Vaibhav Global Ltd: From B2B To B2C

Vaibhav Global Limited (VGL) has become the sought-after talk of town. Maybe this acclaim is quiet justified. They have consistently reported robust earnings and healthy margins, beating street expectations invariably. Their stock price has more than quadrupled from lows in the March Madness of 2020 and hit an all-time high of Rs. 1,057.70, after it turned ex-split. To top it all, they’ve persistently declared sizeable dividends in every quarter of FY21.

VGL is an end to end electronic online retailer of discounted jewelery and lifestyle accessories, with retail operations majorly in the US and UK. It is headquartered in Jaipur, Rajasthan.

However, VGL initially started off as a B2B player, then gradually mutated into a full service retailer and finally transformed into an online deep discount retailer.

Let’s talk about the success story of Vaibhav Global Ltd (VGL) that lies beyond the numbers.

Sunil Agarwal, the founder of VGL was born in a middle class family in Jaipur. He learned the ins and outs of the gems business while interning at an export factory. He launched Vaibhav Enterprises in 1980 and began exporting gemstones to stone dealers and jewelery manufacturers in Hong Kong. At that time gemstones were hand-crafted in India. So, in 1982, Sunil Agarwal became a pioneer by venturing into manufacturing of factory-made semi[1]precious stones like pink tourmaline, red garnet, citrine, etc which were esoteric and not widely known.

Their claim to fame was an exotic and unusual blue-violet semi-precious stone called Tanzanite. Tanzanite is only found in Tanzania and because of its limited supply, it quickly became a unique personal statement of style and beauty. Vaibhav Enterprises processed and supplied the highest quality Tanzanite in variable cuts and settings, from elegant classical styles to simple modern designs for foreign jewelery manufacturers.

In 1989, they incorporated Vaibhav Gems Ltd which eventually went on to take over Vaibhav Enterprises for forward integration. Over the years, they gained momentum and became profitable. They knew the time was ripe to expand further and decided to enter into manufacturing of fine jewelery which had low barriers to entry and was less capital intensive at the time.

In 1996, VGL went public and got listed on the bourses raising Rs. 7.09 crores at a premium of Rs. 20 per share and setup Jewelery Manufacturing as a B2B vendor. In 1998, Sunil Agarwal decided to move to US to establish base of operations.

In 1999 they set up a 100% Export Oriented Unit (EOU) at Export Promotion Industrial Park, Sitapura. VGL was also selling fine jewelry to B2B customers like QVC in UK, Germany and Shopping Home in US which ran 24/7 live TV shopping of products as well as Wal-Mart, JC Penney and Macy’s.

In 2001, the internet was flourishing and VGL set up an e-commerce platform ‘2umbrellas.com’. However, that endeavor didn’t take off as expected and due to lack of capital, they put a lid on it after 2 years. Despite defeat, Sunil Agarwal obtained invaluable experience, which helped the company make a comeback to e-commerce in later years.

It was then that, Sunil Agarwal felt that he was missing something and hence pursued an MBA from Columbia University in 2002. It helped widen his horizons and opened his eyes to new phases of business, like earlier he wasn’t aware that companies could raise additional capital through private equity and that led him to expand the business of VGL.

Between 2003-05, VGL undertook major capacity enhancement by setting up a new state of art jewelery manufacturing unit, a diamond processing unit and also commissioned a micro weight gold chain plant. Their initiatives like gems studded stainless steel jewelery, ion plating, etc were ground-breaking.

However, not all their projects were successful. Things went off track when they got involved in the wholesale diamond business. A short time into the business Sunil Agarwal realized that the wholesale diamond market was highly competitive and they lacked the skills required.

In 2005-06, VGL raised Rs. 516 Crore through a successful GDR issue wherein promoters purchased 66% of the issue at Rs.323 per share and a preferential allotment to Warburg Pincus (a private equity firm) which invested Rs. 208 Crore at Rs. 277 per share for a 27% stake. The purchase triggered an open offer which was made at Rs.279 per share, elevating Warburg’s stake to 32.3%. Their objective was to expand their wholesale business to better compete with big players from China and Thailand.

VGL enhanced their international presence through acquisition of the STS Group of Companies. They were also selling through Ebay and set up 19 brick-and-mortar retail stores in the Caribbean, Mexico and Alaska as these were popular international cruise ship destinations and served as good grounds for impulse purchase of jewelry by tourists.

In 2006, VGL was supplying gem stones to a Singapore based company which ran the Gems TV network with operations only in UK and they were churning profits to the tune of $30 Million annually. This acquainted Sunil Agarwal of the fact that breaking into the UK market is relatively easier.

And that’s how it came to pass, with the money VGL had raised from Warburg, they launched their 24-hour Jewelry TV Shopping Channel called – ‘The Jewelry Channel (TJC)’ in UK, in April 2006. The business model seemed sustainable, they experienced rapid growth, tasted sweet success and further rolled out TJC in Germany and US in September 2006 and April 2007. However, later it all turned out to be a recipe of disaster for them.

In 2007, VGL was at its crescendo, very close to attaining their goal of reaching $1 Billion in Market Capitalization. Everything was hunki-dori and they further raised Rs. 95 Crore at Rs. 220 per share from Nalanda Capital — another private equity fund, whose fund manager Pulak Prasad also sits on VGL’s board, even today.

Unfortunately, the 2007 financial crisis hit, VGL failed to foresee it and things took a turn for the worse. The tables had turned, VGL found itself in dire straits in the recession of 2008. All their TV channels were in nascent stages, losing money and yet to breakeven. Their retail stores and online sales channels lost all their potential clients as the financial crisis had destroyed consumer confidence. They suffered colossal costs such as fluctuations in prices of precious metals (gold, silver, platinum, etc) and foreign exchange, airtime on TV network along with burgeoning interest payable on debt of Rs. 216 Crore. There was very little liquidity in the markets and even if they were able to secure additional capital it would have been at high interest rates and stricter terms.

The walls were closing in on VGL and as a last resort they decided to seek shelter inside Corporate Debt Restructuring (CDR) in 2008. CDR is a framework under which financial institutions and banks come together to restructure the debt of companies facing financial difficulties and provide timely support to such companies.

By the end of March 2009, the stock market was valuing VGL’s equity at just Rs. 40 Crore, down from Rs. 1,200 Crore just three years earlier.

VGL decided to liquidate their entire inventory and cease operations in the United States. They changed their channel name from TJC to Liquidation Channel and sharply decreased prices of their merchandises by offering significant discounts for clearance sales. At that point, VGL noticed that their inventory started selling like hotcakes. Consumers were buying deeply discounted jewelry even during a recession.

That was Sunil Agarwal’s ‘aha moment’. VGL decided to give up selling high-end fine jewelry and instead become a deep discount online fashion jewelry retailer. This insight kindled a new fire inside Sunil Agarwal’s belly. He requested the lenders to grant him more time to repay his debts instead of simply asking them to write it off. He then injected Rs. 44 Crore of his own money into VGL by subscribing to the company’s preference shares, furnishing the liquidity much needed to pull through these tough times.

To quote Joshua Millburn – “The easiest way to organize your stuff is to get rid of most of it.” That’s exactly what Sunil Agarwal did. In his letter to shareholders in 2009 annual report, he wrote –