Operating margins of jewellery players maybe affected: Crisil
Mumbai: Operating margins of gold jewellery players are likely to be affected due to sharp fall in gold prices being witnessed during last three days, according to credit ratings agency Crisil.
Gold prices have declined by nearly 12 percent to Rs 25,650 per 10 gm on April 16, 2013, from the highs of Rs 32,500 per 10 gm, during the last eight months.
The fall during the past one week is expected to cause significant inventory losses and impact margins of gold jewellery retailers and exporters in the first quarter of 2013-14, Crisil said in a report here.
Over the past four years, domestic gold prices increased at a compounded annual growth rate (CAGR) of 24 percent. This rising trend in gold prices adversely affected consumption volumes, which grew at a muted pace of 2.5 percent CAGR. On the other hand, investment demand grew at a much faster rate of 10 percent CAGR, during the same period, the report said.
Crisil Research believes that if gold prices sustain at lower levels, consumption volumes could grow at a faster pace. However, volatility in gold prices could limit investment demand in the near term.
The inventory holding period for a domestic gold retailer is close to 120 days, while, for exporters, it is close to 90 days. As inventory holding days are higher for domestic retailers compared to exporters, domestic gold retailers are expected to see a sharper contraction of 150-200 basis points (bps) in their operating margins, compared to gold jewellery exporters, who could see margins decline by 100-150 bps in Q1 2013-14.
Exporters tend to have lower net margins in the 1-2 percent range, given the high interest costs. Hence, the impact on their net profits would be more severe compared to domestic retailers. The impact of the price decline could vary across players, depending on their level of hedging, Crisil said.
Meanwhile, another rating agency India Ratings said any sustained fall in gold prices can significantly impact the asset quality of gold loan portfolios of non-banking finance companies (NBFCs) and banks.
"We believe that falling gold prices, if sustained, can significantly impair the asset quality of the gold loan portfolios of NBFCs and banks," it said in a report here.
As per the report, while the impact of a sharp fall in gold prices in the last few weeks could be absorbed by high profitability, an incremental softening of domestic gold rates will make a larger part of the portfolio vulnerable, impacting companies with large exposure to gold loans.
The rating agency noted that loan to value (LTV) ratios, which are high due to intense competition to gain market share, along with largely bullet repayment structures (both principal and interest paid together) in the industry, leave limited cushion for correction in the value of security.
The report pointed out that south India-based private banks were likely to be impacted more within the banking space due to higher proportion of gold loans in their books.