Demand spurt to help beat correction in gold prices and low base effect to aid momentum
Despite the steep fall in gold prices and the resultant fall in realisations, retail jewellers are likely to sustain the ongoing demand recovery into the next fiscal with a 30-35 per cent spike in demand.
There was strong demand recovery in the third quarter of 2020-21 due to the festive season, pent-up wedding demand, and a 10 per cent correction in gold prices during festival period from its peak in last August, said India Ratings in a report on Thursday, revising the sectoral outlook to stable from stable-to-negative.
With economic activities reaching pre-pandemic levels, the agency expects the momentum to continue into 2021-22, backed by a softening of gold prices.
The agency expects the jewellery demand to grow 30-35 per cent in 2021-22 over 2020-21, primarily because of a low base and rising demand. But the overall sectoral demand will be only be 5-10 per cent above 2019-20 as the recovery in 2021-22 will be V-shaped.
During the first three quarters of 2020-21, the overall operating margins of the top jewellers put together expanded to 7.7 per cent against 5.9 per cent in 2019-20 because of improved realisation, and a reduction in selling and promotional expenses, among others.
Though price realisation gains may not continue in 2020-22, lower operating leverage and improved efficiencies in terms of lower marking expenses and lower rentals are likely to support margins, which is expected to be 25-50 bps above 2019-20 levels.
Most companies have deferred new showroom launches to 2022-23 and are consolidating their less profitable showrooms. The sector is likely to deleverage in 2021-22, backed by a revival in demand and no significant showroom launches.
On the upward revision in the sectoral outlook to stable for 2021-22, it said, although there have been no rating upgrades in 2020-21 till date, about 11 per cent of the ratings have been put on a positive outlook in view of a sharper-than-anticipated recovery, adequate liquidity buffers and margins supported by high realisations. There were no downgrades of any big players in 2020-21.