IGI IPO analysis

International Gemological Institute (IGI)'s IPO (initial public offering) will open for subscription on December 13, 2024, and close on December 17, 2024. We break down the diamond, gemstone and jewellery grader's strengths, weaknesses and growth prospects to help investors make an informed decision.

IGI IPO in a nutshell

• Quality : Between FY22 and FY24, the company reported a three-year average ROE and ROCE of around 76.8 and 96.1 per cent, respectively.
  
• Growth : Between FY22 and FY24, its revenue and profit after tax grew by 32 and 38 per cent per annum.
  
• Valuation : At the upper end of the price band, the stock is valued at a P/E and a P/B ratio of nearly 76.6 and 8.5 times, respectively.
  
• Overview: IGI, a leading gem certification company, is expected to benefit from the growth of the jewellery market, including studded jewellery, which is expected to compound at 6-9 per cent per annum till 2028. Rising discretionary incomes and women's growing workforce participation can also support growth. However, factors like competition from unorganised players and concerns regarding a slowdown in the diamond industry, which has been ongoing for the last three years, may hamper the company's growth prospects.

About IGI

International Gemological Institute (IGI India) provides certification and accreditation services for diamonds, studded jewellery and coloured stones. The company is known for its expertise in providing certification for natural and laboratory-grown diamonds and is a global leader in the latter. As of the nine months ended September 30, 2024, revenue from natural diamonds accounted for around 60 per cent of IGI's revenue.

The IPO proceeds from the fresh issue of Rs 1,475 crore will be transferred from IGI India to its promoter company, Blackstone Asia, for acquiring the operations of IGI Belgium and IGI Netherlands. Hence, this move will consolidate IGI's international operations under IGI India.

Strengths of IGI

• Oligopolistic industry: The precious stones certification market is dominated by a handful of players, with IGI being the second largest and the only listed company (as of FY24, the company had a global market share of 33 per cent). This is because companies in the industry need to build credibility and possess the required expertise and equipment, making it difficult for new players to enter.

Weaknesses of IGI

• Revenue concentration: The pre-acquisition group derives a significant portion of its revenue from its top 15 clients only. For the nine months ended September 30 2024, these customers accounted for 51.5 per cent of revenue.
  
• Post-acquisition: A potential concern for IGI India post-acquisition is that, despite projected increases in revenue, its valuation may not see a corresponding rise due to decreased EBITDA and PAT margins. While the valuations can be increased by expanding into international markets, it can lead to operational inefficiency and currency exchange rate volatility.

Risk report

Company and business

• Are earnings before tax of IGI more than Rs 50 crore in the last 12 months?
  Yes. The company reported a profit before tax of Rs 325 crore in FY24.
  
• Will IGI be able to scale up its business?
  Yes. The global jewellery market, including the laboratory-grown diamond segment, is experiencing substantial growth, offering significant opportunities for expansion. Demographically, the increased participation of women in the workforce and its corresponding increased demand for jewellery will also support the growth.
  
• Does IGI have recognisable brands with client stickiness?
  Yes. IGI has a recognisable brand and is the second-largest independent certification and accreditation services provider for diamonds and other precious stones.
  
• Does the company have a credible moat?
  Yes. The company is one of the only three companies that offer comprehensive offerings such as grading and classification services across different stone types.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold more than 25 per cent stake in the company?
  Yes. IGI's promoters will hold a 76.6 per cent stake in the company.
  
• Do the top three managers have over 15 years of combined leadership at IGI?
  Yes. Mr Tehmasp Nariman Printer, MD and CEO, has been associated with the company since 1999.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is IGI free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of over 15 per cent and a return on capital employed of over 18 per cent?
  Yes. Its three-year average ROE and ROCE were nearly 76.8 and 96.1 per cent, respectively. In FY24, its ROE and ROCE were almost 74.5 and 94.2 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. The company has reported positive cash flows during FY22-24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company has a net cash position.
  
• Is IGI free from reliance on huge working capital for day-to-day affairs?
  Yes. IGI's business is not working capital intensive. However, the receivables days of the company have risen from around 34 days to 61 days during FY22-24.
  
• Can the company run its business without relying on external funding in the next three years?
  Yes. The company is a net cash company with a history of generating free cash flows.
  
• Is IGI free from meaningful contingent liabilities?
  Yes. As of the quarter ending September FY25, the contingent liabilities as a percentage of total equity is less than 1 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 2.5 per cent on its enterprise value.
  
• Is the stock's price-to-earnings (P/E) less than its peers' median level?
  N/A. It is valued at a P/E multiple of 43.7 times with no listed peers.
  
• Is the stock's price-to-book (P/B) value less than its peers' average level?
  N/A. It is valued at a P/B ratio of over 8.5 times with no listed peers.

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Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

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