3/9/2017 UntitledDocument

Home
WeekMar28Apr01,2016

ISec Report: Indian jewellery sector: Changing dynamics to

boostshiftfromunorganisedtoorganised
AsilentstructuralchangeintheIndianjewelleryindustryisastrongthemetoplayon.Indianjewelleryindustry,about
Rs3,000billion market size, has seen a rapid shift from unorganised to organised from 9% in FY07 to 22% in FY15.
This shift is expected to accelerate further. While currently there is a concern regarding regulatory changes recently
announcedimpactingtheneartermperformanceofjewelleryretailers,webelievethesechangesshallprecipitatefurther
thegrowthoftheorganisedsectorinIndianjewelleryretailing.

Indiagoldjewellerydemandremainedstableovertheyears
WhilegoldpriceshaveincreasedataCAGRof13.9%inFY0715,goldjewellerydemandhasremainedintherange of
500600tonneannually.Weexpectthelongertermtrendonjewellerydemandtocontinue,withapositivebiasongold
pricedecline.

Goldjewellerydemandcontinuestobedrivenbyweddingjewellerypurchases,wheredemandisdrivenbytheabsolute
spendingbudget.GoldjewellerydemandinIndiahasremainedstableirrespectiveofthevolatilityinprices.Asjewellery
purchasesarebasedonaccumulatedsavings,changeinincomelevelsinaparticularyearand volatile gold prices do
notimpactdemandsignificantly.

Goldjewellerydemandaveragesinnarrowband notwithstandinggoldpricevolatility

Source:CompanyData,ICICISecurities Source:CompanyData,ICICISecurities

Threekeyreasonsforstablejewellerydemand

Source:CompanyData,ICICISecurities

Weddingmarketlifelinetojewellerydemand
Withanestimated~10millionweddingsinIndiaeveryyearandaverage jewellery spends of about Rs 0.2 million per
wedding,2xaveragepercapitaincomeofRs0.1million,weexpectweddingdemandtocontinuetosupportjewellery
demandinIndia,unlessthereisabigculturalshift.

Marketdynamics
Organisedplayerstocontinuetogainmarketshare

Though the overall gold jewellery market is stable in volume terms, the organised market continues to grow at robust
rates.Theshareoforganisedplayerswas~9%inFY07,whichhasincreasedto~22%inFY15.

Risingshareoforganisedjewellersintotaljewellerymarket

Source:CompanyData,CARE,ICICISecurities

Keyreasonsforgrowingshareoforganisedplayers:

http://content.icicidirect.com/mailimages/IndianJewellery.htm 1/3
3/9/2017 UntitledDocument

a)Easyaccessibility:Aggressivepresenceoflargeretailersatkeylocations.

b)Moreoptionstochoosefrom:Highernumberofdesigns,supportedbyagoldonleaseprocurementmodel.

c)Awarenessandtrust:Hightrustfactorinjewelleryretailerchains,supportedbyhighdecibeladvertising.

d)Migrationandurbanisation:Migrationtometrosandlargercities,leadingtooptionfornonfamilyjewellers.

e)Goldpricevolatility:Increasinggoldpricesoverthepastdecadehasmadethebusinessunviableforextremelysmall
retailers.Further,thecurrenttrendofvolatilityingoldpricesisfurtherhurtingsmallretailerswiththeirgoldinventorynot
hedged.

Otherimportantreasonsforgrowingshareoforganisedplayers

Source:CompanyData,ICICISecurities

Regulatorymeasuresinrecentpastthatwillfasttrackshiftfromunorganisedtoorganisedsector
In the last few years, the Government of India has been focusing on reforming the Indian jewellery industry. The
previous government imposed restrictions on jewellery trade with: i) imposition of the 80:20 rule, b) banning gold on
lease. These measures impacted organised players more than the overall industry. However, we believe the current
governments regulatory measures shall accelerate the shift of Indian jewellery industry to the organised market.
Measurestakenbythegovernmentinthelastfewmonthsare:

a)Impositionof1%excisedutyongoldjewellery.

b)Mandatoryhallmarkingofjewellery.

c)MandatorydisclosureofPANfortransactionaboveRs0.2million.

Effectiveimplementationofallthethreeabovemeasureswillincreasethecostofoperationsforunorganisedplayers,
andchecktheflowofblackmoneyintheIndianjewelleryindustry.WhilethismayimpactgrowthoftheoverallIndian
jewellery industry in the shortterm, we strongly believe these measures will shift the consumers to organised players
astheattractivenessoftheunorganisedplayersrecede.

MovingtowardsGST

ThegovernmenthasimposedexcisedutyongoldjewelleryproductsintheFY17UnionBudgetas1%withoutCenvat
creditor12.5%withCenvatcredit.WhiletheexcisedutyonjewellerywasfirstintroducedintheFebruary2012Union
Budget,itwasrolledbackinMarch2012followinghugeprotestsbyjewellers.Weunderstandthegovernmentisfirmon
implementing excise duty on jewellery this time despite similar strong protests by the jewellery industry, primarily
because:

a)ItisamovetowardsimplementationofGST.TheGSTCommitteereportrecommends6%GSTonpreciousmetals

b) The government wants to monitor the jewellery value chain in a bid to control the flow of black money in the
jewelleryindustry

Whileimpositionof1%excisedutyongoldjewellerywillrequireorganisedplayerstoincreasetheirportfoliopricingby
about0.7%,wedonotseemuchimpactofitonsalesbecause:

c) The companies selling branded jewellery products can absorb the increase in excise duty more easily than local
players.

d)TheGSTbillspeaksaboutvariousratessuchas2%,4%and6%onjewellerydependingongoldprice.Thecurrent
structureof1%excisedutyandVATrateof1%ongoldjewelleryproductsamountstoonly2%GSTrate.

SuggestedGSTrates

Source:Company,ICICISecurities

a)Thenationwidestrikebyjewellersagainstimpositionof1%excisedutymayimpacttheMarch2016resultsoflisted
jewelleryretailers.

MandatoryPANRequirement:Concernsoverdone

Mandatory quoting of PAN on transactions above Rs 0.2 million is widely expected to impact the jewellery sector.
However,webelieveposttheinitialapprehensions,thiswillbeacceptedbythecustomers.

a) Jewellers can raise different bills for two jewellery items if the bill amount exceeds Rs 0.2 million e.g. they can
raisetwoinvoicesforasetoftwobangles.

b)CustomerswhodonothavePANareallowedtofillinForm60fortransactionsaboveRs0.2million.

Mandatoryhallmarking:Boostfororganisedplayers

RajyaSabhapassedtheBureauofIndianStandards(BIS)bill(2015)onMarch8,2016,whichwasalreadypassedby
LokSabhainAugust2015. The bill stipulates mandatory hallmarking of jewellery in India to ensure purity of gold and
protect consumers from malpractices. Subject to effective implementation of the bill, we expect it to help organised
jewellersas:

a)Itwillincreasethecostofdoingbusinessforunorganisedplayers,forcingthemtoincreaseprices.Itwillalsocurb
allegedmalpracticesbysomeofthesmallerplayers.

b)Thedifferenceinproductpricingbyorganisedandunorganisedjewellerswillreduce.

c) As discussed in Rajya Sabha, 70% of the jewellery sold in India is not hallmarked. Effective implementation of
http://content.icicidirect.com/mailimages/IndianJewellery.htm 2/3
3/9/2017 UntitledDocument

mandatoryhallmarkingshallusherinhighergrowthfororganisedplayers.

Newregulatoryissuestobenefitorganisedplayers
We believe the shift from unorganised jewellers to organised jewellers is imminent and three recent regulations will
hasten the growth of organised jewellers. i) levy of 1% excise duty on gold jewellery ii) mandatory hallmarking (The
new Bureau of Indian Standards bill passed in Raya Sabha in March 2016 will help organised players to gain market
shareasthecostofdoingbusinessforunorganisedplayerswillincreaseandmayalsocurbsomeallegedmalpractices
inthesector)andiii)QuotingofPANforjewellerypurchaseofmorethanRs0.2million.Ifimplementedsincerely,this
willhelporganisedplayerswithalevelplayingfield.


Disclaimer:WeexpresslyclarifythatthiscommunicationisneitherasolicitationnoraninvitationofanysortwhatsoeverfromICICISecuritiesLtd.or
anyofitssubsidiariestocreateaclientrelationship.Thiscommunicationisnotintendedtobeasourceofadvertisingoranyspecificadvicethe
recipientshouldalwaysseektheadviceofcompetentcounsellicensedtopracticeintherecipient'scountry/state.Incasethismaildoesn'tconcern
you,pleaseUnsubscribefrommailinglist.

http://content.icicidirect.com/mailimages/IndianJewellery.htm 3/3