Eyeing investments in jewellery sector? Growth to slow but may retain shine

The Indian jewellery retail sector saw a strong surge in the year ended March 31, 2022 and is estimated to have clocked high double-digit growth on a low base of the previous year. This is likely to moderate in the new year with the growth rate falling back to high single-digit rates.

Sectoral demand is likely to grow 8-10% in the year ending March 31, 2023 because of sustained demand from the wedding segment as well as cultural and traditional factors, according to Fitch-affiliated ratings agency India Ratings and Research (Ind-Ra).

Ind-Ra said it believes the sector ended FY22 with 30-35% growth because of a low base and a strong recovery in demand, supported by the traditional factors driving jewellery purchases.

Indeed, the industry recorded strong revenue growth of more than 50% in the first nine months of last financial year driven by a lower base effect and pent-up demand during festive and wedding seasons.

This was affected in the fourth quarter due to the third wave of Covid-19 that led to short lockdowns and also by the ongoing Russia-Ukraine war and resultant disruptions that has led to a rise in gold prices.

Gold prices will remain volatile in the short term amid the prevailing geopolitical uncertainties. However, over the long run, gold prices are likely to moderate due to factors such as rising bond yields, subsiding impact of the pandemic, increasing vaccination rates, and economic growth expectation.

Despite the elevated levels of gold prices, the gold consumer volume demand is estimated to have increased to a seven-year high of 775-800 tonnes in FY22. Ind-Ra believes the volume demand in FY23 is likely to grow by 5-10%, backed by overall favourable demand dynamics.

This would take the volume levels to an eight-year high, although it would still be a far cry from FY11 when it had crossed the 1,000-tonnes mark.

If we look at the balance sheet of the jewellery retailers, the sector deleveraged itself during FY21-FY22 amid an uncertain gold price scenario, putting breaks on expansion plans, while strong operational performance led to improved profit. The net leverage levels are likely to improve in FY23 with support from improved operational performance.

Over the past few years, the government has taken multiple steps to support the jewellery sector, which include reduction in the import duty on gold, compulsory hallmarking from June 2021 and free trade agreements being discussed with various countries, including the United Arab Emirates.

In addition, funding from banks towards the gems and jewellery sector has been increasing over the past 18 months.