'Jewellery stocks likely to fall further on huge inventory'

Shareholders of Gitanjali Gems have lost Rs 3,000 crore in the last one month, due to sharp fall in share prices. The company’s shares have hit a new 52-week low in a few trading sessions, with substantial stock held on the sell side due to lack of buyers.

On Monday, Gitanjali shares were down five per cent at Rs 225, a fresh 52-week low. At the end of the day’s trading session, there were about 8.44 lakh shares on the BSE and another 3.59 lakh shares stuck on the sell side. The company’s share has fallen to Rs 236 from Rs 566 in June.

There were speculations that financiers are offloading the shares pledged by the promoters through open market, due to margin call. Currently, promoters hold 59.44 per cent stake in the company, of which 34.96 per cent was pledged with financial institutions.

However, when contacted Mehul Choksi, Managing Director, Gitanjali Gems, denied the margin call development. “I am not aware of any margin call by any institution,” he told Business Line.

‘Likely to fall’

Other jewellery company stocks displayed a mixed performance on Monday, with Rajesh Exports falling one per cent while Titan Industries and Shree Ganesh Jewellery gained two per cent each.

Prashanth Tapse, Research Analyst, Mehta Equities, said jewellery company stocks would continue to fall for the next few months as most of these companies hold huge inventory in gold.

Gold prices have fallen to Rs 26,000/10 grams in the June quarter from Rs 28,500 in the same period last year. This will result in huge depreciation in the value of the gold inventory held by the jewellery companies, the analyst said.

In the case of Gitanjali, Tapse said, the company has a working capital limit of $800 million (about Rs 4,720 crore) of which it holds gold worth $200 million (Rs 1,180 crore) in physical form. Most of the gold was bought at a substantially higher price, he said.

This development may erode 10 per cent of the company’s earning before interest, tax, depreciation and amortisation.

The outlook for jewellery companies may continue to remain challenging with the Government restricting gold imports into the country, even after it increased import duty by two per cent to eight per cent.

Generally, jewellery companies hold gold inventory for 90-100 days. With the sudden fall in the yellow metal’s prices, it is expected to take at least the next two quarters for the impact to settle down on the inventory side.

“I foresee another 10-15 per cent fall in jewellery company stocks, with very few investors willing to take the risk of buying the share. People who want to track gold price returns will now buy gold in the physical form rather than a jewellery company stock,” said Tapse, adding he expects a revival in jewellery company fortunes from the December quarter.

suresh.iyengar@thehindu.co.in

(This article was published on July 1, 2013)
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