In today’s Finshots, we dive into the business of the International Gemmological Institute, which closes its IPO application window on 17th December 2024 (Tuesday).

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The Story

At the start of 2024, Prime Minister Narendra Modi unveiled a grand temple dedicated to the Hindu god Ram in Ayodhya. The event drummed up immense excitement. It wasn’t just a momentous occasion, but a deeply emotional and spiritual milestone for many. Every detail of this temple, from the consecration to the rituals, had to be flawless. After all, it wasn’t just about ceremony; it was about honouring the sentiment of millions.

And one company that secretly played a crucial role in making sure that everything about these rituals was just right, is the International Gemmological Institute (India) or IGI, as we’ll call it.

If you’re wondering what IGI has to do with all this, picture the Ram Lalla idol in the temple, adorned with stunning jewellery — the crown, necklace, waistband, anklets and toe rings. These weren’t just ornaments. They were symbols of devotion. And IGI had the important job of certifying that every one of these studded pieces was authentic, with its origins and quality thoroughly verified.

Now, imagine the chaos if this part hadn’t been handled properly. Because let’s face it. It’s not just about jewellery. It’s about honouring the deity with the utmost respect. Anything less wouldn’t just be a mistake, it would be a matter of faith and sentiment. And IGI’s role ensured that everything shone as brightly as it should.

By now, you’ve probably got a pretty good idea about IGI’s business. After diamonds are mined, they go through a meticulous journey — sorted, valued, cut, polished and sold to wholesalers who then supply them to jewellers. But before these polished gems find their way to jewellery stores, they need to be graded and certified by gemological laboratories. That’s where IGI steps in.

With 19 laboratories in India and 31 in total globally, IGI specialises in certifying diamonds and other gemstones. They’ve got their own in-house software, “Swiftcert”, which they use across all their labs. It helps them evaluate everything from colour, clarity and cut to carat weight, and even determines if a gem is natural or lab-grown. This ensures that every piece meets the highest standards of quality and value. And they don’t just stop at loose gemstones, they also certify studded jewellery to make sure it’s up to the mark.

Now, here’s where it gets interesting. The jewellery market is a goldmine, quite literally. As of 2023, the global jewellery market was valued at an incredible ₹26 lakh crores, growing at a steady 9% annually since 2020. Post-pandemic, gold and diamond-studded jewellery have been leading the charge, contributing a whopping 74% to the market.

And the growth isn’t slowing down. Jewellery is no longer just a status symbol. It’s becoming a daily-use fashion accessory. Add to that the rise of demi-fine jewellery, which blends materials like gold-plated silver to make pieces affordable yet durable without compromising on quality. Online jewellery retail is also booming, making it easier for consumers to shop.

Then there’s the demographic push. Urbanisation in countries like India is skyrocketing, nuclear families are on the rise, meaning more people buying jewellery. And there’s a huge, young working population with evolving tastes. India, with a median age of just 28 and over 40% of its population under 25, is a prime market. More women are also joining the workforce. For context, about 33% of Indian women aged 15–64 were working in 2023, reshaping consumption patterns as they make independent purchasing decisions.

Put it all together, and it’s clear the jewellery market is sparkling brighter than ever. By 2028, it’s expected to grow to a dazzling ₹32 lakh crores, with a steady annual growth of 3–6%. And as this glittering market expands, the demand for IGI’s quality and authenticity certification services is only set to soar.

The real game-changer in the jewellery market, though, is the rise of lab-grown diamonds (LGDs). In 2023, global production of gem-quality rough diamonds hit about 60 million carats, but LGDs have been outpacing their natural counterparts in growth. And this trend isn’t slowing down anytime soon.

For starters, LGDs are affordable, costing 70–80% less per carat, while offering an option to customise. Designers can create them in vibrant colours, something that’s rare and expensive when done naturally, all within a matter of weeks in a lab. Plus, they’re seen as a sustainable and ethical choice, free from concerns like forced or child labour, war funding and environmental destruction often associated with natural diamonds. Simply put, LGDs are here to stay.

And that is fantastic news for IGI because LGD certification is the fastest-growing sub-segment in the jewellery market, and IGI dominates it with a whopping 65% market share as of 2023. Over half of its revenue comes from certifying LGDs, placing it in the perfect position to ride this wave of growth.

But IGI isn’t stopping there. It’s planning a ₹4,225 crore IPO to make its prospects even brighter. And that could make it the world’s second-largest independent certification and accreditation services provider for diamonds, studded jewellery and coloured stones, commanding over a third of the global market.

How’s that, you ask?

Well, ₹2,750 crores from the IPO is an offer for sale, where its current promoter, Blackstone Asia, will divest part of its stake. About ₹1,300 crores will go towards acquiring IGI Belgium and IGI Netherlands, which are currently subsidiaries of Blackstone Asia. Once the acquisitions are complete, IGI India, which currently oversees only the Indian and Turkey businesses, will take charge of the entire global operation. The rest of the IPO proceeds will go into building IGI’s brand and expanding its reach.

But is this IPO worth your money?

Well, IGI’s track record speaks for itself. Founded in Belgium in 1975, it now operates a network of 31 labs across 10 countries, including key markets like India, the US and China. It was the first global player to grade lab-grown diamonds comprehensively and issued its first LGD certification report back in 2005. The best part? It worked with 9 of India’s top 10 jewellery chains just last year.

Financially, it’s on solid ground too. Revenue from operations stood at nearly ₹640 crores in 2023, growing at 30–35% annually over the last three years. Certification services for natural diamonds, LGDs, studded jewellery and coloured stones account for 97% of its revenue. The remaining 3% comes from education and other services, like IGI’s gemology schools, which not only create future gemologists but also help spread awareness about its offerings. With 18 schools in 6 countries (9 of them in India itself) it’s building a steady pipeline of talent for the future.

Profitability is another highlight. In 2023, its profit after tax hit ₹325 crores, with a consistent 50% profit margin over the past three years. It also boasts an impressive return on capital employed (ROCE) of over 95% in the same period.

What’s more is that IGI’s business enjoys a strong moat. The barriers to entry in this industry are high, requiring significant capital and expertise that only incumbents like IGI possess. And with no other listed gemological institute globally, IGI will be the first of its kind to hit the public markets.

So yeah, it’s safe to say that IGI has a resume that truly sparkles!

But before you get too excited, there are some challenges too.

To begin with, the natural diamond market is facing its share of geopolitical risks. About 35% of the world’s rough diamonds come from Russia, and with international sanctions due to the Russia-Ukraine war, imports of Russian diamonds have been restricted. This could create a global supply crunch, impacting the availability of natural diamonds. And since nearly a fifth of IGI’s revenue comes from certifying natural diamonds, any disruption in the supply chain could hit their bottom line.

Next, you’ll have to beware of IGI’s revenue concentration. Over the past three years, between 30-45% of its revenue came from just its top 15 customers. And its operations in India are mainly concentrated in Gujarat and Maharashtra, where over 85% of its revenue is generated, thanks to the region being the heart of diamond trade and processing. If there’s a fallout with any of these key customers or if anything disrupts these regions, IGI could feel the impact on its business and finances.

Another thing to note here is that it’s taking longer for IGI to convert sales into cash. The trade receivable turnover days have gone up from about 30 days in 2021 to roughly 55 days this year. That’s a significant delay in getting money at their doorstep.

And, as IGI expands globally, they’ll have to manage a whole new set of challenges — different customer expectations, cultural differences and currency exchange rate fluctuations. It’s not just about running operations in India and Turkey anymore now, it’s overseeing nine other global regions, which is no easy feat.

But the company’s valuation has tripled from around ₹5,500 crores 18 months ago to a solid ₹16,500 crores, just because of this business consolidation aimed at unlocking value. So yeah, IGI must be hoping it pays off.

Until then…

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