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Indian Jewelers to Experience Slow Demand
May 10, 2012 4:28 AM
By Dilipp S Nag
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RAPAPORT... The Indian gems and jewelry industry is likely to continue experiencing subdued demand in 2012, with volume growth of below 4 percent for the overall segment due to a reduction in discretionary spending both in the export and domestic markets, Fitch Ratings projected.
However, given the trend toward industry businesses keeping operating costs under control, they will weather weaker demand and restrict further deterioration in operating margins unlike during the downturn in 2009, Fitch Ratings noted. Analysts also stated that while short-term risks from the global economy have been reduced, the continuation of constrained household spending, particularly in the U.S., coupled with a focus on savings are likely to impact spending on jewelry for the long-term.
Fitch Ratings observed demand from traditional markets such as the U.S., Hong Kong and the United Arab Emirates (U.A.E.), has improved from 2009 levels, given relative improvement in their economic activity. The trading volume of goods has been lower than that observed before the 2008 downturn, but demand in 2012 is at least unlikely to drop below levels of 2011.
With increasing demand from Russia, China and East Asian nations, this may help to balance any reduction in exports from tradition markets, which constitute around 85 percent of the sales from the gems and jewelry sector.
At home, Fitch stated that the Indian households' jewelry purchases depend largely upon discretionary spending, which is affected by a reduction in the savings rate, higher consumer price inflation and flat wage growth. Additionally, the emergence of alternate investment options such as gold exchange traded funds, gold coins and bullion may structurally reduce demand for gold jewelry as an investment option.
Thus, business risk facing this sector is likely to increase and may be reflected by a higher volatility of revenue and margins in line with the business cycle, Fitch said.
The ratings agency noted that the majority of the export-oriented companies operating margins, excluding other income, declined in the range of 3.5 percentage points to 2 percentage points during the 2009 downturn and has since stabilized at around the same level.
Fitch expects operating margins to remain stable in the short- to mid-term as companies have been able to contain a significant reduction in margins through stringent cost controls. The companies have also adopted a cautious approach for inventory stocking, which has helped maintain margins, particularly given the instances of inventory write-offs in 2009 and 2010. The nature of debt -- mainly working capital -- should move in tandem with revenue in order to limit further deterioration in credit profiles.
However, companies also face risks from opportunistic trading activity, which may be unrelated to the core jewelry manufacturing function. In good times such trading activities may have added significantly to the company profits but in the past they have also resulted in instances of losses and higher-than-average inventory write-offs, Fitch noted.
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Tags:
demand, Dilipp S Nag, Fitch, Fitch Ratings, gems, Gems and Jewelry, India, Indian Gems and Jewelry, jewelers, Jewelry, margin, Rapaport, US
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