Mumbai: Jewellery retailers are likely to maintain their revenue growth momentum due to rise in gold prices and additional sales from new outlets, according to a report by ratings agency Crisil.
Retailers are expected to continue expanding their footprint in newer geographies to drive growth, which will help them in braving the current economic slowdown," it said.
Consequently, it said, the credit risk profiles of jewellery retailers are expected to remain stable over the medium-term.
Gold jewellery retailers, which account for a fifth of India's jewellery retailing business, have outperformed the industry, reporting a compound annual growth rate of 15 percent in sales volumes over the three years through 2011-12.
A significant share of the sales growth has come from new stores. Growth in volumes at existing stores, however, has remained muted because of intense competition, compelling retailers to explore new markets.
Tier-II and III towns have emerged as the new growth drivers for retailers as the smaller centres benefit from shifting customer preference towards branded jewellery and low penetration of organised retailing, Crisil said.
The retailers are expected to expand over the medium term, with two of every three new stores coming up in the smaller towns.
Revenues from Tier-II and III towns are, therefore, expected to contribute around 55 percent of the retailers' revenue in 2013-14, up from around 45 percent in 2010-11, it said. Retailers expanding to smaller centres benefit from lower operating costs than in metros and Tier-I centres.
"Smaller showrooms and lower rentals will help retailers save around 25 percent on operating costs. The favourable demand and cost structures in the smaller towns will help them attain early break-even and maintain profitability," Crisil Senior Director (Bank Loan Ratings) Subodh Rai said.
However, new stores will necessitate significant investment in working capital for gold jewellery inventories.
The high price of gold may raise retailers' average inventory costs and weaken their ability to absorb any steep fall in gold prices.
The margin between the average inventory value and gold price has narrowed by 50 percent and retailers whose gold inventory was previously valued at 20 percent lower than the market price have witnessed the gap contract to 10 to 12 percent over the past year, owing to the large expansions, Crisil said.
However, prudent inventory hedging strategies and successful scale-up at the new stores should help retailers maintain operating margins at 6 to 7 percent as in the past.
"Retailers who sustain their sales growth momentum and maintain a healthy capital structure and adequate buffer in inventory holding price, are likely to witness improvement in their credit risk profiles over the medium term," Crisil Director (Bank Loan Ratings) R Vasudevan added.