Business Today

Long on Gold

Despite the pressure on gold prices and the new excise duty, all may not be lost for jewellery retailers.
by Venkatesha Babu   Delhi     Print Edition: March 27, 2016
Customers at PC Jeweller store in Karol Bagh, New Delhi (Photo: Vivan Mehra)

Akshaya Tritiya is a holy day for Hindus and Jains. It usually falls in the last week of April or in the first fortnight of every year. While the day is said to symbolise many religious events, for Vinay Kumar, like a large number of his countrymen, the day stands out for one reason mainly. Akshaya Tritiya is the day when, every year, he buys some gold in the form of ornaments or increasingly in the form of gold coins, as he believes that anything bought on that day will 'multiply and be profitable'.

That was a strategy that paid off handsomely for more than a decade for 47-year-old Kumar, a fast-talking businessman who runs a hardware store. However, in 2015, he says, for the first time in nearly 15 years, he chose not to purchase gold. "In the previous three years, my purchase price was significantly higher than its current value," he says. "In 2012, I was charged around Rs 2,800 per gm of gold, excluding making charges, whereas the price in 2015 hovered around Rs 2,300. I am unlikely to buy in 2016." Even though prices have of late recovered to Rs 2,900 per gm, they are still far below the Rs 3,200-plus level touched in the middle of 2013.

The fall in gold prices and the resulting collapse in demand has not been kind on gold retailers such as Titan and Kalyan Jewellers. And just when they were starting to breathe a little easy due to the recent mini-rally, this year's Union Budget dropped a bomb - it proposed 1 per cent excise duty on gold and diamond jewellery. The livid retailers say this will hit the nascent recovery and, in response, have gone on a nationwide strike.

That's not all. The Budget also exempted gold bonds from capital gains tax at the time of redemption. Besides, it proposed that interest and capital gains from the gold monetisation scheme be made tax-free. The aim is to wean people such as Kumar, who buy the yellow metal as an investment, from physical gold, whose huge imports are a big reason for India's perpetual current account deficit. Most of India's annual gold requirement - 850 to 900 tonnes - is imported.

T.S. Kalyanaraman, CMD of Kalyan Jewellers

"We are positive about our growth prospects and increasing our distribution network in India and GCC region"

All in all, pricing pressures, it seems, are here to stay. After a phenomenal run for a decade, in the past three years, gold has given negative returns each year. The World Gold Council indicates that over the past three years, gold in India would have given negligible returns despite prices firming up recently. In contrast, the BSE Sensex has given returns of 14.3 per cent in the same period, despite stock prices sliding in the past six months.

However, the retailers, especially the big ones, say all is not lost. C.K. Venkataraman, CEO, Jewellery at Titan Ltd., the largest organised sector and listed player in the segment, believes that declining prices of gold is actually an opportunity and sales volume is likely to get a boost because of this trend. "There might be one or two dull quarters based on sentiments, but in the mid to long term, the opportunities for growth are tremendous." The company's net income saw a sharp drop of 25 per cent in the quarter ended September 2015, primarily due to challenges faced by Tanishq, its jewellery selling arm, before recovering in the third quarter of the fiscal. Tanishq, which registered sales of Rs 1,981.73 crore in the second quarter ending September 30, saw its sales rise to Rs 2,819.27 crore in the third quarter.

Venkataraman attributes some of the fluctuation to the withdrawal of 'Golden Harvest', a jewellery purchase scheme that used to contribute about 25-30 per cent of Tanishq's jewellery sales in the second quarter. "We had to withdraw it to meet newer regulatory requirements of the government as, unfortunately, such schemes were categorised as deposit taking ones." He feels that since Indians see gold as more than an investment, growth would eventually come back. Tanishq, he asserted, was on track to open an additional 30-35 stores in 2015/16.

C.K. Venkataraman, CEO, Jewellery at Titan Ltd.

"There might be one or two dull quarters based on sentiments, but in the mid to long term, the opportunities for growth are tremendous"

Some of the other major players are spreading their bets to ensure that even if one geography does badly, others would be able to compensate. T. S. Kalyanaraman, CMD of Kalyan Jewellers, which is stepping up its presence in West Asia, asserts that given the strong tradition of investing in gold and the cultural beliefs about gold in India, price volatility will not have a significant bearing on the category. However, to ensure 'balanced growth', Kalyan has stepped up its presence in West Asia with 13 large-format stores similar to the 85 large stores it operates in India.

"We are positive about our growth prospects and are focusing on increasing our distribution network, both in India as well as the GCC (Gulf Cooperation Council) region," says Kalyanaraman. In India, too, the jeweller sees opportunities in the long term and is aiming to consolidate its presence in existing markets. It has increased its distribution network with new showrooms in Noida, Gurgaon and Kerala. It is adding three new showrooms in Chennai over the course of the year. Recently, it made a foray into the eastern part of the country in Bhubaneswar. It is also expanding its footprint overseas and is entering the Qatar market with six showrooms. "In all, we are hoping to add 22 new showrooms in India and the GCC by the end of the fiscal," says Kalyanaraman.

Vinod Hayagriv, whose C. Krishnaiah Chetty & Sons (CKC) boasts a 145-year-old jewellery making legacy and counts the Mysore royal family amongst its clientele, says that the current market conditions "is a good opportunity for progressive jewellers. Competition will shake out a few players, leading to consolidation". Hayagriv says that while CKC has been growing, a number of jewellers who expanded their footprint aggressively will have to do a rethink. "This is a business where inventory cost is very high, EBITDA margins are very low. A lot of that was taken care of because of the volume of business. However, because of negative sentiments, if footfalls decline then those who expanded aggressively will be severely impacted."

The government's recent move to make PAN (permanent account number) mandatory for all transactions worth more than Rs 2 lakh is also likely to hit the jewellery industry hard. Admits another Kerala-headquartered jeweller who did not want to be identified: "It is true that real estate and gold are two favoured investment destinations for those who haven't fully shown their income. But to penalise everybody for that is ridiculous. In rural India, even some of the well-to-do farmers who, during marriage season, buy several hundred grams of gold jewellery, do not have PAN. How does one address those issues?"

Kalyanaraman says improved sentiments are just a festive or a marriage season away. Indians have an obsession with the yellow metal and are unlikely to give up on it, insist the retailers. For the present, though, gold's glitter has faded a bit.

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