Hyderabad man buys ₹12 cr car: what all can you do with ₹12 cr?

It was about a Hyderabad-based businessman, Naseer Khan who bought the most expensive supercar officially available on sale in India, the McLaren 765 LT Spider.

The car is priced ata whopping ₹12 crore and Mr Khan is probably the first customer of 765 LT Spider in India.

The luxury industry in India is booming with more than 300 international brands planning to enter the India market in the next few years, a clear indication of its potential.

The country’s luxury sector was set to be worth over US$30 billion ( ₹2,482.5 billion) by the end of the year. Experts estimate the luxury market in India will expand five-fold over the next three years as the number of millionaires in the country continues to grow.

But coming back to Mr Khan’s purchase of a ₹12 crore car, it got me thinking… that’s a lot of money to pay for an asset which will depreciate the minute you drive out of the showroom!

Typically, a car’s value decreases 20% to 30% by the end of the first year. In five years, it can lose 60% or more of its initial value.

To make matters worse, a lot of people borrow money to buy a “luxury car." Which makes me wonder, “Why would you borrow money to buy an asset that you cannot afford that immediately goes down in value by 30%?"

We live in a world of instant gratification. It is so easy to get carried away and spend a fortune on something that you may probably regret the minute you buy or might not have use for in a couple of days.

But on the other hand, there is something that once purchased generally tends to appreciate in value and as time passes, in fact becomes dearer to a buyer.

As opposed to a depreciating car, this luxury item has been known to appreciate at times by 50% in a year or perhaps even gain 1,000% or more of its initial value over the long term.

And unlike a luxury item which may be trending in 2022 but be so yesterday in 2023, this luxury item can be popular across generations. It could be as popular in 2050 as it was in 1990.

So, what is it that we are referring to here?

You guessed it right… Stocks!

What would you do if you had ₹12 crore to invest? Buy a luxury car? A house? Or perhaps invest in Gold?

A comparison of asset classes across the last four decades has shown that equity has delivered the best return.

But in this article, we are not referring to any plain boring stocks… after all why compare apples to oranges!

We are talking about “luxury stocks".

Stocks of luxury goods companies manufacture products that are the opposite of necessities. They are items that consumers want but don’t need.

Products of such manufacturing companies are distinct from other companies and more expensive than competing products, as they are perceived as higher quality and confer status on the owner.

Luxury stocks must have a place in almost any equity investors portfolio as such stocks have a history of outperforming the broader market.

 

As the sector is made up of companies that have proven themselves, they are relatively low-risk investments.

Although they are cyclical, a number of trends favour luxury stocks over the longer term. These include the emergence of the luxury goods market in India and an expanding wealth class, which has increased the market for luxury goods.

Good luxury stocks include strong brands, healthy operating margins, and timeless products.

Let us look at three “luxury stocks" that an investor could hypothetically invest in with a corpus of ₹12 crore.

Stocks of these 3 Indian companies are featured in the Deloitte Global 2022 edition of Global Powers ofLuxuryGoods.

 

#1 Titan Company Ltd

 

Tata group company, Titan Company Ltd is thelargestbranded jewellery maker in India and the fifthlargestintegrated own brand watch manufacturer in theworld.

 

Titan was ranked 25th in the Deloitte Global 2022 edition of Global Powers ofLuxuryGoods.

 

The company started its journey in 1984 as a joint venture between the Tata group and Tamil Nadu Industrial Development Corporation (TIDCO) to create a new segment in a market then dominated by HMT with its mechanical watches.

With the introduction of Titan Watches with quartz technology, international designs and retail showrooms, the company took the watch market by storm in the late 1980’s.

In the early 1990s, the company entered the jewellery industry.

And just like it had in watches, Titan differentiated itself from the market with European styled diamond jewellery in a market heavily dominated by gold jewellery.

Unfortunately, the move back fired and the company struggled with the perception that it was very niche. This made the company change tack and foray into the gold jewellery industry which was ruled by local jewellers.

Once again, the company made a breakthrough with its innovative offering.

At the time, jewellers were often suspected of cheating people by selling them gold that was of much less standard than claimed.

To counter this, Titan launched the Karatmeter, a means to check the purity of gold. The instrument used X-rays to measure the purity of gold in three minutes.

This exposed the unfair practices of family jewellers, which helped build customer confidence in the brand.

Over the last three decades, the jewellery business has grown sizeably to become the main source of revenue for the company.

For the quarter ended 30 September 2022, the jewellery segment contributed to 87% of its total revenues. Watches & wearables and eyewear contributed to 9% and 2% of the revenues respectively.

Titan accounts for over 80% of the total marketcap of all jewellery companies listed on the stock exchanges.

In the September 2022 quarter,the company’s profits increased 34% from ₹6.4 billion (bn) to ₹8.5 bn on a year on year basis.

 

Revenue has grown at a compounded annual growth rate (CAGR) of 11.7% since 2018 while profit has delivered a CAGR of 13.4% for the same period.

 

The company is planning to take its jewellery brand Tanishq to the US and other West Asian markets. This is part of its long-term strategy to tap into demand from large Indian diaspora and Non-Indian Resident (NRIs) communities.

 

Market experts believe the company could grow its revenue at a CAGR of over 20% between FY2022 and FY2027 on the back of its ambitious growth plan in the medium term.

 

 

The stock is a multibagger.If an investor had investedRs 1 lakh in Titan Company 20 years ago, it would have risen 64,000% (including stock split and bonus) turning thisRs1 lakh toRs 169 crore in last two decades!

 

#2 Kalyan Jewellers India Ltd

 

Kalyan Jewellers India Ltd (KJIL) is one of the largest jewellery companies in India.

 

Having ventured into jewellery retailing in 1993 in Thrissur, Kerala, the companyhas since expanded to become a pan-India jewellery company, with 124 showrooms located across India.

 

The company also has an international presence with 30 showrooms located in the Middle East and operates in 5 countries.

 

KJIL designs, manufactures, and sells a wide range of gold, studded, and other jewellery products across various price points ranging from jewellery for special occasions, such as weddings, which is its highest-selling product category, to daily-wear jewellery.

 

Back in 2012, the company’s presence was restricted to South India with all 35 outlets of the company operating only in the southern region. That’s when the company decided to make a bold bet to create a pan India presence.

 

With a marketing budget close to ₹1 bn, the company signed on Amitabh Bachchan to become its brand ambassador to make a splash in the western and northern markets.

 

The marketing campaign helped Kalyan Jewellersget noticed. Ever since, the company has added other leading celebrities from across India to its list to endorse its products.

 

In 2007, KJIL introduced the concept of ‘Rate Tags’- price marked on every product for the first time in jewellery retail.

 

One of KJIL’s key competitive strengths is its ability to operate as a hyperlocal jewellery company. The product portfolio is curated after understanding the local market preferences and trends in every geographic region it operates within.

 

The product-mix is tailormade, according to the preference of the region, and as the company adds variety with fresh products from its national/ international portfolio, it has succeeded in becoming the go-to jeweller for all customer categories.

 

The company is planning to expand its retail footprint by over 30% in 2023 by adding 52 showrooms. The expansion will mainly focus on the non-south region, which currently contributes 35% to the India business. The company has set a target to increase this share to 50% by 2025.

 

FY2022 was an excellent year for KJIL with revenue growth of 26% over FY21, recording the highest revenue in its history. The company reported revenue of ₹108 bn and ended the year with a net profit of ₹2.2 bn.

 

Shares of Kalyan Jewellers India Ltd made a tepid stock market debut on 26 March 2021 listing at ₹73.9, 15% below its issue price of ₹87 per share.

However, the stock has recovered very well during the second half of 2022. It has jumped 119% from ₹59.9 on 30 June 2022 to close at an all time high of ₹131.35 on 28 December 2022.

Kalyan Jewellers was ranked 48th in the Deloitte Global 2022 edition of Global Powers of Luxury Goods.

#3 PC Jeweller Ltd

PC Jeweller Ltd (PCJ) started operations with one showroom at Karol Bagh, New Delhi in 2005. 17 years later, it is one of the fastest growing jewellery retail chains having 82 showrooms and four manufacturing units.

The company is engaged in the business of manufacturing, sale, and trading of jewellery. It offers a wide range of jewellery including 100% hallmarked gold jewellery.

PCJ has built up a loyal customer base with its emphasis on designs, purity, and customer friendly policies.

In recent years, the company has been in the news for all the wrong reasons, particularly corporate governance issues.

This has resulted in a massive erosion in market capitalisation of the company over the last few years.

Further, in October 2022, the company disclosed it had defaulted on ₹34.7 bn loan facilities from banks and financial institutions for the second quarter of FY2023.

The company has been trying to regain its market share and increase sales & revenue by working on all aspects of its business.

The company is also working to restart its store expansion after a gap of more than 5 years. However, this expansion will be asset light, with expansion only through the franchisee route. The overall plan is to open at least 50 new stores by August 2024.

For the financial year ended 31 March 2022, PCJ posted a loss of ₹3.9 bn as compared to a profit of ₹600 m in the previous year.

However, the company has started the current financial year on a positive note reporting profits in the first half of the year on the back of significant growth in revenue.

Revenue, which had dipped to ₹1,689 m in the March 2022 quarter, has jumped 395% to ₹8,360 m in the quarter ended September 2022.

The company reported a net profit of ₹730 m for the September 2022 quarter as compared to a loss of ₹758 m in September 2021.

 

The company, which was listed in 2012, touched an all-time high of ₹600 per share on 16 Jan 2018. Since then, the stock crashed 98% to a low of ₹7.8 per share recorded on 26 March 2020.

Since then, the stock has recovered smartly and is currently trading just above ₹80 levels.

With all its problems, PC Jewellers barely made it to the Deloitte Global 2022 edition of Global Powers of Luxury Goods. It dropped 23 places to rank at number 80 on the list.

 

Should You Buy Luxury Goods or Luxury Stocks?

Investing in luxury goods has always been an attractive alternative to investing in the stock market or debt products.

When buying luxury goods, there is a certain prestige attached. More importantly, they are tangible and there’s the benefit of instant gratification, which doesn’t come with traditional investment options such as stocks and bonds.

 

But while investing in luxury goods, one must be prudent in choosing one that offers appreciation in value over time.

 

For instance, cars, diamonds, handbags, perfumes, cosmetics, and clothes are seldom known to appreciate in value.

 

On the other hand, art or luxury homes have been known to offer handsome returns over time.

 

On the other hand, given their propensity to appreciate more quickly than their non-luxury counterparts during times of economic prosperity, luxury stocks can boost an investor's portfolio's overall return.

 

Luxury goods retailers are also more stable than many might think, in large part because wealthy people are less inclined to alter their buying patterns even in times of economic distress.

However, just like any investment in stocks, it is prudent for investors to select companies with long listing history and proven track record that have weathered through different market cycles.

Disclaimer:This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

 

This article is syndicated from Equitymaster.com