Retailers in gold jewellery are likely to maintain their revenue growth momentum, aided by increase in gold prices and additional revenue from new outlets, says Crisil Research.
Gold jewellery retailers—which account for a fifth of India’s gold jewellery retailing business—have outperformed the industry, reporting a compound annual growth rate of 15% in sales volumes over the three years through 2011-12.
“Retailers who sustain their sales growth momentum, and maintain a healthy capital structure and adequate buffer in inventory holding price, are likely to witness improvement in their credit risk profiles over the medium term," said R Vasudevan, director, bank loan ratings, Crisil.
Jewellery retailers, says Crisil, are expected to continue expanding their footprint in newer geographies to drive growth, which will help them in braving the current economic slowdown. Consequently, their credit risk profile is expected to remain stable over the medium term.
Though growth in volumes at existing stores, however, has remained muted because of intense competition, compelling retailers to explore new markets, a significant share of the sales growth has come from new stores.
Crisil says, as anticipated, Tier-II and III towns have emerged as the new growth drivers for retailers; the smaller centres benefit from shifting customer preference towards branded jewellery, and low penetration of organised retailing.
The retailers are expected to expand over the medium term, with two of every three new stores coming up in the smaller towns. Revenues from Tier-II and III towns are therefore expected to contribute around 55% of the rated retailers’ revenue in 2013-14 - up from around 45% in 2010-11.
Retailers expanding to smaller centres benefit from lower operating costs than in metros and Tier-I centres.
“Smaller showrooms and lower rentals will help retailers save around 25% on operating costs. The favourable demand and cost structures in the smaller towns will help them attain early break-even and maintain profitability," said Subodh Rai, Senior Director, Bank Loan Ratings, Crisil.
However, new stores will necessitate significant investment in working capital for gold jewellery inventories. The high price of gold may raise retailers’ average inventory costs, and weaken their ability to absorb any steep fall in gold prices.
According to Crisil the margin between the average inventory value and gold price has narrowed by 50%. Retailers whose gold inventory was previously valued at 20% lower than the market price have witnessed the gap contract to 10 to 12% over the past year, owing to the large expansions.
However, prudent inventory hedging strategies and successful scale-up at the new stores should help retailers maintain operating margins at 6 to 7% as in the past, said Crisil.
