 "Operating margins of gold jewellery retailers to shrink in FY16: Report")
The regulatory proposition and consequent strike by jewellers are likely to impact the industry volumes and margins during the first quarter of the calendar year 2016. But analysts expect overall volumes for the whole year to be spurred up by pent-up demand.
According to an ICRA report, while jewellery volumes for the first quarter of the calendar year is expected to decline by about 40-50 tonnes, the overall volumes for the year would be up. Operating margins, however, are likely to contract by 40 basis points during 2015-16.
ICRA further said that jewellery demand (in value) has fallen in recent years triggered by declining prices and weak economic sentiments. However, in line with the recovery seen in second half of 2016, jewellery industry is likely to record 5-6% value growth during the year driven by some uptick in rural demand and continued thrust on expansion by organised players.
In the Union Budget for 2016-17, the government of India levied a one per cent excise duty on jewellery manufacturing (excluding silver jewellery other than studded with diamonds and some other precious stones) with immediate effect. The proposal to re-introduce the excise duty on gold and studded jewellery (for jewelers with sales of more than Rs 12 crore during 2014-15) created a nation-wide stir owing to concerns on operational hurdles.
It may be noted here that the government had also earlier proposed a similar one per cent excise duty on jewellery during the February 2012 budget, which resulted in similar demonstrations by jewellers culminating in a 21 day strike; the duty was subsequently repealed in the finance bill.
The additional 1 per cent cost is likely to be passed on to the consumers and would not have a major impact on demand as prices have remained lower than past highs and jewellers have adjusted to sharper increase in duty (customs duty raised from 4 per cent to 10 per cent) in the past.
In the near term, organised players could take a hit as small unorganised players may not adhere to these rules. However, ICRA feels that "upon strict enforcement, these measures could result in a more level playing field as payment of excise duty and sales tax would bridge the pricing advantage enjoyed by unorganised players."
The strike has been called off post a three week demonstration under assurances from GoI on ease of implementation. However, ICRA also feels that while the strike has been called off, jewellery consumption, which was witnessing signs of improvement over the last two quarters of CY2015 (on the back of festive and marriage seasons), is likely to contract during Q1CY2016 owing to the impasse. This is despite demand being relatively stable.
Jewellery demand in India (the world’s second largest market, 30 per cent of global demand), after witnessing a bull run (19.3 per cent CAGR in rupee terms) in the ten year period between 2001 and 201, has witnessed a gradual decline in growth rate in recent years, recording a relatively modest CAGR of 4 per cent between 2012 and 2015.
Sub-par monsoons across several states in recent years had also exacerbated the situation – with rural demand being a key driver for jewellery demand (constituting about 60 per cent of total demand), the report said.
Following several quarters of weak demand (value), the industry recorded smart gains during H2CY2015 (9.5 per cent , 1.1 per cent for CY2015) despite continuing headwinds like weak monsoon, supported by strong festive and marriage related push coupled with favourable prices witnessed during the period.
ICRA expects organised retailers (who comprise a little over 20 per cent of the market) to continue building on this growth, given changing consumer preferences favouring branded players.
For the current year (CY2016), ICRA estimates the jewellery industry to record 5 -6 per cent value growth supported by one per cent growth in volumes and 4-5 per cent growth in gold prices driven by some uptick in rural demand and continued thrust on expansion by organized players.
