After two consecutive years of decline, revenue of gold jewellery retailers is poised to grow 12-14% on-year this fiscal, driven by stable gold prices and recovery in discretionary spending, including on wedding and festive jewellery.

Operating margin, though, will be restored to the pre-pandemic level of 6.5-7.0%, with a moderation of 100-120 basis points (bps), given a stabilisation of gold prices and limited scope for further cost optimisation.

Recovery in revenue, along with improved accrual, continued inventory rationalisation and healthy capital structure will keep the credit outlook stable, shows an analysis of 86 jewellery retailers rated by Crisil Ratings.

The growth this fiscal will come on a low base as revenue had contracted 3% and 8%, respectively, in fiscals 2020 and 2021. Demand had taken a knock after import duty was hiked by 250 bps to 12.5% in the Union Budget presented in July 2019, while in fiscal 2021, pandemic-induced lockdowns and store closures impacted revenue.

Says Anuj Sethi, Senior Director, Crisil Ratings, “This fiscal, revenue of organised jewellers is also set to benefit from lower import duty, and introduction of mandatory hallmarking from June 16, 2021, which will make them more competitive compared with unorganised players. Also, while the second wave did curb operations in the first quarter, lockdowns in many states were localised and less stringent, and hence store closures were lower compared to the first wave. Besides, pent-up demand from weddings (55-60% of overall jewellery sales) and festivals in later quarters will help resurrect revenue, just as they did last fiscal.”

Additionally, stabilisation of gold prices will also support demand this fiscal as consumers tend to hold back purchases during times of price volatility. With economic activity picking up gradually, income levels improving, and an increasing number of people getting vaccinated, gold prices have softened from the peak seen in the previous fiscal and stabilised at around Rs 48,000 per 10 gram of 24 carat gold over the last few months (see annexure).

A net reduction of 213 bps in import duty to 10.75%¹ this fiscal has also helped bring down domestic gold prices, making it more affordable for consumers.

Operating margin, however, is set to moderate and settle at pre pandemic level of 6.5-7.0% as the benefit of inventory gains is unlikely to accrue owing to softening of gold prices and limited scope for cost optimisation. Last fiscal, operating margin had improved by ~100 bps to 7.5-8.0% despite lower revenue growth as jewellers made gains on low-priced inventory following ~30% surge in gold prices. This, coupled with cost optimisation measures such as pruning of employee costs, lower promotions and renegotiations of rentals, helped operating margin.

Says Kiran Kavala, Associate Director, Crisil Ratings, “Despite a slight moderation in operating margin, debt metrics will continue to improve this fiscal, supported by higher accruals and prudent debt levels following rationalisation of inventory last fiscal. Besides, similar to last fiscal, when capex² is estimated to have contracted by over 50%, store additions are expected to remain modest this year, too. Therefore, the total outside liabilities to tangible net worth and interest coverage ratios are expected to improve to 0.7 time and 4.9 times this fiscal from 0.9 time and 4.4 times, respectively, in the last.”

That said, more stringent lockdowns due to resurgence of the pandemic, movement in gold prices, and any regulatory change that could impact demand remain monitorables.

¹Net reduction in import duty after factoring in the impact of Agriculture Infrastructure and Development Cess of 2.5% and Social Welfare surcharge of 0.75%
²Capex refers to costs of fit-outs, furnishing, interiors but excludes inventory.