Aggressive promotional schemes and opening of new stores will help domestic organised jewellery retailers maintain growth of 10-11% over fiscals 2020 to 2022, largely comparable with 11.9% seen between fiscals 2016 and 2019.

This is based on an analysis of 50 CRISIL-rated jewellery retailers, which together account for about half of the revenues of the organised jewellery retail market in India.

There were three drivers to revenue growth between fiscals 2016 and 2019: increase in gold prices; a near-doubling of the promotional schemes period from 70-80 days to 150-170 days; and, store additions of ~33%.

Organised retailers were also able to gain more customers from the unorganised segment because of increased preference for branded jewellery.

In the three fiscals through 2022, revenue growth will continue to be supported by longer-duration promotional schemes and fresh store additions (although these will be at a slower pace of ~17%).

Operating profitability is expected to remain stable at ~5%, despite the aggressive promotional schemes and new store openings.

“Favourable product mix towards high-margin categories – diamond and diamond-studded jewellery – has supported operating profitability of late,” said Subodh Rai, Senior Director, Ratings, CRISIL Ltd. “Going forward, the proportion of high-margin products in sales is expected to increase by 200-300 basis points, which would lead to stable profitability.”

Meanwhile, financial leverage of CRISIL-rated jewellery retailers has been improving steadily over the past three fiscals, with total outside liabilities to tangible net worth (TOL/TNW) ratio at 1.2 times for fiscal 2019 compared with 1.7 times in fiscal 2016, because of sharp focus on in-store efficiencies and reduced inventories. Inventory levels improved to ~110 days at the end of fiscal 2019 compared with 120 days at the end of fiscal 2016.

However, bank credit to the gems & jewellery industry contracted by 5% in this period as lending restrictions were imposed on certain public sector banks that were put under the Prompt Corrective Action of the Reserve Bank of India. Gold jewellery retailers responded by tightening their inventory cycle. Sharp focus on working capital management should continue over the medium term.

“Since bank credit to the sector remains constrained, new store additions by organised jewellery retailers will be largely funded through internal accruals,” said Mohit Makhija, Director, CRISIL Ltd. “As a result, the financial profiles of organised jewellery retailers are expected to improve over the medium term with TOL/TNW ratio seen below 1.1 times. The credit profiles of most retailers is expected to remain stable over the medium-term because of sustained demand and stable leverage.”