Jewellery stocks plunge on growth, profitability woes

Shares of jewellery companies correctly sharply on the stock exchanges on Monday, apparently on concerns of falling volumes in the second quarter coupled with the impact on their financing costs in view of recent RBI notification.

On the BSE, shares of Gitanjali Gems fell 19.99 per cent to close at Rs 405.35, while the PC Jeweller stock touched its 52-week low of Rs 84.55 in intraday trading but recovered later to close at Rs 89.35, down 8.55 per cent from its previous close.

Mumbai-based Tribhovandas Bhimji Zaveri (TBZ) saw a fall of 6.88 per cent in its shares and closed at Rs 181.95 on the BSE. Titan stock declined 0.47 per cent to Rs 221.80 on Monday. However, it had fallen sharply since June 3 when it closed at Rs 289.6.  
Analysts attributed the fall to concerns on topline growth in view of the forecast that volume growth in the second quarter would be down by almost half.

Fund Manager, PMS at financial services firm Angel Broking, Phani Sekhar said, “Softening of gold prices is not good for these companies, because their business is a function of high prices. So, it is not surprising that these stocks have fallen sharply.

Another analyst, AVP at Religare Securities, Vikas Inder Jain said that the working capital requirements will be impacted for some of these companies.

“It will increase, pushing the debt equity ratio higher from the current levels by 0.5-0.8 per cent. This in turn will dent the return on equity and capital employed, and there valuations.”

Some of these companies, which had announced expansion plans before the plunge in gold prices and subsequent RBI curbs caught them offguard, could be in a tight spot, said Sekhar. “They have made investments into it and would find it extremely difficult to reverse, in view of the recent developments.”

PC Jeweller said that expansion plans are indeed on course. The president-finance of the New Delhi-based company, Sanjeev Bhatia said, “There is no change in our plans and we are going to open 14 stores this fiscal.” It opened six stores in the first quarter. Its investment in the seven stores slated to open in the second quarter is about Rs 225 crore.

Companies, like PC Jeweller that lease gold won't be affected by the RBI notification on gold imports through consignment basis, Bhatia said.

In the wake of the unprecedented fall in prices in April this year, the director-corporate ratings at India Ratings and Research, Deep N Mukherjee had said: “The price of leased gold is open-ended and the cost of gold is fixed at the time of sale of gold or jewellery to the customer. This enables retail jewellers to lower inventory risk.”