Jewellery company Senco Gold Limited has opened its initial public offering (IPO) for subscription this week. The public issue will be open for subscription till July 6.

The company has pegged the offer size at ₹405 crore. Out of the total funds, ₹270 crore is from fresh issue and ₹135 crore is from a private equity investor (OFS route). Post issue, the promoter’s stake will be at 68.5 per cent.

According to the company, the funds raised will be used for working capital requirements and general corporate purposes. The offer price band is ₹301-317.

The company is valued at a PE of around 15 times its FY23 earnings and the market capitalisation at the upper end of the price band is ₹2,462 crore.

As of 1 pm on July 5, the IPO was subscribed by about 1.5 times.

Here’s our take on Senco Gold’s IPO.

Business and Growth 

The jeweller predominantly operates in the East and Northeast (E&NE) part of the country.

Though the company deals with gold, diamond, silver and gems, around 90 per cent of the revenue is generated through manufacturing and selling of gold jewellery followed by nearly 7 per cent from diamonds.

Like every other jeweller, the company procures raw materials like gold and converts them into chains, rings, etc.

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Senco Gold adds value by making their own designs using in-house designers who keep track of the latest fashion trends and provide fresh designs accordingly, per the company. They also have tie ups with many karigars i.e. craftsmen across West Bengal.

They are the largest player in the region with a network of 136 stores spread across 96 cities in 13 States. Out of the total, 75 of them are company-owned and the remaining 61 are franchise operated. 

Through the franchise model, the company is able to make asset light expansion, especially to Tier-2 cities— 49 out of 61 franchisee stores are in Tier-2 cities. Notably, they make upfront sales to the franchisees which helps them maintain good stock turnover. The company also runs installment schemes through which they are able to generate futures sales.

The company is among very few organised players with branches across States. However, the Indian gems and jewellery industry, which is worth around ₹4.7-lakh crore, is still dominated by unorganised, family-owned jewellers.

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Nevertheless, there has been a structural shift in recent years as the share of organised players has improved from 10-15 per cent in 2000-01 to 33-38 per cent in 2021-22.

Regulatory developments like HUID (Hallmark Unique Identification) and implementation of GST have given a push to the organised players. The market share of organised players is estimated to grow to 42-47 per cent by FY26, a positive for the company.

Within the jewellery market, bridal segment constitutes 50-55 per cent, daily wear (35-40 per cent) and fashion (5-10 per cent). The company has been catering to all these categories and is in a position to maintain the right product mix according to the demand.

The growth of the company is dependent on how the E&NE states of the country grows as most of its stores are present in this region. But note that this region contributes to only 14-16 per cent of India’s total market.

Besides deepening its presence in the E&NE region, the company is also planning to expand its network to the northern region, which accounts for 18-23 per cent of India’s total jewellery demand. 

Senco Gold is also planning to focus on improving the sales of high margin segments such as diamond jewellery.

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In addition to company specific factors, others such as India’s affinity towards gold, increasing share of the working population and the consequent increase in disposable income are likely to lift the demand for jewellery in India.

Overall, the company is placed well to post growth in the coming years.

Senco Gold’s Financials

Revenue from operations has grown at 19 per cent CAGR between FY20 and FY23. The margins have improved in the last two years and the gross and EBITDA margins stood at 16.1 and 8.5 per cent, respectively, in FY23.

The company registered a profit-after-tax of ₹159 crore in FY23, a CAGR of 20 per cent over the last three fiscals. The net profit margin stood at 4 per cent in FY23.

Senco Gold was able to churn the inventory comparatively well, which is crucial in the jewellery business. Its inventory turnover ratio of 2.5 for FY23 is one of the best in the industry. Also, the average inventory days of 166 in the FY20-23 period is among the lowest in the industry.

Risks

Though the company’s operational performance appears good, it is not without risks. The industry is highly competitive and the margins are lower. So, fluctuations in price, especially of gold, can have an impact on the profitability.

The business also requires a significant amount of working capital as gold is the raw material.

Although the company has a hedging policy in place to reduce the price risk, an increase in gold prices can dent the consumer demand.

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Also, expansion to new regions might not always bear fruit as the preferences of customers vary across regions and the success depends on how efficiently and quickly the company caters to the customers’ needs.

The company also faces ‘geographic risk’ as its operations are concentrated in the eastern part, particularly West Bengal, which accounts for 63 per cent of the total number of stores.

Additionally, its reliance on gold jewelry presents another concentration risk.

Should you subscribe?

Jewellery business is very competitive, resulting in low margins. Besides, there are risks like demand sensitivity to prices and the company losing market share should any other competitor entering the E&NE region. 

However, there are only a limited number of companies that can take exposure to the jewellery segment in India. Among them, Senco Gold’s performance has been good, if not the best.

Since FY20, the company has been profitable, indicating its operational efficiency despite rise in gold prices

Moreover, at 15 times PE, the valuation is attractive. Therefore, investors who have a high risk appetite, can consider subscribing to this IPO.

The listed peers of Senco Gold like Titan Company, Kalyan Jewellery and Thangamayil Jewellery, trading at trailing PE of 84, 35 and 26 respectively, are comparatively expensive.

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