INDIAN GOLD JEWELLERY INDUSTRY - Transforming into an organized retail play

Jewellery Feature May 2013

May 2013
ICRA RESEARCH SERVICES

Corporate Ratings
Anjan Deb Ghosh
+91 22 3047 0006
aghosh@icraindia.com

Contacts:
Subrata Ray
+91 22 3047 0027
subrata@icraindia.com
M Balaji
+91 44 4596 4317
mbalaji@icraindia.com
Arockia Mike Pradeep
+91 44 4596 4312
arockia.pradeep@icraindia.com

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Jewellery Feature May 2013

Overview
Indian gold jewellery industry is the largest globally, valued at ~USD 40 billion (including recycled volumes), driven by a gamut of cultural,
social and demographic factors. India along with China are the two largest consumers of gold, with jewellery constituting bulk of the yellow
metal consumption. ICRA believes that the domestic gold jewellery retail industry is witnessing a structural transformation with organized
retailing gaining prominence. Contribution of organized retail to total jewellery consumed in India has grown to ~18% from less than 5%
(largely over the past decade), aided by the widening retail network of organized players and shifting consumer preferences towards
organized / branded jewellery.
Jewellery consumption over the past decade has recorded a strong growth upwards of 15% driven increasingly by organized retail. Rising
quality awareness of customers has also provided a fillip to the organized retail segment, which is banking on its reliability and quality to
compete against the highly fragmented unorganized jewellers. Organized players have steadily chipped away market share from smaller /
unorganized retailers by addressing the need for enhanced experience of a demanding customer base, which is marked by shifting
demographic and socio-economic profiles.
Jewellery consumption in India has been traditionally driven by the strong cultural affinity for gold, with it being the preferred form of
jewellery worn. Gold jewellery is an integral part of weddings in India, and is considered as a necessity with wedding related demand
accounting for substantial portion of overall jewellery demand, especially in the South. Jewellery demand has also been supported by the
increasing appetite for gold jewellery from rural and non-urban markets which constitute a major chunk (about 70%) of the total
consumption. Gold has also served as a means of savings especially for the rural sector, owing to the lack of any major alternative investment
options supported by its anti-inflationary characteristics.
Demand for gold ornaments comprises bulk (~80%) of the domestic jewellery consumption, with studded jewellery including diamonds /
other precious metals contributing the rest. Keeping in mind the demand profile and the vast untapped tier 2 and tier 3 markets, organized
retailers are undertaking large scale geographical diversification and focussed marketing initiatives to improve volume growth tweaking
their product portfolio to suit local needs. The shift can be witnessed with, even the traditional & regional players undertaking significant
scale expansions.
The demand for value added fashionable jewellery including designer, lightweight, custom-made, low carat and high fabrication jewellery
have gained higher prominence in the recent years, driven largely by the urban population. Jewellery consumption / demand in India is also
characterized by its inherent seasonality, with the consumption being at the highest during the festive and wedding seasons. The seasonal
demand and widening market reach has resulted in increasing spends on advertising and other brand building initiatives by retailers, to
garner / improve market share in the new and existing markets.
Operating income for organized jewellers has grown at a considerable pace over the past few years, driven by the increasing demand for the
branded jewelry, aided by the aggressive expansion undertaken coupled with the continued increase in gold prices. Profits / accruals within
the sector have also expanded with widening sales and improving value addition, varying across market players based on product mix, scale
of operations, sourcing method and funding mechanism. While demand is likely to be strong during the current year (2013) aided by lower
prices, operating margins of retailers are expected to be under pressure on account of the sharp decline in gold prices during April 2013.
Further, the recent RBI directive curbing import of gold by banks on consignment basis for domestic could also moderate margins of domestic
retailers to an extent. The working capital intensity of organized retailers is also likely to increase owing to rising stock levels necessitated by
the aggressive expansion of retailers, funded primarily by short term borrowings.

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Jewellery Feature May 2013

Jewellery volumes after recording a steady growth over the past decade and peaking in CY2010, has moderated over the last two fiscals
weighed down primarily by unprecedented increase in gold prices (compounded growth of 20% over the last two calendar years). The
decline in jewellery consumption was also accelerated by increasing investment appetite for gold in the form of medallion and bars
(investment in bars/medallions increased by ~25% as against de-growth in jewellery volumes during CY11) as a hedge against economic
uncertainty and inflation. The declining trend continued during H1 CY12, exacerbated by regulatory developments including the imposition of
excise duties for unbranded jewellery (repealed subsequently) and also the increase in customs duty for gold imports, which impacted
operations and profitability of retailers. Further, earnings were also strained by the continued price volatility, aggravated by the fluctuating
exchange rates. Faced with sustained periods of price and consequent demand volatility, coupled with intensifying competition, jewellery
retailers focused on inventory management strategies to support earnings. Focused marketing initiatives coupled with moderate recovery in
demand driven by festive seasons and some pre-buying (in Q4, 2012) in anticipation of impending import duty boosted jewellery volumes
during the second half of 2012.
ICRA believes that the recent sharp decline in gold prices is a positive for retail jewellery demand. However, growth over the medium term
may remain moderate and would depend on overall macro-economic conditions. Organized retailers are, however, expected to grow at a
relatively healthier pace continuing to gain on unorganized players. Over the long term, gold jewellery demand is likely to witness consistent
growth driven, primarily, by cultural underpinnings in India, evolving lifestyle, anticipated recovery in economic conditions and expected
improvement in demand from tier 2 / tier 3 and rural markets which account for a major chunk of the demand.

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Jewellery Feature May 2013

Subscribe to the full report for the following and more

Historical trend analysis of gold jewellery demand in India

Emergence of the organized jewellery retail sector and factors underpinning the sector's growth

- Cultural and socio-economic demand drivers

- Demographic factors that have driven volumes
- Expansion in the retail network that supported growth
- Shifting preferences - from un-branded to branded jewellery
Seasonality witnessed in jewellery demand and their impact of volumes
Procurement and hedging mechanisms employed by retailers
Assesment of the regulatory issues governing the jewellery retail sector
Near and long term demand outlook for the organized retailers
Analysis of financial performance of a select sample of organized retailers

- Trends witnessed in operating income growth of the considered sample set

- Movement in profit margins and medium term outlook for the same
- Assessment of inventory policy and impact of the same on working capital parameters
- Analysis of the capital structure and coverage indicators

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Jewellery Feature May 2013

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Tel: +91-80-43326400,
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E-mail: jayantac@icraindia.com

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Jewellery Feature May 2013

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