Despite the steep fall in gold prices and the resultant fall in realisations, retail jewellers are likely to sustain the ongoing demand recovery into the next fiscal with a 30-35% spike in demand, according to a report. There was strong demand recovery in the third quarter of FY21 due to the festive season, pent-up wedding demand, and a 10% correction in gold prices during festival period from its peak in last August, said India Ratings in a report on Thursday, revising the sectoral outlook to stable from stable-to-negative.
With economic activities reaching pre-pandemic levels, the agency expects the momentum to continue into FY22, backed by a softening of gold prices.
The agency expects the jewellery demand to grow 30-35% in FY22 over FY21, primarily because of a low base and rising demand. But the overall sectoral demand will be only be 5-10% above FY20 as the recovery in FY22 will be V-shaped.
During the first three quarters of FY21, the overall operating margins of the top jewellers put together expanded to 7.7% against 5.9% in FY20 because of improved realisation, and a reduction in selling and promotional expenses, among others.
Though price realisation gains may not continue in FY22, lower operating leverage and improved efficiencies in terms of lower marking expenses and lower rentals are likely to support margins, which is expected to be 25-50 bps above FY20 levels.
Most companies have deferred new showroom launches to FY23 and are consolidating their less profitable showrooms. The sector is likely to deleverage in FY22, backed by a revival in demand and no significant showroom launches.
On the upward revision in the sectoral outlook to stable for FY22, it said, although there have been no rating upgrades in FY21 till date, about 11% of the ratings have been put on a positive outlook in view of a sharper-than-anticipated recovery, adequate liquidity buffers and margins supported by high realisations. There were no downgrades of any big players in FY21.