High gold prices will be the key driver amid minimal volume growth, credit outlook to remain stable
Sustained high gold prices will brighten up revenue of organised gold jewellery retailers by 16-18% this fiscal, but volume growth will remain modest driven by volatile and elevated gold prices. This comes after a stellar compound annual growth rate (CAGR) of ~35% logged during fiscals 2022 and 2023, led largely by strong volume growth, driven by pent-up demand and increased consumer spend. Average realisations during fiscals 2022 and 2023 increased at a CAGR of ~5%.
Operating margin, meanwhile, is expected to moderate by up to 30 basis points to 7.8-8.0%, led by increasing promotional and store-related expenses. Still, the margin will remain above the pre-pandemic level of 6.8-7.0%. Working capital debt requirement will continue to rise as jewellers keep expanding stores, albeit at a slower pace than in the past two fiscals. Credit profile for the players will remain stable.
A CRISIL Ratings study of 46 gold jewellery retailers, comprising ~25% of the organised jewellery sector revenue, indicates as much. For the record, the organised sector accounts for slightly more than a third of the market, with the highly fragmented unorganised sector making up the rest.
Domestic price of gold increased by ~10% last fiscal, averaging Rs 52,700 per 10 gm (24-carat) and reaching Rs 60,000 per 10 gm by end March 2023. The price further inched up to an all-time high of ~Rs 61,500 per 10 gm during May 2023, as gold kept its shine as one of the safer investment options amid an uncertain global economic outlook. High demand amid the marriage season in India and a gradual recovery in gold buying in China also contributed to the high prices.
Says Anuj Sethi, Senior Director, CRISIL Ratings, "We expect low single digit volume growth for the organised players during fiscal 2024, given elevated gold prices. That said, organised players will continue to see modest market share gain, compared with unorganised players."
Increase in penetration of goods and services tax, mandatory hallmarking, rising disposable income, and diversification in consumer preference in terms of jewellery designs are nudging market share towards organised players. This is also evident from the fact that gold jewellery retailers rated by CRISIL Ratings saw healthy double-digit volume increase last fiscal.
Store expansion, which grew 25-30% last fiscal after two consecutive fiscals of subdued growth, will see mid double-digit growth this fiscal. This will lead to higher inventory requirement, leading to increased working capital debt. Gross bank credit1 to the sector had declined 3% over the 12 months through March 2023 as players rationalised inventory across stores and generated healthy cash.
Says Aditya Jhaver, Director, CRISIL Ratings, "The marginal moderation in operating profitability, along with higher working capital borrowings and finance cost, will lead to a slight moderation in debt metrics this fiscal. Nonetheless, the credit profile of gold jewellery retailers will remain stable with total outside liabilities to tangible net worth ratio and interest coverage expected at 1.0-1.1 times and 8.2-8.4 times, respectively, compared with ~1.2 times and ~9.6 times, respectively, last fiscal."