Analysts bullish on stocks of jewellery retailers for the long-term

Shares of jewellery companies have delivered strong returns in recent months as a sharp pick-up in consumer mobility and pent-up demand after the Covid-19 lull has lifted their prospects.

Stocks of Kalyan Jewellers and PC Jeweller have rallied 76 and 365 per cent thus far in fiscal 2022-23 (FY23), respectively, while Titan is up 3 per cent as compared to a 1 per cent decline in the BSE Sensex during this period.

So, should you look at jewellery retailers ahead of Dhanteras despite the sharp rally in their stocks in the past few months?

Analysts remain fairly optimistic on jewellery players as softening gold prices and the ongoing festive season makes a case for sustained demand momentum going forward.

“Our outlook is positive on jewellery companies as we have entered the peak festive season until February with the wedding season lined up next. So, an above normal push in demand is being witnessed as people are now spending more on jewellery,” said Deepak Jasani, Head of Retail Research, HDFC Securities.

The World Gold Council has also noted strong retail demand going into festivities, which was also reflected in the recent business updates from Titan and Kalyan Jewellers.  

In their pre-quarterly updates for July-September (Q2), Titan and Kalyan Jewellers' overall yearly sales saw a healthy double-digit growth of 18 per cent and 20 per cent, respectively, amid positive consumer sentiment and increased store walk-ins.

That apart, Kalyan Jewellers said its business has seen significant benefits from the shift in demand towards branded retail outlets.

As per HSBC Global, shoppers are turning away from the traditional small, standalone and family-run retailers to regional or national chains due to mandatory hallmarking, and reforms such as GST.

“The transition from unorganised to the organised sector is hugely beneficial for existing organised players, and the current pull rally in the sector is structural due to the imminent market share gains ahead for these players”, said AK Prabhakar, head of research, IDBI Capital.

Prabakar remains bullish on Titan and Kalyan Jewellers as long-term plays. Though he does not expect the sector to replicate the recent sharp gains in the near term as he believes the Street has already accumulated the stocks in anticipation of strong festive season gains.

Besides, HSBC Global has recently initiated coverage on Kalyan Jewellers with a Buy rating as it sees the stock as a high-risk, high-reward opportunity given its network roll-out plans via the capital-light franchise route.

On the other hand, analysts at Kotak Institutional Equities said that Titan’s 18 per cent recurring jewellery growth in Q2 implies that the hurdle rate for the second half of FY23 to meet their FY23 estimate (32 per cent) is just 8 per cent.

Moreover, gold prices are now down around 18 per cent from their March highs due to rising rates in the US, which are rendering the non-yield asset unattractive as compared to bonds.

However, in the domestic market, the weakness of gold prices remains a key incentive for more accumulation in the safe haven, which is another tailwind for the sector, analysts say. In addition, they do not see a material impact of the decline in gold prices on jewellers in the long term as they expect inventory losses to be manageable on a year-to-year basis.