Four-flanked pressure for gold jewellery retailers

Gold jewellery retail is a shimmering business in ways more than one.

But a warren of risks that have built up of late – such as higher import duty, elevated gold prices, sluggish demand, and tighter lending – is set to dull some of that shine.

So much so, we believe revenue growth of organised gold jewellery retailers could halve to 5-6% (compound annual growth rate) in the current and next fiscals, compared with 12% in the preceding three fiscals, a CRISIL study of 44 such retailers it rates shows.

But there are some silver linings too.

For one, jewellery retailers typically have a tenth of their inventory unhedged, which helps them benefit from any sharp rise in gold prices.

Two, high gold prices also provide flexibility to run tactical promotions by reducing jewellery-making charges to boost sales without significantly impacting margins.

And then comes the leg-up from hallmarking rule, which kicks in from January 15, 2021. Less than half of the gold jewellery sold in India is currently hallmarked. So the government diktat will make it tough for unorganised jewellers but help the organised lot from fiscal 2022 onwards.

The twin blows of higher import duty and prices

Indeed, the current fiscal has delivered a double whammy on revenue growth. One, domestic prices have surged 24% in the past one year to ~Rs 42,000 as on February 20, 2020, for 10 gm of 24-carat gold. Gold prices are expected to stay high because of geopolitical uncertainties.

Two, import duty on gold was increased by 250 basis points to 12.5% in July 2019.

Now gold imports are highly elastic to increases in import duty, just the way retail demand is to domestic prices of gold. Not surprisingly, imports fell a fifth during April-December 2019, and nearly halved between July and December, as retailers offloaded their lower-duty inventory and demand slackened.

This is a redux of what happened six fiscals back, when gold imports fell a quarter owing to a phase-wise increase in custom duty on gold by 400 bps to 10% in fiscal 2013.

The lower imports notwithstanding, revenue will grow on account of higher prices and higher proportion of old gold exchange. Consumers will prefer to exchange their old gold for new if prices remain elevated. However, growth will be lower compared with what was seen in the last three fiscals.

Retailers with a reasonable share of diamond-studded gold jewellery sales had a better festive season (in October, which accounts for ~15% of annual sales). They would be relatively less impacted compared with those that sell largely gold jewellery.

Credit crunch constraining expansion

The current downturn, in fact, began in fiscal 2018. Organised retailers were gung-ho about the Goods and Services Tax in early fiscal 2018, as it opened up vistas for expansion in regions where unorganised retailers had reigned. Many regional players made aggressive expansion plans. But the sector was hit by a series of delinquencies and asset quality issues by end of the fiscal.

Consequently, banks began exercising caution in renewing and extending working capital loans. Some even reduced exposure to the sector, which affected lending sentiment. While gross bank credit outstanding rose 7% last December (on-year), lending to the gems and jewellery sector slid 11% during the same period.

Currently lending banks are also seeking higher collateral or margins from jewellers, which increases their cost and constrains store additions. That, in turn, is limiting new store openings, and hence, revenue growth.

Due to the four-way pincer of import duty, higher prices, lower demand and chary lenders, the credit metrics of gold jewellers would continue to be moderate – unless there is a significant jump in demand. That’s a scenario tough to foresee right now, given that economic growth is unlikely to be more than a modicum next fiscal.

Courtesy: EconomicTimes