Mumbai: After the contraction in demand for jewellery in 1HCY16, organized jewellery retailers are expected to witness a change in fate in the next three quarters and record 10%-12% top line growth in FY17, says India Ratings and Research (Ind-Ra). The sector posted flat revenue growth in FY16 and low single digit growth in Q1FY17. Ind-Ra believes that the higher number of wedding days coupled with reduced obstacles on the regulatory front will drive volumes.
The World Gold Council (WGC) highlighted that gold imports contracted and jewellery demand fell by 32% in H1CY16 to around 186 tonnes in India. The key hurdles that the industry faced in 1HCY16 have been 1) strike by jewellers on account of imposition of excise duty and government regulations, 2) delays in purchases on the expectation of fall in gold prices, 3) increase in recycled gold, and 4) possibility of higher share of unaccounted gold in the system due to the spike in prices, regulatory hurdles and levy of excise duty.
Higher number of wedding days in H2FY17 (both on a sequential and year on year basis) together with fading regulatory hurdles is likely to provide a boost to the revenue growth in the coming quarters. Wedding jewellery is a key driver for demand and accounts for 60%-65% of the market demand.
Additionally, the Government’s recent measures namely, increase in the limit of collectible amount under the Gold Savings Scheme to 35% from 25% of net worth and the compulsory hallmarking of jewellery will boost the organized jewellery sector and aid in shifting some of the demand from the unorganized sector. The Gold Savings Scheme contributed 15%-30% of the revenues for the organized jewellers; prior to 2014 when it was closed by the Government. Although the Government resumed the Scheme in 2015, the maximum collectible amount was capped at 25% of the net worth.
The agency believes that organized jewellery retailers are likely to see an improvement in EBITDA margins in FY17 by 100-200bp (FY16: around 8%) on the back of the increased share of high margin diamond jewellery and higher gold prices. However the expansion through franchisee mode may constrain the improvement in margins, given the lower mark up in this channel.
Organized jewellers also face an overhang of the impending GST Bill. The GST committee report recommends an all-inclusive tax rate of 2%-6% on precious metals. The sector currently pays VAT and excise at 1% each and hence the GST rate over and above 2% is likely to increase the tax incidence on end consumers. We expect any increase on account of higher GST to be passed on to the end consumer; albeit it may impact non-wedding segment demand and prompt customers to opt for the unorganized sector.
Jewellery retailers suffered major disruptions in the last two quarters on account of closure of business, due to the jewellers 42-day strike which began in March 2016 in response to the Government regulations namely imposition of excise duty and mandatory pan card requirement for jewellery purchases above INR0.2m. Additionally, consumer demand for jewellery remained muted on account of high as well as volatile gold prices (gold prices have increased about 27% yoy in the H1CY16 to around INR30,000/10gm).
