Standalone PAT to be either used for Dividends and/or Buy-back of shares, subject to the considerations of the parameters stated in this Policy.

India, which cuts or polishes about 90% of the diamonds sold in the world, is ramping up sales of laboratory-made gems as demand from the US surges and they become more accepted in other markets

Diamonds grown in labs represent a small portion of the market currently -- India shipped nearly $24 billion of polished diamonds mined naturally last year. Still, the much cheaper variety has been growing its share as it has the same physical characteristics and chemical makeup as mined stones, with experts needing a machine to distinguish between synthesized and mined gems

Exports of polished lab-grown diamonds from India jumped about 70% in the April-July period to $622.7 million, while those of cut and polished mined diamonds fell around 3% to $8.2 billion during the same period.

From a handful of companies growing diamonds in labs in the mid-2000s, there are now about 25 such growers in India. The country contributes about 15% of the global production of lab-grown diamonds. The government has permitted 100 per cent foreign direct investment (FDI) in the sector under the automatic route.

The Gemological Institute of America predicted the total annual sales of laboratory diamonds will be well over $100 billion in the not-too-distant future, from about $20 billion today. This segment of the diamond is growing at an annual growth rate of 15-20%.

The company was among the first jewellery exporting companies to grow, manufacture and distribute LG Diamonds & Jewellery. Goldiam made a strategic Acquisition of Eco-Friendly Diamonds LLP (EDL) (88%), giving them access to a supply of vital raw materials for manufacturing and growing LGD.

Having a presence in lab-grown diamond manufacturing further helps the parent company secure its diamond sourcing for stud jewellery. This makes Goldiam the only prominent integrated exporter of lab-grown diamond studded jewellery. This move comes at a very opportune time, as the trend around lab-grown diamonds has picked up significantly in the last few years.

We expect the company to post revenue growth of 12% CAGR over FY22-25E. The company witnessed robust growth in FY22 (~70% YoY). We expect FY23E to be muted given the slowdown in the US market, however over the medium term, we expect the company to grow its revenue at 12% CAGR driven by lab-based diamonds.

We expect LGD to post a growth of 42% CAGR and contribute close to 40% of overall revenue (20% currently) on the back of greater acceptance and an increase in first-time buyers. While Natural diamonds are likely to grow at a CAGR of 2%, Which is a consensus decision the company made to reduce its natural diamond presence. The company is also looking at potentially entering the Indian markets, which could provide an additional fillip to revenue; it could also look at the potentially inorganic opportunity.

We expect the company to post an EBITDA growth of 25% over FY22-25E, While margins are likely to improve by 690 bps to 25.8% driven by growth in the lab- diamonds and move toward an e-commerce platform.

We expect the company to post a PAT growth of 25% over the same period led by strong operating leverage

The company has improved its return profile over FY20-21, and we expect that trend to continue going forward.

Given the company's heritage and the level of innovation, they were the first one to move towards lab-based diamonds, with the company acquiring a 88% stake (in two stages – 51% in Dec 2020 and a further 37% on June 21; remaining 12% owned by technology partners) in Eco-Friendly Diamonds LLP. Having a presence in lab-grown diamond manufacturing further helps the parent company secure its diamond sourcing to stud jewellery. This makes Goldiam the only significant integrated exporter of lab-grown diamond studded jewellery. This move comes at a very opportune time, as the trend around lab-grown diamonds has picked up significantly in the last few years.

We believe lab-based diamonds not only offer consumers a chance to buy a higher cartage diamond at a slightly lower cost, but it attracts aspirational buyers and the high-spending middle class, with the likes of De Beers (the world's largest diamond mining company) and Pandora also entering the lab diamond space, it clearly shows the relevance it could potentially have.

What sets LGDs apart from other synthetic diamonds is that they are grown by simulating the conditions of a natural diamond's growth.

The Gemological Institute of America predicted the total annual sales of laboratory diamonds will be well over $100bn in the not-too-distant future, from about $20bn today. This segment of the diamond is growing at an annual growth rate of 15-20 %

We believe lab diamonds are not exactly offering an alternative to natural diamonds but are offering a mere product extension. While in the foreseeable future, lab-growth diamonds are likely to proliferate. Once lab-grown diamonds as a product reach maturity, consumers will likely view natural and lab-grown as different products, so demand will be driven much more by marketing and not product availability.

Exports of polished lab-grown diamonds from India jumped about 70% in the April-July period to $622.7 mn, while those of cut and polished mined diamonds fell around 3% to $8.2bn during the same period, GJEPC data showed.

We believe this is likely to be a driving force for Goldiam in the next couple of years, given there are very companies currently which have the capabilities that of Goldiam in terms of being an end-to-end producer. The company is also talking with a few retailers to make lab-based diamonds exclusively for them, which guarantees supply and orders for Goldiam.

While lab-based diamonds are still primarily restricted to the American market, India, with the largest population of millennials in the world, is perceived to become the largest market for lab-grown diamonds in the future, given the changing spending patterns, where jewellery is not only considered from an investment point of view but more as a fashion product. Given this, Goldiam could look at entering the Indian market with standalone stores for lab diamonds in the not-so-distant future, which we believe could be the next logical step. Additionally, it could look at an inorganic opportunity in the future to increase the addressable market size.

Going forward, We expect the company to post revenue growth of 12% CAGR over FY22-25E to Rs.9,775mn, with lab-based diamonds to grow at 42% and natural diamonds at 2% over the same period. EBITDA over the same period is expected to grow at 25% CAGR to Rs.2,525mn, while OPM is expected to improve by 690bps to 25.8%. PAT is expected to grow at 25% CAGR to Rs. 2,065mn. We currently value the stock at 11x Sept 24 EPS of Rs.16 to arrive at our fair value target of Rs.185, a potential upside of 48% from current levels.