Organised jewellery retailers in India are expected to continue outpacing the industry over the medium term, owing to industry tailwinds such as an accelerated shift in market demand from unorganised retailers and planned expansion of retail presence to capitalise on the tailwinds, according to credit rating agency ICRA.
In its most recent research report, the rating agency forecasts revenue growth of 20 per cent year-on-year (YoY) in Financial Year 23 (FY23) for its sample set of 15 major organised jewellers (revenue growth of 28 per cent in FY2022), compared to industry growth of 15 per cent YoY in FY23.
Despite likely moderation in margins and partially debt-funded store expansions, the sample set’s debt protection metrics and liquidity position are expected to remain comfortable, supported by higher earnings on the back of improved scale of operations. The outlook for the industry is stable.
Demand growth in the second half of FY23 is expected to be muted due to a high base from pent-up demand in quarter three (Q3) FY22. While the current festive and wedding season is seeing healthy demand, the evolving domestic inflation scenario, slow rural economic recovery, and soft consumer sentiments continue to be the main demand constraints.
“The industry growth is likely to moderate to 5 per cent YoY in FY24 due to the high base of FY23, coupled with an evolving macroeconomic scenario,” said Kaushik Das, vice president and co-group head at ICRA.
“However, revenue of organised jewellery retailers is likely to grow at a much faster rate of 10 per cent YoY in FY24, supported by an accelerated shift in market share to the organised sector driven by tightening regulations, a shift in consumer preferences toward branded jewellery, and planned expansion of organised jewellers into tier 2 and tier 3 cities,” he added.
While ICRA expects organised players’ operating margins to contract by 100 basis points (bps) in Future Value (FV) of 2023 and 40-50 basis point (bps) in FY24, the margin is expected to sustain at 7 per cent levels in the medium term.
Margin moderation follows the normalisation of gross margins, which remained elevated in FY20-FY22 due to inventory gains and firm operating costs due to store expansion and advertising.
Despite the expected increase in debt levels to fund store expansions, debt protection metrics for the larger players are expected to remain comfortable, as evidenced by estimated interest coverage of more than 4.5 times and total outside liabilities to tangible net worth ratio of less than 1.5 times over the next 12-18 months, compared to 5.4 times and 1.4 times in FY22.
“Most organised jewellers have recommenced expansion with a focus on capturing the untapped market in tier 2 and tier 3 cities in H1 FY2023,” said Vipin Jindal, assistant vice president and sector head at ICRA, adding “The total store count of ICRA’s sample set is expected to rise by 10 per cent in the next 12-18 months, translating into market share gains and economies of scale.”
