outlook on gold jewellery retail industry

OUTLOOK ON GOLD JEWELLERY RETAILING INDUSTRY India’s Affair for Gold Jewellery Would Continue to Remain

India’s Largest Credit Rating Consultancy Firm

OUTLOOK ON GOLD JEWELLERY RETAILING INDUSTRY

Prepared by Mr. Bhavesh Shah: Director |FinMen Advisors Private Limited

[email protected] | www.finmen.in

October 2016

India’s Affair for Gold Jewellery Would Continue to Remain

OUTLOOK ON India’s Affair for

Mumbai | Pune | Nagpur |

A) India is the second-largest market for gold jewellery, which has a complex and central role in the country’s culture India is the second-largest market for gold jewellery, which has a complex and central role in the country’s cultures. In India, gold jewellery is a store of value, a symbol of wealth and status and a fundamental part of many rituals. In the country’s rural population, a deep affinity for gold goes hand in hand with practical considerations of the portability and security of This, in part, explains how India’s appetite for gold defies market the rupee gold price over the last decade, gold demand from Indian consumers continues to grow. Gold is considered to be auspicious and across the country, regional festivals are celebrated with gold

In South India: Akshaya

In East India: Dura Puja

In West India: GudiPavda

In East India: Baisakhi and Karva

Gold is central to more personal life events too. Gifting gold is a deeply ingrained part of marriage rituals in Indian society—weddings generate approximately 50 per cent of annual gold demand. Families begin saving soon after the birth of a girl, and the ‘Stridhan’, or gift of gold to the bride, gives her financial security once she is married.

B) Indian gold jewellery demand and it has been the third highest year on recordGold is central to more personal life events too. Gifting gold is a deeply ingrained part of marriage rituals in Indian society—weddings generate approximately 50 per cent of annual gold demand. Families begin saving soon after the birth of a girl, and the ‘Stridhan’, or gift of gold to the bride, gives her financial security once she is married. Chart 1: India’s demand for gold

Source: Gold Council

OUTLOOK ON GOLD JEWELLERY RETAILING INDUSTRYIndia’s Affair for Gold Jewellery Would Continue to Remain

Nagpur |Delhi |Bangalore |Kolkata | Hyderabad| Chennai |Ahme

largest market for gold jewellery, which has a complex and role in the country’s culture.

largest market for gold jewellery, which has a complex and central role in the country’s cultures. In India, gold jewellery is a store of value, a symbol of wealth and status and a

ny rituals. In the country’s rural population, a deep affinity for gold goes hand in hand with practical considerations of the portability and security of gold jewellery as an investment. This, in part, explains how India’s appetite for gold defies market conditions the rupee gold price over the last decade, gold demand from Indian consumers continues to grow.

Gold is considered to be auspicious and across the country, regional festivals are celebrated with gold

Tritiya, Pongal, Onam and Ugadi

In West India: GudiPavda

In East India: Baisakhi and Karva Chauth

Gold is central to more personal life events too. Gifting gold is a deeply ingrained part of marriage rituals weddings generate approximately 50 per cent of annual gold demand. Families begin

saving soon after the birth of a girl, and the ‘Stridhan’, or gift of gold to the bride, gives her financial

jewellery demand reached its highest level in CY 2015 since 2010, and it has been the third highest year on record as can be seen in the below chartGold is central to more personal life events too. Gifting gold is a deeply ingrained part of marriage rituals

weddings generate approximately 50 per cent of annual gold demand. Families begin saving soon after the birth of a girl, and the ‘Stridhan’, or gift of gold to the bride, gives her financial

ld jewellery (Tonnes on LHS and Rs./10 g on RHS)

JEWELLERY RETAILING INDUSTRY Jewellery Would Continue to Remain

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| Hyderabad| Chennai |Ahmedabad

largest market for gold jewellery, which has a complex and

largest market for gold jewellery, which has a complex and central role in the country’s cultures. In India, gold jewellery is a store of value, a symbol of wealth and status and a

ny rituals. In the country’s rural population, a deep affinity for gold goes hand in jewellery as an investment.

- despite a 400% rise in the rupee gold price over the last decade, gold demand from Indian consumers continues to grow.

Gold is considered to be auspicious and across the country, regional festivals are celebrated with gold



reached its highest level in CY 2015 since 2010, as can be seen in the below chart




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Mumbai | Pune | Nagpur |Delhi |Bangalore |Kolkata | Hyderabad| Chennai |Ahmedabad

C) While the gold jewellery demand for H1 CY 2016 was the lowest since 2009 at 186.3 tonnes as compared to 279 tonnes in H1 CY 2015 resulting in a de-growth

of 32% (a 23% de-growth can be attributed to the nation-wide strike by jewellery retailers for 42 days in H1 CY 2016)…

The national strike by jewellery retailers (to oppose the excise duty of 1 per cent on gold jewellery announced on 29-Feb-2016 budget) which had closed the market for six weeks: the strike was from 2-Mar-2016 to 13-Apr-2016: 42 days which accounts for 23% of days in H1 CY 2016.The large national and regional jewellery retailers did not oppose the implementation of the excise duty. But smaller, independent and family-based retailers, who prefer to use cash-based transactions, were opposed to the duty and the additional administrative and financial burden it creates. The striking jewellery retailers lost on new business and also faced tough time retaining artisans and paying rent for their establishments. The government refused to give in to any demands before the strike was called off. Post the strike, there was no relief rally. Consumers were unprepared for the huge jump in gold prices when the market re-opened. Despite the discount, domestic prices pushed their way up to – and above – Rs30,000/10g, a significant psychological barrier for Indian consumers and the highest domestic price for more than two and a half years. Consumers were not only put off by the high cost, but also by the belief that such a price level would prove only temporary. Aside from essential purchasing and gifting around Akshaya Tritiya, demand was largely put on hold awaiting lower prices as a buying opportunity. …However, the worst seems to be behind. The demand for gold jewellery in India is expected to pick up significantly over the next four quarters on account of

1) Rollout of 7thPay Commission in major cities The 7thPay Commission rollouts are expected to start from November 2016. The ~3mn Central government employees will get arrears for January 2016 to September 2016 (as per revised rates) in November 2016. As the money flow in the hands of consumers coincides with beginning of festive season in India, Finmen expects healthy demand for gold jewellery.

2) Higher number of wedding days in H2 2016-17 as compared to H2 FY 2015-16 This would lead to higher demand for gold wedding-jewellery in H2 2016-17, and will boost revenues of the entire gold jewellery sector. Chart 2: Auspicious wedding days Wedding days 2015-16 2016-17 2017-18 Q1 22 9 26 Q2 0 0 1 H1 22 9 27 Q3 9 15 6 Q4 23 22 7 H2 32 37 13 Total 54 46 40 Source:http://www.drikpanchang.com/shubh-dates/shubh-marriage-dates-with-muhurat.html?year=2016


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3) Higher gold prices lead to better revenue growth and margins Gold saw a gain of 17% from the start of the current calendar year – Gold prices went up from Rs.2,302 per gm on 4-Jan-2016 to Rs.2,720 on 20-Oct-2016. This has been driven by uncertainty in US economy, Fed were holding off hiking interest rate and with Brexit, slowdown in Europe became apparent. Also Japan and Europe opted for negative interest rate which boosted the appeal for gold. Chart 3: Gold price in INR per kg on LHS and INR per ounce on RHS

Source: http://goldprice.org/gold-price-chart.html Outlook on gold prices: To stay range-bound at the current levels Helping foster gold’s rally during 2016 has been relief that expected rate tightening by the Fed at the start of the year has not materialised. Still, the gold market is on high alert for a December shift from the US central bank — and whether that could presage further increases. That could be bad for gold as it makes other yield-bearing assets more attractive. Many, however, do not believe the Fed will be able to raise interest rates aggressively next year, given an uncertain economic outlook in Europe and China and a new president in the US. Higher gold prices will be crucial for growth of gold jewellery sector as it leads to price-led growth and also results in higher profit margins. 4) Union budget 2016 has been favourable for rural India, which would augment rural demand for gold jewellery


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D) Regulatory changes to result in an increase in market share of organized gold jewellery retailers

Key regulatory changes that will help drive growth ahead are o Imposition of 1% excise duty on gold jewellery o Mandatory hallmarking of gold jewellery o Implementation of PAN card on transactions above Rs 2 lakhs

Finmen believes that these will result in curbing illegal trade practices. As the unorganized gold jewellery retailers will be required to hallmark all gold jewellery, it will increase their costs. Imposition of 1% excise duty will force unorganized gold jewellery retailers to maintain books of accounts as well as inventory details. Since the government’s intention is to keep track of unaccounted money and curb illegal trade practices, stricter implementation of the above-mentioned rules will result in higher growth for organized gold jewellery retailers.

E) Adoption of gold-on-lease scheme by gold jewellery retailers to act as a hedge against volatile gold prices and also reduce the interest cost for the players. What is gold-on-lease scheme? Jewellers use gold as raw material to produce jewellery. They can either purchase this gold from banks on loan or lease it. If they buy, the gold sits as inventory on their balance sheets. However, more and more gold jewellery retailers now prefer to lease the gold from banks. A gold jewellery retailer usually leases gold from banks for a period of 180 days. A spot rate that varies daily is applied on the amount of gold they use each day. Then the gold jewellery retailer settles with the banks at the end of six months. Any daily unused gold is hedged for a few days so any currency fluctuation risk is minimized or eliminated. Benefits of gold-on-lease scheme

Hedging mechanism: This scheme acts as a hedging mechanism against fluctuating gold rates. Since rates are determined daily as the gold is used, gold jewellery retailers do not have risk of buying larger amounts of gold and the price varying till it is sold. Here, gold is paid for each day as it is used.

No Inventory Risks: If gold is bought, the gold jewellery retailers’ inventory is valued on the constantly changing purchase prices. However, in case of gold on lease, no inventory loss or gain occurs

Lower financial expenses: Lease interest rates are normally in the range of 6% to 8% range. This is much lower than the 12-13% that banks charge on cash credit facilities.


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outlook on gold jewellery retail industry

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