“Price is what you pay; value is what you get” – Warren Buffet.

Over the last fifteen years, the role of certification in gemstones has become increasingly important in ensuring that consumers have confidence in what they are buying. The result is that the sector has seen considerable growth, and it wasn’t that surprising, given it is owned by a private equity company, to hear that the International Gemmologist Institute (IGI), the second largest certification company, was doing an IPO in India. IGI Group has 31 laboratories and 18 gemmology schools around the world, which provide natural diamond, Lab-Grown Diamonds (LGD), studded jewellery and coloured stone certification.

By way of background, IGI Group was founded in Antwerp, Belgium in 1975. According to the company it has a global market share of 33%; over half its business comes from certifying lab grown diamonds, just under 30% coming from certifying studded jewellery and coloured stones, while natural diamonds account for under 20% of its revenue; in 2023 it issued 8.39mn certificates (7.72mn in the first nine months of this year). In terms of financials, in 2023 the IGI Group had sales of around $105mn (assuming an exchange rate of INR84.82 to the dollar), EBITDA of $58.5mn and profit after tax of $39mn.

At over 600 pages long, it’s probably fair to assume that not many people will have time to read the whole prospectus, but below are some of the points that caught my interest. First a health warning; in September I emailed the company some questions and received no reply, so these are just my observations; do not mistake this as investment advice. It is not. Please read the prospectus yourself and take expert advice.

In 2018, China’s Fosun Group purchased 80% of IGI Group for around $108mn, which the industry experts I spoke to seemed to think was a reasonable valuation. Last year, Fosun and the other shareholders sold the whole IGI Group to private equity group Blackstone for $569mn – according to the IPO prospectus, Blackstone paid $393mn for IGI (India) and $176mn for IGI (Belgium) and IGI (Netherlands). Chapeau to Fosun. As I write, Blackstone is listing IGI (India) in India.

IGI (India) consists of 19 laboratories in India and one in Turkey (although Turkey’s numbers are almost irrelevant). Last year, IGI (India) achieved sales of $75mn and an after-tax profit of $38mn; IGI (India) accounted for 98% of IGI Group’s profitability.

It is a fast growing, cash generative business; in the first nine months of this year IGI (India)’s sales have kicked on by 31% compared to the same period a year earlier, and the research that IGI itself commissioned forecasts some very positive numbers for jewellery growth over the next five years. At the end of last year, it had virtually no debt and cash on hand of $13mn.

In simple terms, the IPO consists of three interlinked elements. IGI (India) is issuing new shares to the value of $173mn, Blackstone are selling $324mn of its existing shareholding onto the market – for the sake of clarity, none of that money is being reinvested into IGI (India), and IGI (India) is paying (approximately) $158mn to buy from Blackstone IGI (Belgium) and IGI (Netherlands), which were the other parts of the IGI Group that Blackstone purchased from Fosun.

Let’s look at the valuation. The suggested pricing range for IGI (India) is between $4.68 and $4.92 a share, so using a mid-price of $4.80 implies that pre-IPO, IGI (India) with just under 397mn shares in issue has a value of $1.9bn; given that Blackstone paid $393mns for IGI (India) just last year, that’s a substantial uplift in value.

Except of course, as part of the IPO, IGI (India) is also raising approximately $173mn of new capital, which would equate to the issuance of around 36mn new shares (the actual number of shares will depend on the final pricing). That implies a market capitalisation of $2.07bn for a business which in 2023 would have generated after-tax profits of $38.7mn; that is a 2023 sales multiple of around 27x and an (after-tax) earnings multiple of 53x. Those are big numbers.

Interestingly, by the end of the September 2024, cash on hand in IGI (India) had fallen to only $2mn, partly because in the first nine months of this year Blackstone had taken out interim and final dividends totalling some $22mn. In theory the level of cash shouldn’t matter because firstly, it’s a cash generative business, but of greater relevance, the $173mn from the new share issue should significantly bolster the balance sheet, except it won’t, because most of this cash is already spoken for.

The third leg of the IPO is that IGI (India) is buying IGI (Belgium) and IGI (Netherlands) from Blackstone. IGI (Belgium) has one laboratory and one school in Belgium and three laboratories in the United States, and IGI (Netherlands), which is a holding company, operates a single laboratory in each of the United Arab Emirates (UAE), Israel, Thailand and Hong Kong, a gemmology school and laboratory in Egypt, and one school and two laboratories in China.

D&P Advisory in Mumbai “independently” valued IGI (Belgium) and IGI (Netherlands) using a discounted cash flow model and gave a fair value estimate of $85mn for IGI (Belgium) and $90mn for IGI (Netherlands), as of the end of September 2024. IGI (India) is buying the two companies using a pre-agreed valuation formula, subject to some final working capital adjustments, which values them at $158mn.

Why the purchase price is interesting is that last year IGI (Belgium) made a pre-tax loss of $69,000 and an after-tax loss of $173,000, and IGI (Netherlands) made a pre-tax profit of $1.44mn and an after-tax profit of just $890,000. The logic of combining the group into one company is irrefutable, given that that is what it used to be anyway, but in effect IGI (India) are paying around $158mn for two companies which last year would have increased IGI (India)’s after-tax profits by around $720,000.

Last year Blackstone paid $569mn to buy the whole IGI Group. When this IPO is completed, they will likely have monetised approximately $324mn from the sale of some 67.5mn shares (16%) in IGI (India), received around $163mn from the sale of 100% of IGI (Belgium) and IGI (Netherlands) to IGI (India), and this year alone will have taken out $22mn in dividends from IGI (India). Having raised $509mn they will likely still own around 84% of a $2.1bn business ($324mn divided by $2.1bn equates to 16%). Several IGI executives have been quoted in the media saying that Blackstone’s stake will fall to 76% of the listed vehicle. I cannot fathom how they get that percentage but maybe I am missing something. Whatever else, this is a very good deal for Blackstone.

One other issue that caught my attention; 50% of the shares of the new anchor investors are locked in for 90 days, and the other 50% for 30 days. Blackstone’s holding up to 20% of the post IPO company (the “Promoter’s Contribution”) is also locked up for three years, and anything more than that 20% is to be locked up for one year. One of the stated exceptions to this lock-up seems to be when the shares “resulted from bonus shares issued against Equity Shares”. It may just be a technical question, but given that in May this year, the company issued 394,809,000 equity shares by way of a “bonus issue” in the ratio of 200 equity shares for every one equity share held, it would be interesting to know what proportion of Blackstone’s holding is actually locked up.

My final observation is simply this; if it looks like a duck, walks like a duck, quacks like a duck and swims like a duck, it's usually a duck. As with any investment: Caveat Emptor.

 

Richard Chetwode holds a number of non-executive roles in the diamond and property industry. He is a part-time journalist and is currently writing a book on the diamond industry in World War II. All the opinions in this article are his own but while efforts have been made to ensure the accuracy and reliability of the information provided in this article, neither can be guaranteed. and information in this article is strictly for informational purposes. It should not be considered investment or financial advice. Consult your investment professional before making any investment decisions. He is non-Executive Chairman of Namibian based Trustco Resources and has previously also worked for De Beers, Harry Winston, Dominion Diamonds and Gem Diamonds.