Organised Jewellery Retailers Get Their Glitter Back

After the contraction in demand for jewellery in the first half of 2016, organised jewellery retailers are expected to witness a change in fate in the next three quarters and record 10 percent to 12 percent top line growth in the financial year 2016-17, says India Ratings and Research. The sector posted flat revenue growth in financial year 2015-16 and low single digit growth in the first quarter of FY17. Ind-Ra believes that the higher number of wedding days coupled with reduced obstacles on the regulatory front will drive volumes.

The World Gold Council highlighted that gold imports contracted and jewellery demand fell by 32 percent in H1CY16 to around 186 tonnes in India. The key hurdles that the industry faced in 1HCY16 have been

• Strike by jewellers on account of imposition of excise duty and government regulations
  
• Delays in purchases on the expectation of fall in gold prices
  
• Increase in recycled gold
  
• Possibility of higher share of unaccounted gold in the system due to spike in prices, regulatory hurdles and levy of excise duty.
  

Higher number of wedding days in H2FY17 (both on sequential and year on year basis) together with fading regulatory hurdles is likely to provide a boost to the revenue growth in the coming quarters. Wedding jewellery accounts for 60 percent to 65 percent of the market demand and hence is a key driver.

Additionally, the government’s recent measures namely, increase in the limit of collectible amount under Gold Savings Scheme from 25 percent to 35 percent of net worth and compulsory hallmarking of jewellery will provide a boost to the organised jewellery sector and aid in shifting some of the demand from unorganised sector. Gold Savings Scheme contributed about 15 percent to 30 percent of the revenues for the organised jewellers; prior to 2014 when it was closed by the government. Although the government resumed the scheme in 2015, maximum collectible amount was capped at 25 percent of the net worth.

The agency believes that organised jewellery retailers are likely to see an improvement in EBITDA margins in FY17 by 100 to 200 basis points (FY16: around 8 percent) on the back of increased share of high margin diamond jewellery and higher gold prices. However expansion through franchisee mode may constrain the improvement in margins given the lower mark up in this channel.

Organised jewellers face an overhang of the impending Goods & Service Tax Bill. The GST Committee report recommends the all-inclusive tax rate of 2 percent to 6 percent on precious metals. The sector currently pays value added tax and excise at 1 percent each and hence GST rate over and above 2 percent is likely to increase the tax incidence on end consumers. We expect any increase on account of higher GST is likely to be passed on to the end consumer; albeit it may impact non wedding segment demand and prompt customers to opt for unorganized sector.

Jewellery retailers suffered major disruptions in the last two quarters on account of closure of business due to jeweller’s strike for about six weeks beginning March 2016 in response to government regulations like imposition of excise duty and mandatory pan card requirement for jewellery purchases above Rs 2 lakh. Additionally, consumer demand for jewellery remained muted on account of high as well as volatile gold prices (gold prices have increased about 27 percent year on year in the H1CY16 to around Rs 30,000 per 10 gram).

(India Ratings and Research a wholly owned subsidiary of Fitch Group is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.)