Opportunities & Future:
Smart capital for jewellers

In spite of making one of the biggest PE losses with its investment in Vaibhav Gems, Warburg Pincus surprised the community and restored faith in the gems and jewellery sector by investing Rs. 12,000 crore in Kalyan Jewellers in October last year. Around the same time, SAIF Partners invested Rs. 80 crore in Senco Gold. This goes to show that PE is a funding option for the “right” jewellers. To understand what it takes to access this capital, The Retail Jeweller organised a session on “Private Equity and Funding — Opportunities and Future,” in its annual Trendsetter Summit. Here are some forward-looking observations from the panellists. Nikita Peer

Why PE’s sudden interest in jewellery?
“Jewellery is one of the most profitable retail businesses — even more than apparel. If you look at return-on-equity metrics, a well-managed jewellery retail firm can generate about 3X gold inventory turnover with an average of 3 per cent PAT margin and 20 per cent plus return on equity, which is considered good,” said Vishal Sood, managing director, SAIF Partners.

He added: “Consumers show great brand loyalty to larger brands in the jewellery sector. There is a shift from unorganised smaller players to multi-brand, multi-location players.” From 10 per cent in 2008, he said, regional and national chains increased their market share to 23 per cent in 2013.

Why opt for PE?
For jewellers, PE is a longer-term commitment (five to seven years at least) and can be an alternative to debt equity from banks. The fund usually brings in a pool of capital (meaning further rounds of funding) as the company grows.
Also, PE money helps when public markets are not ripe for the industry or if a company’s business model is not yet proven. While banks are not forgiving, PE investors write off their investment in case the company doesn’t work out well.

Interestingly, PE players bring a lot more than capital to a company. They have a large knowledge-base and network, so they also provide business mentoring. “PEs could help jewellers look at cross-border synergies in terms of tie-ups for special expertise etc,” noted Sood. “They have access to a global network, which is no less important for a smaller regional or national player.”

This kind of support makes a company much more transparent and can make it more professionally managed. “We are not afraid of ups and down,” said Sood, “but of not knowing what’s happening in the company.” On bringing in talent, he said, “The entrance of a PE firm shows that a company is serious about growth and there is an opportunity for employees to create an impact. This goes a long way to helping attract a good management team, which traditional family-run businesses struggle to attract as they are considered more old-fashioned and don’t function like MNCs.”

Pet peeves of the sector
Some risk factors have kept PEs away from the sector. Gold price volatility is a big risk inherent in the business and requires a hedging strategy. Besides, the jewellery sector has a reputation for poor corporate governance. Just like real estate, gold is seen as a way of parking black money. Steps to keep such buyers at bay, could lead to short term losses but can create sustainable, scalable and reputable business.

“Another factor that has stopped PEs from investing in the sector is that few B2B suppliers have been able to set up retail jewellery stores. B2B players today have a huge working capital cycle (eight to 12 months), even though margins are a mere 2 per cent. We need to change business models for PE investors to be active enough in the space,” observed Anup Agarwal, director, investment banking, Jefferies India, an investment banking firm.

Preparing to raise funds
The basics are simple. “PEs look for overall sector size, reasonable valuations and a consistent earnings growth of about 25 per cent per annum over at least three years. The business strategy is also key. For instance, Tanishq’s franchisee model helps in an asset-light expansion of the brand as they don’t have to invest in inventory. They make smaller margins but business becomes a lot more scaleable, making return on equity higher,” said Sood.

Of course, the promoter’s reputation, the company’s corporate governance, a concrete, executable plan for five years, the alignment of investors and promoters at the time of initial discussion, and a clear exit opportunity are among the other musts.

“We spent three or four years preparing ourselves for PE funding,” recalled Shankar Sen, MD, Senco Gold and Diamond. “We appointed KPMG as our auditor, changed our company from family-run to a more professional operation, took care of corporate governance and tried to mitigate risks like lack of transparency in the business which led to some sacrifices in initial financial performance.”

Added B Madhuprasad, chairman, Keynote Corporate Services, “When we talk of dilution, jewellers immediately talk about enterprise value and not business plan and capital requirement. Also, some jewellers say that they are totally debt-free, which should make it easy to raise capital. But a jeweller needs to show working capital to establish that it has some financial discipline and accountability.”
In terms of exit opportunities, though an IPO is one of the biggest options, in certain cases PE players could also exit via a secondary sale (which means other PEs or promoters of the company buy their shares), or when the company is sold.