Revenue of jewellery retailers is set to grow 12 to 14% : Crisil
After two consecutive years of decrease, Crisil Ratings expects gold jewellery dealers' sales to climb 12 to 14% year over year this fiscal year.
This will be facilitated by steady gold prices and a rebound in discretionary expenditure, which will include wedding and holiday jewellery.
However, operating margins will be returned to pre-pandemic levels of 6.5 to 7% with a 100 to 120 basis point (bps) reduction, owing to the stabilisation of gold prices and the limited possibility for additional cost optimization.
Revenue recovery, combined with improved accrual, sustained inventory rationalisation, and a solid capital structure, will keep the credit outlook constant, according to a Crisil Ratings research of 86 jewellery retailers.
This fiscal year's increase will come from a low base, as sales dropped by 3% and 8% in fiscal 2020 and 2021, respectively.
Demand had dwindled after import duties were increased by 250 basis points to 12.5% in the Union Budget released in July 2019. In fiscal 2021, sales was reduced by pandemic-related lockdowns and store closures.
According to Anuj Sethi, Senior Director at Crisil Ratings, organised jewellers' revenue is also expected to improve this fiscal year from lower import duties and the implementation of required hallmarking on June 16, which will make them more competitive against unorganised businesses.
Additionally, while the second wave did temporarily halt operations in the first quarter, lockdowns in many states were more targeted and less severe, resulting in fewer store closures than during the first wave.
“Moreover, pent-up demand from weddings (which account for between 55% and 60% of total jewellery sales) and festivals in the later quarters would assist in reviving revenue, just as they did last fiscal,” Sethi added.
Additionally, price stability for gold will sustain demand this fiscal year, as consumers tend to defer purchases during periods of price volatility.
With economic activity steadily building up, income levels improving, and an increasing number of individuals receiving vaccinations, gold prices have dipped from their previous fiscal high and have stabilised at roughly Rs 48,000 per 10 gramme of 24 carat gold in recent months.
A net reduction of 213 basis points in import duty to 10.75% this fiscal year also contributed to the decline in local gold prices, making it more cheap for consumers, according to Crisil.
The operating margin, on the other hand, is expected to decline and stabilise at the pre-pandemic level of 6.5 to 7%, since inventory gains are unlikely to accrue as a result of weakening gold prices and little potential for cost optimization.
The operating margin rose by 100 basis points to 7.5 to 8% last fiscal year, despite lower sales growth, as jewellers profited from low-priced inventory following a 30% increase in gold prices.
This, together with cost-cutting initiatives such as workforce reductions, reduced promotions, and rental renegotiations, benefited the operating margin, according to Crisil.