Jewellery demand to contract in Q2 and Q3; FY2023 growth seen at ~10% YoY: ICRA

ICRA Research, in its recent research report, estimates jewellery demand in India to contract in Q2 and Q3 of FY2023 on the back of tepid demand conditions due to factors including the recent hike in import duty on gold, high volatility in prices and lower disposable incomes in the hands of the consumers due to inflationary pressures. While demand is likely to contract by ~8% YoY in Q2 FY2023, the contraction is expected to be higher at ~15% in Q3 FY2022 due to the extraordinarily high base of Q3 FY2022, following the post-pandemic reopening of the economy and the substantially high demand in the wedding and festive seasons in FY2022. Nonetheless, overall industry is expected to grow by a moderate ~10% YoY in FY2023 on the back of strong performance in Q1 FY2023 and steady demand in wedding and festive season in the current fiscal. Within the jewellery retail industry, the revenue of organised retailers is likely to grow at a higher pace of ~14% YoY in FY2023, driven by continued store expansions and increasing share of organised retailers.

Elaborating on the short-term demand contraction, Mr. Jayanta Roy, Senior Vice President and Group Head, ICRA said: “In addition to the aforementioned factors, an increase in other discretionary spending on things like travel due to lower restrictions and a likely reduction in the share of jewellery purchases in overall wedding expenditure, which was higher last year due to restrictions around gatherings, are also factors that can affect demand. Rural demand for gold is also likely to be impacted by uncertain monsoons in the current year and higher interest rates on agricultural loans which could dent disposable incomes.”

The jewellery retail sector is estimated to have grown by a robust ~88% YoY in Q1 FY2023, higher than ICRA’s earlier expectations of 45% growth, driven by the strong demand during the Akshaya Tritiya season and continued momentum in wedding purchases. This strong growth comes on a relatively low base of Q1 FY2022. The industry consumption surpassed pre-pandemic levels in Q1 FY2023, given the sharp recovery following the pandemic-induced disruptions witnessed during Q1 of the last two fiscals. Banking on the robust growth in Q1, demand in FY2023 is likely to be ~30% higher than the pre-Covid levels seen in FY2020.

Upon considering a sample of 14 major organised retailers, the estimated revenue growth for these organised players is expected to be healthy at ~14% YoY in FY2023, higher than the expected industry growth of ~10% YoY, driven primarily by anticipated store expansions and a gradual shift from the unorganised segment to the organised players. Post the healthy levels of operating profitability seen in FY2021 and FY2022 on the back of inventory gains, profitability in FY2023 is estimated to witness some moderation because of an increase in operating costs. Nevertheless, margins of organised retailers are likely to remain higher than the average levels seen over the last decade and are expected to stabilise at around 7-7.5% over the medium term.

Adds Mr. Kaushik Das, Vice President and Co-Group Head, ICRA, “With the stable jewellery demand witnessed in the recent past, organised players had re-initiated their expansion plans in FY2022. The pace of addition is likely to gain further momentum in the coming quarters, with the total store count for ICRA’s sample set of 14 major organised retailers likely to increase by more than 10% in the next 12 months. Despite the expected increase in debt levels to fuel store expansions, the debt protection metrics for the larger market players is expected to remain comfortable, as reflected by an estimated interest coverage of 4.8 times expected in FY2023 (against an estimated 5.0 times in FY2022). Similarly, total outside liabilities to tangible net worth is expected to be at a comfortable 1.4 times in FY2023, in line with that estimated for FY2022.”

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