Organised Jewellery Shift And Export Expansion Are Expected To Drive Long-Term Upside

Catalysts

About Sky Gold and Diamonds

Sky Gold and Diamonds is a fast growing B2B jewellery manufacturer that supplies lightweight gold and diamond jewellery to leading organised retailers in India and select export markets.

What are the underlying business or industry changes driving this perspective?

• Accelerating shift from unorganised to organised jewellery retail, supported by lightweight machine made designs and wider national distribution, is deepening wallet share with large chains and is expected to sustain high volume growth. This may help lift revenue and earnings driven by operating leverage.
• Rising preference for everyday wearable jewellery, including 18 carat and diamond studded pieces, is increasing design led making charges per gram and the mix of higher margin categories. This is supporting gross margin expansion and higher net margins.
• Expansion of advanced gold and job work driven models, including the Speed Bangle and Shri Rishab Gold businesses, structurally reduces inventory and funding needs while adding fee like making charge income. This is improving working capital turns, EBITDA margins and return on equity.
• Scaling export operations via the new Dubai office and deeper penetration into the Middle East and Southeast Asia broadens the addressable market and adds relatively lower credit risk sales. This is driving incremental revenue growth and helping stabilise overall earnings.
• Progressive ramp up of gold metal loans and better inventory management systems is expected to materially reduce interest costs and shorten the cash cycle. This should translate into improved PAT margins and stronger free cash flow as volumes move toward the guided 900 kilograms per month.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Sky Gold and Diamonds's revenue will grow by 32.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 4.2% in 3 years time.
• Analysts expect earnings to reach ₹4.6 billion (and earnings per share of ₹26.64) by about December 2028, up from ₹1.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 30.8x on those 2028 earnings, up from 27.1x today. This future PE is greater than the current PE for the IN Luxury industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 5.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.04%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The business model remains highly sensitive to gold price cycles, and management is explicitly assuming that gold will appreciate by 20% to 25% annually over the next few years. Any sharp and sustained decline in gold prices that forces a reset of customer quotations could compress making charges and slow B2B demand, weighing on revenue and earnings growth.
• Working capital intensity and leverage are elevated, with net debt around INR 400 crores to INR 450 crores, negative operating cash flow expected until after March 2027, and a large capex program for a new facility. Any delay in scaling advanced gold and export business or in ramping gold metal loans could keep cash flow weak and pressure net margins and return on equity.
• The growth plan relies on rapidly scaling volumes to 900 kilograms per month, deepening relationships with a concentrated group of large retailers, and ramping exports to 15% to 20% of sales by 2027. A downturn in discretionary jewellery spending, a slower shift from unorganised to organised retail, or the loss of key clients could materially slow volume expansion and revenue.
• Management plans to fund roughly INR 150 crores of new facility construction and INR 100 crores of machinery largely through internal accruals and additional term loans. Any disappointment versus the guided PAT trajectory or higher interest rates could strain the balance sheet and dilute future earnings through higher finance costs.
• The strategy assumes continued margin expansion from a higher share of advanced gold and studded jewellery and from cheaper gold metal loans at around 4 percent interest. Execution risks such as a slower GML ramp due to bank documentation and supply constraints, or weaker than expected profitability from acquisitions like Speed Bangle and Shri Rishab Gold, could cap gross margin improvement and limit PAT margin gains.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of ₹501.5 for Sky Gold and Diamonds based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be ₹108.3 billion, earnings will come to ₹4.6 billion, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 16.0%.
  
• Given the current share price of ₹324.6, the analyst price target of ₹501.5 is 35.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.