Continued difficulties in importing gold, higher premiums and increased working capital requirements may continue to weigh on the earnings of the listed jewellery makers. After a dismal show in the second quarter of 2013-14, a substantial recovery in earnings is unlikely even in the third quarter, which generally gets a boost from festive and wedding season purchases.
Most listed jewellery firms, including Titan Industries, reported a sharp decline in y-o-y earnings in the three months to September 2013. Strong sales in the first quarter and weaker demand environment weighed on the topline that contracted by 5% to 35% for most companies compared to last year.
Even Titan Industries reported a moderate 1% y-o-y growth in its revenue as the volumes of jewellery segment declined 4% during the period.
Even self-imposed bans on coin sales by most jewellers to support the government?s efforts to restrict gold imports also impacted the volume numbers.
Analysts say the volume recovery may not take place in the near future given the muted buying activity around Diwali, which generally sees strong purchases. Amid strict import regulations, rising premiums to international prices are also considered as a deterrent as jewellers have to pass on this cost to end consumers.
? There is an evident short supply in the market, which may abate in the coming months due to clarity around the new import rules, especially related to the 20/80 rule, which involved the customs department. However, as of now gold importing banks are charging 1% to 2% higher on gold shipments,? said a senior official of a listed jewellery firm.
Although the industry as a whole is facing supply deficit, organized domestic players such as Titan Industries and Tribhovandas Bhimji Zaveri (TBZ) are likely to be more impacted as they have to procure gold at higher premiums unlike the unorganized smaller players.
? While unorganized sectors are tapping into gold available through unofficial channels, bigger players have to pay a 5% to 7% premium to landed cost in order to obtain their gold requirements. Hence their effective costing tends to be 15% to 20% higher, including the impact of import duty,? said an analyst.
Experts also feel that higher working capital requirement after the discontinuation of gold on lease model may impact earnings of jewellery firms, especially the smaller players.
?After the regulatory changes, these companies have witnessed a rise in their interest cost from 3-5% to about 12%. This change is likely to impact the FY14 balance sheets to a great extend,? said an expert.
Morgan Stanley, in a recent note, said post regulatory changes Titan will become a net debt company. ?According to the management, current debt is R950 crore , which will trend up to R1,800 crore by F4Q14.?
The impact of this burden is already visible in terms of deteriorating interest coverage of some of the listed companies in the last four quarters, including Titan. The ratio that gauges a company’s ability to meet its debt burden through operating profit has particularly weakened for TBZ and Gitnajali Gems given that interest costs are almost equal to their Ebitda.
