A gem under pressure

Summary: A high-quality business is facing pressure from changes within its core industry. This piece explores how structural shifts can impact even strong business models. It highlights the tension between business quality and future uncertainty. 

Summary: A high-quality business is facing pressure from changes within its core industry. This piece explores how structural shifts can impact even strong business models. It highlights the tension between business quality and future uncertainty.  International Gemological Institute (IGI) lost its lustre on Dalal Street since its debut over a year ago. The diamond certification company that once stood out for its fat operating margins of nearly 70 per cent has seen its earnings multiple cut in half to around 26 times today. We take a look at why such a profitable business has failed to make a mark with investors and whether it still has a chance at redemption. An asset-light machine A diamond sitting on a jeweller’s counter derives much of its value from a certificate that verifies its quality. This certificate tells the buyer what the stone is, where it came from and how it scores on the 4Cs of diamond quality: cut, colour, clarity and carat weight. IGI issues these certificates for roughly 50 per cent of all diamonds certified in India, 33 per cent globally and nearly 65 per cent of all lab-grown diamonds certified worldwide. It charges a flat fee per certificate, needs almost no capital to run (which explains its swelling margins) and converts most of its earnings into cash. By most measures, this is an outstanding business. Market concern lies not in how it operates but whether its core offering can retain relevance. The lab di