Price drop to clip 40-60 bps off profitability despite reduced working capital; credit profiles stable
Revenues of organised gold jewellery retailers will increase 22-25% on-year this fiscal - a good 500-600 basis points (bps) more than the 17-19% expected earlier[1] - following the sharp reduction in import duty announced in the full Union Budget. The incremental growth will be driven by higher volumes even as retail gold prices come down from their lifetime highs.
The sudden price decline could lead to some inventory loss on existing stock, though its impact would be partially mitigated as improved demand limits spending on marketing and promotional campaigns. Operating profitability will moderate by 40-60 basis points (bps) to 7.1-7.2%.
That said, reduced inventory due to lower prices will bring working capital benefits despite the significant store additions planned. In the milieu, credit profiles will remain stable.
A CRISIL Ratings analysis of 58 gold jewellery retailers, which account for a third of the revenue of the organised jewellery sector, indicates as much. For the record, the organised sector accounts for slightly more than a third of the market, with the highly fragmented unorganised sector making up the rest.
Says Himank Sharma, Director, CRISIL Ratings, "The duty cuts to their decadal lows have come at an opportune time for the gold jewellery retailers as they start stocking for the festive and marriage seasons from the latter half of August. However, the inventory losses on the existing stock due to the price cuts will be partially mitigated by the reduced spends on marketing and discounts, as demand revives. All said, profitability will see a marginal dip on-year to 7.1-7.2%."
While profitability will be lower, the cash flows of retailers will improve with higher revenues, allowing them to take up store expansion - seen at 12-14% of existing stores this fiscal. Still, working capital requirements will likely remain flattish as higher inventory requirements due to increased store counts will be partly offset by lower input prices.
Says Gaurav Arora, Associate Director, CRISIL Ratings, "Gold jewellery retailers will maintain comfortable financial metrics this fiscal, with total outside liabilities to tangible networth (TOL/TNW) and interest coverage ratios remaining around 1.0 and 9 times, respectively. These will be moderately better than our earlier expectations, keeping credit profiles stable."
All said, any sharp volatility in gold prices, further changes in government regulations and import duties on gold, as well as consumer sentiment will bear watching. |