Credit outlook moderately negative for gold jewellery retailers: Crisil
Slack demand, resulting in lower cash accrual, along with elevated inventory levels and curtailed bank finance, will lead to a moderately negative credit outlook for gold jewellery retailers this fiscal, Crisil Research said on Thursday.
An analysis of 92 gold jewellery retailers, accounting for 40 per cent of the sector’s revenue, showed that the number of new store additions is expected to reduce to almost by a third of the average between fiscals 2017 and 2020, it said.
“Consequently, capital investments will be 70 per cent lower at Rs 650-700 crore this fiscal compared with the average of the past four fiscals,” the Crisil analysis said.
“Cash accrual is expected to decline 40 per cent on-year, given an expected 35-40 per cent fall in sales volume for the industry – the steepest on-year drop in more than a decade – despite higher gold prices.”
As per the analysis, sales volume would plunge because of curtailed discretionary spending following the Covid-19 pandemic, stores remaining shut for most of the first quarter, and intermittent lockdowns in some states in the second quarter.
“Overall revenue would drop an average 20-25 per cent this fiscal,” the analysis said.
However, the analysis said that operating profitability will see only a limited decline of 100-150 basis points to 4.2-4.7 per cent for reasons such as operating leverage is currently low with fixed costs accounting for less than 10 per cent of the total costs.
Besides, industry players are undertaking cost-optimisation measures, including renegotiating rentals, curtailing employee costs, and reducing promotional expenses.
In addition, surge in gold prices affords room to run tactical promotions such as lower jewellery making charges to prop up revenues without significantly impacting margins.