Jewellery stocks lose sheen amid renewed Covid-19 restriction, muted demand

Jewellery stocks: With gold prices bottoming out and demand facing headwinds, analysts expect volatility in the jewellery space to continue. That said, they stay optimistic on Titan & Kalyan Jewellers

An nearly 9 per cent YTD drop in the price of gold and sporadic lockdown amid fears of resurgence of Covid-19 cases has taken some sheen off gold and jewellery stocks. The initial public offer (IPO) by Kalyan Jewellers, too, analysts say, has not met with an overwhelming response as was expected.

“Despite the wedding season coming up, the demand may remain low compared to historical trends as state governments are gradually putting restrictions on the number of guests in social gatherings. The three-day IPO of Kalyan Jewellers is not getting the desired response, underscoring the bearish mood in the sector,” says Ambareesh Baliga, an independent market analyst.

According to a recent report by India Ratings, while the demand recovery of jewellery will be V-shaped in FY22, the overall sectoral demand shall remain only 5 per cent-10 per cent above levels of FY20. 

Thus far in calendar year 2021 (CY21), jewellery stocks have given mixed returns. While Titan Company and Thangamayil Jewellery given returns of -4.28 per cent and 2 per cent, respectively compared to S&P BSE Sensex’s 5.4 per cent rally, Vaibhav Global and Tribhovandas Bhimji Zaveri (TBZ) are up 91 per cent and 16 per cent, respectively.

The mixed trend largely depicts the companies’ December quarter performance. Investors rewards the stock of Vaibhav Global, for instance, after it’s retail revenues, earnings before interest, taxes, depreciation, and amortization (Ebitda) and profit after tax increased by 30 per cent, 37 per cent and 41 per cent, respectively on a year-on-year basis (YoY) resulting in a sustained margins expansion.

Titan, on the other hand, missed Street’s expectations and reported a 11 per cent YoY fall in PAT to Rs 419 crore. While its operating profit rose 17 per cent YoY to Rs 858 crore, its operating margin remained flat at 11.8 per cent.

During 9MFY21, the overall Ebitda margins of the top Ind-Ra rated companies and listed jewellers put together expanded to 7.7 per cent because of improved realisation, and a reduction in selling and promotion expenses among others. 

“Although price realisation gains may not continue in FY22, lower operating leverage and improved efficiencies in terms of lower marking and selling expenses and lower rental are likely to support margins in FY22,” said the India-Ra report. 

Sector outlook

The size of the Indian jewellery retail sector, which was estimated at $64 billion in fiscal 2019-20 (FY20), is expected to fall to $41 billion in FY21, ICICI Securities said in a report. Thereafter, it is estimated to bounce back and grow at an accelerated CAGR of 22 per cent in the next four years to $89 billion by FY25.

“Within the jewellery retail industry, the organised segment is expected to de-grow by 32 per cent whereas the unorganised segment is expected to de-grow at 40 per cent in FY21. Moreover, the larger players in the organised space are expected to consolidate the market share away from the unorganised segment on account of weak balance sheets of smaller players and their inability to sustain during the lockdowns, which severely constricts their ability to maintain their operations,” the brokerage said. 
 

The share of organised retail in the sector was at 32 per cent in FY20, comprising national and regional players. The rest of the jewellery retail, however, continues to be dominated by the unorganised segment, comprising over 500,000 local goldsmiths and jewelers, it notes.

Given this, Vinod Nair, head of research at Geojit Financial Services remains optimistic and expects organised players, like Titan and Kalyan, to do well. The overall organised sector, he says, is likely to grow from 32 per cent to 40 per cent in FY25.

Investment strategy

With gold prices close to bottoming out and demand recovery facing headwinds, analysts expect volatility in the jewellery space going-forward.

“Gold prices have started bottoming out and may see a bounce back soon. We expect the gold industry, as a whole, to show decent growth in the coming months backed by improved physical demand and lower prices,” says Sunil Katke, head Commodities & Currencies at Axis Securities.

He expects the prices to hit Rs 50,000 per 10 grams over the next three to four months, and thus suggests investors adopt a ‘buy on dips’ strategy for jewellery stocks in the near-term.

Rajnath Yadav, research analyst at Choice Brooking, too, believes that since most of the positives are factored-in the stock prices, the stocks are unattractive at current levels. However, he says investors can buy Titan Company from a long-term perspective.

ICICI Securities, too, prefers Titan over other jewellery stocks and has a target price of Rs 1,830 on the stock.