Tuesday, December 2, 2014

Lower premium and easing of gold supply to help jewellery firms The upside of the stocks hinges upon improvement in consumer demand

Shares of jewellery makers rallied on Monday on expectations that gold supply will improve and the premium will shrink after the Reserve Bank of India (RBI) scrapped the restrictions on gold imports last week.
Lower premium and easing of gold supply to help jewellery firms
RBI has withdrawn the 20:80 scheme which required traders to export 20% of the precious metal they bought overseas. “The gold premium which has already declined to around $10-15 per ounce after RBI allowed select trading houses to import gold in May is expected to normalize to around $3-4 per ounce in the coming days, benefit of which will be passed on to the consumers,” said Subbu Subramaniam, chief financial officer at Titan Co. Ltd. Due to restrictions on supply, registered banks and bullion traders were charging a steep premium of around $100-150 per ounce over international gold prices a year ago, making it expensive for jewellery makers to procure gold.

As supply surges and premiums shrink, gold prices in the domestic market will decline, which could spur demand for the jewellery industry. Prashant Kutty, an analyst at Emkay Global Financial Services Ltd, said in a research note dated 1 December that they expect a 30-40 basis points improvement in Ebitda (earnings before interest, taxes, depreciation and amortization) margin resulting in a 4% positive change in FY16 and FY17 earnings for Titan as the premium shrinks. Smaller jewellery makers will benefit the most as they will not be forced to pay a hefty premium to procure gold.

Jewellery makers can now take full advantage of the gold on lease scheme, without export restrictions which is a positive for their balance sheet because it is a low-cost hedging mechanism, allowing jewellery makers to expand without taking on debt. “We will not have to resort to debt and our interest costs will also come down as we can buy gold on credit for up to 180 days; it is a natural hedge to contain volatility in prices as the selling price is fixed,” added Subramaniam. The stocks of most jewellery firms rallied on Monday, but the upside hinges upon improvement in consumer demand, said analysts.

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