Outlook on gold jewellery retail industry

OUTLOOK ON GOLD JEWELLERY RETAILING INDUSTRY
India’s Affair for Gold Jewellery Would Continue to Remain
India’s Largest Credit Rating Consultancy Firm
Prepared by
Mr. Bhavesh Shah: Director |FinMen Advisors Private Limited
bhavesh.shah@finmen.in | www.finmen.in
October 2016

OUTLOOK ON
India’s Affair for
Mumbai | Pune | Nagpur |
A) India is the second-largest market for gold jewellery, which has a complex and
central role in the country’s culture
India is the second-largest market for gold jewellery, which has a complex and central role in the
country’s cultures. In India, gold jewellery is a store of value, a symbol of wealth and status and a
fundamental part of many rituals. In the country’s rural population, a deep affinity for gold goes hand in
hand with practical considerations of the portability and security of
This, in part, explains how India’s appetite for gold defies market
the rupee gold price over the last decade, gold demand from Indian consumers continues to grow.
Gold is considered to be auspicious and across the country, regional festivals are celebrated with gold
 In South India: Akshaya
 In East India: Dura Puja
 In West India: GudiPavda
 In East India: Baisakhi and Karva
Gold is central to more personal life events too. Gifting gold is a deeply ingrained part of marriage rituals
in Indian society—weddings generate approximately 50 per cent of annual gold demand. Families begin
saving soon after the birth of a girl, and the ‘Stridhan’, or gift of gold to the bride, gives her financial
security once she is married.
B) Indian gold jewellery demand
and it has been the third highest year on record
in Indian society—weddings generate approximately 50 per cent of annual gold demand. Families begin
security once she is married.
Chart 1: India’s demand for gold
Source: Gold Council
Nagpur |Delhi |Bangalore |Kolkata | Hyderabad| Chennai |Ahme
largest market for gold jewellery, which has a complex and
role in the country’s culture.
largest market for gold jewellery, which has a complex and central role in the
ny rituals. In the country’s rural population, a deep affinity for gold goes hand in
hand with practical considerations of the portability and security of gold jewellery as an investment.
This, in part, explains how India’s appetite for gold defies market conditions
Tritiya, Pongal, Onam and Ugadi
In West India: GudiPavda
In East India: Baisakhi and Karva Chauth
weddings generate approximately 50 per cent of annual gold demand. Families begin
jewellery demand reached its highest level in CY 2015 since 2010,
and it has been the third highest year on record as can be seen in the below chart
ld jewellery (Tonnes on LHS and Rs./10 g on RHS)
JEWELLERY RETAILING INDUSTRY
Jewellery Would Continue to Remain
2
| Hyderabad| Chennai |Ahmedabad
largest market for gold jewellery, which has a complex and
largest market for gold jewellery, which has a complex and central role in the
ny rituals. In the country’s rural population, a deep affinity for gold goes hand in
jewellery as an investment.
- despite a 400% rise in
reached its highest level in CY 2015 since 2010,
as can be seen in the below chart

3
Mumbai | Pune | Nagpur |Delhi |Bangalore |Kolkata | Hyderabad| Chennai |Ahmedabad
C) While the gold jewellery demand for H1 CY 2016 was the lowest since 2009 at
186.3 tonnes as compared to 279 tonnes in H1 CY 2015 resulting in a de-growth
of 32% (a 23% de-growth can be attributed to the nation-wide strike by jewellery
retailers for 42 days in H1 CY 2016)…
The national strike by jewellery retailers (to oppose the excise duty of 1 per cent on gold jewellery
announced on 29-Feb-2016 budget) which had closed the market for six weeks: the strike was from 2-
Mar-2016 to 13-Apr-2016: 42 days which accounts for 23% of days in H1 CY 2016.The large national
and regional jewellery retailers did not oppose the implementation of the excise duty. But smaller,
independent and family-based retailers, who prefer to use cash-based transactions, were opposed to
the duty and the additional administrative and financial burden it creates. The striking jewellery retailers
lost on new business and also faced tough time retaining artisans and paying rent for their
establishments. The government refused to give in to any demands before the strike was called off.
Post the strike, there was no relief rally. Consumers were unprepared for the huge jump in gold prices
when the market re-opened. Despite the discount, domestic prices pushed their way up to – and above
– Rs30,000/10g, a significant psychological barrier for Indian consumers and the highest domestic price
for more than two and a half years. Consumers were not only put off by the high cost, but also by the
belief that such a price level would prove only temporary. Aside from essential purchasing and gifting
around Akshaya Tritiya, demand was largely put on hold awaiting lower prices as a buying opportunity.
…However, the worst seems to be behind. The demand for gold jewellery in India is expected to pick
up significantly over the next four quarters on account of
1) Rollout of 7th
Pay Commission in major cities
The 7th
Pay Commission rollouts are expected to start from November 2016. The ~3mn Central
government employees will get arrears for January 2016 to September 2016 (as per revised rates) in
November 2016. As the money flow in the hands of consumers coincides with beginning of festive
season in India, Finmen expects healthy demand for gold jewellery.
2) Higher number of wedding days in H2 2016-17 as compared to H2 FY 2015-16
This would lead to higher demand for gold wedding-jewellery in H2 2016-17, and will boost revenues of
the entire gold jewellery sector.
Chart 2: Auspicious wedding days
Wedding days 2015-16 2016-17 2017-18
Q1 22 9 26
Q2 0 0 1
H1 22 9 27
Q3 9 15 6
Q4 23 22 7
H2 32 37 13
Total 54 46 40
Source:http://www.drikpanchang.com/shubh-dates/shubh-marriage-dates-with-
muhurat.html?year=2016

4
3) Higher gold prices lead to better revenue growth and margins
Gold saw a gain of 17% from the start of the current calendar year – Gold prices went up from Rs.2,302
per gm on 4-Jan-2016 to Rs.2,720 on 20-Oct-2016. This has been driven by uncertainty in US economy,
Fed were holding off hiking interest rate and with Brexit, slowdown in Europe became apparent. Also
Japan and Europe opted for negative interest rate which boosted the appeal for gold.
Chart 3: Gold price in INR per kg on LHS and INR per ounce on RHS
Source: http://goldprice.org/gold-price-chart.html
Outlook on gold prices: To stay range-bound at the current levels
Helping foster gold’s rally during 2016 has been relief that expected rate tightening by the Fed at the
start of the year has not materialised. Still, the gold market is on high alert for a December shift from the
US central bank — and whether that could presage further increases. That could be bad for gold as it
makes other yield-bearing assets more attractive. Many, however, do not believe the Fed will be able to
raise interest rates aggressively next year, given an uncertain economic outlook in Europe and China and
a new president in the US. Higher gold prices will be crucial for growth of gold jewellery sector as it leads
to price-led growth and also results in higher profit margins.
4) Union budget 2016 has been favourable for rural India, which would augment rural
demand for gold jewellery

5
D) Regulatory changes to result in an increase in market share of organized gold
jewellery retailers
Key regulatory changes that will help drive growth ahead are
o Imposition of 1% excise duty on gold jewellery
o Mandatory hallmarking of gold jewellery
o Implementation of PAN card on transactions above Rs 2 lakhs
Finmen believes that these will result in curbing illegal trade practices. As the unorganized gold jewellery
retailers will be required to hallmark all gold jewellery, it will increase their costs. Imposition of 1%
excise duty will force unorganized gold jewellery retailers to maintain books of accounts as well as
inventory details. Since the government’s intention is to keep track of unaccounted money and curb
illegal trade practices, stricter implementation of the above-mentioned rules will result in higher growth
for organized gold jewellery retailers.
E) Adoption of gold-on-lease scheme by gold jewellery retailers to act as a hedge
against volatile gold prices and also reduce the interest cost for the players.
What is gold-on-lease scheme?
Jewellers use gold as raw material to produce jewellery. They can either purchase this gold from banks
on loan or lease it. If they buy, the gold sits as inventory on their balance sheets. However, more and
more gold jewellery retailers now prefer to lease the gold from banks. A gold jewellery retailer usually
leases gold from banks for a period of 180 days. A spot rate that varies daily is applied on the amount of
gold they use each day. Then the gold jewellery retailer settles with the banks at the end of six months.
Any daily unused gold is hedged for a few days so any currency fluctuation risk is minimized or
eliminated.
Benefits of gold-on-lease scheme
 Hedging mechanism: This scheme acts as a hedging mechanism against fluctuating gold rates.
Since rates are determined daily as the gold is used, gold jewellery retailers do not have risk of
buying larger amounts of gold and the price varying till it is sold. Here, gold is paid for each day
as it is used.
 No Inventory Risks: If gold is bought, the gold jewellery retailers’ inventory is valued on the
constantly changing purchase prices. However, in case of gold on lease, no inventory loss or gain
occurs
 Lower financial expenses: Lease interest rates are normally in the range of 6% to 8% range. This
is much lower than the 12-13% that banks charge on cash credit facilities.

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About FinMen Advisors Private Limited
Founded in 2010, FinMen Advisors pioneered in credit rating consultancy and remains the largest credit
rating consultant till date with a Pan-India presence. The company has successfully consulted more than
800 companies to get the deserved credit rating of debt instruments like Bank loan, structured products
like NCD, Commercial Paper etc. FinMen also assists in SME rating and IPO grading.
FinMen has a dedicated team of experts with specialized knowledge for handholding clients throughout
the rating process. The team consists of professionals with experience from leading rating agencies like
CRISIL, CARE, India Ratings, and Brickwork Ratings.
What differentiates Finmen Advisors from the rest
 Pioneer in the credit rating consultancy space: Manish Jain, with his profound experience in
credit rating with CRISIL, grabbed this opportunity to launch FinMen in 2010. With proficiency in
his domain the young entrepreneur has started this exclusive service providing credit rating and
risk management solutions.
 Pan India presence: We are headquartered in Mumbai and having its branch offices across other
cities at Bangalore, Hyderabad, Ahmedabad, Delhi, Kolkata, Nagpur, Raipur, Pune and Chennai
 Client Servicing: FinMen has worked with 800+ clients. This has further helped the team to
acquire valuable intelligence on approach, perspectives, assessment models and logic used by
multiple credit rating agencies across multiple sectors. With deep insights into credit rating pre-
requisites, parameters and overall process, combined with in-house expertise adds an enduring
strength to clients' credit standing.
 Expertise: Getting credit rating is time consuming and critical exercise in which FinMen experts
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it effectively. With the dedicated team of experts belongs from ex-rating agencies or big
financial institutions, proved to be an important asset in the growth.

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