Opulence forever?

It is like operating a bank,” Balram Garg searches for, and finds, the perfect analogy for running a jewellery business. “Customers won’t put their hard-earned cash just anywhere. Trust and goodwill can fill the coffers and the lack of these can empty them just as fast.” Garg’s coffers seem to be in danger of overflowing. His gold and diamond jewellery manufacturing and retail venture, PC Jeweller (PCJ), clocked a turnover of ₹4,018 crore in FY13 (and in December 2013, had already crossed ₹3,788 crore for the first nine months of FY14). This is an impressive near-doubling from ₹2,209 crore just two years earlier. The number of stores has also increased from just one in 2005 in New Delhi’s Karol Bagh area to 41 in end-March 2014. Not bad at all for a company that will turn nine only later this year.

PCJ’s flagship store, complete with Grecian columns and flower-bedecked wrought iron balconies, looks more suited to Europe than hot and dusty north India. But the massive white multi-storeyed structure occupies one whole corner of Karol Bagh’s famous Bank Street, which ironically has more jewellers than bankers on it. Further down, on the adjacent street, you come across another well-known ornate, over-the-top building — this is the showroom of PP Jewellers, incidentally, Garg’s old workplace. In 1981, he entered the jewellery business with his maternal uncle, opening a small showroom at the same location.

By the time he ventured out on his own nearly 25 years later, PP Jewellers had become a famous landmark on Bank Street. Garg named his new business PC Jeweller for his elder brother, Padam Chand Gupta, who is a 28% shareholder and chairman of the company. Garg, who holds 36%, is managing director. In the early years, there was no concept of an organised player in the jewellery business. “A jeweller would show you photos of rings or necklaces, perhaps a sample or two from his safe, but display was limited since inventory and investment were both limited,” Garg recalls. But sensing that expansion and growth in future would be along organised lines, he persevered. “We developed our model based on customer psychology,” he says. 

That meant recognising that while customers will not hesitate to pay ₹10,000 or more for branded perfumes from just about any store, they won’t do that with jewellery — they need reassurance that the store and seller aren’t fly-by-night ventures. “In Delhi, people knew us and our brand but as we moved outside, we deliberately opened large, grand stores in each city’s most important locations,” Garg explains. The company now has stores in 11 states across India, including Chhattisgarh, Gujarat, Andhra Pradesh, Karnataka, Punjab and Madhya Pradesh. The large structure, white stone and curved doorways theme that characterises PCJ stores in Delhi continues in all its 40-odd stores.

Obviously, PCJ isn’t the only jeweller who believes in blinging it up. Other jewellers, too — whether it’s Tanishq from Titan or, closer home, PP Jewellers — have large, fancy showrooms with expensive stone and glass façades. So, what explains PCJ’s success? Garg believes it is his company’s customer policy that’s the secret behind its Midas touch. “We have lower making charges and also offer the option of returning jewellery within one week for a full refund. Other jewellers usually retain the making charges on returns,” he says. While the company has less than a dozen such cases every year, PCJ’s manufacturing and inventory strategy allows it to make this offer. About 30% of the jewellery it sells is non-designer, which involves low making charges. Then, the company has its own manufacturing plant, which lets it save 2-3% on making charges as well. 

More significantly, PCJ has been able to ride the wave of change in the Indian jewellery market. The ₹3 lakh crore market is slowly becoming organised, with about 20% of all regional and national players becoming organised. The figure drops to 7-10% if you count only large players such as Titan, Keshavlal Dalpathbhai Zaveri & Sons, Joyalukkas, Kalyan Jewellers, Gitanjali and PCJ, among others.

David vs Goliath

Despite fewer stores, PCJ’s per sq sales match up to the market leader’s

As consumers switch to shopping at organised jewellery outlets, PCJ has been quick to leverage the opportunity. “We opened 11 stores last year and six the year before that. We now have 41 stores, which has ensured good revenue growth,” says Garg. In 2012, PCJ came out with an IPO and raised ₹600 crore to fund its expansion. Adhidev Chattopadhyay, research analyst with HDFC Securities, believes “store addition on a low base and good exports” explain PCJ’s high growth over the past few years. Now, he says, the company is in a growth phase. While market leader Titan has 190 stores and Gitanjali 101 stores, in comparison, PCJ only has 41 stores till date and has become a multi-region player only recently. “Titan is the only pan-India player, with a 4-5% market share,” adds Chattopadhyay. But the key is that despite its relatively smaller size, PCJ has per sq ft sales that match up to Titan (see: David vs Goliath). 

Diamonds are forever

The firm’s focus is on increasing share of high-margin diamond jewellery

Diamond and domestic

In the past two years, Garg has willingly abdicated two strategies that accounted for much of PCJ’s initial success — selling more of gold than diamonds and looking for outside markets (see: Diamonds are forever). “Our focus now is not merely on topline. We will adopt strategies that help our bottomline as well,” says Garg. The margin on diamond jewellery is 25-30% compared with 10-15% on gold jewellery, which is why the company has slowly managed to increase the contribution of diamond jewellery from 18% in FY10 to 31% in FY13. In the next couple of years, it plans to further better the mix. PCJ is working with its designers to create lightweight, less ornate designs. “We are readying younger customers to buy jewellery. When they get married, they will buy diamond jewellery,” explains Garg. Currently, about 80% of jewellery sold in India is for weddings, while 20% is bought for investment and gifting purposes.

Similarly, PCJ has made a conscious decision to focus on domestic expansion. Its overseas market comprises NRIs looking for handmade Indian jewellery. The machine-made designs that are otherwise popular abroad are not the company’s forte and it has decided to stick to its knitting. “You can grow only so much in overseas markets. That is why we have intentionally kept our export sales at around ₹1,000 crore for the past two years, while we continue to expand domestically,” says Garg. 

That means adding one store every month in FY15, the first four of which have already been finalised and are being readied for launch, in Patna, Jammu, Guwahati and Ranchi. Like the proverbial goldsmith, Garg weighs every option carefully and on multiple parameters before taking a decision — and PCJ’s expansion plans are no different. An internal recce team from PCJ surveys all potential locations, considering the city’s growth, purchasing power of the people there, the ratio of organised to unorganised jewellers, preference for diamond versus gold jewellery, etc., before making its recommendations to the management. “A third of new stores are opened in cities where we are already present and break-even here is usually in under six months. The next 33% are opened in the same region where we are present and here break-even is between six and nine months. The remaining 33% are opened in entirely new regions and we break even in about a year,” he says. 

Store size and investment in inventory is more or less standard, and so far, all stores have been company-owned. Now, Garg is toying with the idea of going the franchise route. It will be easier finding franchisees in smaller cities, he believes. “The investment required is lower and store size is also smaller,” he points out. Opting for franchises will allow PCJ to expand more rapidly, something that is becoming a business imperative. “Right now, at least, we are not facing much competition in tier 2 cities from organised players. It’s necessary to seize first-mover advantage in such markets,” Garg adds. As it expands, PCJ is going to need all the advantages it can get. 

Off home turf

For starters, the tier 2 organised jewellery space isn’t quite as vacant as Garg would like to believe. “Big brands are getting everywhere, even in tier 2 cities,” confirms Deepak Agrawal of Impetus Advisors. For example, Titan’s Tata Gold Plus jewellery stores are present in 33 small towns. Stepping out of its comfort zone — north India, specifically Delhi — will also not be easy. “PCJ will face challenges as it gets into non-home markets,” points out Chattopadhyay. 

Big is better

A majority of PCJ’s stores are large-format outlets in excess of 3,000 sq ft

Entering a new market is particularly difficult, since jewellery shoppers are notoriously loyal and distrusting of strangers. For its part, PCJ is attempting to carve a space for itself by emphasising its transparent pricing, hallmarked jewellery, return policy and designs — the company ties up with local designers in each location, in addition to getting jewellery manufactured at its central manufacturing unit in Delhi. Last year, PCJ ventured into south India for the first time, opening stores in Mangalore, Bengaluru and Hyderabad. “We are aware of the preference for local designs in south India and 50% of our inventory for this market is localised,” says Garg. Now, with stores opening in Jammu & Kashmir and northeast India, he hopes to make PCJ a pan-India player by this year-end.

If entering new markets brings its own set of challenges, what’s more worrying is flat growth. “PCJ’s growth has mainly come because it kept adding new stores and markets. Same store growth has not been much,” says Impetus’ Agrawal. Indeed, for FY14, same-store growth across PCJ’s stores was almost completely flat, a combination of tightening regulations by the Reserve Bank, a sluggish market and curbs on imports. But Garg doesn’t seem concerned. “For others in the industry, same-store sales growth was negative. So this is not worrying. The market will change,” he says confidently.

What does worry him, though, are concerns that affect the entire industry — regulations.

The heat is on

For starters, the RBI has withdrawn the lease provision for gold hedging, thus increasing working capital requirements of jewellers. Earlier, a jeweller could lease gold from a bullion banker for 90 days at a fixed price by merely paying 3-4% interest. For instance, if someone leased 1 kg gold for 90 days and sold 0.5 kg on Day 20, he would pay for that quantity only then, and that too at the agreed price, thus hedging himself from fluctuations in gold price. 

Now, a jeweller needs to pay upfront for gold or seek different hedging mechanisms. So far, the RBI has allowed only Titan to hedge with international markets, as it is the only jeweller with a gold import licence while all others import through intermediaries. “This can certainly slow the expansion plans of organised players,” feels Agrawal. What has been the impact on PCJ? Where it was 100% hedged earlier, now that ratio is down to 70% and it is relying on other mechanisms such as hedging with MCX and buying physical gold and selling to others on paper. Working capital needs are also up “somewhat”, says Garg, adding that “debt is confined to working capital space only. We have no long-term debt.”

Another RBI provision has the potential to make life uncomfortable for PCJ, going forward. Last year, the Reserve Bank introduced the 80:20 rule to cap shooting gold prices. Essentially, this means that 20% of all imported gold has to be re-exported after value addition. “Luckily, we are a fit with this policy currently, as our exports stand at 25%,” says Garg. But that ratio will come down as domestic revenue outgrows exports and this may become a pain point. 

Despite those concerns, PCJ is going full steam ahead with its growth plans. It is working on pushing sales through its online retail portal. The past two quarters have been sluggish for everyone in the jewellery business, but Garg is focusing on his high-margin diamonds business and new store launches gameplan. Though it is yet to achieve the targeted number of 50 stores by March 2014 set at the time of the stock’s initial public offer in December 2012, it has enough firepower, given it has over ₹358 crore worth of IPO proceeds of the total ₹603 crore raised and a negligible debt-to-equity ratio of less than 1X. After all, when the organised market is such a small fraction of the total, there’s a lot of room to be covered.