Ind-Ra: Gems & Jewellery Exporters to Shine Brighter than Domestic Retailers

India Ratings & Research (Ind-Ra) has maintained a Stable Outlook on gems & jewellery exporters for FY15, while revising the Outlook on domestic retailers to Stable from Stable to Negative.

The Stable Outlook for exporters is supported by the agency's expectation of modest demand growth in key export markets in FY15. Positive signs from export destinations such as higher disposable income and consumer spending as well as improvements in consumer confidence will support export volumes of gems & jewellery. Exporters are thus likely to report moderate revenue growth of 4%-5% yoy in FY15 and operating margins in the range of 3.5%-4%.

The Outlook for domestic retailers has been revised because of the likely increase in volume demand of gold jewellery in FY15. Ind-Ra expects gold prices to decline in FY15 and improve the margins of domestic players by 1 to 2 percentage points to the FY13 levels of 9%. The margins were impacted in 2013 due to a rise in domestic gold prices in the face of muted consumer demand and the players had to offer discounts to attract customers.

Revenue in FY14 was driven by gold prices and not volumes. Further support to revenue could come from new store additions by existing players in Tier II and Tier III towns. Ind-Ra expects domestic retailers to witness 3%-8% yoy revenue growth in for FY14 and FY15.

The working capital days of jewellery retailers have consistently increased since FY09. A possible uptick in sales volume could reduce inventory levels. However, some industry players have been impacted by restrictions on leasing gold, which have caused them to purchase gold outright for manufacturing. Given the typical inventory management practice, jewellers replenish gold almost daily to the extent used. Thus, a gradual fall in gold prices is unlikely to affect inventory value significantly. However, any sharp correction in gold prices could result in some inventory write-offs, which would adversely impact profit margins by around 1%-2% from an accounting perspective.

What Could Change The Outlook

Pricing and regulatory risks: The Outlook on domestic jewellery retailers could be revised to Negative if gold prices increase further or if regulatory risks persist, which could further impact their operating profitability and thus credit profile. A Positive Outlook could result from a favourable policy environment, continued stability in gold prices and a continuous improvement in sales volume.

Geopolitical pressures: Uncertainty in Russia and Ukraine or any financial turbulence in global economies including that of China could severely affect the weak credit profile of most gems & jewellery exporters.

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