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Sarine Technologies: Hitching A Ride On Luxury Spending
âDiamonds are foreverâ, is a slogan behind the hugely successful marketing campaign initiated by De Beers, the largest diamond miner in the world. Its success became so phenomenal that it has even dethroned Nike and its ever popular slogan âJust do it,â to the second place.
Since then, diamonds have been branded as an emblem of eternal love. It is almost a de facto requirement for a male to put a diamond engagement ring through his ladyâs finger during his proposal.
Just like everything else, nothing comes for free. In the case of diamonds, the price tag attached to them is nothing short of extravagant.
Well, a cheap price-tag would not pan out to be a convincing display of everlasting commitment afterall.
This brings us to a unique company, Sarine Technologies, one which fits into a less common space within the diamond value chain, midstream, to be specific. The company is engaged in the development of advanced evaluation, refining and grading systems for diamond and gemstone production.
To better comprehend this, perhaps a little lesson on diamonds will help one to better understand these sparkling gems, especially males.
By far and large, diamonds are graded by four aspects, carat, colour, clarity and cut. A colour like white are common colours found in most diamonds, while clarity is affected when imperfections like bubbles, cracks and scratches can be seen on the surface or in the diamond.
Cut determines the shine and overall beauty of the diamond. Due to poor symmetry, a poorly cut diamond will misdirect light and will appear duller than one which is well-cut.
Lastly, carat denotes the weight of a diamond and derives majority of its value there. Not only bigger in size, higher carat diamonds are also rarer, and therefore the premium to be paid for a one-carat and two-carat diamond exceeds two times the amount.
The combination of all four aspects will ultimately determine the final value of a diamond.
Although the equation might appear as simple as maximising these four aspects to create the most valuable diamond during its manufacturing process, however, the caveat lies in production wastage. According to statistics from Bain and company, out of five carats mined, more than 30 percent are lost during production.
These diamond manufacturers, who are already suffering from low profit margins, would definitely be able to recognise tremendous value in ways to reduce their operating margins.
Having said this, Sarineâs role becomes relevant as it steps in with its Galaxy systems, which are rough diamond processing systems equipped with its proprietary technology. The system is able to reduce production wastage to a large degree and increase the quality of diamonds during the manufacturing process.
The price of diamonds can soar as much as 17 times for higher carat diamonds and six times for higher quality diamonds, translating into higher operating margins for these manufacturers.
Holding a 20 years strong operating history in the diamond planning and diamond manufacturing equipment industry, Sarine is crowned as the market leader and commands a staggering 75 percent market share within its industry, essentially being labelled as a semi-monopoly.
Investment Merits
Semi-monopolistic position with product offerings moated with its proprietary technology, as displayed with its superior gross profit margin of > 70 percent and occupying 75 percent of market share
Strong earnings visibility as the companyâs business model creates a recurring income stream via a per-use basis of its equipment, as opposed to the sale of equipment
Debt-free balance sheet
Investment Risks
A further depreciation of rupees as a large proportion of the companyâs revenue is derived from India
The diamond industry is cyclical and therefore susceptible to economic headwinds which could cause the demand of diamonds to fall
As Sarine is incorporated in Israel, the company is exposed to geopolitical risk between Israel and the Middle Eastern countries
SI Research Takeaway
Over the years, luxury spending has been growing leaps and bounds, from fanciful electronic gadgets, posh restaurants, majestic jewellery to luxury cars, driven by a growing proportion of middle income households who are commanding a higher level of disposable income.
Barring any unforeseen circumstances, such as âgold becoming forever,â diamonds which are a subset of luxury spending, are set to further ride on the growth story.
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