ICRA expects large retailers to record 10%+ growth over the short to medium term buoyed by improving consumer sentiments and aggressive store expansion.
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 organised sector,according to a recent study by ICRA on Indian gold jewellery retail industry.
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 ~10% during the current year, supported by recent regulatory reliefs for the industry. Over the long term, gold jewellery demand in India is supported by cultural underpinnings in India, evolving lifestyle and growing disposable income, especially in tier 2 / tier 3/ rural markets which account for a major chunk of the demand.
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. The analysis has also thrown up interesting trends related to store formats which are becoming smaller as organized players are penetrating deeper into tier II and tier III markets to garner market share from the large untapped unorganized segment catering to these markets.
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.
Jewellery volumes during CY14 grew by 8%, spurred by healthy growth in volumes during the second half of the year. Demand started off on a sober note, with a 14% yoy drop in H1 CY14, where jewellery demand was also impacted by the expectations / uncertainty amongst the consumers on the restrictive measures imposed during the previous fiscal. The improvement in demand during the second half of 2014 (37% volume growth when compared to H2 CY13 and 19% yoy growth during the fourth quarter) was supported by improving consumer sentiments, with the volumes reaching historical high of 662 tonnes, despite H1 being weaker than estimates.
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). 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.
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