We are seeing incremental incentives from jewellers to push diamond sales in Q4. Recent recommendations by RBI on gold loan lease rates (if implemented) may pose downside risks to earnings/working capital assumptions and may remain a stock overhang. We also note that gold price inflation y-o-y continues to moderate limiting support to topline growth in coming quarters.
Jewellers witnessed good rebound in sales growth in the festive-cum-wedding seasons over Oct-Nov12. However, some moderation was seen in January. TBZ noted that they had to offer tactical incentives to drive sales. Sustenance of demand in Q4 would be key to gauge underlying confidence in consumer sentiment.
Share of studded jewellery was lower for most on account of weak discretionary demand for diamond jewelry particularly from entry level purchasers as noted by TBZ. We note companies like Titan are running special promotions on diamond jewellery in the current quarter to push up sales.
Final recommendations by RBI related to gold loan lease rates (making them at par with base rates) if implemented could pose downside risks to earnings/working capital for jewellery retailers and may remain a stock overhang.
If this scenario comes true, Titan would likely consider managing a balance between margins and WC cycle while TBZL and PCJ have stated that they would prefer to pass the increased cost to consumers. Increase in custom duty rates will not impact volumes materially as per most jewelery retailers.
Direct gold imports no longer an attractive option considering lower lease period of 90 days vs 180 days which jewelers are getting under gold lease currently. Delay in moving to direct gold imports (which would have led to 50- 70bps saving) limits margin upside.