Volume growth to stagnate as gold prices rise; credit outlook to remain stable
Organised gold jewellery retailers are set to clock 17-19% on-year revenue growth in fiscal 2025, driven by higher realisations stemming from elevated gold prices, while volume will remain steady.
Retailers are likely to step up marketing and promotional campaigns this fiscal to combat the moderation in demand amid rising gold prices. Hence, operating profitability may marginally moderate 20-40 basis points on-year to 7.7-7.9%.
Working capital requirements may rise, too, resulting from increased inventory due to a substantial rise in gold prices and new stores additions. That said, credit profiles should remain stable.
A CRISIL Ratings analysis of 54 gold jewellery retailers, which account for ~32% 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 gold price increased ~15% during fiscal 2024 and reached ~Rs 67,000 per 10 gm as on end of March 2024. It inched up to about Rs 73,000 during April 2024 as gold kept its shine as one of the safer investment options seen by various central banks across the world as well as end consumers amid geopolitical uncertainties.
Says Aditya Jhaver, Director, CRISIL Ratings, "Apart from ramping up branding and marketing expenditure, retailers are likely to offer higher discounts to buyers even as they continue to expand product designs/offerings in a bid to attract customers amidst higher gold prices. We expect a shift to gold jewellery of lower carat and continued promotion of gold exchange programme to support volume."
As a result, the share of gold exchange schemes is expected to inch up from almost a third of the overall volume for most large retailers.
Moreover, organised retailers will continue to gain market share at the expense of the unorganised ones, supported by changing consumer preferences and store expansion into Tier 1 and 2 cities and beyond. Supported by healthy balance sheets, store expansions (primarily by large jewellery retailers) have seen strong double-digit growth post-pandemic. The pace of store addition may moderate to 10-12% in fiscal 2025, given the flattish volume.
Elevated gold prices will result in gold inventory being replenished at a higher cost this fiscal. This, along with inventory required at new stores, will lead to higher working capital debt. The availability of bank funding to established gold jewellery retailers has improved in recent years, as reflected in the steady gross bank credit1 to the sector. This is expected to continue over the medium term.
Says Himank Sharma, Director, CRISIL Ratings, "Stronger cash generation, due to healthy revenue growth and adequate profitability, will keep credit profiles of organised gold jewellery retailers stable, despite an expected rise in working capital borrowings. Debt metrics will remain comfortable in fiscal 2025, moderating only slightly from the fiscal 2024 levels, with the total outside liabilities to tangible networth and interest coverage ratios expected at 1.0-1.1 times and 8.0-8.2 times, respectively."
Sharp volatility in gold prices, changes in government regulations and import duties on gold, as well as consumer sentiment will bear watching.
Shares of CRISIL Limited was last trading in BSE at Rs. 4449.70 as compared to the previous close of Rs. 4365.35. The total number of shares traded during the day was 446 in over 98 trades.
The stock hit an intraday high of Rs. 4462.95 and intraday low of 4356.85. The net turnover during the day was Rs. 1977207.00. |
