Senco Gold IPO

Objects of the Offer :

The IPO consists of a fresh issue of shares aggregating up to Rs3,250 mn and an offer for sale aggregating up to Rs2,000 mn by the selling shareholders from the promoter and promoter group. The total IPO size is Rs 5,250 mn. The selling shareholder will be SAIF Partners India IV.

Around Rs 2,400 million of net proceeds from the fresh issue will be utilised towards funding working capital requirements and the remaining amount for general corporate purposes. The proceeds of the offer for sale will go to the selling shareholders.

SENCO gold ltd IPO ANALYSIS

Consistent track record of financial performance:

The company’s consolidated revenues for FY21 stood at Rs26,603mn. The company’s consolidated EBITDA for the same period stood at Rs1,753.25 . Senco’s profit for the fiscal ended March 2021 stood at Rs 614.82 mn. The numbers for FY21 are consolidated, and cannot be directly be compared to FY20 and FY19 since they are standalone numbers.

CONSOLIDATED FINANCIAL SUMMAry of senco gold

(`₹ in Millions)	FY21	FY20
Revenue from Operations	26,603.79	24,203.39
Adjusted EBITDA	1,753.25	2,161.58
EBITDA Margin (%)	6.59%	8.93%
PAT	614.82	909.34
RoNW (%)	10.65%	17.86%
Basic EPS	9.25	13.68

Competitive Strength:

strong brand name with heritage and a legacy of over five decades

Senco gold has over five-decade track-record evoking consumers’ trust in their products. To ensure transparency to their customers, they have been BIS hallmarking their gold jewellery for all gold jewellery, since 2012, prior to the regulatorily mandated hallmarking which started from May 2021. They have also installed gold testing machines (XRF machines) to provide assurance to customers for the hallmarked gold jewellery sold at all their showrooms and follow stringent and transparent purity checks to ensure quality of their jewellery before being sold to their customers. Most of the gold used as raw material by them is sourced by way of gold metal loan facilities offered by bullion banks and loose diamonds are mostly procured from reputed sight holders and the manufacturing of jewellery is carried out either by the skilled Karigars in West Bengal for hand made products or by organised manufacturers in Mumbai, Maharashtra or Kerala or Rajkot, Gujarat or Coimbatore, Tamil Nadu or in house at their manufacturing facility at Ankurhati, Howrah.

Their commitment to quality and transparency has enabled them to position “Senco Gold & Diamonds” as a strong and trusted brand in markets in which they operate East and North-East India, as a jewellery retailer with a wide range of gold, silver and diamond jewellery products. They have received the award of “Best Chain of Retail Stores (National-2017)” by Indian Bullion and Jewellers Association Limited at the 4th India Bullion and Jewellery Awards, 2017. They have improved their ranking from 4th most trusted jewellery brand by TRA’s Brand Trust Report 2017 to 2nd most trusted jewellery brand by TRA’s Brand Trust Report 2020. They have also been awarded the 2nd Most Desired Jewellery Brand in India by TRA and the Best Brand in Jewellery Category by The Economic Times in 2021.

They believe that their focus on quality, craftsmanship and original designs, together with their targeted marketing and customer service, has contributed to their brand recognition and customer loyalty. As a part of their brand building strategy, they regularly tie-up with celebrities as brand ambassadors to promote their brand or specific collections and also sponsor sporting teams and events. They have appointed and work with actors, athletes, sportsperson and various celebrities or brands to enhance their brand presence and market their products.

Largest organized jewellery retail player in the eastern region of India based on number of stores

Senco Gold is the largest organized jewellery retail player in the eastern region of India based on number of stores and among eastern India based jewellery retailers, they have the widest geographical footprint in non-eastern states (Source: CRISIL Report). Their oldest operational showroom is located in the Bowbazar area of Kolkata (a jewellery market hub), where they have been present, through Senco Jewellery Museum (an erstwhile family run proprietary concern), for over five decades. From their roots in Kolkata, West Bengal, they have strategically expanded their presence to 13 states across India. As on the date of the DRHP, they have 70 company operated showrooms and 57 franchisee showrooms (including four franchisee owned and company operated showrooms) located across 89 cities and towns in India with an aggregate area of approximately 393,342sq. ft.

In line with their expansion strategy, while entering new state geographies, they endeavour to register their presence in the state capital or the largest city in the state through company operated showrooms before venturing into tier-II and tier-III locations in such state, primarily through franchisee showrooms in order to leverage logistical efficiency of inventory and return on capital. This hub and spoke approach has enabled them to successfully implement a franchisee model for their business and become a well-established name for jewellery, particularly in East and North-East India.

Established asset-light ‘franchise’ model leading to operating leverage.

Senco Gold focuses on attaining an optimal balance between their owned showrooms and expanding their asset-light franchisee model. To capitalise on the shift in consumer demand to organised jewellers from the traditionally unorganised, many brands started to expand their presence at a pan-India level. Apart from opening company operated showrooms, many also adopted the asset-light, franchisee route for expanding their geographical presence. This reduced the capital expenditure (capex) requirement and enabled faster expansion. (Source: CRISIL Report). The company’s showroom count has increased from 49 company operated showrooms and 48 franchisee showrooms as on March 31, 2019 to 70 company operated showrooms and 57 franchisee showrooms (including four franchise owned and company operated showrooms) as at the date of DRHP, with their franchisee showroom count having increased from 48 as on March 31, 2019 to 57 as on the date of this DRHP. Among the eastern India based jewellery retailers, they have the widest geographical footprint in non-eastern states. (Source: CRISIL Report) The addition of 12 company operated showrooms (net) during the period from fiscal 2019 till fiscal 2021 resulted in revenues of Rs 5,312.19 million and capital expenditure of Rs 182.29 million as compared to an increase of seven franchisee showrooms (net) over such period which resulted in revenues of Rs 2,476.55 million and without any capital expenditure. Accordingly, while their margins from their franchisee showrooms are typically lower than the margins at their company operated showrooms, the reduced setup cost of the franchisee showrooms along with the transfer of inventory to the franchisee ensures that the ‘franchise’ model continues to promote asset-light growth for the company, with almost negligible capital payout.

Such a setup enables Senco to balance risk and transfer the optimal cost of inventory to their franchisee partners. In their ‘franchise’ model, management know-how is provided by them to the franchisee partner together with the “Senco Gold & Diamonds” brand. Inventory is provided against receipt of funds for a majority of the sales made to their franchisee showrooms. At times, due to a spurt in demand owing to seasonal factors or decrease in prices, the company offers short term credit facilities to their Franchisee Showrooms. Even within their ‘franchise’ model, they evaluate both ‘franchisee owned, franchisee operated’ as well as the ‘company owned, franchisee operated’ models, based on the location and market potential of the showroom.

As on the date of the DRHP, they have 53 showrooms which are ‘franchisee owned, franchisee operated’ and four Showrooms which are ‘franchisee owned, company operated’. The first franchisee agreement was signed in the year 2000 and since then they have been maintaining a cordial relationship with their franchisee partners, which has resulted in opening of multiple “Senco Gold & Diamonds” showrooms by the same franchisee partner.

Calibrated focus on light, affordable jewellery with the intention to cater to the upwardly mobile and younger generation.

Senco Gold’s wide range of product offerings caters to diverse customer segments. In particular, they cater to the upwardly mobile class and younger generation. Further millennials or Gen Y being persons born between 1981 and 1996 tend to have slightly higher disposal income while Gen Z, born after 1996, are yet to hit their peak earning potential, leading to lower disposal incomes. (Source: CRISIL Report) With the increasing number of working women, exposure to global designs, and rising number of young consumers who prefer to purchase jewellery for adornment rather than investments, consumer preferences are shifting away from traditional bulky jewellery to light-weight contemporary jewellery. Hence, jewellery retailers have started manufacturing light-weight jewellery of contemporary designs, suitable for daily use. (Source: CRISIL Report) Accordingly, Senco’s product range, for light and affordable jewellery starts at approximately Rs 2,000. Further, they have a diverse range of offerings within the category of affordable jewellery, with an active catalogue of more than 108,000 designs for gold jewellery designs and more than 46,000 designs for diamond jewellery.

In particular, they have developed two specific ranges/ brands to target these demographics. Their Everlite brand of light-weight gold and diamond jewellery varies from approximately Rs 5,000 to Rs 60,000 and is targeted at the upwardly mobile. The products offered under this line are theme based as per different tastes of the customers. As on the date of this DRHP, they have two exclusive Everlite showrooms in addition to dedicated Everlite counters at most of their showrooms. Their Gossip brand caters to the silver and costume jewellery needs of younger customers. This fast-moving, fashionable and easy-to-wear jewellery gives customers freedom to change their jewellery with varying clothes preferences at different occasions. Their Gossip brand is made of sterling silver or base metal, studded with semi-precious stones and imitation stones including zirconia and coloured crystals.

They have also started the D’Signia branded Showrooms to focus on more premium or higher value jewellery with an average ticket size of Rs 51,000 to provide a premium shopping experience. Their focus on diamond jewellery sales results in higher profit margins for their products. In Fiscals 2019, 2020 and 2021 and in the eight months ended November 2021, sale of diamond, platinum jewellery and precious/semi-precious stones represented 6.35%, 7.64%, 6.82%, and 6.26% respectively, of their revenue from operations.

In 2019, the company launched the Aham collection to provide jewellery for men. While jewellery for women constitutes majority of the jewellery segment, large organized players also have dedicated men’s jewellery lines. (Source: CRISIL Report) The market for online purchase of jewellery has increased at a CAGR of ~33% from fiscal 2017 to Fiscal 2021. (Source: CRISIL Report) Further, CRISIL estimates that although the share of online in total gems and jewellery sales is currently less than 4% of the total industry, it is poised for fast growth of 30- 35% and is expected to account for 6-7% of the gems and jewellery segment by Fiscal 2024. (Source: CRISIL Report) Their dedicated mobile application “MySenco” also allows customers to review, purchase and receive delivery of jewellery from the comfort of any location. As of January 31, 2022, the MySenco app had over 150,000 downloads. They also have marketing arrangements with leading online marketplaces and have added video calling and tele calling services to allow customers to purchase jewellery from anywhere. A key issue during online jewellery purchase is the consumer’s preference for physically examining the product for its size and look, prior to a purchase. However, players have tried to overcome this roadblock via solutions such as free trials at home, applications that allow virtual trial of jewellery, and customisation of size after finalisation of the product. (Source: CRISIL Report).

Senco’s focus on design and innovation, their ability to recognize consumer preferences and market trends, the intricacy of designs and the quality and finish of products are their key strengths. They have a wide range and variety of products and have been able to demonstrate their ability to recognise trends in the jewellery industry in order to cater to their customers. In addition, proximity to a wide range of skilled Karigars from West Bengal allows them to offer a diverse product range, catering to latest consumer trends.

Weakness:

• The company faces a lot of competition from the organised as well as unorganised players, which can make it difficult to improve margins in the long-run.

• Commodity market fluctuations could affect the company’s business

• The company’s operations are subject to seasonal variations

Opportunities:

• Expansion through omni channels will bring a wide range of customers across expansive geographies

• Catering to millennials and generation Z will help build a brand presence and improve pricing

Threats:

• The company is heavily dependent on gold jewellery. Any factors that could affect the procurement or sale of gold could impact its business.

• Given its regional concentration in the east, any fluctuations in the region could affect its operations

Strategies going forward:

Amplify presence through a strong and diverse distribution channel

Senco’s operating model comprises a mix of physical showrooms (both company operated and franchisee showrooms) and digital presence (through their websites, mobile application and third party marketplaces), with their physical presence consisting of 70 company operated showrooms and 57 franchisee showrooms (including four franchisee owned and company operated showrooms), as on the date of the DRHP. Their ‘hub and spoke’ approach to enter new geographies means that they typically foray into large or new cities by way of their company operated showrooms and then leverage their ‘franchise’ model to further penetrate into the smaller tier-II and tier-III locations. Accordingly, they intend to continue to open company operated showrooms in metro cities and tier-I cities and towns, including strengthening their presence in Kolkata and expanding in states where their presence is comparatively low with a focus on high growth and GDP area. They have recently opened a showroom in Lucknow, Uttar Pradesh and they intend to continue to expand their network in the northern states in India in the near future. Prior to selection of proposed locations for their new showrooms, whether it is their own or based on the franchisee model, they conduct an analysis on the market in each location. Post such analysis, they decide if a high street showroom or a showroom in a mall should be set up. They aim to enter jewellery markets where they can potentially gain market share from local jewellers by carving a niche through offering a diverse product mix, designs and price structure and utilizing their brand name and goodwill, which was established over a five-decade long history. Feasibility factors include the estimated size of jewellery sales in the targeted market and the sales mix of different products and the potential for growth in each category, market share of potential competitors in the target market and availability of experienced labour and staff.

As part of their expansion strategy and becoming future ready company, they intend to customise their showroom formats based up on location and target segment. In addition to their regular showrooms, format they intend to add new and future generation showroom formats including, D’Signia Showrooms in areas of comparatively higher affluence and Everlite Showrooms in areas with comparatively lower age median. In addition to physical showrooms, they have also adopted a “Phy-gital” model. To ensure that they reach geographies beyond their physical showrooms, they intend to continue building brand presence in the country through available e-commerce and online channels, including continued and seamless customer experience for online and offline sales through their websites, mobile, chat-bots, their mobile application and showrooms. Towards this end, they continuously invest in technology with a view to complementing their physical showroom presence with their digital presence.

They aim to continue to increase their presence in the digital space through their online platforms as well as through online marketplaces. With the increasing use of the internet in India and the continued development of online channels, they expect to expand their customer reach and increase their sales through the digital channel with relatively low investments. In addition, they believe that they can enhance their brand awareness among internet users and cater to a wider customer segment. They have launched their online platforms, as well as a mobile application, MySenco, through which they offer their jewellery products and gold coins to a diverse range of customers. Further, they have started selling their products on websites of various e-commerce aggregators.

Focus on increasing the overall operating margins by adapting optimal product mix

Senco plans to increase their gross margins by focusing on product categories which yield higher margins. They intend to prioritise diamond jewellery, as diamond studded jewellery typically involves higher gross margins than gold jewellery. In Fiscals 2019, 2020, 2021 and in the eight months ended November 2021, sale of diamond and precious/semi-precious stones represented 5.62%, 6.13%, 5.06%, and 4.84% respectively, of their revenue from operations. They believe that consumer demand for diamond jewellery in India has increased at relatively higher rates compared to the demand for gold jewellery. They intend to further increase diamond jewellery sales as a portion of their overall sales, and thereby attempt to increase their overall profit margins. Senco intends to increase light-weight diamond jewellery sales through various initiatives such as the introduction of their own branded jewellery lines, development of light-weight products with competitive pricing,

Increasing their range of diamond jewellery to cater to customer segments such as younger generation and upwardly mobile in India, and advertising and promotional campaigns focused on diamond jewellery. In addition, consistent with their focus on increasing sales of diamond jewellery, their showroom set-up ensures increased visibility for their diamond jewellery, including by way of separate display counters for Everlite brand and Perfect Love Diamond Solitaires collection. In line with this strategy, they also aim to reduce the holding period of their inventory by improving operational efficiency.

Continue to invest in marketing and brand building initiatives through hyperlocal strategy.

Senco’s marketing and promotion efforts seek to increase sales by building brand awareness that stimulates interest in their product range, and strengthening their position in the Indian jewellery industry. The key marketing channels that they use on an ongoing basis include customer advertisements with specific coverage in local lifestyle, fashion magazines and events, newspapers, outdoor billboards and signage, online/ digital and television advertisements and below the line marketing activities like in-showroom customer engagement programmes, spreading awareness through leaflets inserts in local newspapers and use of marketing collaterals like posters, banners and tent cards. They also work with various local and national influencers for brand collaboration to increase reach and brand visibility through social media platforms.

Senco’s focus on quality, craftsmanship and original designs, together with their targeted marketing and customer service, has contributed to their strong brand recognition and customer loyalty. They have implemented a loyalty program with over 630,000 active customers, as of January 31, 2022 and have entered into an agreement with a third-party service provider for providing among others, financing facilities to customers to purchase high value diamond jewellery through repayment in installments. They also offer one-year free insurance on purchase of diamond jewellery above a certain value from their showrooms. They intend to continue to leverage their existing customer base of over 630,000 active customers as January 31, 2022 and to encourage customers through referral and loyalty programs.

They believe that their brand has been built on the basis of offering their customers a smooth and delightful overall experience. As part of their overall brand building and customer satisfaction program, they have voluntarily adopted selling of jewellery under BIS Hallmarking norms from 2012, prior to the same being mandatory from May 2021 and providing various authentication certifications for diamond jewellery from SGL (for diamonds) or GEMEX, USA (with respect to brilliance of certain specific diamonds such as Hearts & Arrows cut diamonds).

They have also introduced loyalty programs, wherein benefits are provided to customers basis prior purchases or referrals. In addition to their pricing strategies aimed at providing maximum value to their customers, they also provide warranty for products purchased from their showrooms and easy replacement policies. Going forward, their strategy is to increasingly market their products to millennial customers through digital media, such as social media websites. They believe this branding strategy helps retain existing customers and attract new customers. They intend to continue investing in their marketing initiatives and brand building exercise, including advertising through various media. They also continue to provide effective training for their sales personnel in sales techniques and product knowledge. They believe that effective marketing is important for future revenue growth, enhancing their brand visibility, to establish relationships with target customers and to sell their products in a competitive cost-effective manner.

Focus on catering to the younger generation and the upwardly mobile in India

Senco expects the branded jewellery market to provide significant growth opportunities. With the increasing number of working women, exposure to global designs, and rising number of young consumers who prefer to purchase jewellery for adornment rather than investments, consumer preferences are shifting away from traditional bulky jewellery to light-weight contemporary jewellery. Hence, jewellery retailers have started manufacturing lightweight jewellery of contemporary designs, suitable for daily use. Further, in recent years, many young Indians have ventured out of their hometowns for better career opportunities. Rise in migratory population augurs well for the organised jewellers as these consumers mostly do not have strong relationships with local jewellers and are typically more inclined towards organised stores which offer better and contemporary designs. (Source: CRISIL Report) Having set up their Everlite and Gossip brands and Perfect Love Diamond Solitaires and Aham collections, they aim to cater to the younger generation and the upwardly mobile in India by building brands with a lower product price. Their Everlite brand offers designs in gold and diamond jewellery, with the average price of jewellery starting at approximately Rs5,000 and going up to Rs60,000. They aim to have dedicated Everlite counters at each of their showrooms and also have exclusive Everlite branded showrooms at specific locations. Similarly, their Gossip brand of costume and silver jewellery also merits separate counters within their showrooms. The designs created under these collections are targeted at casual and formal attire. These brands help target younger customers, who as per CRISIL are demonstrating a shift towards artificial or fashion jewellery as the storage value of gold is lower for these customers. Further, the share of working age population (15-64 years) as a part of overall population has risen from ~65% in calendar year 2013 to ~67% in calendar year 2020. Demand for light-weight, daily-wear fashion jewellery is expected to rise as the younger generation enters the workforce. This augurs well for jewellery retailers as this group accounts for bulk of gold demand. (Source: CRISIL Report) Their presence in shopping malls caters to the younger generation and the upwardly mobile India. Further, through Everlite and Gossip, they intend to continue to build-up their digital presence by developing websites, mobile applications and cataloguing products, in line with their strategy on catering to younger generations. They also intend to continue to focus on their handcrafted affordable gold and diamond jewellery wedding collection under the Vivaha collection, as this too is specifically targeted at the younger generation and upwardly mobile in India. They have also launched the Aham collection designed especially for the cosmopolitan man and can be used as part of daily wear as well as in social occasions. Further, they have also launched an online platform for the purchase of gold, www.mydigigold.com, through which customers can accumulate gold in a physical third-party locker and to subsequently sell the same online or redeem the gold in the form of jewellery at any of Senco’s Showrooms. They also have jewellery purchase schemes with installments ranging from six months up to 18 months. Additionally, to cater to the changing needs of consumers, specially of the young generation, company may look at exploring complementary products to jewellery in the business of luxury and lifestyle such as perfumes and bags.

Disclaimer -

The content on this page is made available on the basis of the DRHP (draft red herring prospectus ) filed by Senco Gold Limited. The final content could change based on the Red Herring Prospectus (RHP) filed