Caratlane: Anatomy of a glittering exit

To be sure, this is an unusual event in the Indian startup ecosystem, where most founders, including those who founded Zomato and Nykaa, have their net worth tied up in their companies’ shares. The Bansals of Flipkart are an exception, having pocketed over a billion dollars each in cash from the sale of their stakes to Walmart, between 2018 and 2021. With this deal, the ecosystem will have its third such cash-rich startup founder.

Sacheti agreed to sell his 27% stake in Caratlane to Titan for over ₹4,621 crore on Saturday, in a deal that will take the latter’s stake in the business to over 98%, and value Caratlane at over ₹17,000 crore ($2 billion). This is the final part of a transaction that was first struck in 2016, when Titan acquired a 62% stake in the company from Tiger Global for ₹357.24 crore, then valuing Caratlane at ₹576 crore.

‘Hyper-growth ahead’

In 2016, Tiger Global barely made a profitable exit. The hedge fund invested a total of ₹302 crore across four tranches beginning 2011, and exited with a small profit in 2016, less attractive in dollar terms, according to VCCircle and VCCEdge reports of the time.

Since then, Caratlane has grown exponentially under the Tata umbrella. It is also the only company within the Tatas’ startup portfolio that is profitable. The group has acquired online grocer Big Basket, online pharmacy 1MG, and a stake in online gym platform Curefit in recent years—they’re not profitable yet and, to be fair, are still a work in progress. In financial year 2022-23, Caratlane registered a turnover of ₹2,169 crore against the previous year’s ₹1,256 crore. And it recorded a profit before tax of ₹119 crore against the previous year’s ₹39 crore.

Titan’s acquisition of Caratlane at $2 billion is lower than JM Financial’s $3 billion estimate, the brokerage said in a report on 19 August. “Caratlane is a high-quality, high-growth business built by Mithun Sacheti from scratch—it has a richer gross margin profile (c.35%) vs Tanishq’s and at steady-state could possibly be clocking a higher operating margin than Tanishq. The stake acquisition has been done at 4.5x FY25E sales which is tad lower vs Titan’s own valuation of c.5x sales," the report said.

Further, the JM Financial report added that Caratlane is still in a “gestating but hyper-growth phase". The firm termed the deal as short-term EPS dilutive but value accretive. On Monday, Titan shares shot up in early morning trade on the NSE and ended the day at ₹3,078, up 0.9%. The shares traded at around ₹360 apiece when Titan first acquired a majority stake in Caratlane in May 2016.

All of this indicates that this has worked out to be a great exit for Sacheti as well as a great deal for Titan. Not just that, the deal has also emerged as a money spinner for over 75 senior employees, who will collectively take home around ₹340 crore.

How did this come about and what made Caratlane the gem it turned out to be? Some of it has got to do with how Caratlane’s founders imbibed qualities from its investors—first from Tiger Global and then from the Tatas. But some of it also has to do with its origins.

Gems & jewellery

Sacheti hails from a family of jewellers. His father Padam Sacheti moved to Mumbai in 1974 to set up what is now an upmarket jewellery store, Jaipur Gems, in a rented industrial compound of Glaxo, in Worli. By 1987, the store was moved to the high street of Hughes Road. At the time, the exquisite jewels sold by Jaipur Gems were only restricted to a few wealthy buyers. For instance, even today, the site lists emerald and diamond-laced chockers for upwards of ₹50 lakh.

Padam Sacheti’s sons, Siddhartha and Mithun, joined the business. The latter, all of 21, was by then a gemologist certified by the Gemological Institute of America (GIA), California. He moved to Chennai to oversee Jaipur Gems’ expansion.

But why Chennai? Sacheti opened up to Mint as he commuted on the Chennai Metro, en route to the airport to catch a flight to Mumbai (once in Mumbai, he changed three trains to get to Marine Lines for a meeting). “I grew up in a jewellery family. I’m the second child in the family and we have a store called Jaipur Gems in Mumbai. When I returned from California after studying Gemology, I realized there was no room for a fourth decision maker there. So, I ran to Chennai at 21 and decided to build another store in the third-largest market. It is in Chennai that I realized that I loved jewellery manufacturing," he said.

He spent the next eight years building the backend as well as expanding the retail footprint for Jaipur Gems in Chennai and Coimbatore. Jaipur Gems catered to the high-end market—people willing to buy high-quality and expensive jewellery. What pushed Sacheti towards Caratlane was an opportunity to make quality jewellery affordable for the masses, by going online.

And so, in 2008, CaratLane was born, selling rings, bangles and earrings, starting at ₹25,000—price points vastly different from Jaipur Gems. The move was largely in line with Sacheti’s belief that beautiful jewellery ought to be more accessible to mass consumers. However, the business moved at snail’s pace in the first few years.

When he launched the startup, Sacheti put in around ₹75 lakh; his co-founder Srinivasa Gopalan put in ₹27 lakh (Sacheti bought out Gopalan in 2018 for around ₹50 crore, giving him a decent exit).

Initially, their decision to sell jewels online drew a lot of naysayers given how the country was steeped in purchasing and owning gold and precious jewels from stores. The market in 2008 was dominated by mom-and-pop shops, and giants like Tanishq, Titan company’s flagship jewellery brand.

Enter, Tiger Global

In 2011, Tiger Global decided to invest around $6 million in the company, and made similar amounts of follow-on investments over subsequent years. This switched things up for Caratlane, as it began investing in marketing, branding and expansion. This was a crucial phase in the growth of Caratlane but also involved burning a lot of money.

Now, Sacheti talks about the mistakes he made at the time, thinking he had to compete with the larger players in the ecommerce segment. “I can tell you very safely that of the first ₹300 crore that I raised from Tiger Global, I blew ₹150 crore not even knowing what I was doing. I set out to compete with Flipkart and Myntra when I had no business competing with them. That’s because the investor was the same—Tiger Global—so, I thought, to be relevant in their eyes, I had to do that. That was a big learning curve for me and I see that with everybody. You’re solving for your investor, you’re not solving for your business or customer. The inability to understand that is what makes you burn that kind of money that all of us combined have burned so far," Sacheti said.

For instance, Caratlane opened its first offline store in 2011 in Delhi’s upmarket Greater Kailash area after the first round of funding from Tiger Global. The store, designed with large screens and no jewellery for customers to see, was a total disaster. A second store in Hyderabad also failed after the retailer opened a store “too big" for the collection Caratlane offered.

However, a store in Bengaluru’s KR Puram a few years later, with an “inviting" front design and localized digital marketing was a roaring success, giving the founders the belief that offline retail for precious stones and gold was indeed the way forward. In 2015, the retail chain opened up to the franchisee model to allow others to have “skin in the game".

In those five years, Sacheti was often in close contact with Bhaskar Bhatt, the Titan MD at the time. Sacheti would ask Titan to participate in each round, but finally attracted Bhatt’s interest only in 2015, after years of pursuit. But that meant convincing Tiger Global to exit, which was no easy feat.

“It was hard; they (Tiger) had put in $30 million, and they obviously did not want to exit at that point. But getting Titan in was the right thing to do. We knew what we wanted and they (Titan) were the right ones to build large-scale retail," he recalled.

Sacheti recalls shooting an e-mail to Lee Fixel, Tiger’s partner at that time, convincing him to sell his stake to Titan. The e-mail read: “Look, as a fund you have 10 lives; as an entrepreneur I have three lives. But a business only has one life. So, let’s do what is right for the business." Lee called back immediately agreeing to sell the stake. The two still meet when Sacheti travels to the US.

Fixel did not immediately respond to a request for comment on Monday.

Once the Tatas came in, Caratlane took on a different approach.

Turning a profit

It wasn’t easy at first. A wake up call for Sacheti was when Titan was set to invest ₹99 crore in primary capital in Caratlane in 2019. At the time, Sacheti thought that the company would maintain its previous valuation of around 5X in sales.

“But in their eyes, that was not the case. The company’s value had dropped," he said. Sacheti realized that the business needed to make money. Although the company had grown in revenue terms, it had reported losses of ₹46 crore in FY19. “Businesses need to make money and grow at the same time. They are not disconnected activities. VCs might like to believe that but that is not the case," he said.

Thereafter, Sacheti began focusing on how much cash the business had, how much it needed to generate, and what he needed to do to make it viable. He began to figure out what required capital and solve for it individually. Instead of setting up stores, which would make it capex heavy, he moved to a franchise model. Working capital was another challenge, so the company worked out a line of credit with its lender—here, the Tata brand’s leverage helped secure a better deal.

Caratlane turned a small profit in FY21, which increased in FY22. In fiscal 2023, the company added 84 stores to take its total store count up to 222. That financial year, Caratlane registered a turnover of ₹2,169 crore against the previous year’s ₹1,256 crore and recorded a profit before tax of ₹119 crore against the previous year’s ₹39 crore.

“The store growth was (earlier) 20 stores a year, and it became 80 stores last year (FY23) because the profit came last year in a very big manner. So, we designed the business to mimic the cash flow of the business," Sacheti said.

Caratlane was like a car that was “extremely inefficient in the beginning and then became very efficient later," said Sacheti. “I can tell you that (the first) seven years I didn’t do a great job, but the next seven years, I did a fabulous job. The result is in the change in value, and when I did a fabulous job, I didn’t need capital. When I didn’t do a fabulous job, I needed a lot of capital," he explained.

What next

Going forward, Sacheti plans to help other founders replicate his success. He plans to invest in other startups and back founders within the consumer ecosystem. Here, he plans to channel the advice of the late Rakesh Jhunjhunwala, a stakeholder in Titan, whom he cites as a mentor. “I’m personally looking forward to building more businesses—if more opportunities come my way to invest, I’d love to," he said.

To be sure, as part of the deal, Sacheti’s non-compete clause is restricted only to the jewellery retail business.

Sacheti said the Bombay Shirt Company is the kind of business that he would love to invest in. He also pointed to an uptick in demand for branded luggage, an outcome of post-pandemic pent-up demand, which he thinks is an “exciting" space. Footwear, too, is an area of interest. In addition, he is also investing a couple of hundred crores in two tech-focused funds, Singularity Ventures and Binny Bansal’s o21 Capital.

But before all that, there will be a brief respite, as the 45-year-old wants to spend more time with his wife and two children.