MD Mangesh Chauhan tells BW Retail World that the company expects the advance gold model to contribute 30 per cent of volumes by 2030 and aims to increase the share of exports from the current 11 per cent to 20 per cent
Sky Gold & Diamonds is anchoring its next phase of growth on an asset-light manufacturing strategy, scaling up its advance gold business and expanding exports, as it seeks to improve capital efficiency while sustaining revenue growth and profitability. Managing Director Mangesh Chauhan stated that the company expects the advance gold model to contribute 30 per cent of volumes by 2030 and aims to increase exports from the current 11 per cent to 20 per cent over the same period.
In an interview with BW Retail World, Chauhan said the company is targeting revenue of around Rs 8,100 crore by FY27 while improving its gross margin to 7.5 to 8 per cent. Looking further ahead, Sky Gold aims to scale revenue to Rs 18,000 to Rs 19,000 crore by 2030, with exports contributing 20 per cent of the business. He added that the company has also replaced its earlier greenfield manufacturing plan with an asset-light leased expansion model, allowing it to add capacity with lower upfront capital while reducing debt and preserving returns. Edited Excerpts:
Sky Gold 3.0 focuses on balancing growth with operating cash flow and capital efficiency. With a target of Rs 180-225 crore positive operating cash flow in FY27, which operational lever will drive this the most: advance gold, exports, shorter receivable cycles or something else?
I just want to clarify that we have not shifted our focus from growth to cash flow. It is a phase in which we are balancing all three of them: sales, profitability, as well as cash flow per se. Previously, since we were not very big in size, our major focus was on improving overall sales. Then, the focus shifted from sales to improving the gross margin as well, wherein we introduced many new products, and that has led to an improvement in the gross margin.
In the current phase, we are trying to balance all three of them: sales, profitability, as well as cash flow. In terms of improving cash flow, the major drivers are the advance gold model, since it has an infinite ROCE and we do not have to invest in inventory as well as receivables. The second driver is the export business because it has a shorter receivable cycle. Our focus is to increase the export business from 11 per cent to 20 per cent by 2030. Currently, we are in Dubai, Malaysia and Singapore, and we are also looking at expanding into more geographies.
The third thing is improving profitability because profitability adds to the overall net operating cash flow of the business. As our operating cash flow improves, our debt levels come down, my interest costs also come down and these things will help improve my cash flow from operations going forward.
Consumers are responding to high gold prices by opting for lighter jewellery without compromising on purity. From a manufacturing perspective, are retailers increasingly ordering lightweight, daily-wear and lower-ticket jewellery, and how has this changed your product mix?
In terms of orders, we are seeing that the jewellery is becoming lighter and lighter because of gold prices. That is one of the factors. Secondly, there is also a change in consumer behaviour because previously it was only the senior members of the family who used to take the investment decision of buying jewellery, but now even Gen Z and younger members of the family are involved in the buying decision. The overall theme of buying is changing from investment-led buying to more of an investment-plus-fashion-led buying as well. Previously, weddings were a significant part of the overall industry, contributing close to 70 per cent of total sales. Earlier, if someone had a budget of maybe Rs 20 lakh or Rs 2 crore, they would go for two to three heavy sets.
Now, the pattern is that they would go for two to three medium-level sets and at least 5 to 20 smaller jewellery pieces, depending on the budget, which they can use for office wear, party wear, etc. These factors are leading to higher demand for lightweight jewellery, in which we are very strong. We are known for making ultra-lightweight gold jewellery, and these factors are helping us grow at a much faster pace than our industry peers.
Whatever data you are getting is for sales at the retail counters. For us, however, sales come from existing customers as well as newer stores. Since close to 2,500 new stores are expected to open in India over the next 24 months, these new store openings are also a major lever for the growth of a B2B player in the sector.
You have spoken about entering newer categories such as 18KT, 9KT, diamond-studded jewellery. Which of these do you believe could become a meaningful revenue contributor over the next five years?
We are expecting 9-carat (9KT) jewellery, which is currently below 0.5 per cent, to grow to 4-5 per cent, as it is a better-margin segment. 9KT jewellery with lab-grown diamonds is the next segment that can see significant growth. In natural diamonds, we are at 1.5 per cent and we expect this to go up to 5 per cent in the coming years because we have a strong trigger for natural diamond jewellery. Lab-grown diamonds are a new sunrise sector that is gaining traction in both 9KT and 14KT jewellery. In the gold segment, 9KT is growing, while 18KT has already seen significant growth.
Your investor presentation shows value-added jewellery has increased from below 10 per cent in FY23 to nearly 50-55 per cent today, becoming a major margin driver. Where do you see this mix reaching over the next three years?
The advance gold business has grown from 0 to 10 per cent. In natural diamond jewellery and lab-grown diamond jewellery, we have gone up to 9 per cent. Generally, we are guiding a gross margin of 7.5 per cent to 8 per cent, with a mix of advance gold, 9KT and 14KT natural diamond and lab-grown diamond jewellery, while 22KT and 18KT gold remain strong segments. Overall, we are guiding a gross margin of 7.5 per cent to 8 per cent.
The advance gold model is one of the more unique aspects of your business. While it contributes only making charges to reported revenue, it significantly improves cash flow and returns. What share of volumes do you expect it to contribute by FY27?
We are expecting that the revenues from this model is expected to grow from 11 per cent to 30 per cent by 2030. Around 5 to 7 per cent year-on-year increase is what we are expecting in terms of the improvement in the volumes from the advanced gold business, going forward.
You have replaced your owned manufacturing expansion plan with an asset-light leased model, with land monetisation expected to reduce net borrowings by around 20 per cent. What drove this decision?
We have tried to align our sales growth with the ROCE of the business, which is 35-36 per cent. It is a very encouraging number. If we have to put in a capex, because of the way a large manufacturing setup is being built, you have to infuse or you have to pump a lot of money upfront for setting up the entire facility. That would have led to a higher capex as well as increase in the net debt of the business. That is where it was not in line with the overall philosophy of the company. That is where we thought that we would go in the asset-led model, which is a ROCE accredited business.
And getting the new property in the vicinity is not a big task and a new facility can be set up in three to four months’ time. That made more sense when we internally discussed within the board.
You have expanded your Dubai office to serve the Middle East and Southeast Asia. Beyond the Indian diaspora, which international markets do you see driving the next phase of export growth?
Currently our business or the kind of design library that we have is suited for the Asian diaspora and that is the first point of focus. Thanks to our Prime Minister Modi that so many FTAs are happening. That will help a lot in improvement in the export competitiveness of India versus other manufacturing companies and countries in the jewellery sector. We are expecting that the new FTA with UK and Europe should help. Also, a new FTA is expected with Saudi Arabia, which is one of a very big market for similar kind of jewellery.
Sky Gold is expanding beyond corporate accounts into large unorganised players and smaller brands through a dedicated vertical. Operating largely on advance gold or spot payment terms, how significant is this opportunity, and what revenue contribution do you expect from it?
The unorganised market is shifting towards the organised market at both the manufacturing and retail levels. You can see manufacturers with 30 to 50 workers, as well as smaller designers, coming up every month.
We are gaining their market share and our value share is increasing in retail. Also, around 2,500 new stores of our customers are expected to open over the next two years. We are gaining share from both the existing stores and the new stores, and our inventory is going there.
Our sales are increasing in both ways, by supplying inventory to existing stores as well as new stores. There is a huge shift from the unorganised to the organised sector at the retail level. The organised market is worth Rs 6.5 lakh crore, while the unorganised market is Rs 9 lakh crore. There is a significant shift from the unorganised to the organised sector and we are gaining market share through this transition. Similarly, there is also a shift taking place at the manufacturing level.
The unorganised jewellery market continues to be significantly larger than the organised segment. In your view, what will accelerate the shift towards organised players over the next few years?
For that, we need to understand what the hindrances are in the shift from the unorganised to the organised market and how this shift has happened. A few initiatives by the Modi government have contributed to this. The first was demonetisation. Secondly, GST came into play. Thirdly, there is the rule that you have to submit your PAN and Aadhaar for purchases above Rs 2 lakh.
The fourth is various other initiatives under the PMLA and other laws that have made compliance in this segment stricter. These measures have helped drive the shift from the unorganised to the organised segment. Apart from this, there are a few other forces currently underway that are also leading to this shift.
One is the increase in gold prices because, as gold prices rise, the overall working capital or funds available with any manufacturer decline. When we started the business, gold was Rs 5 lakh per kg. Now it is close to Rs 1.45 crore.
This is creating significant working capital pressure on smaller manufacturers, which is a major constraint. This is where we gain because we have completed two fundraises and have Rs 2,000 crore of capital. This enables us to service large orders. So, that is one factor.
The second is space and infrastructure because manufacturing requires space, infrastructure, and investment in technology and machinery to produce ultra-lightweight jewellery. These factors are driving the shift from the unorganised to the organised sector on the retail, or B2C, side. However, one thing to note is that in this industry, 80 per cent of B2B manufacturing is still unorganised. So, there is a strong tailwind supporting the shift towards organised B2B manufacturing as well.
What has been the stance of the company when it comes to acquisition? Are you more open to acquisitions going ahead?
In last two years we have done the acquisition mainly in terms of the product portfolio expansion, in entering into new geography and new customers. Now, we are in 70 per cent of the retail jewellery SKUs. We are also in the key geographies per se. So, at this point of time we are not looking at any acquisitions per se because we are there in majority of the products and geographies.
What is your outlook for the upcoming festive season, and how has Sky Gold prepared to meet the expected demand?
In terms of the demand outlook, the outlook remains strong. However, there are a few changes that are very evident. First is the shift towards 18-carat, 9-carat and lower-carat jewellery. The second trend we are seeing is an improvement in the studded mix, with the majority of retailers trying to increase their studded and diamond-studded jewellery business.
The third thing is that we are seeing a lot more old gold coming back because, at the retail level, we are hearing that old gold exchange, which was close to 20 per cent, has now increased to 50 per cent. So, we are getting more old gold as well. These are some of the changes that we are seeing at the business level in terms of margins and the other drivers of the business.
