Yet, stocks up as curbs on importing against credit go

Many jewellery stocks have surprisingly rallied sharply since Monday after the RBI’s move to link gold imports by authorised agencies and banks to the quantum of exports. PC Jeweller has shot up 22 per cent, TBZ is up around 11 per cent, and Shree Ganesh Jewellery has gained 7 per cent. Titan Industries, despite paring gains on Tuesday, is up around one per cent.

The RBI’s latest measure to curb gold imports requires the nominated banks and agencies to ensure that at least 20 per cent of every lot of gold they import gets exported. Fresh imports are permitted only after three-fourth of this 20 per cent is actually exported. With gold imports now dependent on exports, “it’s a case of the tail wagging the dog,” says Sanjeev Bhatia, CFO, PC Jeweller.

Given that the move actually restricts imports, why did the jewellery stocks rally? “The RBI’s restrictions were actually milder than expected because the industry was bracing for more severe measures to curb imports,” says an industry source.


Even as the RBI sought to tighten up gold imports, it has done away with the earlier restrictions on importing against credit.

The market seems to be relieved with the withdrawal of RBI’s instructions of May and June on import of gold on consignment basis and letter of credit restrictions. The central bank had prohibited credit of any kind for imports of gold for domestic consumption.

This necessitated a change in the business model of many jewellery companies that operated on the gold-on-lease model (paying for gold purchases to banks and agencies within an agreed credit period on the basis of rates realised on sales).

A likely increase in working capital expenses, hedging costs and higher inventory risk saw many jewellery stocks lose significant ground on fears of margin erosion. But now, with credit lines open again, it may be back to the old business model — a big plus for companies such as Titan Industries.

But the question is whether this concession will offset the impact of the new rule mandating exports? Companies such as PC Jeweller, for which exports account for nearly 25 per cent of sales, may be better placed.

For the sector as a whole though, the latest move is not good news. Reluctance of banks and agencies to import could tighten gold supply in the domestic market.

Says Sanjeev Bhatia of PC Jeweller, “Nominated banks and agencies will be comfortable importing only if they are confident that at least 20 per cent can be exported.”

This is a negative for jewellery companies, especially those like Titan Industries that do not currently export jewellery. Also, smaller players focused only on the domestic market may find the going tough.

Besides, the groundwork to be done by banks and agencies to ensure compliance could be onerous. A South-based jeweller indicates that some banks have already turned cautious on supplying gold to jewellers.

It is also a fact that exports fetch lower margins for jewellery makers than sales in the domestic market.

This is the reason why many Indian jewellery companies have reduced focus on exports and opened local stores in recent times.

(This article was published on July 24, 2013)
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