outlook 2013: indian gems & jewellery - india ratingsoutlook 2013: indian gems & jewellery...

Corporates

www.indiaratings.co.in 20 February 2013

Natural Resources

Outlook 2013: Indian Gems & Jewellery Demand Stabilisation Supports Exporters, Expansion to Pressure Retailers

Outlook Report

Rating Outlook

Different Markets, Different Outlooks: India Ratings has a Stable Outlook for gems &

jewellery (G&J) exporters and Stable to Negative Outlook for domestic G&J retailers for 2013.

While exporters are likely to report better revenue growth (median) in 2013, their margins may

be comparable to 2012. Domestic retailers are likely to report lower revenue growth (with a

possible volume decline) along with marginally lower margins than in 2012. Retailers resorting

to aggressive store additions may be worst affected.

Ratings Reflect Inherent Risk: India Ratings has already captured the inherent risks in the

sector in its current outstanding ratings in the G&J portfolio. The agency rates nine issuers in

the segment, of which only two companies have investment grade ratings (both domestic

retailers). To the extent the ratings reflect the risks; all the ratings are at a Stable Outlook.

Export Slippage May Stop: India Ratings expects overall G&J revenue (in USD) growth to be

in the range of 4% to 9% yoy in 2013. Economic activity in major export markets such as Hong

Kong, UAE and Singapore is likely to show a relative improvement over 2012, supporting

growth of finished products. US demand is expected to remain steady. However, the overall

G&J export volumes are unlikely to reach the 2011 levels.

Exporters May Stabilise at Low Level: With expected revenue growth and on-going tight cost

control measures, the credit profile of exporters may stabilise at the current low levels.

Established exporters with muted revenue growth (5% to 15%) but stable margins may exhibit

better credit profiles, within this sub-sector. However, some exporters have exhibited

aggressive revenue growth (upwards of 20%) in FY13 till date, often at the cost of deterioration

in margins. The credit profile of such aggressive exporters is likely to deteriorate.

Volumes Fall in Domestic Jewellery: The portion of demand from domestic retailers catering

to investment needs of customers may gradually dwindle over a period of time. Jewellery

volumes declined by 5.2% over during January-December 2012 after a decline of 11.4% in

2011. However, investments in gold exchange traded funds (ETF) increased 23.9% yoy in

2012. India Ratings estimates that domestic G&J retailers’ revenue may grow in the range of

15%-25% in 2013 (2012: around 40%) with operating margins declining by 75-100bps yoy.

Expansion Pressures Credit Profile: Given the trends in domestic consumption and higher

inventory requirement for store expansion, domestic retailers may experience a marginal

deterioration in their credit profile. Particularly, the credit profile of retailers undergoing

aggressive store expansion will be impacted while others may broadly maintain their credit

profile.

What Could Change the Outlook

Global Recovery: While a slow and steady global recovery is likely, any economic or

geopolitical event reversing the global recovery process would severely affect the weak credit

profile of most G&J exporters. Given mixed signals from US consumers’ discretionary

purchase, a change in the Outlook of G&J exporters to Positive in unlikely.

Rating Outlooks

Exporters

S T A B L E

Retailers

S T A B L E T O

N E G A T I V E

Related Research

Indian Gems and Jewellery: Suppressed but Stable Margins (9 May 2012)

Other Outlooks www.indiaratings.co.in/Outlook2013

Analysts

Giribala Shah

Deep N. Mukherjee

+91 22 4000 1721

[email protected]

Prakash Choraria

+91 33 4006 5887

prakash.choraria@ indiaratings.co.in

Corporates

Outlook 2013: Indian Gems & Jewellery

February 2013 2

Further Deterioration in Domestic Consumption: The Outlook on domestic jewellery

retailers could be revised to Negative if gold prices increase further, which could impact

demand for both cosmetic and investment purposes. A Positive Outlook may result from a

favourable policy environment, continued stability in gold prices and a continuous improvement

in sales volume.

Exporters

Key Issues

Export Slippage May Stop: The demand of G&J from major markets such as Hong Kong,

UAE and Singapore may show a marginal improvement in 2013 as the economic activity of

these countries is likely to improve slightly. These markets experienced recessionary conditions

in 2012. (Please refer to Annex 3)

India Ratings expects overall G&J growth to be in the range of 4% to 9% yoy as volumes will

remain well below the 2011 levels. The growth of finished products is likely to be driven by the

likely improvement in major export markets.

Jewellery exports to the US may show muted growth in 2013. While disposable income in the

country has been steadily increasing, any stringent tax policy or reduction in government

spending may adversely impact discretionary spending particularly on expensive items such as

jewellery

Jewellery sales growth in the US has been muted in recent months. However, the US

consumer confidence index (Annex 2) remaining well above 60 suggests that the G&J export

volumes to the US would at least be maintained at the 2012 levels.

Related Criteria Corporate Rating Methodology (September 2012)

Figure 2

Figure 1

Figure 3

Figure 4

Corporates


February 2013 3

Credit Profile: Exporters

EBITDA Stabilisation at Low Level

India Ratings expects the credit profile of CPD exporters to remain at levels similar to FY12.

This is because of the likely stabilisation of EBITDA margins at the current low levels for 2013

on account of the cost control measures adopted by the companies since 2009.

Five key exporters’ revenue increased in FY12 with an average growth rate of 21.9% yoy. This

was driven by higher polished diamond prices and rupee depreciation. However, the gains

were partially offset by the higher costs of raw material as they are imported.

India Ratings expects muted revenue growth for key exporting companies in 2013 as sales

volume of CPD declined significantly in 2012 (a decline by 45.3% yoy during January –

December 2012).

Operating margins (not considering other income) are also likely to be maintained at the current

low levels in 2013 after stabilising in FY12.

With profitability being maintained at the low levels, interest coverage for CPD manufacturers in

FY13 is likely to remain at the FY12 level (2.8x), which was similar to the FY11 levels (2.9x).

Figure 5

Figure 6

Corporates


February 2013 4

High Other Income May Spell Trouble India Ratings is concerned about the high proportion of other income of jewellery exporters as it

forms a considerable portion of their profit before taxes (PBT). It primarily consists of interest

income earned against fixed deposits placed for buyer’s credit and/or margin money for its

working capital requirements as well income from trading activities. This is opportunistic trading

activity which may be unrelated to their core jewellery manufacturing function. Such activities

add to the volatility of earnings and thereby increase the credit risk of firms.

On an average, other income comprises around 9%-10% of PBT based on the numbers of the

last six quarters. However, for a few companies other income as a proportion of PBT is over

30%–35%.

Domestic Retailers

Key Issues

Segregation on Investment and Cosmetic Demand: Traditionally, gold jewellery was

purchased for investment as well as cosmetic purposes. However, rising gold prices as well as

easily available gold investment may have somewhat changed this behaviour. During January-

December 2012, demand of gold bars and coins declined 15.8% yoy and jewellery demand

declined 5.2% yoy while investments in gold ETF increased 23.9% yoy in 2012

Consumer Mind-set Drives Revenue: Indian consumers when purchasing jewellery for

cosmetic purpose focus more on its value than volume. This is reflected in the revenue growth

of 43% yoy in 2012, supported by price increases, despite an 11.9% yoy decline in demand for

gold jewellery. However, given the deteriorating trend of household balance sheet and historic

low levels of Private Final Consumption Expenditure (PFCE), revenue growth in 2013 is likely

to be much lower (15% to 25%) than that in 2012.

Figure 8

Figure 9

Figure 10

Figure 7

Corporates


February 2013 5

Emerging Preference for Branded Jewellery: Major domestic retail jewellers are expanding

in Tier 2 and Tier 3 towns, with some of them financing the expansion by equity capital raised

from initial public offerings. In the medium to long term, branded retail jewellers may benefit

from such expansion at the expense of small players. An observable trend is smaller players

becoming franchisees of the more established brands.

Retailers Burden - Inventory: Inventory requirement for retailers is high (around four months’

requirements) as retail outlets require a certain minimum inventory level. The seasonality

inherent in the jewellery business requires additional inventory to be held during peak periods

such as weddings and festivals. New showrooms would require higher inventory levels initially,

which would necessitate high working capital borrowings.

The working capital days for such players have shown a consistent increase since 2009 and

the trend is likely to continue in 2013. However, at least some of the stores (particularly in tier 2

and Tier 3 cities) opened by branded players follow the franchisee model. In certain cases, the

franchisee is required to purchase its inventory requirement from the retailer on a cash basis

and/or lower credit period. This enables the retailer to lower their inventory cycle and thus

working capital borrowings. However, given the deteriorating private consumption, the overall

benefit will be limited.

Companies Existing Stores Location

Gitanjali Gems Ltd 1,100

In H1FY13, 14 owned retail stores and 36 shop‐in shops and 31 franchisees were opened. The franchisees were opened in tier I & II towns such as Kurnool, Jharsuguda, Angul, etc.

Tara Jewels Ltd 30 Six stores in Mumbai and another 24 in 18 cities

Shree Ganesh Jewellery House Ltd 46

Mumbai (Maharashtra), Kolkata (West Bengal), Ludhiana (Punjab), Rajkot (Rajasthan) and Ghaziabad (Uttar Pradesh)

Tribhovandas Bhimji Zaveri 14 Across 10 cities in 5 states

Titan Industries

Tanishq (Includes Zoya) 145 83 towns

GoldPlus (Titan) 31 31 towns

B C Sen 5 Kolkata, Gurgaon

Chandukaka Saraf and Sons 7 Baramati, Pune, Chinchwad Ahmednagar, Sangola & Karmala

Arena Lifestyle Pvt. Ltd. 3 Bombay

Karan Kothari Jewellers Ltd. 3 Nagpur

Tribhovandas Bhimji Zaveri – Delhi 1 Delhi

Source: Company Reports, India Ratings

Figure 11

Figure 12

Figure 13

Corporates


February 2013 6

Credit Profile: Domestic Jewellery Retailers

Margins May Moderate The sector’s margins may reduce by 50 to 75bp yoy in 2013, after ranging between 5%-8% for

the past three years. Domestic retailers on the store expansion spree may experience an

increase in operating costs without a commensurate increase in revenue (at least initially).

Domestic jewellery manufacturers are generally able to pass on increases in gold prices to

retail customers which support their operating margins. However, sharp increases and volatility

in commodity costs result in a time lag before being fully reflected in retail prices. Any further

increase in gold prices would lead to the deferment of jewellery purchases and thus companies

would face lower sales. Several jewellers are trying to attract customers by providing discounts

on making charges of jewellery.

Liquidity Profile Liquidity is likely to remain stretched for both the non-diamond trading company (DTC) sight

holders and jewellers planning retail expansion in 2013. Inventory levels are likely to increase

moderately in 2013 on account of slowing sales and new store openings that would keep the

inventory requirements high during the year.

Overall, working capital cycle increased in FY12 to 138 days (FY11: 125 days) as inventory

levels were higher than that in the previous year (FY12: 133 days; FY11: 128 days on an

aggregated basis) which is in line with the increase in revenue. Although retailers tried to

reduce inventory level by offering higher discounts, suppliers lowered their credit period for

jewellers.

Figure 14

Figure 15

Corporates


February 2013 7

India-Ratings Rated G&J Companies: Corporate Profiles

Chandukaka Saraf and Sons ('IND BBB'/ Stable) is a domestic jewellery retailer. It achieved

revenue of INR7,706.8m in FY12 (FY11: INR5708.4m), with stable EBIDTA margins in the

range of 4.9%-5.6% since FY10 due to the company's ability to pass on increases in gold

prices to its consumers. Financial leverage (net debt/EBITDA) remained low between 0.5x-

1.15x and interest coverage was in a comfortable range of 5.8x-13.1x during FY10-FY12.

Revenue may be impacted by the on-going pressure in consumer spending and upward trend

in gold prices. The company has an obligation of paying 4% interest costs for the gold deposits

it accepts from its customers.

BC Sen & Company Limited (‘IND BBB’/Stable) is a domestic jewellery manufacturer. It

achieved revenue of INR1,795m in FY12 (FY11: INR1730.4m), with EBIDTA margins in the

range of 7%-8% since FY09. Financial leverage (net debt/EBITDA) remained low between

1.0x-1.4x with interest coverage was in a comfortable range of 3.8x to 7.17x during FY10-

FY12. Credit profile is likely to remain stable in line with flat domestic demand, but pressure on

margins will come from rising gold prices.

Arena Lifestyle Pvt Ltd (‘IND BB’/Stable) is a jewellery retailer specialising in gold and

diamond jewellery. Revenue declined marginally in FY12 due to low demand resulting from

high gold prices. EBITDA margins were consistently high at around 11%-12% over the three

years ended FY12 because of its ability to pass on price changes to consumers. However,

financial leverage (net adjusted debt/operating EBITDA) increased to 4.1x in FY12 (FY11: 3.4x)

and net interest coverage was low at 2.4x (2.01x) due to higher debt requirements.

Figure 16

Figure 17

Corporates


February 2013 8

Tribhovandas Bhimji Zaveri (Delhi) Pvt Ltd (‘IND BB+’/Stable) is a gold jewellery retailer. It

achieved revenue growth of 25% yoy to INR2,200m in FY12 mainly due to rising gold prices.

Net financial leverage remained moderately high at 4.09x in FY12 though improved from 5.7x

in FY11, as EBITDA margins increased marginally to 4.24% (4%). Net interest coverage

remained low at 2.14x in FY12 (FY11: 2.1x).

Karan Kothari (‘IND BB+’/Stable) is a gold jewellery retailer. It achieved revenue growth of

25% yoy to INR2,200m in FY12 mainly due to rising gold prices. Net financial leverage

remained moderately high at 4.09x in FY12 though improved from 5.7x in FY11, as EBITDA

margins increased marginally to 4.24% (4%). Net interest coverage remained low at 2.14x in

FY12 (FY11: 2.1x).

Mani Exports (‘IND BB-’/Stable) exports polished diamonds. The company has illustrated its

ability to sustain its interest coverage above 2.5x for the two years ended FY12 (year end

March) despite increasing working capital requirements. Operating EBITDA/gross interest

expense was 3.5x in FY12 and 3.4x in FY11 due to stable EBITDA margins of around 5% in

FY11 and FY12. This, along with revenue growth (FY12: INR1,699m, FY11: INR1,245m) on

the back of higher diamond prices and 9% volume growth, led to a significant improvement in

operating profits (INR85m; INR67m). However, its size of operations is still small

Om Anand Exports (‘IND A4’) is a partnership firm, involved in the export of cut and polished

diamonds. It reported revenue of INR573.5m in FY11 (FY10: INR451.2m), operating EBITDA of

INR25.8m (INR13.9m) and interest coverage (operating EBITDA/gross interest expense) of

1.6x (0.95x). The company is faced with a moderate-to-weak liquidity position, characterised by

its almost full utilisation of working-capital limits in FY12. The company has large working-

capital requirements due to high debtor and inventory days.

MK (‘IND A4’) is a partnership concern, and manufactures and exports diamond-studded gold

jewellery. The company’s revenue increased to INR472.5m in FY11 from INR379.62m in FY09.

MK had volatile EBITDA margins of 3% to 6% over FY08-FY11 due to its exposure to volatility

in gold and diamond prices. Its liquidity position is moderate. However, cash flow from

operations is expected to remain negative due to high working-capital requirements.

Jodhani Exports (‘IND A4’) is a partnership firm, involved in the export of cut and polished

diamonds reported revenue of INR1,015.8m in FY11 (FY10: INR846.2m), operating EBITDA of

INR151.7m (INR47.7m) and interest coverage (operating EBITDA/gross interest expense) of

3.9x (3.7x). Its liquidity is stretched as a result of the high working-capital needs arising from a

long credit period offered to clients and the inherently high inventory levels.

MM Group Entities (‘IND BB-’/Stable): India Ratings took a consolidated view of the MM

group while assigning the ratings, given the strong operational linkages among the companies

in the group in terms of the same line of business (manufacturers, wholesalers and retailers of

jewellery), common founders and the fungibility of funds. Mohan Gems & Jewels Private

Limited (MGJ) and Delhi Diamonds Private Limited (DDPL) are rated at 'IND BB-' while M.M.

Jewellers (MMJ) is rated at ‘IND B+'.

The group's liquidity position is stretched as reflected by its fully utilised working capital limits in

FY12, due to its high working capital requirements to maintain a large of inventory of gold.

However, the latter also provides a cushion against financial distress. MMJ's ratings are further

constrained by the partnership nature of the organisation. Provisional results for FY12 (financial

year ending March) indicate consolidated revenue of INR10,028.74m (FY11: INR5,044.22m),

EBITDA margins of 3.74% (FY11: 1.76%), net financial leverage of 4.18x (FY11: 9.6x) and net

interest coverage of 2.29x (FY11: 1.78x).

Corporates


February 2013 9

Annex 1: Gold Demand Trends

Corporates


February 2013 10

Annex 2: US Consumer Confidence Index and Personal Savings

Corporates


February 2013 11

Annex 3: Exports of Gems & Jewellery

Corporates


February 2013 12

ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://WWW.INDIARATINGS.CO.IN/UNDERSTANDINGCREDITRATINGS.JSP IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS’ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.

Copyright © 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings, India Ratings & Research (India Ratings) relies on factual information it receives from issuers and underwriters and from other sources India Ratings believes to be credible. India Ratings conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of India Ratings factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of India Ratings’ ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information India Ratings relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to India Ratings and to the market in offering documents and other reports. In issuing its ratings India Ratings must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed.

The information in this report is provided "as is" without any representation or warranty of any kind. A rating provided by India Ratings is an opinion as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that India Ratings is continuously evaluating and updating. Therefore, ratings are the collective work product of India Ratings and no individual, or group of individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. India Ratings is not engaged in the offer or sale of any security. All India Ratings reports have shared authorship. Individuals identified in a India Ratings report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a rating by India Ratings is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of India Ratings. India Ratings does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. India Ratings receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. The assignment, publication, or dissemination of a rating by India Ratings shall not constitute a consent by India Ratings to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction including India. Due to the relative efficiency of electronic publishing and distribution, India Ratings research may be available to electronic subscribers up to three days earlier than to print subscribers

outlook 2013: indian gems & jewellery - india ratingsoutlook 2013: indian gems & jewellery...

Documents