RENAISSANCE GLOBAL LTD (RGL) Q4 FY23 Earnings Concall Transcript

RENAISSANCE GLOBAL LTD (NSE:RGL) Q4 FY23 Earnings Concall dated May. 29, 2023

Corporate participants:

Jenny Rose —

Sumit Shah — Chairman & Global CEO

Hitesh Shah — Managing Director

Analysts:

Pavan Kumar — Ratnatraya Capital — Analyst

Devanshu Bansal — Emkay Global — Analyst

Chirag Vekaria — Budhrani Finance — Analyst

Vikram Mehta — Shade Capital — Analyst

Drasti Shah — Blue Lotus Capital Advisors LLP — Analyst

Bhavika Choudhary — Emkay Global Financial Services — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Renaissance Global Limited Earnings Conference call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this call is being recorded.

I now hand the conference over to Ms. Jenny Rose from CDR India. Thank you and over to you.

Jenny Rose —

Good afternoon, everyone, and thank you for joining us on Renaissance Global Q4 and FY ’23 earnings conference call. We have with us today Mr. Sumit Shah, Chairman and Global CEO, and Mr. Hitesh Shah, Managing Director of the company. We would like to begin the call with brief opening remarks from the management, following which we will have the forum open for an interactive question and answer session.

Before we start, I would like to point out that some statements made in today’s call may be forward-looking in nature, and a disclaimer to this effect has been included in the results presentation shared with you earlier.

I now like to invite Sumit to make his opening remarks. Over to you, sir.

Sumit Shah — Chairman & Global CEO

Good afternoon, everyone. On behalf of Renaissance Global, I extend a warm welcome and thank you all for joining us on our earnings conference call for the quarter and year ended 31 March 2023. I will initiate the call by taking you through a brief overview of the Company’s operational and business highlights for the period under review, post that Hitesh will give you a rundown of our financial performance, following which we will open the forum for the question and answer session.

This fiscal year has been a challenging year for our industry, with global challenges impacting demand in key markets. The Russia-Ukraine war, high inflation and recessionary trends in the U.S. notably impacted the demand sentiment. Despite these challenges, we believe that we have reported a resilient performance and have concluded the year on a steady note on the back of the healthy performance of our core branded jewelry segment and improved contribution from the gold segment.

Within the branded business, our high margin direct-to-consumer segment exhibited growth, we achieved annual sales of INR239 crores, which is an impressive 92% compounded annual growth over the last two years. The margin from the D2C division has also improved sequentially on account of the acquired engagement ring business having turned profitable. We’re on track to restore our operating margins of this segment back to its historic levels. Overall, during the year, our total income stood at INR2,243 crores, up 1.5%.

Our focus on direct-to-consumer operations within the branded jewelry sector remains a key growth driver for us. To strengthen our position in the global branded jewelry industry, we expanded our licensing portfolio by partnering with Marvel, Disney Jewels and NFL in addition to our existing agreement with Enchanted Disney Fine Jewelry, Hallmark and Star Wars. These strategic partnerships complement our direct-to-consumer branded business and support its growth.

Furthermore, the integration of Four Mines was completed during the year. We’re happy to state that within a few quarters, we were able to successfully restructure the business and has started contributing to profitability from Q4. Accordingly, as mentioned earlier, we expect margins in the direct-to-consumer business to improve in the coming quarters.

Four Mine has not only strengthened our foothold in the engagement ring and wedding band business but also in the lab grown diamond space. It has also brought about significant synergies across our other D2C segments. One such notable trend that we are seamlessly incorporating is a growing demand for customization. This trend has gained substantial momentum in the market with customers seeking unique and personalized pieces that reflect their individuality and style.

By integrating customization options into other D2C segments, we’re providing customers with an unparalleled freedom to create pieces that truly resonate with their preferences. This enables us to enhance their overall shopping experience and establish strong connections with our valued customers. Moreover, customization allows us to operate on leaner working capital cycle. As customers participate in the design process, orders for personalized items are placed in advance, enabling us just in time production approach.

By producing based on confirmed orders, we significantly reduce working capital tied up in inventory, improve cash flows and financial efficiency. This can be reflected in the improvement in the FY ’23 free cash flow and net working capital levels as compared to ones in FY ’22. Overall, we remain extremely bullish on the long-term potential of our direct-to-consumer segment, and the next few years it starts strategic focus to make this one of our largest business verticals.

Another noteworthy metric that I’d like to bring to your notice in this regard is that the branded-to-studded ratio which increased to 33% in Q4 from 24% in the same quarter last year, and on a yearly basis, it has increased to a 32% — 30% contribution as compared to 25% in FY ’22.

In yet another key development, our India-focused retail brand IRASVA has successfully launched a new store at Banjara Hills, Hyderabad following the success of our Mumbai and Ahmedabad stores. Hyderabad shoppers can now indulge in luxury and lifestyle offerings at this new store designed with an open layout, modern facade displays and elegant jewelry showcases. This expansion comes after a turnaround of our existing stores and reflects our strategic approach of expanding our direct retail presence in a calibrated manner. Moving forward, we aim to expand IRASVA’s presence in key metros while embracing an omnichannel strategy enabling us to reach a wider audience.

Also, we’re glad to inform you that we’ve received the 49th Gem & Jewellery Awards for the second largest exporter of studded precious metal jewelry and the largest exporter of silver jewelry from India from the German Jewelry Export Promotion Council that signifies our continued leadership in this market.

All in all, I’d like to say that despite temporary setbacks, the U.S. and European markets maintain their status as a dominant consumer markets on a global scale. So, while the external environment remains uncertain in the near term, we are confident that our expertise in product design distribution, combined with our deep industry insights, we will be able to capitalize on the long-term growth prospects of the global jewelry industry. Our priority remains to expand our profitable branded jewelry and direct-to-consumer segments, as we firmly believe that this focused approach will enable substantial values for all stakeholders in the foreseeable future.

On that note, I’d like to hand over the call to Mr. Hitesh Shah to discuss our financial performance during the quarter. Over to you, Hitesh.

Hitesh Shah — Managing Director

Thank you, Sumit. Good afternoon, everyone. As mentioned by Sumit, we have reported a resilient performance during the year gone by, supported by our branded jewelry segment with a solid contribution from our direct-to-consumer business. In Q4 of FY ’23, our total income stood at INR501 crores compared to INR536 crores in Q4 of FY ’22. While for the entire year FY ’23 total income grew by 1.5% at INR2,243 crores compared to INR2,209 crores in FY ’22.

Our branded jewelry sales in Q4 stood at INR147 crores, which is a growth of 23% year over year, of which our B2B segment revenue stood at INR81 crores. In Q4 and FY ’23 revenue share of studded jewelry stood at 89%. Of total studied jewelry revenues in Q4 FY ’23 branded jewelry business contributed 33%, up from 24% last year.

During Q4, direct-to-consumer business posted revenues of INR66 crores compared to INR29 crores in Q4 of FY ’22, registering a growth of 125%. In FY ’23, the total revenues of our branded jewelry segment grew by 27% — stood at 27%, of which the B2B segment was 16% and the balance was the D2C segment.

In FY ’23, the direct-to-consumer business revenue was up by 93% to INR239 crores compared to INR223 crores in FY ’22. Further, our two-year direct-to-consumer revenue CAGR has surged to an impressive 92% with a year-on-year increase in our annual revenues for FY ’23 to INR239 crores, which is higher than the run rate of INR225 crores reported during Q3.

I would like to highlight that while revenue growth for our Plain Gold segment came in at 44% for Q4 and 68% for FY ’23, the volumes were flat in Q4 of FY ’23 and was higher by 34% for the year ended 31st March 23.

On the profitability front, EBITDA stood at INR38 crores in Q4 FY ’23, and for the full year it came in at INR168 crores, translating into EBITDA margins of 7.6% and 7.5% respectively. In FY ’23 branded jewelry business reported an EBITDA margin of 13.1% and the D2C business registered a 12.9% EBITDA margin. Given the high EBITDA margins in our D2C business and the increasing contribution of D2C revenues to our overall revenues, we anticipate a positive trend in our consolidated EBITDA margins in the future. We expect our D2C operations to continue to drive profitability, resulting in sustained margin expansion.

In Q4 of FY ’23 PAT came in at INR19.7 crores versus INR21.4 crores in the corresponding period last year, while in FY ’23 PAT showed at INR87.3 crores against INR106.5 crores in FY ’22, registering a degrowth of 18%.

Lastly, in terms of our balance sheet, our net debt to equity ratio stands at a healthy 0.22 versus 0.30 as of last year. Our total net debt has reduced to INR223 crores as against INR280 crores in FY ’22, and our cash and bank balances and current investments stand at a healthy INR239 crores.

To conclude, we have delivered a steady performance in a challenging environment. With a strong balance sheet position, we should be able to navigate through these tough times and deliver much stronger results in the upcoming years.

On that note, I would now request the moderator to open the forum for any questions or suggestions that you may have. Thank you.

Questions and Answers:

Operator

Thank you very much. We will now begin the question and answer session. [Operator Instructions] Our first question is from the line of Pavan Kumar from Ratnatraya Capital. Please go ahead, sir.

Pavan Kumar — Ratnatraya Capital — Analyst

Sir, how much is the organic growth rate in the branded segment for this particular year?

Sumit Shah — Chairman & Global CEO

Sorry? Can you clarify if the question was for the branded B2B or D2C segment?

Pavan Kumar — Ratnatraya Capital — Analyst

Both, if you can share.

Sumit Shah — Chairman & Global CEO

Yeah, so I think that we haven’t broken up the organic versus the inorganic growth, but our growth for the year is about 20% or so. I would say that the organic growth would be in the low double digits because the new acquisition was just completed year one. So while I don’t have specific numbers, but the organic growth would be in low double digits.

Pavan Kumar — Ratnatraya Capital — Analyst

Okay. Can you just give us an idea of how big are the Marvel and Jewels that you are launching compared to our existing brands?

Sumit Shah — Chairman & Global CEO

So I think there is a trajectory of growth that takes place as we increase distribution and acquire customers online. So usually the brands take a couple of years to mature and Marvel is obviously not yet live. We are working on the launch in Q3 of the current year. Disney Jewels is something that has just gone live. So the relative contribution of those brands would be small.

Pavan Kumar — Ratnatraya Capital — Analyst

Okay. Can you just help us understand what is the demand environment in our key market that is U.S.? Because a lot of other industries have indicated that there is some kind of slowdown in the demand.

Sumit Shah — Chairman & Global CEO

Yeah. So I think we are in a discretionary category. And due to the high inflation environment, based on the results you’re seeing, that demand has definitely been impacted. I think that the degree of impact on demand is varying based on the customer segment. So our input is — the feedback that we’ve received looking at the sales data is that the lower income customer or consumer has been impacted a lot more than the slightly more affluent customer. So while it’s not fixed, the demand environment definitely remains challenging. And it’s a mixed bag depending on which segment of the final consumer that we’re talking about.

Having said that, we are seeing some stabilization on year-over-year numbers because inflation has remained elevated for a while. So we’re cautiously optimistic that in FY ’24, based on these numbers, we should be able to see some stabilization and growth from these numbers.

Pavan Kumar — Ratnatraya Capital — Analyst

And one last question, sir. Since we have generated a fair amount of cash this year and we also have some cash in the books. Any plans of the — what is the plans of dividend policy or anything going forward?

Sumit Shah — Chairman & Global CEO

Yeah. We’ve actually in the past year reduced debt by about — gross debt by about INR100 crores. We had extremely strong cash flows during the year because of strong discipline with our inventory. We’ve reduced inventories meaningfully by about INR80 crores or INR90 crores and generated INR159 crores of free cash flow. We’ve used some of this money to repay the debt and we’ve reduced debt. As interest rates have gone up for us at a marginal rate it makes sense to reduce debt and bring the debt levels even lower that they have been.

In the past year, we’ve had significant amount of capital expenditure due to us moving to a new facility in New York in order to fulfill some of our growth of our direct-to-consumer segments. And we’ve also done the acquisition of Four Mine Inc. So for the current year, considering the current demand environment, which we were a little bit tentative on, I think that currently the Board has decided to maintain the cash balances and relook at buybacks, maybe buyback or dividend a year from now.

Pavan Kumar — Ratnatraya Capital — Analyst

Thank you, sir. That was for me. Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.

Devanshu Bansal — Emkay Global — Analyst

Yes. Hi, Sumit, thanks for the opportunity. Sumit, two, three questions from my end. So we were earlier planning to sort of launch NFL and Netflix, which were likely to be launched in H2 FY ’23. So if you could share anything on that front, how has been the traction that we have seen in these things towards the latter half of FY ’23?

Sumit Shah — Chairman & Global CEO

So we’ve launched both NFL and Netflix. On NFL, we’ve seen a very positive response from the customers and we expect NFL to contribute to our revenues and profitability going forward. I think Netflix, we haven’t received a great response for the brand. So our expectation is that Netflix will not translate into a meaningful business. So I think it’s been a mixed response. NFL has been extremely positive and it’s something that we will continue to focus on to grow into a meaningful business.

Devanshu Bansal — Emkay Global — Analyst

Got it. And for how many months is with clarity included in FY ’23?

Sumit Shah — Chairman & Global CEO

FY ’23 Four Mine Inc. was for the whole year.

Devanshu Bansal — Emkay Global — Analyst

For the whole year. So that INR60 crore, INR70 crore sort of —

Sumit Shah — Chairman & Global CEO

The acquisition was completed in FY ’23 last year. That’s right.

Devanshu Bansal — Emkay Global — Analyst

So that entire INR60 crore, INR70 crore, whatever run rate is there, would be there in ’23 numbers, right?

Sumit Shah — Chairman & Global CEO

That’s right.

Devanshu Bansal — Emkay Global — Analyst

Okay. And you talked about this reduction in inventory which led to sort of good amount of cash flows for us in this year. So I just wanted to check, is this reduction in inventory sustainable or it’s a time being thing that since the demand environment is weak, so we are not sort of investing in the on the inventory side?

Sumit Shah — Chairman & Global CEO

Yeah, so I think it’s a sustained inventory reduction. As we are shifting our business to more capital-efficient businesses, our view is that going forward, the growth areas of the businesses, the working capital needs are significantly less than what they were in our traditional businesses. So our endeavor is going to essentially generate more cash flow than the net profit generated by the company by controlling our working capital, which is primarily inventory significantly going forward. So we feel that some of these benefits generated are sustainable and we plan to sort of continue to optimize inventory and improve the working capital cycle for the business going forward.

Devanshu Bansal — Emkay Global — Analyst

And just on the bit of demand environment front, Sumit, branded business, I understand that demand has been weak because from last three quarters, if we see it’s been on a declining trend, I’m talking about the B2B part of the branded jewelry. So how should we see the trajectory going into FY ’24 for this part of the business particularly?

Sumit Shah — Chairman & Global CEO

Yeah. I think the challenge clearly with the U.S. consumer facing the inflation headwinds. I mean, we’re seeing a challenging demand environment. I think that at our end, we feel that we’ve got very robust brands which have strong consumer appeal. We’re working with sort of our merchandising team to sort of work on innovation, fresh assortments and new product launches to be able to kind of bring innovation and excitement back into the branch to grow it. But overall, demand environment for the year has definitely been challenging. And we’ve kind of maintained on the B2B side the revenues at a similar level for the year. But it’s definitely a challenging environment. We see this the numbers will get lapped now. And our sense is that in FY ’24, we should start to see some modest growth in all of the segments.

Devanshu Bansal — Emkay Global — Analyst

And from a quarterly perspective, Sumit, I guess 1Q is the only quarter where base is higher. So from 2Q 3Q onwards we should start seeing growth or do you foresee these challenges to continue for some time?

Sumit Shah — Chairman & Global CEO

Yeah. So our expectation is we are kind of working hard towards trying to create some innovation and excitement. And as you pointed out, I think that the base effect becomes a lot easier from Q2 onwards. So it’s a little bit early to say. I think we’ll be able to comment by July or August, so by the next earnings calls, because I think that a significant part of the holiday orders would be in. So we should be able to provide a much clearer perspective on the numbers going forward. But I think the base effect should take place from Q2, which hopefully we should start growing from there.

Devanshu Bansal — Emkay Global — Analyst

Okay. Sumit, one more from my side. For D2C, what’s your outlook? Because the situation is exactly opposite, right? So we were getting some benefit from this acquisition and now going ahead into ’24, it’s going to be opposite. So that base itself has become high now. So how should we see this part of the business now?

Sumit Shah — Chairman & Global CEO

Well, I think that the direct-to-consumer segment will benefit on two fronts. There is going to be — we see meaningful growth even in FY ’24 coming in the direct-to-consumer segment. Our expectation is growth will moderate from the 90% that we experienced this year, but our expectation would be 50% plus growth for the current year as well. And we will see normalization of margins back to historic levels. Because currently on the direct-to-consumer segment, we’ve got two businesses which in the current year lost money Four Mine Inc. as well as the IRASVA business. Four Mine Inc. is now profitable. So we should start to see significant revenue growth in FY ’24 from the D2C segment along with a normalization of margins back to historic numbers.

Devanshu Bansal — Emkay Global — Analyst

So, you’re saying against that 12.5% margins that we have done this year, and prior to that we were at 19%, 20%, so we should sort of move towards that in ’24.

Sumit Shah — Chairman & Global CEO

So I think it’ll be maybe a two or three year journey to get back to 19%, 20% because the Four Mine Inc. business is lower profitability than the licensed brands D2C business. But we should gradually see a transition over the next two years or so back to the 18% to 19% margins that we had last year.

Devanshu Bansal — Emkay Global — Analyst

Got it. I’ll come back in the queue. Thanks. For answering questions.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Chirag Vekaria from Budhrani Finance. Please go ahead.

Chirag Vekaria — Budhrani Finance — Analyst

Yeah. Hi, sir. My questions have been answered. Thank you.

Sumit Shah — Chairman & Global CEO

Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Vikram Mehta from Shade Capital. Please go ahead.

Vikram Mehta — Shade Capital — Analyst

Hi. Congrats on a good set of numbers in a tough environment. Two, three questions. First of all, the interest cost seems to have gone up while we reduced debt, right? But if I see the P&L, the overall interest cost has gone up to almost INR40 odd crores for the year. One on one side we’ve had higher interest rates but it just seems a little skewed. Any thoughts on that?

Sumit Shah — Chairman & Global CEO

Yeah. So I think that interest costs have more than doubled, right? So while we reduced debt by about INR100 crores, I think that interest costs have gone from 4.5% to 5% to 8%. So while debt has gone down, interest costs have gone up in line with because our arrangements are in U.S. dollars with about approximately 3% overfed fund rate. So currently we are in the 8% to 8.5% percent whereas a year ago we are likely to be sub 5%.

Vikram Mehta — Shade Capital — Analyst

Because I’m curious on the other side we have almost INR250 crores plus of cash. If you are seeing higher interest rates, why don’t we just use that cash and pay down the debt to a higher level, right?

Sumit Shah — Chairman & Global CEO

Which we’ve done in the current year and we plan to continue to do that. I think that you have to understand that we’ve got around INR2,200 crores in annual revenue so the monthly sales are around INR200 crores. And some amount of this money is money in transit which is not really free money sitting in our bank accounts. It’s money being paid by our various subsidiaries and money that is required then for vendors to be paid. So while the absolute number is big relative to our sales, some of it is money that is being used for operating purposes as well. But I think that your point is well taken that interest costs have gone up meaningfully and we fully expect that we will use all free cash flow going forward to pay down debt meaningfully as the cost is now at 8% to 8.5%.

Vikram Mehta — Shade Capital — Analyst

Got it. Basically, some of the money is not easily fungible as it’s across countries and geographies, right?

Sumit Shah — Chairman & Global CEO

It’s fungible but it’s required for operations of the company, right? Because we’ve got vendor payments to make. We’ve got manufacturing facilities where money has got to be. So while the absolute number sounds large as compared to our revenues, it’s under one month of sales. So there is some amount of money being used for the operations of the company.

Vikram Mehta — Shade Capital — Analyst

Got it. And secondly, I just wanted to know your ten-year vision for the company in the sense that you see it as a pure play B2C company ten years from now, is that the aspiration? Because clearly the B2B bid with all the working capital requirements, etc., doesn’t really give a very exciting ROE, right. So I just wanted to get a sense of what’s your ten-year vision for the company.

Sumit Shah — Chairman & Global CEO

Yeah. So I think great question, and I think that’s something that we keep our mind on sort of every single day in terms of where we are going and what the direction is. And if you look at sort of the investments that we’ve made over the last five years, having gotten into the licensed brands business and then the customer engagement ring business, I think that our goal really is for the branded business. And even within that, the direct-to-consumer business to be the most significant part of our business over the next five and ten years.

And within that the D2C segment, there’ll really be three legs of growth. I think that there is the licensed brands, direct-to-consumer, there is a Four Mine Inc. business which we acquired and there is also IRASVA in India, which we’re seeing now turn profitable at store level. And we’re very excited about growing sort of in a differentiated manner, the diamond jewelry business in India as well. So I would expect that the branded business in the next three years will be at least 50% of our revenue. And over the next ten years, the expectation would be to transition our company to 100% branded jewelry business.

Vikram Mehta — Shade Capital — Analyst

Great. All the best in all your efforts. We are patient and extremely excited about the future of the company. So just one submission. Just see how we can improve some liquidity in this talk. I guess as more investors come in, maybe the liquidity will get better, but as of now, it seems to be very thinly created. So I don’t know whether you’ve got some thoughts on how to address that going forward. That’s it from my side. Thanks.

Sumit Shah — Chairman & Global CEO

Thank you.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Devanshu Bansal from Emkay Global. Please go ahead.

Devanshu Bansal — Emkay Global — Analyst

Yes. Thanks for the follow-up opportunity. So I wanted to understand this strong profitability improvement in IRASVA. Firstly, I wanted to understand if this brand competes with the likes of CaratLane, BlueStone, etc., is it in the similar segment? And secondly, what are your sort of expansion plans for IRASVA? And thirdly, will you also sort of explore franchising the expansion? So these are the three questions on the IRASVA.

Sumit Shah — Chairman & Global CEO

Yeah. Thank you. Thank you for the question. I think that we’re really excited about IRASVA business going forward. I think that we started the business actually six months pre-COVID, and we lost a couple of years sort of in the business because it was very nascent. But we have a new CEO who joined in late 2020 and actually early 2021, and he’s changed the product profile of the business to a slightly premium customer. So, to answer your question, it doesn’t really compete with CaratLane and BlueStone because their average unit retail is probably significantly less than ours. I think IRASVA the store experience is definitely a luxury premium store experience. The consumer actually sits down on a table and is offered a very personalized shopping experience. I think that we plan to open during the current year at least two more stores, two more locations, and based on the profitability and the ROE profile of the business in FY ’25, we will probably ramp up expansion of store locations for IRASVA.

Devanshu Bansal — Emkay Global — Analyst

Got it. Sumit, Plain gold, I guess, was an area of less focus for us. But this segment has seen a very sort of strong growth at about 68% in FY ’23. You mentioned that this is partly because of increase in gold prices, I guess. But still, what’s your outlook for this part of the business? As in, how should we see the growth here going ahead?

Sumit Shah — Chairman & Global CEO

Yeah. So I think the gold business 67% is not really representative of the performance of the business because we bill all of our customers kind of on a net basis, and there are a couple of customers where the agreement is sort of on a gross basis. So I think the right way to look at it would be on volumes. And volumes were up about 30% — 35% year-over-year for FY ’23 compared to FY ’22.

Part of the reason why this business has performed well is because this business is actually primarily Middle East based. So we have manufacturing facilities in Dubai and customers also in the Middle East. This region is experiencing extremely strong growth and unlike the U.S. which is facing inflationary pressures. I think that Dubai has seen a significant influx of tourists as well as people moving to Dubai. So the economic environment in the addressable market of the gold jewelry business has been favorable.

Having said that, we don’t expect the plain gold business. I think we generated about INR17 crores of EBITDA in FY ’23. Our expectation would be sort of not extremely high levels of growth from this profitability.

Devanshu Bansal — Emkay Global — Analyst

Got it, Sumit. Okay. That’s it for my end.

Operator

Thank you. [Operator Instructions] Our next question is from the line of Drasti Shah from Blue Lotus Capital Advisors LLP. Please go ahead.

Drasti Shah — Blue Lotus Capital Advisors LLP — Analyst

Hi, I just wanted to understand how much portion of our revenue comes from lab grown diamonds and what is the difference in profitability in terms of margins between lab grown diamonds and mine diamonds jewelry.

Sumit Shah — Chairman & Global CEO

So I think lab grown diamonds as of right now would be sub 10% of our current revenue. Although they’ve grown meaningfully in this year compared to last year. The lab grown diamonds would be slightly more profitable than company average. So it’s not a meaningful number yet, but our expectation would be this would be a very fast-growing segment of our business going forward.

Drasti Shah — Blue Lotus Capital Advisors LLP — Analyst

Okay. Can you say the difference in terms of percentage, not the percentage as such, but the difference percentage as in 10% or like 5% difference in the margins in terms of lab grown and the mine diamond and jewelry.

Sumit Shah — Chairman & Global CEO

So on lab grown diamonds, while initial margins may be 4% higher than the natural diamonds, there is also an inherent risk with lab grown diamonds of declining prices. So I would say that on a net basis, as of right now, due to the decline, significant decline in prices of lab grown diamonds, I wouldn’t say it’s significantly more profitable. I think the increase in profitability will happen when prices stabilize. So in the last 12 months, the prices of lab grown diamonds would probably have fallen by greater than 50%. So while the initial margin may be better, I think one has to take slightly more pragmatic approach of this and be cautious with inventory and inventory valuations here as well, because there is definitely a price risk in lab grown diamonds as compared to natural diamonds. Natural diamonds have remained stable in price, whereas lab grown diamond prices would have declined by more than 50% in certain cases in past 12 months.

Drasti Shah — Blue Lotus Capital Advisors LLP — Analyst

Okay. Just to understand, what causes so much of price volatility in this lab grown diamond? I mean is it — would it be —

Sumit Shah — Chairman & Global CEO

What causes the volatility increased production. I mean, production is increasing at an exponential rate. The cost of manufacturing is going down, right? Because lab grown diamonds have gone from sub 5% to now about 25% of the demand of engagement rings in the U.S. And production has increased exponentially with increased production, the cost of manufacturing is going down as well, which has caused the prices of lab grown diamonds to decrease dramatically.

Drasti Shah — Blue Lotus Capital Advisors LLP — Analyst

Okay. So we expect this kind of — the segment to grow. The consumer experience is also like more and the market for this lab grown diamonds also increasing, right? I mean, for you as the company also, as your brand, for you also?

Sumit Shah — Chairman & Global CEO

Yes. I think that clearly lab grown diamonds will become a very significant and meaningful part of any studded jewelry business worldwide. I think that this has been accepted by consumers and it’s going to be a very important part of any jewelry retailer, brand manufacturers, sales. I think that currently there is significant price erosion happening on lab on diamonds due to which there isn’t sort of positive impact on profitability. But going forward, this is going to be a very meaningful part of the business and they should be more profitable than natural diamonds.

Drasti Shah — Blue Lotus Capital Advisors LLP — Analyst

Okay. So we can expect margins in the range of 15%, 20% when the lab grown diamond becomes a significant part of our revenue, right|?

Hitesh Shah — Managing Director

On lab grown business, yes.

Drasti Shah — Blue Lotus Capital Advisors LLP — Analyst

Yeah. All right. that’s it from my side. Thank you.

Operator

Thank you, [Operator Instructions] Our next question is from the line of Bhavika Choudhary from Emkay Global. Please go ahead.

Bhavika Choudhary — Emkay Global Financial Services — Analyst

Hi, sir. So just wanted to know, what is the pricing difference between lab grown diamonds and normal diamonds?

Sumit Shah — Chairman & Global CEO

Yeah. The majority of the lab grown purchases by consumers are in larger diamonds. I mean, it varies by sizes, but broadly, I would tell you that in the sizes that are popular, which is essentially one character up where lab grown diamonds have made meaningful dent, I would say that the price difference is between 70% to 80%.

Bhavika Choudhary — Emkay Global Financial Services — Analyst

Okay, got it. That’s it for my end.

Operator

Thank you. That was the last question of our question and answer session. I would now like to hand the conference over to the management for closing comments.

Sumit Shah — Chairman & Global CEO

Thank you, everyone, for joining us on the annual conference call. Look forward to seeing you on the next conference call. Thank you.

Operator

Thank you.

Hitesh Shah — Managing Director

Thank you.

Operator

[Operator Instructions]