Recently Ind-Ra published the ‘FY 17 Credit Outlooks’ & that also included the outlook for Gem-n-jewellery trade & industry. Ananda Bhoumik, Managing Director & Chief Analytical Officer said, “Corporate India’s performance in FY17 will be influenced by three key factors: strong GDP growth, significantly lower commodity prices and the opportunities thrown up by the government’s large number of plans to create public infrastructure.”
Ind-Ra forecast’s growth at 7.9% in FY17 (estimated FY16: 7.4%) assuming improvement in private consumer expenditure by 8.4% (8.3%) and gross fixed capital formation at 8.3% (7.6%). Growth in household liabilities has been decreasing year-on-year and is pointing to increased headroom for household expenditure. Coupled with low inflation and interest rates, leads to an expectation of a higher consumer spend. Consumer durables steady growth is likely to continue.
FY17 Outlook says for Gems and Jewellery Retailers to Fare Well; Exporters to Face Headwinds!
Stable Outlook for Retailers: India Ratings and Research (Ind-Ra) has maintained a stable outlook for jewellery retailers for FY17. The agency expects retailers to fare well underpinned by a sustainable domestic demand, shifting preference towards branded jewellery, and fading regulatory headwinds.
However, the excise duty hike announced in the union budget may have a marginal impact on the demand in the near term. Negative Outlook for Exporters: Ind-Ra has revised the outlook for jewellery exporters to negative for FY17 from stable.
The agency expects exporters to face temporary headwinds with slowing Chinese demand for diamond jewellery. Also, they are likely to have limited headroom to withstand further pressure on margins due to divergence in rough and cut and polished diamond (CPD) prices as rough price index remained higher than polished price index during FY13-FY15.
Stable Domestic Consumption Demand: Ind-Ra expects jewellery demand to remain robust and grow at 3%-5% in 2016 to 670-685MT driven by wedding related purchases. The demand has remained steady at 600-670MT in the last few years (source: World Gold Council (WGC)) despite gold price volatility.
Ind-Ra expects an improvement in demand for coins and bars as consumers seek gold’s wealth protection properties in the backdrop of a high economic and political uncertainty globally, turmoil in equity markets, and weakening in domestic currency.
Government Policies to Have a Mixed Impact: In 2015, the government launched a gold monetisation scheme (GMS) and a gold bond scheme (GBS) to develop the domestic gold market. Another change which has kicked in from January 2016 is the mandatory furnishing of pan card details by customers for any jewellery purchases above INR0.2m.
According to Ind-Ra, these schemes will have a mixed impact on retailers in the medium term – on one side, with a fall in dependence on imports, regulatory intervention by the government may decline leading to stability in the operating environment for retailers.On the other side, the introduction of gold-linked financial products and mandatory pan card submission could impact the revenue of retailers.
Sustained Pressure on CPD Exports: Ind-Ra expects CPD exports to remain under pressure as steady growth in diamond jewellery consumption in the US market will be offset by weaker sales in China and Hong Kong. According to a De Beers’ report, demand for diamond jewellery in China grew 6% in 2014 much below its five-year CAGR of 14% and is likely to have further deteriorated in 2015.
With a continued weak economic activity, plunging stock markets and strong USD, Ind-Ra expects Chinese consumer demand for diamond jewellery to remain sluggish in 2016 as well. In line with the slowing demand for diamond jewellery, CPD exports from India fell 15% yoy to USD14.7bn for the nine months ended December 2015.
Outlook Sensitivities are 1: Resurfacing of Regulatory Actions: Reintroduction of any measures to curb gold imports or restoration of any excise duty is likely to have a negative impact on the sector, 2: Recovery in Demand and Reduction in Divergence of Prices: Recovery in Chinese demand, a buoyant US demand for diamond jewellery, and an improvement in CPD prices relative to rough prices are likely to have a positive impact on exporters. & 3: Supply Shocks in Short Term: Any severe fall in supply of mined gold globally can lead to higher gold prices and may dampen gold consumption, leading Ind-Ra to change its outlook to negative for the sector.