Jewellery demand in India during the quarter to end June, primarily driven by the marriage season and a couple of festivals, has been significantly washed out due to the nation-wide lockdown for more than 40 days. The demand for retail jewellery should remain muted in first half (1H) of FY20-21; however, a sharp recovery is expected in third quarter (3Q) of FY2021 due to the festive and wedding season, however, there would be an overall 25% decline in retail jewellery revenues over FY2021, says India Ratings and Research (Ind-Ra).
In a research note, the ratings agency says, "The gold jewellery demand had already slowed down in FY2020 in the tonnage and revenue terms due to the economic slowdown and increased gold prices. The possibility of a recovery of demand in FY2021 has been derailed by the corona virus (COVID-19) led lockdown and the subsequent continued economic slowdown in the country."
Ind-Ra says it has already revised its FY2021 gross domestic product (GDP) growth twice since January 2020 to 1.9%, and a further downward revision is possible if the pandemic continues to evolve. "This can have a prolonged negative impact on gold demand because of the possibility of a further reduction in the overall discretionary spend. The volatility in gold prices is also expected to hurt consumer sentiments," it added.
Even after the lockdown gets lifted gradually across the nation, Ind-Ra says it expects muted demand outlook because of continuation of the social distancing norms, reduced footfalls in stores, and prioritisation of spends towards essentials and low-ticket discretionary items amid a squeeze on income levels.
As per the ratings agency's discussions with various jewellers, the online sales during Akshay Tritiya have been meagre because of the inability to provide delivery during the lockdown and the fact that many customers still prefer to see visit the stores personally.
"Furthermore, lack of festivities and maintenance of social distancing norms will remain a drag in 2Q, which is relatively lean period in a normal year. Currently, jewellery manufacturing happens in high-density workshops and the largest bullion and ornament markets such as Zaveri Bazaar in Mumbai, Chandani Chowk in Delhi and T-Nagar in Chennai are highly congested areas. Also, customer interaction is a necessary part of retail showroom sales. Evolved social distancing norms shall remain a challenge which may restrict operating capacities of various jewellery manufacturers and sales of retailers," the ratings agency says.
Ind-Ra says it believes that the demand in 3QFY21 will be contributed by the pent-up weddings demand and major festival season. As per India meteorological department, monsoon rainfall is likely to be normal (96%-104%). Thus, Ind-Ra says it expects 3Q demand will be supported by a healthy post-harvest demand from the rural region.
The ratings agency expects retail jewellery revenues to increase by around 6% (average for Ind-Ra portfolio estimates) in FY2020 due to an increase in gold prices, offset by around 15% reduction in sales volumes.
It says, "The expected loss of sales in 1HFY2021 due to the lockdown could partially be compensated by pent-up wedding sales in 2HFY2021. The overall revenue in FY2021 shall decline by 25%, due to a reduction in discretionary spending amid a reduction in income due to the ongoing slowdown. However, the business from rural areas and weddings may remain resilient."
"From 4QFY2021, sales are likely to improve due to the base effect and expected normalisation in economic activities. Note that the post-COVID estimates are basis a gradual lifting of lockdown after mid-May 2020. Any further lockdown and prolonged impact of COVID-19 will lead to a further downward revision of estimates," Ind-Ra added.
As per export-import data from Directorate General of Foreign Trade Organisation (DGFT), India's gold imports in first 10 months (10M) of FY2020 stood at 64% and 75% of the imports during FY2019 in volume and Indian rupee terms, respectively.
Ind-Ra says it believes that India’s gold imports are estimated to have dropped by about 27% and 5% in FY2020, due to a drop in consumer demand (jewellery and coin, bars) led by the slowdown in domestic economy as well as about 20% increase in gold prices.
"Note that consumer demand contributes 85%-90% to gold imports. Thus, overall sectoral retail jewellery sales are estimated to have declined in single digits over FY2020. Overall, the estimated growth of 6% in FY2020 revenues of Ind-Ra rated portfolio indicates increasing formalisation of retail jewellery market and increasing market share of organised jewellers," the ratings agency says.
In FY2021, Ind-Ra says it expects the retail jewellery sales to decline by 25% in FY2021 on account of over 40 days of lockdown and an overall reduction in disposable income. Additionally, the share of old gold purchases as a percentage of total purchases by jewellers could increase from around 35% for large organised jewellers. Thus, the total gold import of India, which is primarily driven by jewellery demand, is also likely to drop to a decade low in FY2021.
During FY2020, gold prices soared amid the worsening of US-China trade war and interest rate cuts by various central banks worldwide. In FY2021 till date, gold prices haves remained high, amid the COVID-19 outbreak and its adverse impact on economic activity and global markets. Investors across the world are fleeing to safer investments including gold.
Domestic jewellery and gold consumer demand is dependent on a specific budget, thus rising gold price will have a negative impact on the overall demand in the short term.
Another reason for the impact on demand is perceived uncertainty in gold prices. Historically, gold prices have been increasing. Demand gets impacted intermittently in case of significant fluctuations in gold prices before settling for a new normal. Sharp fluctuations in gold prices impact customer affordability and lead to postponement of jewellery purchase. Any further increase gold prices shall adversely impact overall gold demand in tonnage terms.
However, Ind-Ra says it expects demand for jewellery in marriages to remain stable. It says, "Retail jewellery is a discretionary purchase; however, it is an essential purchase for marriages. Thus, we expect 40%-50% of the demand that is contributed by marriages to remain intact. We believe that curtailing wedding expenses such as venue, guest accommodation, honeymoon due to social distancing norms, can free up some budget for jewellery purchase, even in an environment of slowdown."
The ratings agency says it believes that jewellery demand shall be supported by a rise in savings at the hand of salaried middle-class and upper-middle class end-users due to the postponement of purchases and cancellation of travel and tourism plans among other reasons.
"However, it remains to be seen whether such savings would add to jewellery demand in 2HFY21 or will be used in compensating loss of income or saved for emergency situations. The overall long-term demand outlook remains upbeat because gold remains to be an attractive investment destination. Thus, the industry expected to bounce back after FY21 with increasing gold rates and continued attraction to gold jewellery due to traditional factors," Ind-Ra concludes.