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Jewelry Retailers Defy Downturn With New Stores
Sep 27, 2012 8:13 AM
By Dilipp S Nag
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RAPAPORT... Indian jewelry retailers are likely to maintain momentum, aided by increased gold prices and new revenue from recently opened stores, the CRISIL Ratings agency concluded. Jewelry retailers are expected to continue expanding their footprint in new regions to drive growth, which will help them in braving the current economic slowdown.
Consequently, the credit risk profiles of jewelry retailers are expected to remain stable over the midterm, CRISIL noted.
The ratings agency stated that CRISIL-rated gold jewelry retailers have outperformed the rest of the industry, reporting a compound annual growth rate of 15 percent in sales volume over the past three years through the financial year that ended on March 31, 2012. A significant share of the sales growth has come from new stores. Growth in volume at existing stores, however, has remained under pressure because of intense competition, compelling retailers to explore new markets.
As anticipated, tier-II and tier–III cities have emerged as the new growth areas for retailers, CRISIL said. The smaller centers benefit from shifting customer preference towards branded jewelry and low penetration of organized retailing. The rated retailers are expected to continue expansion plans with two of every three new stores opening in the smaller towns. Revenue from these new stores is therefore expected to contribute around 55 percent of their total revenue in 2014, up from around 45 percent in 2011.
Retailers expanding to smaller cities benefit from lower operating costs than in metros and tier-I centers, the ratings agency stated.
“Smaller showrooms and lower rentals will help retailers save around 25 percent on operating costs,” said Subodh Rai, the senior director of bank loan ratings at CRISIL. “The favorable demand and cost structures in the smaller towns will help them attain early breakeven and maintain profitability.”
CRISIL, however, said that new stores will necessitate significant investment in working capital for gold jewelry inventory. The high price of gold may raise retailers’ average inventory costs, and weaken their ability to absorb any steep fall in gold prices, it added.
The margin between the average inventory value and gold price has narrowed by 50 percent, CRISIL stated. It added that retailers whose gold inventory was previously valued at 20 percent lower than the market price have witnessed the gap contract to 10 percent to 12 percent over the past year, owing to store expansions.
However, prudent inventory hedging strategies and successful scale-up at the new stores should help retailers maintain operating margins at 6 percent to 7 percent as in the past, CRISIL said.
“Retailers who sustain their sales growth momentum, and maintain a healthy capital structure and adequate buffer in inventory holding price, are likely to witness improvement in their credit risk profiles over the medium term,” concluded R. Vasudevan, the director of bank loan ratings at CRISIL.
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Tags:
Crisil, Dilipp S Nag, expansion, gold, India, Jewelry
Jeweler, Rapaport, retailers, stores
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