Sky Gold ltd. – Will it reach the sky?

Here is a summary of the Sky Gold Limited (SGL) Q2 FY25 Earnings Conference Call held on November 19, 2024. This summary includes key figures and insights from the management’s presentation and the Q&A session:

SGL Q2 FY25 Earnings Call Summary

• Strong Q2 and H1 FY25 Performance: SGL achieved record-high quarterly revenues and profits, driven by positive market dynamics and the anticipation of a strong wedding season.

  • Q2 FY25 revenue reached INR768.8 crores, a 94% year-over-year increase.
  • Q2 FY25 profit after tax (PAT) was INR36.7 crores, a 405% surge compared to the previous year.
  • H1 FY25 revenue came in at INR1,491.9 crores, reflecting a 93.3% year-over-year growth.

• Growth Drivers and Market Outlook: The Indian jewelry market is poised for substantial growth, fueled by various factors.

  • The overall market, currently valued at approximately $90 billion, is projected to expand by 12% to 15% annually in the coming years.
  • Demand is being driven by stock market volatility, a robust wedding season, and general economic stability.
  • The casual jewelry segment is experiencing rapid growth due to its appeal to younger consumers who appreciate its lightweight and diverse designs.

• Strategic Investments and Initiatives: SGL recently secured INR270 crores in funding, which will be allocated to support several key initiatives.

  • Product Portfolio Expansion: SGL plans to introduce new offerings in 18-carat gold and diamond jewelry to cater to changing consumer preferences.
  • Subsidiary Growth: Increased capital will be injected into Star Mangalsutra Private Limited and Sparkling Chains Private Limited, with the goal of capturing a larger share of an expanded TAM.
  • Capacity Enhancement: The company is investing in its workforce by hiring more skilled designers, artisans, and sales and merchandising professionals.
  • International Expansion: SGL aims to establish a strong presence in key international markets, including the Middle East, UAE, Singapore, and Malaysia.
  • Acquisitions: The company is actively exploring acquisition opportunities.

• Production, Exports, and Key Personnel: SGL reported positive trends in both production and exports.

  • Monthly production volume in Q2 FY25 averaged 345 kgs, a significant 38% increase from 250 kgs per month in the prior year.
  • Export sales reached INR63.9 crores, representing 9% of total quarterly sales.
  • The company appointed Mr. Akash Talesara, a seasoned industry veteran with over 20 years of experience, as President of Sales and Business Development.

• Financial Guidance: SGL provided insights into its financial expectations for the remainder of FY25.

  • The company anticipates generating INR3,300 crores in revenue for FY25.
    • This projection includes INR2,700 crores from core operations and INR600 crores from the recently acquired subsidiaries.
  • Management expects a gross margin of 7% to 8% in FY25, driven by an optimized product mix and increased export sales.
  • The company is targeting a long-term EBITDA margin of 5% to 5.5%.
  • PAT margin expansion is expected to be achieved through a reduction in interest costs facilitated by increased utilization of gold-metal loans (GMLs).

Key Insights from the Q&A Session

The Q&A session covered various topics, providing further insights into SGL’s operations and strategic direction. Some key highlights include:

• Revenue Contribution from Subsidiaries: SGL projects a combined revenue of INR1,000 crores in the next quarter, comprising INR700-750 crores from its core business and INR150-350 crores from the subsidiaries.

• Wedding Season Demand: Management expressed confidence in a strong upcoming wedding season.

  • The management noted that gold prices have decreased by 5% in recent months, leading to greater affordability and potentially boosting demand.
  • India is expected to see 4.8 million weddings this year, with 25% more weddings occurring in the current quarter.
  • This increase in weddings is estimated to generate $6 billion in revenue across various sectors, with jewelry accounting for approximately 25% of this total.

• Gold Price Outlook: SGL believes gold prices will stabilize in the next 2-3 quarters after experiencing a 20%-25% surge.

• Employee Count and Hiring: The company’s employee count has increased to 800, including approximately 650 employees at SGL and 150-180 employees across both subsidiaries.

  • SGL is open to adding more employees as needed, particularly as its turnover and volume increase.
  • The company is actively seeking to hire a CFO and add two new board members with significant industry experience.

• New Client Contributions: Both CaratLane and P.N. Gadgil contributed to Q2 revenue, and SGL expects their contributions to grow in the coming quarters.

  • P.N. Gadgil is projected to add INR50-100 crores to SGL’s sales.
  • CaratLane, which provides SGL with raw materials, is expected to increase production volume by 50 kg in the next two quarters.

• Gold-Metal Loan Utilization: SGL is aiming to increase its reliance on GMLs, which are currently at 20%-22% of total debt, to 50%-60% by December and potentially 80%-85% by March.

  • The blended cost of debt for GMLs is estimated to be around 3%.

• Working Capital Cycle: SGL’s working capital cycle is currently around 75 days.

• Retail Expansion: The company is currently focused on B2B manufacturing and has no plans to expand into retail in the near future.

• Subsidiary EBITDA Margins: The subsidiaries currently have an EBITDA margin of 4.5%, and management aims to increase this to 5.5% by the December quarter.

• Subsidiary Sales Estimates: SGL expects its subsidiaries to generate INR1,300 crores in revenue in FY26.

• Capacity Utilization:

  • SGL’s subsidiaries are currently operating at 30%-33% capacity utilization, and the company intends to ramp this up to 100%.
  • SGL itself has a capacity utilization of 46%.

• Export Growth Strategy: SGL plans to increase its export sales from the current 9%-10% to 15% by next year, focusing on markets like Malaysia, Singapore, and Middle Eastern countries like the UAE, Dubai, and Qatar.

  • Exports are expected to contribute 12%-13% to sales by the end of the current year.
  • The gross margin for exports is approximately 6.5%.

• Source of Increased Other Income: The significant other income in Q2 FY25 stemmed from the sale of shares in HDFC Bank and TCS that SGL held for several years.

  • The company plans to divest its remaining shares, currently held by SBI Bank as collateral, in the December quarter.

• Volume Guidance:

  • SGL’s current monthly production volume is 350 kgs.
  • The company aims to reach 375-400 kgs per month by the end of FY25.
  • FY26 volume guidance is 550-600 kgs per month.
  • SGL expects to reach 750 kgs per month by FY27.

• Risk Mitigation Strategy for Gold-Metal Loans: SGL mitigates the risk of gold price fluctuations associated with GMLs by hedging its inventory in the MCX, a commodity derivatives exchange in India.

• “Studded Ratio” and Product Mix: SGL plans to increase the proportion of studded and 18-carat gold jewelry in its offerings.

• Client Acquisition:

  • SGL is actively pursuing Tanishq as a potential client.
  • The company is targeting new clients in the Middle East and Singapore, focusing on mid-sized and smaller companies with growth potential.

• Margin Guidance: SGL projects a gross margin of 6.5% and an EBITDA margin of 5%-5.5% for FY25.

• Receivables Management:

  • Increased receivable days in Q2 FY25 were attributed to SGL offering clients extended payment terms due to the substantial rise in gold prices.
  • Management expects receivable days to decrease in future quarters as they revert to previous practices, onboard new clients with shorter credit terms, and focus on cash-and-carry transactions.
  • The company expects the growth of its export business, which primarily operates on a cash-and-carry basis, to contribute to a reduction in overall receivable days.

• PAT Margin Expectations:

  • SGL aims to achieve a PAT margin of 3.5% in FY25 by reducing interest costs through increased GML utilization.
  • The company’s long-term goal is to reach a 4% PAT margin by FY26, supported by new product launches and a focus on high-margin segments like studded jewelry, 18-carat gold, and potentially lab-grown diamonds and Moissanite jewelry.

• App Development: SGL is developing an app that will allow clients to view products, check inventory, and place orders online.

  • The app is currently in its trial phase and is expected to launch in December.

• Rationale for Bonus Share Issuance: SGL’s decision to issue bonus shares in a 1:9 ratio aims to improve liquidity and make the company’s shares more accessible to retail investors.

  • Management believes this move is sustainable given the company’s robust financial position, substantial reserves, and positive profit outlook.

• Dividend Distribution Policy: SGL plans to retain profits for the next 1-2 years, focusing on strengthening its financial position and becoming debt-free.

  • The company will consider dividend distributions once it achieves its financial targets, likely in FY26 or FY27.

• International Expansion Risks and Mitigation: The primary risks associated with SGL’s international expansion plans are related to potential credit and payment issues with international clients.

  • SGL intends to mitigate these risks by focusing on cash-and-carry transactions and limiting credit terms, especially for new clients.

• Addressing Competition: SGL believes its strengths, including its position as a leading manufacturer in India, its large-scale infrastructure, skilled workforce, advanced technology, and focus on quality and design innovation, will enable it to compete effectively against both organized and unorganized players.

This summary provides a detailed overview of SGL’s Q2 FY25 Earnings Conference Call, capturing key highlights and insights from both the management’s presentation and the Q&A session. The company’s strong performance, ambitious growth plans, and focus on strategic investments suggest a positive outlook for the future. However, it’s important to note that all information in this summary is derived from the sources you provided.