The rupee’s sudden weakness has brought about a series of regulatory changes. One of the key measures was Gold duty being hiked to 15% from 6%. Prime Minister Narendra Modi also requested citizens not to buy gold for one year. However, the measures are aimed at a broader economic goal but how can it impact overall demand for gold? Should jewellery companies get worried? JM Financial says not yet.
Their “analysis of such past instances indicates limited impact on revenue growth.”
Here is a detailed analysis of the JM Financal study on the outlook for gold going forward –
Gold buyers may trim purchase size
JM Financial noted that customers tend to adjust to the higher price by purchasing lower grammage. Instead of stop buying at all. “Whenever gold prices see sharp volatility, consumers usually pause their purchases and resume it once volatility settles down.” JM Financial noted.
The brokerage firm also pointed out that the upcoming Adhika Masa next month, a period during which customers don’t invest or buy anything new, may impact gold purchases. “There is enough time for consumers to digest the elevated prices without materially impacting demand,” JM Financial noted.
Jewellery firms to benefit from one-time inventory gains
The hike in import duty on gold, silver and platinum came as a measure to reduce pressure on forex reserves amid the ongoing West Asia crisis. JM Financial noted that such duty hikes are common during periods of rupee weakness or rising current account deficit.
“As custom duty amounts are never hedged, this would result in one-off inventory gains for jewellery companies, which could be spread over the next two quarters,” JM Financial noted.
RBI gold loan restriction remains a key risk – JMFL
JM Financial pointed out to the bigger concern for jewellery companies that is the possibility of the RBI restricting the Gold Metal Loan (GML) or Gold on Lease scheme, similar to what happened in 2013–14. Back then, the restriction sharply increased working capital needs and interest costs for jewellers.
During that period, Titan’s cumulative interest cost had risen 71% year-on-year during that period, while capital employed had surged 2.2 times year-on-year to Rs 25 billion, the report noted.
However, the brokerage believes the impact could be lower this time because gold exchange programmes have become more prominent across jewellery companies.
“For example, Titan’s gold exchange went from 20% in 2013-14 to roughly 50% currently,” the report said.
Conclusion
Stocks of gems and jewellery companies are under pressure. Titan fell 8.81% in the last one month, and Kalyan Jewellers fell 15.28% in last one month.
JM Financial believes that analysis of Titan’s standalone jewellery business during earlier periods of customs duty hikes reveals an encouraging picture. Revenue growth largely depended on movements in gold prices, with customers typically adjusting by purchasing lower grammage jewellery to fit their budgets. The brokerage also observed that Titan’smargins expanded in the quarter following the duty hike, mainly due to inventory gains.
However, they believe that the sector may be able to sustain the impact.