Precious no more

Weak demand and rising working capital needs take the shine out of jewellery stocks

What began as a gentle nudge by the Reserve Bank of India (RBI) has ended in a push that has taken the sheen off jewellery stocks. A rising current account deficit and a weak currency, led largely by rising crude and gold imports, prompted the RBI to urge banks to desist from pushing sales of gold coins and bars. But even as the surge continued — 162 tonne of gold imports in May — the RBI was forced to tighten the screws by making it mandatory for jewellers to import gold, either through banks, nominated agencies or directly, but with 100% margin. In other words: no credit from suppliers or bullion banks. Then, for the second time in six months, the government increased import duty on gold from 6% to 8%.

While it’s still early to see if the measures help in containing the deficit, the Street has been quick to react. Jewellery stocks have tanked in the past one month, some touching 52-week lows. Gitanjali Gems declined the most, by 59%, from May 31 to June 29. Similarly, PC Jeweller (18%), Shree Ganesh Jewellery House (20%), Titan Industries (23%) and Tribhovandas Bhimji Zaveri (25%), too, came under selling pressure.

Analysts fear the worst as a clampdown on gold consumption impacts topline growth, while weak currency and credit curbs increase working capital requirements. According to Vikas Inder Jain, assistant vice-president, retail research, Religare Securities, “Higher working capital requirements will push up debt equity ratios by 0.5-0.8%.” 

The All India Gems & Jewellery Trade Federation has pointed out that jewellers will now have to pay more as bankers have started charging around $6-7 per ounce for leased gold against the earlier $1.5-2. Since most jewellery players lease gold from banks, their ability to pass on the higher cost to consumers is in question. Though players like Titan Industries have moved away from lease and have started importing gold directly, this could weigh on return ratios. 

There are concerns that newly-listed players such PC Jeweller could go slow on their expansion, though the management has stated that it will open 14 stores this fiscal. The worst hit has been Gitanjali Gems, whose stock has come under severe selling from financiers, with whom the stock was pledged as collateral. Promoter Mehul Choksi has pledged around 15 million shares. Based on FY13 earnings per share, the stock is now quoting at a trailing 12-month multiple of just below 10. 

Not surprisingly, analysts feel the rich multiple (35 times) enjoyed by jewellery stocks in the past will soon be history. Gautam Duggad, analyst at Motilal Oswal, feels much of the correction is already done. But, if the RBI decides to link gold lease rate to banks’ base rate, a fresh round of selling could well be in the offing.