Jewellery, gold, silver, jewel

Gold prices have gained steadily over the past few months, thanks to fragile equity market sentiment and fears of global economic slowdown as US-China trade war intensifies. Thus far in calendar year 2019 (CY19), gold prices have surged 24 per cent. Silver, too, has gained 24.3 per cent during this period as investors flocked to safe-haven assets.

Last week, the yellow metal hit an all-time high, breaching the crucial Rs 40,000 per 10-gram level in the domestic bullion market, thus indicating the increased consumers’ demand for safe haven assets. Going forward, the price of precious metal is expected to soar even further, given the uncertainties around U-China trade tensions, analysts say.

“The US-China trade war with new tariff announcement has pushed gold and silver prices to record levels. Depreciating Indian rupee has also helped the rise in prices. We expect the current trend to continue for gold and silver. On the MCX, we expect gold prices to touch Rs 40,500 by the end of this year,” said Pritam Kumar Patnaik, Head Commodities at Reliance Commodities.

So, what does this mean for the overall gems and jewellery sector and the investors in these counters?

According to experts, the biggest positive for the players in this space is that there is a scope of improvement in their balance-sheet (inventory gains) with the rise in gold prices. However, since listed companies are in a very small fraction of unlisted companies in the industry, it will benefit only marginally the former, they say.

“Most companies in this space have a lot of balance-sheet problems. So, the price rise will give some relief because the value of their inventory will improve,” explains G Chokkalingam, founder and managing director at Equinomics Research.

Thus far in the calendar year 2019, most of the gems and jewellery stocks have underperformed the market. Stocks such as Goenka Diamond & Jewels and PC Jeweller have slumped up to 61 per cent as compared to nearly 3 per cent rise in the S&P BSE Sensex, ACE Equity data show. On the other hand, Rajesh Exports has gained 23 per cent during the period, followed by Tata Group’s Titan Company (up 18.57 per cent). Goldiam International is another outlier in this segment, rallying over 17 per cent during this period.

Titan remains top pick

Among the lot, most brokerages have retained their bullish stance on Titan, saying the company is a strong play on discretionary spends and demand shift from unorganised to organised segment.

“Titan remains the biggest beneficiary of the formalisation theme with its jewellery division gaining market share from the unorganised players. Increasing female working class, strong brand recall, trust and transparency are the key factors that are likely to drive above industry growth for the company,” analysts at Reliance Securities wrote in a note dated August 6. They expect Titan’s net earnings to compound at higher double-digit going ahead, once the expansion phase is over and new brand investments get mature.

At the fundamental level, analysts at ICICI Securities believe Tanishq’s initiatives such as studded activation (started in August 2019) and a zero markdown scheme in gold exchange could help drive growth going ahead. Besides, Tanishq is also likely to shift to a fixed making charge structure from ‘making charges as a percentage of gold price’ currently.

“Although, such a move entails lower gross margins, it can very well drive revenue growth through increased customer footfalls and conversions at Tanishq stores,” Manoj Menon, research analyst at the brokerage, wrote in a co-authored note with Vismaya Agarwal.

The brokerage has ‘ADD’ rating on the stock with a discounted cash flow (DCF)-based target price of 1,200. “On the flip side, high share of gold exchanges i.e. consumers exchanging / bartering old jewellery and purchasing new jewellery and any potential reduction in PAN card limit from Rs 0.2 million are the key risks to the company’s growth,” it cautioned.


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