India Ratings and Research (Ind-Ra) today said it has maintained a stable outlook on organised jewellery retailers and a negative one on cut and polished diamond (CPD) exporters for FY18. As per the World Gold Council, India’s gold jewellery demand fell sharply by 22 per cent YoY to reach a seven-year low in 2016 (522 MT). The demand was impacted severely on account of various events last year such as nationwide jeweller strikes and severe liquidity crunch on account of the Government’s demonetisation drive. After the four months of complete disruption on either the supply or demand side, the fall in consumer demand was caused by idiosyncratic factors.
However, the underlying jewellery demand still remains robust, given India’s strong macro-demographics and the consumer’s affinity towards gold. Hence, demand is likely to bounce back to above a five-year average of 600 MT in 2017, Ind-Ra said in a report here. The Government has been introducing regulatory changes over the last two years to control illicit trade practices prevalent in the jewellery industry and these are likely to benefit organised jewellers at the cost of unorganised ones.
Retailers face an overhang of the impending Goods and Services Tax (GST) Bill and a higher slab rate may turn out to be demand dampener particularly for the non-wedding segment, the rating outfit said.
The CPD exports increased 13 per cent YoY to USD 16.8 billion during 9M FY17, after declining for two consecutive years as per the Gems and Jewellery Export Promotion Council.
This was because players across the value chain restocked following stock unloading and cautious inventory management in 2015 in response to a slowdown in the consumer demand for diamond jewellery in China beginning 2H14. Although CPD exports have rebounded, the agency believes that midstream players continue to face headwinds for diamond jewellery demand owing to political and economic environment in key export markets. Additionally, the players continue to operate on thin margins and carry the inventory/price risk, the report said.
Ind-Ra said rough diamond producers continued to lower rough prices by around 5 per cent in 2016, while maintaining production close to 2015 levels (128 million carats) and extending additional flexible purchasing terms to CPD players. Ind-Ra expects rough prices to remain stable in 2017, unless CPD prices decline sharply due to muted demand and rough producers are forced to lower rough prices again.
Organised retailers are likely to have a limited impact of demonetisation in FY17 as reflected in revenue growth of around 8 per cent YoY and improved EBITDA margins of 50 bp to 10.2 per cent in 9MFY17, it added.