'Promoters don't want to over-leverage’: Reva Diamond CEO explains early IPO push will fund expansion

PNGS Reva Diamond Jewellery

• PNGS Reva to use IPO funds for 15 new stores and marketing
• Promoters prefer equity over debt to fund expansion
• Majority of new stores to open in Maharashtra for easy returns

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“We can borrow, but our promoters are shy of debt," said Amit Modak, CEO of PNGS Reva Diamond Jewellery, explaining why the diamond retailer is heading to the public markets barely a year after being carved out from group company P. N. Gadgil & Sons.

The issue proceeds will be used to fund the diamond player's expansion, with Rs 286.5 crore earmarked to set up 15 new stores, and Rs 35.4 crore of Rs 380 crore issue used for marketing purposes.

Here are some edited excerpts.

You were carved out into a standalone entity just a year ago. Why come to market so soon?

Reva will be a 360-degree natural diamond brand, offering everything from nose pins to high-end branded jewelry, roughly in the Rs 15,000 to Rs 12-15 lakh price range. Very few brands service such a wide variety in diamond jewelry exclusively.

Traditionally, family jewelers have handled both traditional and diamond jewelry together. But there's a growing inclination among customers to associate a specific brand with their diamond purchases, especially since gives them pride when explaining what they're wearing. We also want to cater to the Gen Z and young, discerning customers. To capture this brand-conscious mindset, we created Reva as a separate entity. And we are coming to market to fund our store expansion.

But you could have borrowed more instead of diluting equity for this. 

A: Our promoters are shy to borrow. They don't want to over-borrow. We have a borrowing limit of Rs 800 crore in our main company, but our utilization is only Rs 450-500 crore. We're very conservative. If any eventuality comes, we need to face it effectively. We're comfortable at every ratio, but aggressive borrowing would impact our margins.

Are you comfortable with your valuations?

A: We want to grow in this segment, and if we want to grow, it should be with the people. And if it's with the people, they should get reasonable returns on their investment.

For example, we issued PNGS Gargi Fashion Jewellery at 7x P/E. Today it trades at 35x P/E. People have made 5x their investment. The Rs 30 issue price is now Rs 900 per share. It's moving to mainboard in September, just 30 months after listing. That's the kind of value creation we want to replicate.

Why reduce the IPO size from Rs 450 crore to Rs 380 crore?

The project cost is Rs 328 crore. IPO expenses are 5-6 percent of issue size. We don't need extra money for general corporate purposes, especially since that creates negativity with investors because it gives the issuer too much liberty. Our valuation is very comfortable. We could have raised more, but the promoter wants investors to benefit, not pay a higher price.

Giants like Titan are pushing lab-grown diamonds. How do you compete?

A: Actually, Titan has made it easy for us. Their buyback policy for lab-grown diamonds only covers the gold content, there's no value assigned to the diamond portion. That's explaining to customers what value they're actually wearing. Natural diamonds remain a store of value.

Aren't diamond prices falling globally?

A: Yes, international diamond prices are falling 2-3 percent per annum for the smaller sizes we use. But our currency is falling 5-6 percent. So net-net in India, there's actually an appreciation of 2-3 percent in rupee terms.

You're opening 15 COCO (company owned, company operated) stores. What happens to your EBITDA margins that benefitted from the Promoter being the key franchisee?

We'll see a 100 basis point impact at the EBITDA level from common expenses, such as electricity, rent, et cetera. Interest costs will also pressure PAT margins in the near term, but over time, internal accruals will repay the debt and we'll become debt-free soon.

Why do you have such a heavy concentration in Maharashtra, aren't investors being over-exposed to a single state?

A: Look at Thangamayil, they are also concentrated in one state with a Rs 10,000 crore market cap and Rs 5,000-plus crore revenue. Maharashtra and Gujarat have higher disposable surplus. So 60 percent of new stores in Maharashtra are planned, and the remaining 40 percent goes to north India where population is high but disposable surplus is lower. This combination gives us easy returns from Maharashtra while we are building a pan-India presence.

Your inventory levels seem high at 360 days.

A: That's normal for diamond jewelry. Gold jewelry sees 3.5-4.5x stock turns because it's fast-moving, chains, rings, mangalsutras. Diamond jewelry is different, since it's a niche customer base with higher margins. Industry stock turns range from 0.75 to 1.5x. Below 0.75, you're loss-making. Above that, you have good EBITDA. Our new locations reach 0.75 within 8-12 months.

Also Read | PNGS Reva Diamond Jewellery IPO GMP rises ahead of Rs 380-crore IPO launch next week

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