Other income poses a threat for jewellery exporters

Rising proportion of “other income” in the companies’ profit before tax poses a threat for gems and jewellery exporters considering it as a major portion of their variable income. Being it a inconsistent income, which may not continue in coming years, growing dependence of jewellery exporters is likely to prove risky for 'companies’ future performance.

Other income primarily consists of interest income earned against fixed deposits placed for buyer’s credit and / or margin money for its working capital requirements as well as income from trading activities. This is opportunistic trading activity which may be unrelated to their core jewellery manufacturing function. Such activities add to the volatility of earnings and thereby, increase the credit risk of firms.

A Fitch Ratings study showed that the “other income” comprises around 9-10% of profit before tax based on the numbers of the last six quarters. However, for a few companies’ other income as a proportion of profit before tax is over 30-35%, said the report.

Karmala–focused Chandukaka Saraf and Sons is a domestic jewellery retailer which achieved revenue of Rs 770.68 crore in FY12 as against Rs 570.84 crore in the previous year. The company’s had a stable EBIDTA margins in the range of 4.9 - 5.6% since FY10 due to its ability to pass on increases in gold prices to its consumers.

Kolkata-centric BC Sen & Company Ltd is a domestic jewellery manufacturer. It achieved revenue of Rs 179.5 crore in FY12 compared with Rs 173.04 crore in the previous year, with EBIDTA margins in the range of 7 – 8% since FY09.

Mumbai-based Arena Lifestyle Pvt Ltd is a jewellery retailer specialising in gold and diamond jewellery. Revenue declined marginally in FY12 due to low demand resulting from high gold prices. EBITDA margins were consistently high at around 11 – 12% over the three years ended FY12 because of its ability to pass on price changes to consumers.

Tribhovandas Bhimji Zaveri (Delhi) Pvt Ltd, a gold jewellery retailer, achieved revenue growth of 25% y-o-y to Rs 220 crore in FY12 mainly due to rising gold prices. EBITDA margins of the company increased marginally to 4.24% versus 4%.

Another jewellery company Mani Exports which primarily exports polished diamonds illustrated its ability to sustain its interest coverage above 2.5 times for the two years ended FY12 on an overall revenue at Rs 169.9 crore as against Rs 124.5 crore in the previous year despite increasing working capital requirements. EBITDA margins of the company stabilised at around 5% in FY11 and FY12.