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Are rising gold prices impacting all jewellers? - Views on News from Equitymaster
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  • Sep 12, 2012

    Are rising gold prices impacting all jewellers?

    Rising gold prices have always been a cause of worry for the jewellery retailers. As a result of increased gold prices, jewellers suffer from twin problems of higher input costs and lower sales. Gold prices have risen by nearly 13% in the past 6 months. Most jewellers are fully hedged against volatility of gold prices via purchasing future contracts. In addition to rising gold prices, currency depreciation has further increased gold input costs for jewellers.

    And importantly, jewellers can do little as consumers defer or cancel their purchases with rising gold prices. The drop in consumer sentiment link further ensured that jewellery buyers stay away from showrooms.

    In this article, given these gold price hikes, we examine which jewellery companies l have been able to grow their topline and bottomline, and why.

    1QFY13 - Performance of the Big 3 Jewellers

    The table below summarizes the key financial performance of Titan Industries, Gitanjali, and Shree Ganesh.

    Big 3 Jewellers - key financials
      Titan Gitanjali Shree Ganesh
      1QFY12 1QFY13 1QFY12 1QFY13 1QFY12 1QFY13
    Growth YoY (in %)
    Sales   9.2   30.4   16.5
    Operating Profit   10.4   9.9   8.0
    PAT   8.8   20.9   14.1
    Profit margins (in %)
    Operating Profit 9.5 9.6 7.7 6.5 4.3 4.0
    Net Profit 7.1 7.1 4.7 4.4 3.2 3.1

    Titan Industries witnessed subdued performance in 1QFY13. Due to the factors mentioned above, sales growth was a slow 9% (YoY). Titan was further affected by the economic slowdown, because of the discretionary nature of its products - jewellery and timewear (watches). Despite all this, Titan managed to maintain highest operating and PAT margins. This highlights the company's ability to control costs, and shows its financial strength - it has zero debt on its books and so negligible interest expenses.

    Gitanjali Gems on the other hand witnessed a huge 30% YoY jump in sales - the highest in the industry. Gitanjali has lately focused on diamond and studded jewellery, and gets higher revenue than plain gold jewellery from this segment. This diversified business model cushions the company from the volatility in gold prices. Gitanjali has also been expanding into the smaller towns and cities to tap the growing demand for branded jewellery in those places. Solid topline numbers helped the company post a strong 21% (YoY) net profit growth.

    Shree Ganesh Jewellery witnessed a good 16.5% (YoY) sales growth % in 1QFY13. This jewellery company generates as much as 88% of its sales from exports. The gloomy global economic scenario and the ongoing Euro Zone crisis reduced demand for jewellery. However, the company benefitted from its large exports due to rupee deprecation. But, the higher costs of gold reflected in the company's slower 8% (YoY) growth in operating profits. With these somewhat offsetting factors, Shree Ganesh was able to maintain its profit margins at the same level as the same quarter last year.

    We conclude that although all these companies are involved in the same business of jewellery retailing, their performance is varies by how much of their business is in gold versus studded. Investors would do better to look for companies that are more diversified, less export oriented and relatively less dependent on the volatility in forex rates.



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