'2012 will be tough year for gems and jewellery sector'

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SME Times News Bureau | 10 May, 2012
Gems and jewellery industry will see muted demand in 2012 with volume growth to be around 4 percent for the sector, Fitch Ratings said Wednesday.

According to the rating agency, the low volume growth expected to be logged by the sector may 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, the agency said in a statement.

It said 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 2011 levels.

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 percent of the sales of organised 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 alternative 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 business cycle, Fitch Ratings said.

For the majority of the export-oriented companies, operating margins (not considering other income) had fallen in the range of 3.5 to 2 percentage points during the 2009 crisis and have stabilised at around the same level.

Fitch Ratings 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.