Company released Q2FY20 details that mentioned that surge in gold prices have led to fall in sales as customer put the purchase on hold anticipating some price correction.
Our analysis of the past 13 quarters and previous years, have showed that the company is not able to reduce its contribution by jewellery business despite major efforts made by management. This dependency exposes its to a lot of external factors as the Gold prices though have been stable in past 10 quarters but it has spiked in past two quarters due to geopolitical and global growth slowing down.
Jewellery Segment :
Jewellery segment contribution to the total revenue has been in range of 80% - 85% and the trend has been seasonal in nature irrespective to store openings or other factors. The only time it was below at 76%-78% was in Q1FY2017 & Q2 FY2017 when the gold prices increased as trade war started and Brexit fears increased.
Gold Prices & Impact :
The gold prices in terms of INR has reached all time high. Earlier the higher prices were result of USDINR depreciation that in last few years have been 4-5% per year. This is increase the company is able to pass on to the customer without impacting the volume growth or consumer sentiment. Since September 2018 , there has been increase in the currency depreciation due to NBFC crisis and from May 2019 there has been increase in Gold prices globally due to growth cuts & trade issues also increases.
It can be seen that during Q1-Q3 FY 2017 the gold prices increased to Rs. 2974 per gram that resulted in volume de-growth of 32% in Q2FY2017. But post that there was stability in price increase to maximum of 5%-6% that was passed on to the consumer without impacting demand. But from Q3FY2019 gold prices surpassed Rs.3000 per gram that resulted in continuous fall in growth rate every quarter. This would result in payback period of new stores opened in last 12 months which would impact the balance sheet or further capex if the prices sustain above Rs.3000 per gram.
Revenue & Volume Growth :
The pricing power in the company has increased over period as the transformation from traditional to branded business resulting in increased margins and more sustainable earnings. But the price changes can only be done to an extent any extreme changes results in sharp reaction that results in volatility of revenue and earnings.
It is very for the company to reduce the dependency on jewellery business even though it is transforming and increase the millennial purchase along with customers that previous purchased from local stores. This would give a better valuations and less compression of stock price during period when gold prices increases which this time can sustain for longer as trade issues and other growth related issues is resulting in large growth forecast cuts in major economies.
We do not see gold prices reducing in short to medium term that might help the company reverse the current decline.This would put pressure on stores opened in past 12 -18 months extending the payback period and impacting the cashflow generation which is being deployed to increase the revenue share of other categories.
We have a SELL rating on the company.