Sen further says: “Our diamond stud ratio for the previous financial year was around 11.8%, which grew up from around about 10.8-11%. So that is the growth and in the coming three-four years, our plan is to take it to upwards of 15% or so, so that is how we want to increase the stud ratio. And the margins that you make in the industry is from the making charges.”
Kumar Mangalam Birla has announced plans of making forays into retail jewellery business. He has said that Rs 5,000 crore worth of initial investment will be done. If biggies want to launch business in your area, what is the size of opportunity? When you launched your IPO, you said it is a simple, boring business and I got excited about that because money is made on simple, boring businesses and you have made good money for your shareholders. So, how are you looking at the size of the opportunity from here?
Suvankar Sen: We all know that the market size is Rs 7-8 lakh crore in terms of the value that is being transacted and that is quite a big size for many players to coexist together. And this whole endeavour of the Birla group to enter into the industry is just a signal that the industry is getting more and more organised. So, the story that we have been hearing over the last 5-10 years, the shift from the unorganised to organised, these are the actions and the events that we see in the industry which will help the industry become more formal, more professional, more organised. Everyone else will be able to learn from the best practices and the best initiatives that are taken.Are you worried at all about the competition because right from a Kalyan to a Titan to now the AB Capital Group and of course Reliance through its various ventures, have been looking at expanding and tapping into this entire theme of unorganised to organised. In terms of your market share and the potential, are you worried or how are you looking at competition?
Suvankar Sen: One can look at it as a case of glass half empty or half full. India as a country has a huge potential. Urbanisation is happening. There is growth in the tier II, III, IV towns and cities. India in the next 10-15 years has a great potential of growth. The consumers are becoming much more evolved. The disposable income will be there. Therefore, the market is only going to go big and what you have seen in the gold prices, the kind of performance that gold as a category has happened in the last two months or so, maybe in the short term we are seeing that consumers are getting used to the prices, they are taking a little bit of a wait and watch theory but in the long run, the faith on the product, the faith on the category, the returns that they are getting, it is not just an adornment but also an investment.
Therefore, the future potential of the market is increasing. The worry in the sense that in a Rs 7 – 8 lakh crore market, if you add up all the numbers of all the turnovers of the big industry players, you will see that there is a lot of scope and a lot of room for all of us to keep growing. As long as we are doing the fundamentals right, maintaining the quality, coming up with new designs, creating excitement in the consumer base, the market will continue to grow.
Let us talk about micros. There was a very sharp surge in gold prices. You can say that you just pass it on, but does not such a sharp surge in gold start impacting demand to a certain level at the retail end or it does not?
Suvankar Sen: It does. What we have seen in the past also is that whenever there are these sudden surges in gold prices, there is an immediate impact in the volumes. The quantity will go down. At these kinds of levels, there will be a 15-20% impact on volume because the gold prices have gone up. The consumers do take some time to get adjusted to the price, their income, the expenses that they are bearing. So, they will all have to get used to the idea.
We can see two kinds of consumers here. One is that there are a lot of consumers who got weddings in their families for the end of the year and they are panicking. They are thinking that today the gold price is close to Rs 75,000. People are already talking of Rs 85,000, 90,000. What if it goes up to that level? What if the war escalates? In this whole panic situation, some of them are coming and starting to buy jewellery.
Then there is the other set of consumers who love the fact that the gold in their household lockers and in their almirahs are appreciating. So they want to buy something, but their budget is limited. So the quantity is getting impacted. We have to create lighter designs. What we are also seeing with the increase in gold prices is that 14 carat, 18 carat purity gold with diamonds and stones are showing growth. In the last financial year, we had almost a 30% plus growth in the diamond jewellery segment. I think this year with an increase in gold price, the consumer’s interest and within their budget, diamond jewellery as a segment will continue to grow for everyone.
You have shared very good growth numbers and that too on the basis of promising less but delivering more. That is what the Street likes. Overall, how many stores do you have right now and how is this franchisee model of yours spreading in the neighbouring states? How many stores do you want to add over the next two to three years?
Suvankar Sen: Considering the various formats, we have about 158 stores. And very recently we launched one more store, which is focusing on lab-grown diamonds. But the focus on a strategic growth level is that we will continue to grow in eastern India and northern India, that is where we want to penetrate through the franchisee model. It allows us to penetrate into the tier III, IV, V towns and even semi-rural markets.
Today if growth has to happen, you need to take people along with you. So, in the bigger towns and then the capital cities while we will focus on having our company on company-operated stores, we will look for potential franchisee partners who can become the brand custodians and then accordingly we will be able to penetrate into smaller towns. That is where the game changer thought process will happen in those smaller cities where usually the market is unorganised. With gold prices increasing more and more, it will be difficult for a lot of people to maintain the various regulations to get the capital for growth, to give the experiences and with the increasing gold price.
Let me be very clear and we are quite sure about it, that the consumer will need value for money and that value for money will not only be in terms of discounts, offers, pricing, but it is also the experience that we are giving, the designs we are offering, the brand that we are building. So, the holistic aspect of it, I think that it will only help the organised players to grow in this kind of scenario.
You are saying that historically increase in gold prices results in a bit of a downtick in terms of the volume offtake and that the overall share of the diamond studded jewellery is expected to go up. What will be the overall ratio for studded jewellery for the company going forward and what would it mean for the revenues as the bottom line and margins in that context because while the volumes will come down, I am sure the value will go up. So, net-net, where do you see the revenue as well as margins in the next 12 to 18 months?
Suvankar Sen: Our diamond stud ratio for the previous financial year was around 11.8%, which grew up from around about 10.8-11%. So that is the growth and in the coming three-four years, our plan is to take it to upwards of 15% or so, so that is how we want to increase the stud ratio. And the margins that you make in the industry is from the making charges.
So, when the gold prices go up, making charges, which is a percentage of the gold value, will overall go up and your cost will go up and consumers over a period of time will get used to it. Yes, in these short term scenarios to make the consumer feel confident on buying jewellery, offers, discounts, schemes, will obviously be given so that the consumers keep coming to the store. But in the long run, your making charges is where you will get your margins from.
With the increase in sales of diamond studded jewellery, the margins will be a little higher compared to gold jewellery. Over a long period of time, I would say that our PAT in the historical past has been in the range of 3.2-3.5% and I should give you that idea and the guidance that the PAT will remain in the same kind of range as it has been in the past because the brand will be built, there will be expansions, there will be investments that will be done. That is how one should look at the business over the long term.