Revenue of organised gold jewellery retailers are set to improve by 22-25 percent this fiscal primarily due to the customs duty cut, which is down to a decadal low now.
The incremental growth will be driven by higher sales as retail gold prices are down from their lifetime highs since the budget that slashed the duty to 6 percent from 15 percent. Lower sales base of the retailers last year is another factor for the sales boost anticipated.
According to Crisil Ratings, the sudden price decline can lead to some inventory loss on existing stock, though the impact will be partially mitigated as improved demand limits spending on marketing and promotional campaigns. This will have the operating profitability moderating by 40-60 bps to 7.1-7.2 percent, the agency said.
However, lower inventory due to falling prices will bring working capital benefits despite the significant store additions planned, helping them maintain credit profiles, said the Crisil report.
The report was based on the analysis of 58 gold jewellery retailers which account for a third of the revenue of the organised jewellery sector. The organised sector accounts for a little over a third of the market.
According to Himank Sharma, a director with the agency, the duty cut to a decadal low have come at an opportune time for the gold jewellery retailers as they start stocking for the festive and marriage seasons from the latter half of August.
However, the inventory losses on the existing stock due to the price cuts will be partially mitigated by the reduced spends on marketing and discounts, as demand revives. All said, profitability will see a marginal dip on-year to 7.1-7.2 percent.
While profitability will be lower, the cash flows of retailers will improve with higher revenue, allowing them to take up store expansion, which is seen at 12-14 percent of existing stores this fiscal. Still, working capital needs will likely remain flattish as higher inventory requirements due to increased store counts will be partly offset by lower input prices.