Indian Gold Jewellery Retail Industry

Transcription

1 Indian Gold Jewellery Retail Industry Proposed launch of Gold Bond Scheme and Gold Monetization Scheme is expected to have a moderately positive effect on reducing gold imports over the medium term; impact on the organized jewellery industry to be marginally positive Special Comment September 2015 ICRA RESEARCH SERVICES ICRA Comments GBS is expected to aid in moderating imports by 3%-5% over the medium term; the impact of GMS is, however, likely to be limited by concerns regarding the modality of the scheme September 2015 ICRA RATING FEATURE Gold imports expected to reduce over the medium term on implementation of proposed schemes: Recently, the Government of India (GoI) approved the implementation of two schemes to tackle the issue of high gold imports. The Gold Bond Scheme (GBS) and the Gold Monetization Scheme (GMS) aim to curb investment demand for gold and also mobilize idle gold lying with households. While we expect the GBS scheme to be relatively successful, the impact of GMS is likely to be limited because of concerns regarding the operating modalities of the scheme. We anticipate that the low interest rate expected to be on offer under the GMS is unlikely to compensate for the loss of jewellery (financial cost) through melting 1 owing to the strong emotional quotient attached. GBS, on the other hand, provides an alternative avenue for channeling investments into the commodity in addition to generating some additional returns as against direct investments into Exchange Traded Fund (ETFs) / gold bars, where returns are linked to price movements alone. ICRA expects that the overall impact of the above schemes on the Indian gold imports to be moderately positive over the medium term, with imports likely to decline by 3%-5% (compared to our earlier estimates) over the next months. The salient features and expected impact of the schemes on the industry are discussed in the subsequent sections. Exhibit 1: Gold Supply Earlier Estimates Current Estimates (Volume in Tonnes) FY14 FY15 FY16 E FY17E FY16 E FY17E Net import ,087 1,122 1,082 1,086 Recycled gold Domestic others Total Supply 854 1,031 1,174 1,208 1,169 1,172 Source: ICRA estimates Key Facts about GBS and GMS Gold Bond Scheme ( GBS ): Under the GBS scheme, customers invest in sovereign guaranteed gold bonds which can effectively replace their investment in physical gold. In return for the investment, customers receive bonds denominated in grams of gold which are linked to gold prices. While the initial investment value would be made at the prevailing gold prices on the date of investment, at redemption the customer would gain / lose contingent upon the price prevailing on the date of redemption. In addition to the redemption of capital, customers will also be entitled to a fixed / floating interest rate (likely to be linked to international gold lease rates) on the initial quantum of investment. As the funds collected under the scheme are likely to be used by the GoI in lieu of Government borrowing, any losses incurred on account of appreciation of gold prices would be adjusted against a gold reserve fund with the proposed collections under the scheme being small, the GoI has not proposed any formal hedging measures. The Gold Reserve Fund is to be created out of interest savings derived by GoI from the low cost funds collected. The issuance of the Sovereign Gold Bonds will be within the government s market borrowing programme, where the actual amount of issuance will be determined by RBI, in consultation with the Ministry of Finance. 1 The proposed form of redemption under GMS is bullion / cash

2 ICRA Comments The salient features of the scheme are: Bonds will be issued on behalf of the GoI by the RBI in various denominations of grams of gold. The bonds would enjoy sovereign guarantee. Investments are restricted to resident Indians with a cap of 500 g per year. The Government will issue bonds with a rate of interest that will be calculated on the value of the gold at the time of investment. The rate could be a floating or a fixed rate, as decided. The price of gold would be taken from a reference rate to be decided by the RBI. This rate will be used for issuance, redemption and disbursement of loans against these bonds as collateral (LTV as per RBI norms). Banks/NBFCs/Post Offices/ National Saving Certificate (NSC) agents and others, as specified, may collect money / redeem bonds on behalf of the government (for a fee) to ensure wider reach. Bonds would be allowed to be traded on exchanges to allow easy exits for investors who may so desire. KYC norms and capital gains tax treatment will be the same as for physical gold/ ETF for an individual investor with Indexation benefits available for long term capital gains. On maturity, the redemption will be in rupee amount only. If the price of gold has fallen from the time that the investment was made, the depositor will be given an option to roll over the bond for three or more years. The tenor of the bond could be for a minimum of 5 to 7 years, so that it would protect investors from medium term volatility in gold prices. Gold Monetization Scheme ( GMS ): The GoI has also approved the launch of a GMS to unlock the economic value of idle household gold (~20,000 tonnes). The scheme proposes to reduce the reliance on imports, by also on-lending the gold collected under the scheme to jewellers through gold metal loans (GML). The mobilized gold will also supplement RBI s gold reserves and will help in reducing the government s borrowing cost. Customers can deposit under three different tenors - a short-term period of 1-3 years (with a roll out in multiples of one year); a mediumterm period of 5-7 years and a long-term period of years (as decided from time to time). While the customer can redeem the short term deposits (principal and interest) in cash or gold, redemption for the other tenors would necessarily be in the form of cash. The short term interest rates would be linked to international gold rates and be denominated in grammage. For the longer tenors, the interest rates would be periodically decided by the GoI in consultation with the RBI, with interest rates being calculated on the initial quantum of investment. Similar to the GBS, the GoI and customers would be exposed to price risks. GoI in turn proposes to manage these risks through the Gold Reserve Fund (created out of savings on interest rate differential between the current borrowing cost and the interest to be paid under the medium / longer tenor schemes). The salient features of the scheme are: Upon depositing gold with the collection centre, a gold savings account is opened after KYC compliance (gold deposit certificates were issued earlier). Customers can deposit a minimum of 30 grams as against 500 grams earlier. Tax exemptions extended under the erstwhile deposit schemes would continue ICRA Limited P a g e 2

3 ICRA Comments Exhibit 3: Process flow for GMS Gold collected under the short term tenor, would be used for minting coins or on-lending to jewellers under the GML; whereas, gold collected under the longer tenors could also be used for auctioning and replenishment of official gold reserves Impact on jewellery industry to be marginally positive: moderate easing of supply chain and lower cost of funds to support organized jewellers, despite anticipated loss of sale from investment related gold demand: GMS to improve accessibility of the metal; likely extension of tenor of gold metal loans to reduce rollover costs and aid ~40bps expansion in PBT margins for organized retailers Impact on overall demand to be moderate ~3%-4%; absolute profit levels to decline impacted by loss of bullion sales; profitability, however, to remain largely intact Access to low cost funding and bullion supply to improve: ICRA expects collections under the GMS to be modest, and sourcing under GMS is expected to reach ~10-15 tonnes (a fraction of the est. 20,000 tonnes of idle household gold) within 2-3 years of launch. The same would primarily benefit organized players who enjoy strong relationships with the banking system, as bulk of the collections under the GMS is expected to be on-lent to jewellers under the Gold Metal Loan (GML) route. Also, the tenor of GML (180 days for domestic retailers) is likely to be re-aligned in line with the minimum lock-in period (one year) of the scheme, which is expected to reduce cost of funds. As per our estimates, we anticipate PBT margins for organized retailers to improve by ~40bps supported by longer tenor GML as rollover costs are reduced. Impact of GBS and GMS on gold demand: It is estimated that the investment demand in India is at ~45% of overall demand which includes the entire bar / coin demand and a portion of jewellery purchased. While the launch of GBS (Q4-FY16E) would have some impact on investment demand (primarily bar / coin demand), GMS is unlikely to register any impact on account of issues discussed above. We anticipate overall gold demand to decline by 3%-4% (as against earlier estimates). For organized retailers, while absolute profit levels could moderate by ~80-100bps owing to loss of bullion / investment related jewellery sales, PBT margins and RoCE are, however, expected to be better by ~30-40bps owing to skew in sales mix towards higher margin jewellery sales. Exhibit 2: Gold Demand Earlier Estimates Current Estimates* (Volume in Tonnes) FY14 FY15 FY16 E FY17E FY16 E FY17E Jewellery demand (tonnes) Bar Total Gold 1,107 1,044 1,027 1,119 1,023 1,083 Source: ICRA estimates; *assuming 2% and 5% of the investment demand to shift towards GBS in Q4-FY16 and FY17, respectively ICRA Limited P a g e 3

4 ICRA Comments Recent trends in Indian Gold jewellery industry: Jewellery volumes in India are expected to be supported in the near term by the impending festive and marriage seasons and also from the renewed thrust on store expansion by organized players given the anticipated improvement in demand supply dynamics. Gold jewellery demand after recording steady performance during the last quarter of the fiscal 2015, moderated during first quarter of the current fiscal (FY2016), owing to a combination of reasons. Unfavorable weather patterns coupled with weak wedding related demand during the recent quarter impacted volumes. Looking back at the performance during fiscal 2015, demand remained stable through the year, barring Q2 FY2015 which recorded surge in volumes supported by wedding and festive seasons and also easing of the supply situation. Exhibit 4: Volume Growth Trends in Indian Gold Jewellery Demand Source: ICRA estimates Over the near term, ICRA expects Exhibit 5: Indian Gold Jewellery Demand Value trends improvement in demand environment - driven by the impending marriage and festive seasons, which in addition to the aggressive store expansion by organized retailers, will drive growth by about 3%. The jewellery industry in India, from an estimated INR 2.2 trillion during , is expected to grow to ~ INR 2.3 trillion over the next two fiscals. Over the long term, gold jewellery demand in India would be supported by cultural underpinnings, evolving lifestyle, growing disposable income, especially in Source: ICRA estimates tier 3 & rural markets which account for a major chunk of the demand and the growing penetration of the organized sector. ICRA expects the domestic gold jewellery industry to record robust growth of ~6-8% over the medium to long term. ICRA Limited P a g e 4

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