Will investments in jewellery companies sparkle? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Will investments in jewellery companies sparkle?

Mar 13, 2012

The Indian Jewellery industry is estimated at Rs. 973 billion in 2009-10, and it contributed 6% to the overall retailing sector.

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.

Jewellery is lowering in consumer purchasing priority

Rank 2009CategoryRank 2014*
1Food and Grocery1
2Healthcare2
3Apparel and Home Textiles4
4Housing5
5Education3
6Telecom6
7Jewellery and Watches9
8Personal Transport7
9Travel and Leisure8
10CDIT $10
* Expected Rank in 2014
$ 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.

To conclude

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

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.


Equitymaster requests your view! Post a comment on "Will investments in jewellery companies sparkle?". Click here!

  

More Views on News

TRENT LTD Announces Quarterly Results (2QFY20); Net Profit Up 16.3% (Quarterly Result Update)

Nov 14, 2019 | Updated on Nov 14, 2019

For the quarter ended September 2019, TRENT LTD has posted a net profit of Rs 383 m (up 16.3% YoY). Sales on the other hand came in at Rs 8 bn (up 32.8% YoY). Read on for a complete analysis of TRENT LTD's quarterly results.

TITAN Announces Quarterly Results (2QFY20); Net Profit Up 3.8% (Quarterly Result Update)

Nov 7, 2019 | Updated on Nov 7, 2019

For the quarter ended September 2019, TITAN has posted a net profit of Rs 3 bn (up 3.8% YoY). Sales on the other hand came in at Rs 47 bn (up 2.1% YoY). Read on for a complete analysis of TITAN's quarterly results.

PC JEWELLER 2018-19 Annual Report Analysis (Annual Result Update)

Oct 18, 2019 | Updated on Oct 18, 2019

Here's an analysis of the annual report of PC JEWELLER for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of PC JEWELLER. Also includes updates on the valuation of PC JEWELLER.

TRENT LTD 2018-19 Annual Report Analysis (Annual Result Update)

Jul 4, 2019 | Updated on Jul 4, 2019

Here's an analysis of the annual report of TRENT LTD for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of TRENT LTD. Also includes updates on the valuation of TRENT LTD.

TCNS Clothing: Is this Retail Company Focusing on Women's Apparel Worth Betting On? (IPO)

Jul 17, 2018

With topline growth of 50% CAGR over a period of four years, should you apply to this initial public offer?

More Views on News

Most Popular

How to Buy the Best Safe Stocks in 2020 (The 5 Minute Wrapup)

Jan 17, 2020

Don't fall for the safe stocks narrative going around in the stock market these days.

Guess Which Stocks Are Rising at Double the Speed of Sensex (Profit Hunter)

Jan 15, 2020

These stocks can move twice as fast as the Sensex - to take advantage of their money multiplying power get in now as the rally is still just taking shape.. read more to not miss out.

For 1,000%+ Gains, Follow the 8-Year Cycle in the Stock Market (Fast Profits Daily)

Jan 17, 2020

This is how the biggest trading profits are made.

What the Infosys Results Tell Us About the Next Infosys (The 5 Minute Wrapup)

Jan 15, 2020

If you're interested in the next Infosys, I'll tell you where to look.

The Best Asset Class to Invest in 2020 (Fast Profits Daily)

Jan 24, 2020

Why I'm most bullish on this asset class above all else in 2020.

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get our special report, Secret to Increasing Your Trading Profits Today Now!
We will never sell or rent your email id.
Please read our Terms

COMPARE COMPANY

MARKET STATS