Signs of a Golden Run

CRISIL Ratings view on gold jewellery retailers

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er 20, 2022
Key messages
• India’s share in global jewellery demand estimated at 32% in H1 of fiscal 2023, up from 27% at the beginning of the decade
‒ Improvement comes despite a slowdown in demand from China
‒ Domestic gold jewellery segment grew more than 75% last fiscal and has maintained momentum
‒ Goods and Services Tax (GST), mandatory hallmarking pushing the sector towards organised retailing and organized share to inch to 40%
‒ Penetration of digital initiatives (‘visit online and buy offline’) on the rise
• Revenue of CRISIL Ratings’ players to grow 23-25% on-year this fiscal (35% last year), to normalise to 8-12% next fiscal
‒ Strong demand during wedding and festive seasons in the first and third quarters to support growth, as gold prices remain rangebound

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‒ Revenue growth expected to normalise to past levels of 8-12% next fiscal, on a high base, after two strong growth years
• Operating profitability of players to moderate to pre-pandemic levels in next two fiscals
‒ With limited scope for cost-optimisation and as retailers add stores and increase marketing spends, operating margins may stabilise at 6.6-7%
this fiscal and the next
• Credit outlook to be ‘moderately positive’; debt metrics improving gradually
‒ Store expansion to return to pre-pandemic levels, supported by improving demand and access to funding
‒ Debt metrics to benefit from better operating leverage, despite slight moderation in profitability
Jewellery continues to drive global gold demand
Central banks have overtaken demand for investment; jewellery still half of the pie

Segment-wise global gold demand in %

Tonne 4720 4649 4497 4432 4564 4215 4133 4541 4385 3472 4339 2149

100%
10% 9% 9% 7% 10%
13% 13% 13% 13% 16% 14%
90%
27%

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80% 18% 21% 29%
29% 34% 40% 32%
70% 38% 32% 26% 35%
8% 16%
60% 8%
8%
7% 8% 7% 8% 7%
50% 8%
9% 7% 9%
40%

30% 61% 58%

51% 54% 51% 51% 50%
47% 49%
20% 43% 44% 44%

10%

0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 H1
Jewellery Technology Investment Central banks and other institutions
Source: Metal Focus, Refinitiv GFMS, WGC, ICE Benchmark Administration

3
Steady rise in Indian jewellery share in global demand
Indian share in global demand on the rise, share of China reducing
100%

90%

80%
35% 35% 36%
70%

60%

38% 36% 32%

50%

65% 64%
40%

30%

65%
29% 32%
20%

27%

© 2023 CRISIL Ltd. All rights reserved.

10%

0%

FY13-17 FY18-22 FY23 H1

India China RoW

Gold jewellery comprised ~53% of the Rs 6.5 lakh crore jewellery sector in fiscal 2022

Gold jewellery

Diamonds Export, Rs 0.7 lakh crore

Export, Rs 1.4
Domestic,
lakh crore
Rs.2.8 lakh
crore

Domestic, Rs 0.3 lakh crore

4
Domestic gold jewellery demand outpacing other segments
Gold jewellery continues to drive demand, rising over 70% in fiscal 2022 and expected to double in fiscal 2024 vis-à-vis pre-pandemic levels

5.1 5.8 5.3 4.3 6.5 7.3 7.9

• Domestic demand for gold
9.0 60,000
jewellery rose sharply last
Gems and jewellery industry size (Rs lakh crore)
fiscal and the momentum
50,800-51000 50,800-51,000
8.0 has continued this fiscal
47,914 48,025 50,000
7.0 • Prices saw a sharp uptick

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2.2-2.3
in fiscal 2021 and have
6.0 31,175 36,984 2.2-2.3 40,000 stayed high since
29,296 2.2
5.0 0.9 • Domestic gold jewellery
0.8 30,000
2.7 demand was supported by
2.2
4.0 2.3 0.9 volume in fiscal 2022; the
1.7
3.0 20,000 segment grew over 75%
0.4 0.6 3.7-3.9
0.4 3.3-3.5
0.7 • Share of other segments
2.0 2.8
1.9 1.8 has been stagnant
1.8 10,000
1.0 1.6
• Introduction of 5% VAT by
0.6 0.8 0.8 0.7 0.8-0.9 0.9-1 UAE saw an impact on
0.0 0.4 0
FY18 FY19 FY20 FY21 FY22 FY23 E FY24 P export demand for India
Gold Jewellery Export Gold Jewellery Domestic Coin and Bars Others realisation (Rs per 10 gram)

Source : GJEPC, WGC, Industry, CRISIL Ratings estimates

5
Consolidation towards the organised segment
Organised players gaining market share, aided by GST and hallmarking

55-60%
70-75% 68-70% 65-68%

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40-45%
25-30% 30-32% 32-35%

FY15 FY20 FY22 FY25 P

Organised Unorganised

Source : WGC, Industry, CRISIL Ratings estimates

• GST has narrowed the difference in margin between organised and unorganised players in the past few years

• Customers turning to branded sellers, as they inspire more trust, have a larger retail footprint and provide a hygienic and safer environment

• Organised retailers also benefitting from the compulsory hallmarking and the prohibition on sale of carats other than 14, 18 and 22, effective from
June 16, 2021

6
Jewellery retailers go digital to drive sales
Given the ‘touch and feel’ requirement and due to high purchase points, jewellers are adopting the digital route to drive footfall

Penetration of
online
• Despite increasing platforms, online sales comprised only around 3% of
2-3% 7-10% total jewellery sales in value terms
jewellery
7% 7.0
sales
6% 6.0
5% 5.0 • No increase in the average ticket size
4% 4.0

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3% 3.0 • Share of online jewellery to increase to 7-10% over the next five years
2% 2.0
1% 1.4 6.0 1.0
0% 0.0 • Lightweight jewellery—average weight of 5-10 gram or price less than Rs
FY20 FY25P 30,000—to dominate online sales
E-tail size (in US bn) as % of Retail

Source: Company presentations, Metals Focus, WGC, CRISIL Ratings

Increased use of digital platforms Targeted customer reach Alternative means to connect

In the long run, digital initiatives will lead to inventory rationalisation

7
Regulatory changes, duty structure affecting demand
Regulatory changes have a significant impact on gold imports, also depending on demand
Duty hiked twice, in June and Decline in demand due to Introduction of Duty increased to 12.5% Duty cut to 10.75%; agri Duty hiked
August 2013, from 6% to 8% and demonetisation in the third GST cess introduced to 15%
then to 10% quarter

1,000.0 20.0
800.0 15.0
600.0
10.0
400.0
200.0 5.0

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0.0 0.0
FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19 FY 20 FY 21 FY22 FY23 H1

Source: World Gold Council Net bullion imports (Tonnes) LHS Import duty and GST % (RHS)

Impact on demand Month Historical events impacting the sector

June 2013 100% cash-backed letters of credit for gold imports. Gold-on-lease or credit in any form disallowed for gold imports
The Reserve Bank of India (RBI) introduced the 80:20 rule—20% of every lot of gold import should be made available exclusively for
Drop in demand in fiscal 2014 July 2013
export and the balance for domestic use
August 2013 80:20 rule + 100% upfront payment for gold imports. Customs duty raised to 10%
March/May 2014 RBI allowed more banks and star trading houses to import gold, easing supply
Demand revived in fiscal 15
November 2014 RBI scrapped the 80:20 rule, easing gold supply. Ban on import of gold coins was lifted
Reduced sales due to strike by jewellers against January 2016 RBI reduced the transaction threshold for PAN card requirement from Rs 5 lakh to Rs 2 lakh
excise duty introduced in the Union Budget in
Feb 2016 April 2016 Excise duty of 1% introduced
Import duty increased by 250 bps to 12.5% July 2019 Import duty hike impacted demand
Import duty reduced by over 200 bps to 10.75% February 2021 Impact of duty reduction coincided with wave 2 of the pandemic
Introduction of mandatory hallmarking June 2021 Hallmarking is mandatory for jewellers with annual turnover of more than Rs 40 lakh, expected to benefit organised jewellery retailers
Import duty increased by over 400 bps to 15% July 2022 Use of recycled gold increasing with higher prices

8
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Revenue, Profitability and Credit Outlook:
- CRISIL Ratings gold jewellery portfolio
CRISIL Ratings portfolio covers a third of sectoral revenue
Key rated entities – As on November 21, 2022 Rating distribution

Company name Rating by CRISIL Ratings Total rated debt - Rs 10,709 crore

Titan Company Ltd AAA/Stable/A1+

CaratLane Trading Pvt Ltd. AA/Stable/A1+

BBB
37%
Joyalukkas India Pvt Ltd A+/Stable/A1

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Hasmukh Parekh Jewellers BBB+/Positive/A2
A and above
Malabar Gold Palace Pvt Ltd BBB+/Stable 58%

Malabar Jewels and Gems Pvt Ltd BBB+/Stable

P.N.Gadgil Jewellers Pvt Ltd BBB+/Stable/A2

P.N.Gadgil & Sons BBB+/Stable/A2

Tribhovandas Bhimji Zaveri Ltd BBB+/Stable BB and below

5%
Chandana Brothers Textiles and Jewellers Pvt Ltd BBB/Stable

The CRISIL Ratings portfolio comprises 76 jewellery retailers

*Analysis includes data for 76 companies rated by CRISIL Ratings, representing a third of the industry revenue for FY22
Source: CRISIL Ratings

10
Demand momentum steady this fiscal, to moderate in next
Revenue to grow 23-25% in fiscal 2023, boosted by pent-up demand post-Covid

17% CAGR: FY22-FY24 • Revenue grew exponentially in the first half of fiscal 2023, on a
23-25% 8-12% low base in the first half of the previous fiscal
36%
(2%) • Growth in the second half of this fiscal to moderate over the
extraordinarily high base of the third quarter of fiscal 2022
128
116
94
• Overall, fiscal 2023 revenue to grow 23-25% on-year
Rs ’000 crore

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69 70 69
58 • Revenue expected to grow 8-12% in fiscal 2024 over a high base
and given tempering income growth outlook

FY18 FY19 FY20 FY21 FY22 FY23P FY24P

Demand remains stronger in the second half Weddings drive South accounts for
domestic demand bulk of demand
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar West North
Daily Fashion
20-25% 15-20%
25-30% 5-10%
H1 H2
Festivals

Marriages

Harvests
Wedding East South
Lean season Peak season
55-60% 10-15% 35-40%

Source: Company presentations, CRISIL Ratings

*Analysis includes data for 76 companies rated by CRISIL Ratings, representing a third of the industry revenue for FY22
11
Op. profitability to moderate this fiscal and next to pre-pandemic
levels, due to higher selling costs, initial losses from new stores
Rangebound gold prices and limited scope for cost-optimisation to result in profitability reverting to pre-pandemic level

30.0

7.5 7.1 7.4 6.7-7.0 6.6–7.0

8.0

25.0
6.1 6.3 7.0

6.0

20.0

5.0

15.0 4.0

21.6 22.8 24.5 22.5

19.2 20.6
3.0

17.2
10.0

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2.0

5.0

1.0

0.0 0.0

FY18 FY19 FY20 FY21 FY22 FY23P FY24P

ROCE (in %) Ebitda margin (in %)

Higher selling expenses, initial losses from new stores to weigh on profitability

*Analysis includes data for 76 companies rated by CRISIL Ratings, representing a third of the industry revenue for FY22
Source: CRISIL Ratings

12
 Debt metrics to remain healthy despite higher inventory
Steady growth in inventory to meet demand will require
incremental working capital debt … ... but rising cash accrual will support leverage, debt coverage

80.0 0.40
12.0 1.60

0.34 0.33 0.34 0.34 1.36 1.36

1.32
70.0 0.35

1.40

0.31 10.0

0.29 0.29 10.19

60.0 0.30

9.77
1.11
1.20

1.05

Rs ’000 crore

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50.0 0.25
8.0

0.99
43.0 8.07 1.00

39.0 0.84
Rs ’000 crore

40.0 0.20

31.3 6.29 6.40

6.0 0.80

30.0 0.15
5.88 5.91
22.0 23.5 0.60

20.0

17.0 19.8 0.10

4.0

11.5 5.8 0.40

8.5 9.3 8.1 8.5-9.0 8.5-9.0 5.3

10.0
7.6 0.05

2.0
4.5
3.1 3.0
2.4
0.20

0.0 -
2.0
FY18 FY19 FY20 FY21 FY22 FY23P FY24P 0.0 -

Inventory Total debt Inventory/sales FY18 FY19 FY20 FY21 FY22 FY23P FY24P
Net Cash Accruals Interest cover TOL/TNW
*Analysis includes data for 76 companies rated by CRISIL Ratings, representing a third of the industry revenue for FY22
Source: CRISIL Ratings
TOL/NW: Total outside liabilities/tangible net worth

13
Better funding access to drive store expansion over medium term
Bank funding to the gems and jewellery sector rose in fiscal 2022 and will continue in fiscal 2023
1.50 1.5%

0.9% 0.8% 5% growth in

1.00

0.6% 0.7% 0.7% 0.6% credit deployed till

1.0%

Oct 2022 (vis-à-

0.73 0.72 0.74 0.81 0.78
0.50 0.5%

0.60 vis Oct 2021)

0.00 0.0%

FY18 FY19 FY20 FY21 FY22 FY23

FY23
(till Oct 21,21)
(till Oct 2022)

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Gems & jewellery (Rs lakh crore) % of gross bank credit deployed
Source: Reserve Bank of India

Store additions by jewellers logged 9% CAGR over fiscals 2017-22; further expansion likely at pre-pandemic momentum

9% CAGR: FY17-FY22 Total Capex for store expansion (Rs. Crore)

FY 24P 225-250
13%
1,600 14%

11% 11%
1,400

10% 10% 12%

FY 23P 225 -250

1,200

FY 22 225
10%

6%
1,000

8%

1,465 FY 21 119
800

1,165 1,315 6%

1,062 1,097
600

866 955 4%

FY 20 224
3%
400

FY 19 197
2%

200

- 0%

FY18 FY19 FY20 FY21 FY22 FY23P FY24P FY 18 178

No of stores Growth in stores
*Analysis includes data for 76 companies rated by CRISIL Ratings, representing a third of the industry revenue for FY22
Source: CRISIL Ratings
14
 Credit outlook: ‘Moderately Positive’
Compulsory BIS hallmarking has aided
Improved working capital management organised retailers
leading to improvement in debt protection
metrics
Organised jewellers benefited
from GST, demonetisation
9.0

8.5
8.0

7.0
As on October 31,
2022, there were
Credit ratios

Jewellers strike due to excise Tightening of liquidity six upgrades and

6.0

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duty implementation impacted metrics no downgrades in
3.9
5.0

impacted credit profiles

4.0
the portfolio
3.0

2.0

1.4 1.3
0.8
1.0

0.3
0.0

FY17 FY18 FY19 FY20 FY21 FY22

Credit ratio = Upgrades/ Downgrades

• Supply side reforms, demand momentum and improving inventory management have helped stabilise credit profiles
• Bank funding has improved over the past two years, on a case-to-case basis, especially for organised players

*Analysis includes data for 76 companies rated by CRISIL Ratings, representing a third of the industry revenue for FY22
Source: CRISIL Ratings

15
Summary
• Share of India in global demand to expand further; organised retailing to gain market share over the medium term

• Jewellery retailers to maintain revenue growth this fiscal, driven by pent-up demand and burgeoning wedding and festive jewellery purchases

• Revenue of players rated by CRISIL Ratings projected to grow 23-25% this fiscal, but may moderate next fiscal

• Store expansion to return to pre-pandemic level, supported by improving demand and access to funding

© 2023 CRISIL Ltd. All rights reserved.

• Operating margin to moderate over the next two fiscals, with rangebound gold prices and limited scope for further cost-optimisation. Improvement in
product mix provides potential to improve margin

• Credit quality of players to remain ‘moderately positive’; key debt metrics to remain healthy despite moderation in profitability.

• Movement in gold prices, government regulations and duties, and any change in consumer sentiment remain key monitorables

16
 Thank You

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 Annexures

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Jewellery, investment continue to drive global demand
Gold reserves with central banks (indexed to Q1FY19) ― reserves with central banks in emerging countries increased the most

200

180

160

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140

120

100

80

60
Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 Q1FY22 Q2FY22 Q3FY22 Q4FY22 Q1FY23 Q2FY23
Brazil Cambodia Egypt, Arab Rep. of India Turkey

Source: World Gold Council, CRISIL Ratings

Note: Gold reserves of developed countries such as the US, Germany, Italy, France, have remained at the same level as Q1FY20

19
Growth contribution of volume, realisations
Consecutive two years of strong volume growth in fiscals 2022 and 2023

0%

61%

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5-7%
30%
6% 19% 16-18% 2-4%
12% 8% 6-8%
-1% -15%
-39%

FY18 FY19 FY20 FY21 FY22 FY23 E FY24 P

Volume growth realisation growth

Source : WGC, Industry, CRISIL Ratings estimates

20
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