Multibagger: Sky Gold gained 771% in last 1 year but Nuvama sees another 44% upside – key reasons why

Sky Gold, a prominent gold jewellery designing company, has been a standout performer in the stock market, with its share price skyrocketing by 771 percent over the past year. Despite this massive surge, brokerage house Nuvama remains bullish on the stock, projecting an additional 44 percent upside. The firm has issued a "Buy" call on Sky Gold, setting a target price of ₹3,600 per share.

"SKYGOLD can be a long-term compounding story. Given its record of overachieving its targets in the past; aggressive growth for FY24-27 and execution capabilities of management, we think that SKYGOLD can be a long-term growth story," said the brokerage.

Stellar Stock Performance

Sky Gold has delivered phenomenal returns over the past five years, with its stock price zooming 2600 percent from ₹92.5 in August 2019. In 2024 alone, the stock has rallied 145 percent year-to-date, with positive returns in five of the eight months so far. The stock has gained 21 percent in August, continuing its upward trend for the third consecutive month after posting gains of nearly 26 percent in July and 39.6 percent in June.

Meanwhile, it lost 1.3 percent in May after a 25.4 percent rise in April. Before that, it fell 8.5 percent in March, and 10.3 percent in February. It rose 13.5 percent in January.

Strong Q1FY25 Earnings Boost Confidence

Sky Gold recently announced robust earnings for the quarter ending June 2024 (Q1FY25). The company reported a 99 percent increase in net profit, reaching ₹21 crore for the April-June quarter, up from ₹11 crore in the same quarter last year. Revenue for the quarter also surged by 92 percent to ₹723 crore, compared to ₹376 crore in the corresponding period of the previous fiscal year.

Mangesh Chauhan, Managing Director of Sky Gold, attributed this remarkable performance to the company's recent expansion into a larger facility in Navi Mumbai, which has significantly increased its production capacity. "In Q1 FY25, our capacity utilization stood at 33% of the total capacity (including additional capacities from acquisitions). This highlights our capability to scale operations and strengthen our position in the gold jewellery market both in India and globally," Chauhan said.

“Moving forward in FY25, we plan to increase capacity utilization at our new facility, invest in IT and automation, implement an ERP system, strengthen our mid-management and regional sales teams, and optimize our financials through the use of gold metal loans to improve profitability and reduce borrowing costs,” he added.

Nuvama's Upgraded Estimates

Following Sky Gold's stellar performance in Q1FY25, Nuvama has slightly upgraded its estimates. The brokerage now expects the company's revenue, EBITDA, and PAT to grow by 53 percent, 56 percent, and 70 percent, respectively, over FY24–27. Despite a slight dilution in earnings per share (EPS) due to recent fundraising, Nuvama projects a 63 percent compound annual growth rate (CAGR) for EPS.

"We maintain ‘BUY’ with revised TP of INR3,600 (35x FY26E earnings). We expect its EPS to grow at 84% over FY24-26E. Despite of such a high growth, the company should be able to grow at a healthy rate in upcoming years. This gives us comfort on our target multiple. Our EPS growth and target multiple imply a PEG ratio of 0.4 which leaves enough margin of safety for investors and room for further upgrade in P/Ex multiple as the company executes its strategy," it said.

Capacity Expansion and Strategic Acquisitions

Sky Gold's shift to its new facility in FY24 expanded its monthly production capacity from 200kg to 750kg. The company is working to boost utilisation, which stood at approximately 47 percent in Q1FY25, through client additions and increased wallet share from existing customers. The company has seen incremental volume growth over the last four quarters and has added clients in the export segment, with plans to increase export contributions to 10 percent in FY25. Nuvama expects exports to become a significant driver of volume growth in the medium to long term.

Sky Gold also acquired Sparkling Chains and Starmangalsutra for a consideration of ₹88 crore in Q1FY25. These acquisitions have expanded the company's addressable market to 70 percent from 35 percent. The management expects to scale these entities and targets sales of ₹500–600 crore in FY25, with a PAT of ₹15 crore. The company plans to raise ₹270 crore for capacity enhancements at these new entities and to meet the working capital needs of the consolidated entity.

Focus on High-Margin Segments

Sky Gold is focusing on the 18-carat gold category and diamond jewellery, which offer higher margins. The management is targeting revenue of ₹6,300 crore by FY27, with a PAT margin of over 3 percent and a return on capital employed (RoCE) of 25 percent. Nuvama believes the company will comfortably achieve these targets, driven by higher capacities, recent acquisitions, increased contributions from exports, and market share gains.

Sky Gold's gold metal loan (GML) usage, currently at 10 percent, is expected to rise to 100 percent by December, leading to an expansion in PAT margins. This could result in the company achieving margins better than Nuvama's current estimates.

Founded in 2008, Sky Gold operates on a business-to-business model, serving leading jewellery retailers like Malabar Gold, Joyalukkas, Kalyan Jewellers, and Senco Gold, among others. With its aggressive growth plans, strategic acquisitions, and focus on high-margin segments, Sky Gold is well-positioned to continue its impressive growth trajectory, offering significant potential for long-term investors.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.