The RBI, during the previous fiscal relaxed all extant restrictions on import of gold and funding for jewellers, including withdrawal of the 20/80 scheme and the re-introduction of metal loans. The relaxation of restrictions provided a fillip to the industry, which was recording lower than expected volumes (during H1 CY14), said ICRA.
In terms of supply, imports over the medium term are expected to reach the levels witnessed prior to the curbs, largely replacing sourcing of gold through the unofficial channels / recycled gold. However, as against expectations by most industry players of a moderate cut in the import duty for bullion, the duty has been maintained, which could result in some imports continuing through illegal channels.
The shift towards Gold Metal Loans would lower borrowing costs and also act as a hedge against price risk. While the deposits garnered under erstwhile schemes have largely been redeemed by most players against jewellery purchase, subscription to new schemes has been weaker than expected.
Over the near term, ICRA expects improvement in gold availability coupled with the re-introduction of low cost gold metal loans, rising consumer sentiments and aggressive store expansion by organized retailers to drive volume growth.
ICRA expects jewellery demand growth to be nearly 10% during the current year, supported by recent regulatory reliefs for the industry. It expects the domestic gold jewellery industry to record robust growth of ~8-10% over the medium to long term, aided by the growing penetration of the organized sector.
ICRA's analysis of store level metrics including same store sales growth, EBITDA and revenue per square feet for eight leading players indicates that a majority of these indicators have witnessed a moderation in FY14 and early FY15 (impacted by weak demand sentiments and rising competitive pressures).
However, with the improving demand prospects and easing up of the operating environment, ICRA estimates a growth in the range of 4-8% for several of the aforementioned parameters.
ICRA expects the share of studded jewellery in the retailers' portfolio to increase from the present 20% to 23% over the medium term.
While performance during majority of 2013-14 was impacted by restrictions and muted demand, revenues recovered moderately during 2014-15 supported by favorable demand supply dynamics.
ICRA expects large retailers to record 10%+ growth over the short to medium term buoyed by improving consumer sentiments and aggressive store expansion. Post the sharp dent in margins (~150bps) on account of inventory losses during FY14, scale economics, shift towards studded jewellery and reduced financing costs because of gold metal loans are expected to aid growth in earnings and support a 100-150 bps expansion in profit margins.
While the coverage metrics have improved mirroring growth in earnings / profitability, TOL / TNW is likely to remain at current levels on the back of debt funded store expansion envisaged by jewellers.
