Does In-Factory Grading Help IGI Achieve Huge Margins?

Nestled in the International Gemological Institute (IGI) stock-flotation document were a few important and perhaps surprising facts.

One was that the grading lab’s “pre-acquisition group” — which refers to IGI India and its Turkey subsidiary — registered an EBITDA margin of 79% for the three months ending March 31, 2024. (EBITDA stands for earnings before interest, taxes, depreciation, and amortization.) This figure did not fall below 65% for any of the 2021, 2022 or 2023 calendar years.

The second revelation is that IGI has been operating in-factory certification services for “select high-volume” synthetic-diamond growers in India since 2021. “These in-factory laboratory setups are equipped with the necessary equipment supplied by our customers, and are staffed with our gemologists and employees of our customers, who attend trainings provided by us on certain basic steps of the certification process,” according to the initial public offering (IPO) draft prospectus. IGI has 12 of these in India and one in the US, it says.

The information became public as part of IGI India’s plan to float on two Indian stock exchanges. The company intends to use the proceeds to acquire the lab’s Belgium and Netherlands businesses from the group owner, an affiliate of Blackstone.

Other data points indicate these in-factory labs are likely a major chunk of IGI’s business, though we cannot say for sure. In 2023, IGI India derived almost 41% of its revenue from its top 10 customers, the filing revealed. Some 53% of total revenue came from lab-grown diamonds. IGI CEO Tehmasp Printer declined to comment beyond what is in the prospectus.

Employee expenses

Using customers’ own employees and equipment undoubtedly reduces costs. IGI India spent 15% of its revenue on salaries and other employee benefits in 2023, down from 18% in 2022 and 20% in 2021. The company’s EBITDA margin stood at just under 66% in 2021, 68% in 2022, and 70% in 2023, while its net margin after tax was 47% in 2021, 49% in 2022 and 51% in 2023. In the first quarter of 2024, the net margin rose to 60%.

There is not much in India with which to compare this, as no other major gradings lab have published their financials. However, a comparison with the Gemological Institute of America (GIA) indicates that IGI gets a good deal.

Gemological Institute of America, Inc., the GIA’s US entity, spent 54% of its $291.1 million revenue on salaries and employee benefits in 2022, according to the most recent available accounts for the grading organization. The GIA incurred a loss of $10.4 million that year — though the accounts do not use the terms “profit” or “loss,” just “revenue less expenses” — with a negative net margin of 3.6%. As a 501(c)(3) nonprofit, the GIA is required to file an annual form 990 with the US’s Internal Revenue Service (IRS), stating its key financial data.

The numbers do not include the GIA’s subsidiaries and affiliates, a GIA spokesperson clarified. Grading carried out at GIA’s Indian labs of diamonds submitted by Indian customers count toward revenue of GIA’s India subsidiary, GIA India Laboratory Private Limited, not of the US entity, the spokesperson also noted.

In 2021, the GIA’s US revenue came to $358.4 million, with salary and employee benefits costing 41% of that. The organization turned a profit of $105.1 million that year, translating to a net margin of 29%.

“The financial information in the 990 forms reflects conditions in the market,” said the GIA spokesperson, who also pointed out that the US entity funded the GIA’s “mission-driven activities, including our extensive education and research programs.”

Risk factor

IGI appears to benefit from the cost structure resulting from its in-factory model. However, we do not know what proportion of the workers in those labs are IGI’s and what proportion are the customer’s. In addition, wage costs are inevitably higher in the US than in India, so the comparison with the GIA is not completely fair.

It’s noteworthy that IGI includes its in-factory model — as well as its mobile laboratories, which cater to jewelry manufacturers — in its list of risk factors.

“As certification via our in-factory and mobile laboratory setups are conducted on the premises of our customers, we may also have less oversight over third parties who have access to our customers’ premises,” according to the IPO prospectus. “While we conduct quality checks and periodic calibration of our gemologists to reassess and adjust their grading techniques, such measures may not be effective in preventing all instances of grading errors or fraud by gemologists or third parties.”

The GIA said every diamond it evaluated was examined by “trained experts in laboratories directly operated by GIA, independent of any other organization or interest. This ensures trade and consumer confidence in GIA reports.” It declined to comment on how other organizations may operate.