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Budget dulls investment in Branded Jewellers?

Mar 20, 2012

In Part I of this series, we highlighted the changing scenario of the Rs. One Trillion plus jewellery retailing industry in India.

With the growing Indian economy and middle class, demand for branded jewellery is rising. The jewellery sector is following the megatrend of moving from an unorganized, to a branded organized one. Also, recognition of gold and jewellery as an investment asset class, and increasing exports have benefitted the Jewellery Industry.

Factors for assessing investment potential in branded jewellery companies include real estate space, working capital cycles, competition, the degree of diversification into other jewellery products, and/or into other non-jewellery related businesses (e.g. Gitanjali Gems is also in the lifestyle and apparel business).

Branded players will clearly benefit from this rising demand. The very idea of branding brings with it organisation and an expansion of the customer base. Earlier, jewellery was a special purchase. Now, it is now being positioned for all occasions, and for all consumer segments.

While there seems to be a meaningful opportunity for investment in branded jewellers, this third article discusses some possible dull spots in sparkle.

Higher customs duty - the recent Budget pronounced basic customs duty increased from 5% to 10% on gold bars and coins, and from 1% to 2% on gold ore. Obviously, the price of gold imports will rise, and so will input costs for jewellers.

Service Tax hiked- The hike in service tax from 10% to 12% will result in further raising store rentals which already account for 10-15% of a retailer's total costs. Retailers are not allowed to offset these rentals against Value Added Tax (VAT).

Higher marketing expenses - In 1996, Titan's Tanishq was the first branded player in the jewellery space. The company now boasts of almost 80% revenues coming from the jewellery segment. This was because the company successfully navigated through the growing branded jewellery unchartered territory well, and leveraged its first mover advantage. For branded players who came in later, and potential new entrants, connecting with the consumer and building market share will require investing in brand building and innovation. Such exercises can hurt their profit margins.

With the above swelling of costs, jewellers will, in all probability, resort to price increases which can negatively impact volumes. At the same time branded jewellers will face severe competition, and so margin pressures.

Competition from Family jewellers - Branded players in India face stiff competition from traditional family jewellers. Family jewellers have established trust and confidence in their customers for years, and branded companies will find this difficult to emulate in the near and mid-term. Family jewellers also provide easy financing options, and even home service. Indian consumers still appreciate this relationship and convenience. However, the rapidly growing middle class may be open to new avenues for purchasing their jewellery.

Competition from regional jewellers, national retailers and international brands - Tastes and preferences for jewellery may vary from region to region. There are a lot of regional players like B.C.Sen in the East, PP Jewellers in the North, and Tribhovandas Bhimji Zaveri in the West. Apart from the specialty retail players, many retail chains such as Shoppers Stop, Lifestyle and Big Bazaar now have jewellery counters from branded chains. During the past few years, international luxury jewellery brands such as Cartier and Tiffany's have also entered India. And lots of jewellery exporters (Eg. Rajesh Exports) are also actively evaluating the India market, with a view to opening their own retail outlets. Further, the listed companies' space is becoming crowded as more players recognize this opportunity. A few companies including Tara Jewels and TBZ have already filed their IPO applications and may soon get listed on stock exchanges.

Competition from online sales of jewellery- A new trend that can be seen is the online sales of jewellery. E-commerce has spread its wings into the jewellery retailing space too. A website by the name of JewelsNext is targeting a turnover of Rs. 1 bn through online sales of jewellery in the next couple of years. It has partnered with a lot of jewellery companies whose products it offers through its website. For customers, this allows making their purchases at a convenient time from a single place, instead of paying physical visits to individual shops. This distribution channel will pose a challenge to jewellery "brick and mortar" retailers - a phenomenon proven in other industries.

Clearly there will be intensified competition in this branded jewellery space.

So while the jewellery industry is growing, and there is a meaningful opportunity; the concerns of inventory and working capital planning, cost increases and competition are very real. To identify good investments, a good place to start is to consider branded jewellery companies which have demonstrated stable financial health.

Next, we believe it would be wise to look for companies with a well diversified jewellery portfolio. These would score over companies with a single product focus (i.e. one of gold, silver, diamonds or other precious stones). The impact of changing economics and industry dynamics will be much less for diversified companies.

In our next and final article of this series on Jeweller Retailers, we will review the fundamentals of a few branded jewellery players. This will help select investments that can sparkle!

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