India Jewellery Retail Key trends/issues; demand/regulatory changes to be keenly watched : JPMorgan

Our discussions with key jewellery retailers indicate that recent fall in gold prices
led to sharp uptick in volume growth for gold jewellery during the months of April
and May 2013. This was also supported by ongoing wedding season and some
auspicious days during these months. Demand trends have moderated a bit post
the initial rush but still remain fairly healthy. Gold rush, however, led to lower
proportion of diamond jewellery sales and this could weigh on % margins in
Q1FY14; though absolute profit growth is likely to be higher. Recent RBI
notification restricting gold imports by consignment route though unfavorable
may not impact the organized players much

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 Demand trends. Jewellers witnessed sharp recovery in volume growth during
April-May’13 aided by decline in gold prices and ongoing wedding season.
TBZ noted that it has seen over 50% volume growth in April-May’13. However,
post the initial rush growth rates have moderated a bit but still remain at healthy
levels.
 Product mix trends. Share of studded jewelry has been lower on account of
consumer rush towards gold. Discretionary demand for diamond jewelry
remains subdued. We expect companies to run more promotional schemes to
push up sales for studded jewellery. While lower proportion of diamond sales
would weigh adversely on % margins in Q1, we would expect profit growth to
be higher owing to better offtake of gold jewellery. Interestingly, TBZ noted that
sales of gold jewellery were better than gold coins in recent months.
 Regulatory concerns – lower probability of impacting organised retailers.
Recent RBI circular restricts import of gold on consignment basis by banks,
except for exporters. While still awaiting finer details, most jewellery retailers
believe that this should not impact them adversely given gold on lease model
may not be affected. However, there seems to be a disruption to source gold
locally in recent weeks. Titan Industries has started importing gold directly for
the time being to meet its requirements. Though direct imports (90 days credit
period) are not likely to affect the profitability, they don’t bode well for working
capital requirements and could weigh on return ratios. We would expect Titan to
move to a mix of gold on lease and direct imports. Some jewellers mentioned
that they now need to plan a bit better in terms of placing their demand with
banks. TBZ mentioned that gold lending banks are charging ~$5/ounce
premium, which is being easily absorbed by the customer. There have been no
new updates on regulations related to inclusion of jewellery industry under the
PMLA act (necessitating the KYC disclosures) and RBI’s proposal to link gold
lease rate to base rate. In case of unfavorable outcomes on either of these two
issues, the companies are hopeful of managing these challenges well without
impacting the demand much.
 Space addition to support revenue growth rates further. After adding
152Ksq ft space for its jewellery stores in FY13, Titan plans to add another
~100K sq ft in FY14. Importantly, mgmt noted that much of the incremental
space will be in new towns which should limit the threat of cannibalisation. TBZ
and PCJ also maintained their earlier store expansion plans of adding 16 stores
and 20 stores respectively in FY14.
 Stay OW on Titan. We think Titan remains a good long-term play on
discretionary consumption, with strong brand equity, good management and a
strong balance sheet.