Sharp cut in gold import duty to hike jewellery retailers’ revenues by 22-25%

Organised gold jewellery retailers are set to witness a 22-25 per cent increase in revenues this fiscal according to a CRISIL report. The forecast is 500-600 basis points higher than the earlier estimate of 17-19 per cent. This surge follows the significant reduction in import duties of around 900 basis points announced in the Union Budget. The expected growth will primarily be driven by higher sales volumes as retail gold prices decline from their previous lifetime highs.

The CRISIL report says, “Although the sudden drop in gold prices may result in inventory losses on existing stock, these losses are expected to be offset by improved demand.” It adds, “Retailers will be able to reduce spending on marketing and promotional campaigns due to the stronger demand.”

The report, however warns, despite the growth in revenues, operating profitability is projected to decline slightly by 40-60 basis points to 7.1-7.2 per cent.

Even with the expected decline in profitability, retailers are likely to see a working capital advantage due to lower inventory costs stemming from reduced gold prices. This will be particularly beneficial as many organised jewellery retailers plan significant store expansions this fiscal. Overall, credit profiles are expected to remain stable, according to an analysis by CRISIL Ratings of 58 organised gold jewellery retailers, which represent about a third of the sector's revenues.

The organised jewellery sector currently accounts for just over a third of the total market, while the remaining portion is controlled by the highly fragmented unorganised sector.

Himank Sharma, Director at CRISIL Ratings, noted that the recent import duty cuts have come at an ideal time, just as gold jewellery retailers begin stocking for the upcoming festive and wedding seasons starting in late August.

Despite the slight reduction in profitability, higher revenues are expected to boost cash flows, enabling retailers to expand their store network by 12-14 per cent. Working capital requirements are expected to remain flat, as the increase in inventory from store expansions will be balanced by the lower cost of gold inputs.

Gaurav Arora, Associate Director at CRISIL Ratings, stated that gold jewellery retailers are expected to maintain solid financial metrics throughout this fiscal year. Key ratios such as total outside liabilities to tangible net worth (TOL/TNW) and interest coverage are projected to remain at around 1.0 and 9 times, respectively, reflecting slightly better performance than previously expected. This will help maintain the overall stability of credit profiles in the sector.

However, the report cautions that sharp fluctuations in gold prices, further government regulations, or changes in import duties could impact consumer sentiment and pose risks to the sector.