Revenue for jewellery retailers are projected to increase by 22-25% in annual terms for the current fiscal, according to a Crisil Ratings analysis. This compares to previous expectations of 17-19%.
This growth will be driven by higher volumes as retail gold prices decline from their record highs, following announcement of the duty cut from 15% to 6% in the Union Budget.
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The price drop, which has seen retail gold prices fall by Rs 4,500-5,000 per 10 grams, is expected to improve affordability and boost volume by 3-5% this fiscal. However, the reduction in gold prices might lead to some inventory loss on existing stock. Despite this, the impact will be partly offset by reduced spending on marketing and promotions due to improved demand.
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Operating profitability is anticipated to decrease slightly by 40-60 basis points, bringing it to around 7.1-7.2%. Nevertheless, the lower prices will lead to reduced working capital requirements, even with planned store expansions of 12-14%. Credit profiles for gold jewellery retailers will remain stable, with financial metrics such as total outside liabilities to tangible net worth and interest coverage ratios holding steady at around 1.0 and 9 times, respectively, Crisil said.
That said, gold prices remain higher than last year's average by 17% and are expected to remain firm as the festive and marriage seasons approach, driving sales of jewellery retailers higher in the second half of the year, than the first half of each fiscal, the note said.
Crisil's analysis of 58 gold jewellery retailers, which account for a third of the revenue of the organised jewellery sector, indicates as much. Organised sector accounts for slightly more than a third of the market, with the highly fragmented unorganised sector making up the rest, the note said.
“The duty cuts to their decadal lows have come at an opportune time for the gold jewellery retailers as they start stocking for the festive and marriage seasons from the latter half of August," said Himank Sharma, director at Crisil Ratings.
However, inventory loss on the existing stock, due to the price cuts will be partially mitigated by the reduced spends on marketing and discounts, as demand revives, he said.
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