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, ratings agency CRISIL said in a note.
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, it added.
A recovery in revenue, along with improved accrual, continued inventory rationalisation and healthy capital structure will keep the credit outlook stable, an analysis of 86 jewellery retailers rated by CRISIL Ratings showed. The growth this fiscal will come on a low base as revenue had contracted 3% and 8%, respectively, in fiscals 2020 and 2021.
CRISIL said demand had taken a knock after import duty was hiked by 250 bps to 12.5% in the national budget presented in July 2019, while in fiscal 2021, pandemic-induced lockdowns and store closures impacted revenue.
“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,” said Anuj Sethi, Senior Director, CRISIL Ratings.
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, the note said.
A net reduction of 213 bps in import duty to 10.75% this fiscal has also helped bring down domestic gold prices, making it more affordable for consumers, CRISIL said, adding that 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.