Bangalore, April 18, 2013:
The impact of the recent correction in gold prices on the domestic jewellery industry will be mixed and will depend on the gold sourcing norms of specific jewellers. Jewellers who lease a major portion of the gold will positively benefit from the correction while others may be affected negatively.
Most jewellers source gold either as outright purchase (held as inventory) or lease it from nominated agencies (14 banks as identified by the Reserve Bank of India). The usual inventory holding period ranges from 100 days to 150 days. If the sharp price correction of gold continues, it may to lead to inventory write offs for jewellers who purchase outright. EBITDA margin reduction of 1.5 to 2.5 percentage points may take place if the loss is recognised in the profit and loss account. While this is an actual economic loss, if the company chooses to adjust it through its reserves, the loss may not be apparent.
Jewellers who lease most of their gold from the nominated banks would remain relatively unaffected. Retail jewellers lease gold from banks for a period of 180 days against a collateral placed at an interest rate of 3.5% to 4% (primarily linked to the international gold leasing interest rates), which is usually lower than the interest rates on the rupee loans to purchase the gold outright. The price of leased gold is open-ended and the cost of gold is fixed at the time of sale of gold or jewellery to the customer. This enables retail jewellers to lower the inventory risk. It also provides a cushion when prices fall and keeps the inventory loss restricted to the extent of the gold taken on lease.
Jewellery retailers, which usually lease gold, will be relatively unaffected by a sharp decline in prices. However, in such cases, the nominated banks would have to bear the commodity risk and thus incur losses.
The price correction may possibly increase the volume demand for gold jewellery which fell 19% over 2010 to 2012 due to a sharp rise in gold prices (around 55%). However, it is expected that the discretionary spending to be impacted as buyers of gold for investment purposes would postpone their purchases until the gold prices stabilise. Operating margins are also likely to be impacted by the decline in prices as some retail jewellers quote making charges as a percentage of raw material cost./ENN
