Mar 13, 2012|
Will investments in jewellery companies sparkle?
The Indian Jewellery industry is estimated at Rs. 973 billion in 2009-10, and it contributed 6% to the overall retailing sector.
Jewellery is lowering in consumer purchasing priority
As India grows, one megatrend is the emergence of the organised sector in many industries. Consistent with this, there are an increasing number of organised players representing 10% of total Jewellery market.
Tata's Tanishq (by Titan) was the first branded player in the industry in 1996. Then more branded players entered (like Gitanjali, Reliance Jewels) and with intense competition the Jewellery sector underwent a dramatic change.
Traditionally, Indians have been more comfortable with the idea of a family jeweller, who looks after the needs of the entire family, and who has a relationship with the family over generations. His services are called for whenever there is a wedding or any other auspicious occasion. Now, due to changing lifestyles, the Indian consumers' buying habits are also changing. They now prefer to shop in the showrooms where they get multiple design and price options under one roof. The Gems & Jewellery industry is expected to grow at 13% annually over next 2-3 years. In this article and a subsequent one, we analyse if investing in companies in this sector provide "sparkling or shining" investment opportunities.
Why has jewellery become so popular?
There are several reasons for the growing popularity of both unbranded, and more so, branded gems and jewellery in India. First, a major factor is obviously India's fundamental economic growth. This has resulted in a large and growing middle class population. The proportion of middle class is expected to be 41% in 2025 up from 5% in 2005. (Source: FICCI report). This middle class has rising aspirations, increasing discretionary spending power, and is buying more jewellery along with other consumer goods.
Second, with the recent global economic crisis, investors have become more aware of, investment in gold as an asset class. Jewellers have recognized this opportunity and have responded by offering various easy installment payment gold investment schemes. Tanishq's Swarn Nidhi and Gitanjali's Tamanna are such schemes.
Third, branded jewellery brings with it the hallmarks of trust and image association. This along with brand building activities, advertising and service is "hooking" consumers to brands that they connect with.
Finally, gems and jewellery also account for a substantial, approximately 15% of India's exports. To enhance this opportunity, the government has declared jewellery as a thrust area, and provides various incentives to increase exports.
So, a combination of the growing middle class with increased spending power, a move to gold and jewellery as an investment asset class, the creation of branded jewellery and increasing exports have all contributed to the sustainable growth of this industry.
Growth challenges and pangs for the Jewellery Industry
However, as this industry grows, we feel that intense competition will put pressure on profit margins. Raw materials account for a major portion of the total costs and higher demand will push raw material prices further up. This along with high lease rentals will reduce profit margins.
An interesting phenomenon is that when consumers use the price of gold as an indicator to make jewellery purchase decisions. So they prefer they prefer stable gold prices, or wait for gold prices to drop before buying jewellery. Lately, gold prices have been very volatile thereby adversely impacting jewellery demand.
Also, companies need to keep pace with the evolving tastes of the Indian consumer. Companies need to invest in skilled manpower, creating newer and more contemporary designs, and brand building including advertising and hiring brand ambassadors.
Further, jewellery buying is essentially discretionary in nature. As evidenced in the recent economic crisis, during times of slowdown, such spending will suffer. Also, as the table below indicated, Indian consumers seem to favour owning vehicles and travel over jewellery. So the latter's share of the average Indian's consumption basket is expected to decrease.
* Expected Rank in 2014
||Food and Grocery
||Apparel and Home Textiles
||Jewellery and Watches
||Travel and Leisure
$ CDIT – Consumer Durable and IT Products
Source: Retail Consultancy Firm Technopak's Research
Jewellery companies will also have to contend with the existing major "family" jewellers who will try and evolve and some will become local brands themselves.
Knowing that India is a diverse country with varying local tastes and preferences, brand differentiation, product innovation and operational efficiency will be challenging and a huge opportunity for those that can deliver.
Demand for branded jewellery is expected to increase over the next few years. A major reason is the growing Indian economy, resulting in a growing middle class with discretionary income, and which will be exposed to significant brand building and advertising messages. Also, recognition of gold and jewellery as an investment asset class, and exports has benefitted the Jewellery Industry.
Branded players will benefit from this rising demand. However, while revenues will increase, competition from the existing "family jeweller", as well as other branded jewellers, will exert pressure on their profit margins.
In such a scenario, branded Jewellery companies will have to be more innovative and efficient, while investing in real estate and brand building. Leveraging first mover advantage will be important for early entrants. But we need to review other parameters too before investing in these companies.
In our next article we will discuss the pros and cons of investing in these branded jewellery retailing companies.
||Jinesh Joshi (Research Analyst) holds a masters degree in Finance and has over 8 years of experience in tracking equities. He has a keen affinity for number-crunching and is often sought after for his valuable insights on financial modeling and valuations. He has a keen eye for spotting emerging growth opportunities across sectors and market caps. Jinesh contributes to our Megatrend investing service The India Letter.
More Views on News
Aug 10, 2017
However, growth at these levels are unlikely to be sustainable.
Mar 7, 2017
Equitymaster analyses Initial Public Offering (IPO) of Avenue Supermarts Limited.
Feb 14, 2017
Titan Industries declared its results for the third quarter of financial year 2017 (3QFY17). While topline growth was 14.7% YoY, net profit grew by 13.1% YoY during the quarter. Here is our analysis of the results.
Nov 16, 2016
Titan Industries declared its results for the second quarter of financial year 2017 (2QFY17). While topline growth was flat, net profit grew by 23.5% YoY during the quarter. Here is our analysis of the results.
Aug 9, 2016
Titan Industries declared its results for the first quarter of financial year 2017 (1QFY17). The company reported 3.3% YoY increase in sales, while net profit fell by 16.3% YoY during the quarter.
More Views on News
Aug 10, 2017
Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.
Aug 8, 2017
'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407