gems, jewellery industry to witness muted demand in 2012: Fitch Ratings
Ratings expects the Indian gems and jewellery industry to continue witnessing
muted demand in 2012 with volume growth of below 4% for the overall segment.
The low volume growth may possibly be attributed to a reduction in
discretionary spending both in the export and domestic markets.
However, a lean cost structure adopted by companies in the sector and limited
further downside of macroeconomic factors impacting jewellery demand are likely
to limit further deterioration in operating margins experienced in 2009.
While short-term risks in the global economy have fallen, the continuation of
household balance sheet deleveraging (particularly in the US) and a focus on savings are likely to limit discretionary spending.
Demand from traditional export markets (the US, Hong Kong, UAE) has improved
from 2009 levels, given relative improvement in their economic activity from
the 2008-2009 crisis period. While volume growth has been lower than that
observed pre-crisis, demand (in volume terms) in 2012 is unlikely to fall below
Relief may, in any case, be available from the increasing demand from Russia, China and East Asian nations. As such, exports, which constitute around 85% of the sales of organized
companies in this sector, are likely to remain flat in volume terms.
The Indian households' jewellery purchases depend largely upon discretionary
spending power which is affected by a reduction in the savings rate driven by
high consumer price inflation and muted wage growth.
Additionally, the emergence of alternate investment options such as gold
exchange traded funds, gold coins and bullion may structurally reduce demand
for gold jewellery as an investment option.
Thus, business risk facing this sector is likely to increase and may be
reflected by a higher volatility of revenue and margins, in line with the
For the majority of the export-oriented companies, operating margins (not
considering other income) had fallen in the range of 3.5 to 2.0 percentage
points during the 2009 crisis and have stabilized at around the same level.
expects operating margins to remain stable in the short to medium term as the
companies have been able to contain a significant reduction in margins through
stringent cost control measures. The companies have also adopted a cautious
approach for inventory stocking which has helped maintain margins, particularly
given the instances of inventory write-offs in 2009-2010.
The self-adjusting nature of debt (mainly working capital), by moving in tandem
with revenue, limits further significant deterioration in credit profiles.
However, companies in this sector also face risks from other income such as
opportunistic trading activity, which may be unrelated to the core jewellery
manufacturing function. While in good times, such trading functions may have
added significantly to company profits; however; in the past; they have also
resulted in instances of losses and higher-than-average inventory write-offs.
such, companies whose other income's contribution is above 20% of profit before
tax and which have low operating margins would be very significantly affected
in a scenario of rising forward Libor rates and simultaneously falling
However, Fitch believes that an oil price shock (around USD150 per barrel)
would adversely affect the economic activity both domestically and globally. In
such a scenario, a demand reduction will cause credit profiles to deteriorate.
This article was originally published in the Economic Times dated, 9th
May, 2012, written by Sutanuka Ghosal, associated with the Economic Times
Fibre2fashion.com does not warrant or assume any legal liability or responsibility for the excellence, accurateness, completeness, legitimacy, reliability or value of any information, product or service represented on Fibre2fashion.com. The information provided on this website is for educational or information purposes only. Anyone using the information on Fibre2fashion.com, does so at his or her own risk, and by using such information agrees to indemnify Fibre2fashion.com, and its content contributors from any and all responsibility, loss, damage, costs and expenses (including legal fees and expenses), resulting from such use.
Fibre2fashion.com does not endorse or recommend any article on this site or any product, service or information found within said articles. The views and opinions of the authors who have submitted articles to Fibre2fashion.com belong to them alone and do not reflect the views of Fibre2fashion.com.
If you wish to reuse this content on web, print or any other form, please seek for an official permission by writing to us on email@example.com
Subscribe today and get the latest information on Textiles, Fashion, Apparel.