Retail - 80:20 Scrapped: Acche Din for Jewellers? :: Edelweiss, link

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The Reserve Bank of India (RBI) has removed one more curb on gold imports, i.e., the 80:20 scheme (possibly due to comfortable current account deficit (CAD) number and industry pressure). Scrapping of the rule will improve supply and lower the premium on gold (could fall to USD3-4 from earlier USD10-15). This comes as a big relief for the jewellery industry as it reduces bureaucratic hassles, delays and uncertainty. The move is a bit surprising though as gold imports had jumped sharply in September (~100tonnes) and October (~150tonnes) spurred by the wedding season and fall in gold prices. Moreover, anticipated curbs on gold import had led to further surge in November. The supply situation is largely under control for listed entities like Titan, PC Jewellers and TBZ and they will benefit as gold on lease cost will reduce to ~3% resulting in lower working capital requirements.

How does it benefit Titan?

The 80:20 scheme had a crippling impact when it was initially levied in August 2013. The curbs had spurred smuggling and premium in the market. It also puts to rest the advancement of gold imports by traders in anticipation of additional curbs. Titan’s direct gold import licence is likely to be renewed, which will reduce costs further led by 1% VAT savings. Also, volatility in the company’s margin due to impact of high gold premium will ease. We anticipate Titan’s gold sales to revive gradually due to the revised Golden Harvest Scheme (GHS) and lower premium on gold. The much-anticipated cut in the custom duty remains at 10%, which combined with removal of the 80:20 scheme will aid government revenue.

Can government impose new rules to check overall imports?

Tanking oil price has brought CAD well under control (1.7% of GDP in Q1FY15 from 4.7% in FY14), which lend the government confidence to remove the 80:20 scheme. Though jewellery demand is strong, investment demand remains soft due to subdued gold prices. However, we do not rule out imposition of overall quota on gold imports in case the recent spurt in the same sustains.

Pre-wedding cheer for small jewellers

Bigger listed players like Titan, PC Jewellers and TBZ have been able to manage the supply situation better because of their brand might, balance sheet size, export capabilities, obtaining working capital finance etc. Smaller players, on the other hand, lack these capabilities; however, with elimination of the final curb of 80:20 scheme smaller players are likely to revive. This may pose some competition to listed players, particularly during the wedding season, wherein consumers could shift to smaller players who levy lower making charges.

LINK
https://www.edelweiss.in/research/EdelFlash-Retail--8020-Scrapped-Acche-Din-for-Jewellers/27735.html