Outlook negative for jewellery retailers

Crisil Ratings said the credit outlook for gold jewellery retailers will be negative in the ongoing fiscal as lower demand will lead to curtailed store expansions, higher inventory and weaker bank finance.

"Slack demand leading to lower cash accrual, elevated inventory levels and curtailed bank finance will lead to moderately negative credit outlook for gold jewellery retailers this fiscal and hardbrake store expansion," Crisil said in a report.

The number of new store additions is expected to reduce to almost a third of the average between fiscals 2017 and 2020, it said. Consequently, capital investments will be 70% lower at Rs 650-700 crore this fiscal as compared with the average of the past four fiscals, it added.

Cash accrual is expected to decline 40% year-on-year, given an expected 35-40% fall in sales volume for the industry, the steepest drop in more than a decade, despite higher gold prices.

Sales volume would plunge because of curtailed discretionary spending following the COVID-19 pandemic, stores remaining shut for most of the first quarter, and intermittent lockdowns in some states in the second quarter, Crisil Ratings stated.

Overall revenue would drop by an average of 20-25% this fiscal. However, operating profitability will see only a limited decline of 100-150 basis points to 4.2-4.7% as players are undertaking cost-optimisation measures, including renegotiating rentals, curtailing employee costs, reducing promotional expenses and the surge in gold prices.