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www.indiaratings.co.in 20 February 2013

Natural Resources
Outlook 2013: Indian Gems & Jewellery
Demand Stabilisation Supports Exporters, Expansion to Pressure Retailers
Outlook Report

Rating Outlook
Different Markets, Different Outlooks: India Ratings has a Stable Outlook for gems &
jewellery (G&J) exporters and Stable to Negative Outlook for domestic G&J retailers for 2013.
While exporters are likely to report better revenue growth (median) in 2013, their margins may
be comparable to 2012. Domestic retailers are likely to report lower revenue growth (with a
possible volume decline) along with marginally lower margins than in 2012. Retailers resorting
to aggressive store additions may be worst affected.
Ratings Reflect Inherent Risk: India Ratings has already captured the inherent risks in the
sector in its current outstanding ratings in the G&J portfolio. The agency rates nine issuers in
the segment, of which only two companies have investment grade ratings (both domestic
retailers). To the extent the ratings reflect the risks; all the ratings are at a Stable Outlook.
Export Slippage May Stop: India Ratings expects overall G&J revenue (in USD) growth to be
in the range of 4% to 9% yoy in 2013. Economic activity in major export markets such as Hong
Kong, UAE and Singapore is likely to show a relative improvement over 2012, supporting
growth of finished products. US demand is expected to remain steady. However, the overall
G&J export volumes are unlikely to reach the 2011 levels.
Exporters May Stabilise at Low Level: With expected revenue growth and on-going tight cost
control measures, the credit profile of exporters may stabilise at the current low levels.
Established exporters with muted revenue growth (5% to 15%) but stable margins may exhibit
better credit profiles, within this sub-sector. However, some exporters have exhibited
aggressive revenue growth (upwards of 20%) in FY13 till date, often at the cost of deterioration
in margins. The credit profile of such aggressive exporters is likely to deteriorate.
Volumes Fall in Domestic Jewellery: The portion of demand from domestic retailers catering
to investment needs of customers may gradually dwindle over a period of time. Jewellery
volumes declined by 5.2% over during January-December 2012 after a decline of 11.4% in
2011. However, investments in gold exchange traded funds (ETF) increased 23.9% yoy in
2012. India Ratings estimates that domestic G&J retailers revenue may grow in the range of
15%-25% in 2013 (2012: around 40%) with operating margins declining by 75-100bps yoy.
Expansion Pressures Credit Profile: Given the trends in domestic consumption and higher
inventory requirement for store expansion, domestic retailers may experience a marginal
deterioration in their credit profile. Particularly, the credit profile of retailers undergoing
aggressive store expansion will be impacted while others may broadly maintain their credit
profile.
What Could Change the Outlook
Global Recovery: While a slow and steady global recovery is likely, any economic or
geopolitical event reversing the global recovery process would severely affect the weak credit
profile of most G&J exporters. Given mixed signals from US consumers discretionary
purchase, a change in the Outlook of G&J exporters to Positive in unlikely.
Rating Outlooks

Exporters
S T AB L E

Retailers
S T AB L E T O
NE GAT I V E


Related Research
Indian Gems and Jewellery: Suppressed but
Stable Margins (9 May 2012)

Other Outlooks
www.indiaratings.co.in/Outlook2013

Analysts
Giribala Shah

Deep N. Mukherjee
+91 22 4000 1721
deep.mukherjee@indiaratings.co.in

Prakash Choraria
+91 33 4006 5887
prakash.choraria@ indiaratings.co.in

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Outlook 2013: Indian Gems & Jewellery
February 2013
2

Further Deterioration in Domestic Consumption: The Outlook on domestic jewellery
retailers could be revised to Negative if gold prices increase further, which could impact
demand for both cosmetic and investment purposes. A Positive Outlook may result from a
favourable policy environment, continued stability in gold prices and a continuous improvement
in sales volume.
Exporters
Key Issues
Export Slippage May Stop: The demand of G&J from major markets such as Hong Kong,
UAE and Singapore may show a marginal improvement in 2013 as the economic activity of
these countries is likely to improve slightly. These markets experienced recessionary conditions
in 2012. (Please refer to Annex 3)
India Ratings expects overall G&J growth to be in the range of 4% to 9% yoy as volumes will
remain well below the 2011 levels. The growth of finished products is likely to be driven by the
likely improvement in major export markets.
Jewellery exports to the US may show muted growth in 2013. While disposable income in the
country has been steadily increasing, any stringent tax policy or reduction in government
spending may adversely impact discretionary spending particularly on expensive items such as
jewellery



Jewellery sales growth in the US has been muted in recent months. However, the US
consumer confidence index (Annex 2) remaining well above 60 suggests that the G&J export
volumes to the US would at least be maintained at the 2012 levels.
Related Criteria
Corporate Rating Methodology
(September 2012)


Figure 2
Figure 1
Figure 3
Figure 4
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Outlook 2013: Indian Gems & Jewellery
February 2013
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Credit Profile: Exporters
EBITDA Stabilisation at Low Level

India Ratings expects the credit profile of CPD exporters to remain at levels similar to FY12.
This is because of the likely stabilisation of EBITDA margins at the current low levels for 2013
on account of the cost control measures adopted by the companies since 2009.
Five key exporters revenue increased in FY12 with an average growth rate of 21.9% yoy. This
was driven by higher polished diamond prices and rupee depreciation. However, the gains
were partially offset by the higher costs of raw material as they are imported.
India Ratings expects muted revenue growth for key exporting companies in 2013 as sales
volume of CPD declined significantly in 2012 (a decline by 45.3% yoy during January
December 2012).
Operating margins (not considering other income) are also likely to be maintained at the current
low levels in 2013 after stabilising in FY12.

With profitability being maintained at the low levels, interest coverage for CPD manufacturers in
FY13 is likely to remain at the FY12 level (2.8x), which was similar to the FY11 levels (2.9x).

Figure 5
Figure 6
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Outlook 2013: Indian Gems & Jewellery
February 2013
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High Other Income May Spell Trouble
India Ratings is concerned about the high proportion of other income of jewellery exporters as it
forms a considerable portion of their profit before taxes (PBT). It primarily consists of interest
income earned against fixed deposits placed for buyers credit and/or margin money for its
working capital requirements as well income from trading activities. This is opportunistic trading
activity which may be unrelated to their core jewellery manufacturing function. Such activities
add to the volatility of earnings and thereby increase the credit risk of firms.
On an average, other income comprises around 9%-10% of PBT based on the numbers of the
last six quarters. However, for a few companies other income as a proportion of PBT is over
30%35%.
Domestic Retailers
Key Issues
Segregation on Investment and Cosmetic Demand: Traditionally, gold jewellery was
purchased for investment as well as cosmetic purposes. However, rising gold prices as well as
easily available gold investment may have somewhat changed this behaviour. During January-
December 2012, demand of gold bars and coins declined 15.8% yoy and jewellery demand
declined 5.2% yoy while investments in gold ETF increased 23.9% yoy in 2012

Consumer Mind-set Drives Revenue: Indian consumers when purchasing jewellery for
cosmetic purpose focus more on its value than volume. This is reflected in the revenue growth
of 43% yoy in 2012, supported by price increases, despite an 11.9% yoy decline in demand for
gold jewellery. However, given the deteriorating trend of household balance sheet and historic
low levels of Private Final Consumption Expenditure (PFCE), revenue growth in 2013 is likely
to be much lower (15% to 25%) than that in 2012.
Figure 8
Figure 9
Figure 10
Figure 7
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Outlook 2013: Indian Gems & Jewellery
February 2013
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Emerging Preference for Branded Jewellery: Major domestic retail jewellers are expanding
in Tier 2 and Tier 3 towns, with some of them financing the expansion by equity capital raised
from initial public offerings. In the medium to long term, branded retail jewellers may benefit
from such expansion at the expense of small players. An observable trend is smaller players
becoming franchisees of the more established brands.


Retailers Burden - Inventory: Inventory requirement for retailers is high (around four months
requirements) as retail outlets require a certain minimum inventory level. The seasonality
inherent in the jewellery business requires additional inventory to be held during peak periods
such as weddings and festivals. New showrooms would require higher inventory levels initially,
which would necessitate high working capital borrowings.
The working capital days for such players have shown a consistent increase since 2009 and
the trend is likely to continue in 2013. However, at least some of the stores (particularly in tier 2
and Tier 3 cities) opened by branded players follow the franchisee model. In certain cases, the
franchisee is required to purchase its inventory requirement from the retailer on a cash basis
and/or lower credit period. This enables the retailer to lower their inventory cycle and thus
working capital borrowings. However, given the deteriorating private consumption, the overall
benefit will be limited.
Companies Existing Stores Location
Gitanjali Gems Ltd 1,100
In H1FY13, 14 owned retail stores and 36 shopin shops
and 31 franchisees were opened. The franchisees were
opened in tier I & II towns such as Kurnool, Jharsuguda,
Angul, etc.
Tara Jewels Ltd 30 Six stores in Mumbai and another 24 in 18 cities
Shree Ganesh Jewellery
House Ltd 46
Mumbai (Maharashtra), Kolkata (West Bengal), Ludhiana
(Punjab), Rajkot (Rajasthan) and Ghaziabad (Uttar
Pradesh)
Tribhovandas Bhimji Zaveri 14 Across 10 cities in 5 states
Titan Industries
Tanishq (Includes Zoya) 145 83 towns
GoldPlus (Titan) 31 31 towns
B C Sen 5 Kolkata, Gurgaon
Chandukaka Saraf and Sons 7
Baramati, Pune, Chinchwad Ahmednagar, Sangola &
Karmala
Arena Lifestyle Pvt. Ltd. 3 Bombay
Karan Kothari Jewellers Ltd. 3 Nagpur
Tribhovandas Bhimji Zaveri
Delhi 1 Delhi
Source: Company Reports, India Ratings
Figure 11
Figure 12
Figure 13
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Outlook 2013: Indian Gems & Jewellery
February 2013
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Credit Profile: Domestic Jewellery Retailers

Margins May Moderate
The sectors margins may reduce by 50 to 75bp yoy in 2013, after ranging between 5%-8% for
the past three years. Domestic retailers on the store expansion spree may experience an
increase in operating costs without a commensurate increase in revenue (at least initially).
Domestic jewellery manufacturers are generally able to pass on increases in gold prices to
retail customers which support their operating margins. However, sharp increases and volatility
in commodity costs result in a time lag before being fully reflected in retail prices. Any further
increase in gold prices would lead to the deferment of jewellery purchases and thus companies
would face lower sales. Several jewellers are trying to attract customers by providing discounts
on making charges of jewellery.
Liquidity Profile
Liquidity is likely to remain stretched for both the non-diamond trading company (DTC) sight
holders and jewellers planning retail expansion in 2013. Inventory levels are likely to increase
moderately in 2013 on account of slowing sales and new store openings that would keep the
inventory requirements high during the year.
Overall, working capital cycle increased in FY12 to 138 days (FY11: 125 days) as inventory
levels were higher than that in the previous year (FY12: 133 days; FY11: 128 days on an
aggregated basis) which is in line with the increase in revenue. Although retailers tried to
reduce inventory level by offering higher discounts, suppliers lowered their credit period for
jewellers.

Figure 14
Figure 15
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Outlook 2013: Indian Gems & Jewellery
February 2013
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India-Ratings Rated G&J Companies: Corporate Profiles
Chandukaka Saraf and Sons ('IND BBB'/ Stable) is a domestic jewellery retailer. It achieved
revenue of INR7,706.8m in FY12 (FY11: INR5708.4m), with stable EBIDTA margins in the
range of 4.9%-5.6% since FY10 due to the company's ability to pass on increases in gold
prices to its consumers. Financial leverage (net debt/EBITDA) remained low between 0.5x-
1.15x and interest coverage was in a comfortable range of 5.8x-13.1x during FY10-FY12.
Revenue may be impacted by the on-going pressure in consumer spending and upward trend
in gold prices. The company has an obligation of paying 4% interest costs for the gold deposits
it accepts from its customers.
BC Sen & Company Limited (IND BBB/Stable) is a domestic jewellery manufacturer. It
achieved revenue of INR1,795m in FY12 (FY11: INR1730.4m), with EBIDTA margins in the
range of 7%-8% since FY09. Financial leverage (net debt/EBITDA) remained low between
1.0x-1.4x with interest coverage was in a comfortable range of 3.8x to 7.17x during FY10-
FY12. Credit profile is likely to remain stable in line with flat domestic demand, but pressure on
margins will come from rising gold prices.
Arena Lifestyle Pvt Ltd (IND BB/Stable) is a jewellery retailer specialising in gold and
diamond jewellery. Revenue declined marginally in FY12 due to low demand resulting from
high gold prices. EBITDA margins were consistently high at around 11%-12% over the three
years ended FY12 because of its ability to pass on price changes to consumers. However,
financial leverage (net adjusted debt/operating EBITDA) increased to 4.1x in FY12 (FY11: 3.4x)
and net interest coverage was low at 2.4x (2.01x) due to higher debt requirements.
Figure 16
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Outlook 2013: Indian Gems & Jewellery
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Tribhovandas Bhimji Zaveri (Delhi) Pvt Ltd (IND BB+/Stable) is a gold jewellery retailer. It
achieved revenue growth of 25% yoy to INR2,200m in FY12 mainly due to rising gold prices.
Net financial leverage remained moderately high at 4.09x in FY12 though improved from 5.7x
in FY11, as EBITDA margins increased marginally to 4.24% (4%). Net interest coverage
remained low at 2.14x in FY12 (FY11: 2.1x).
Karan Kothari (IND BB+/Stable) is a gold jewellery retailer. It achieved revenue growth of
25% yoy to INR2,200m in FY12 mainly due to rising gold prices. Net financial leverage
remained moderately high at 4.09x in FY12 though improved from 5.7x in FY11, as EBITDA
margins increased marginally to 4.24% (4%). Net interest coverage remained low at 2.14x in
FY12 (FY11: 2.1x).
Mani Exports (IND BB-/Stable) exports polished diamonds. The company has illustrated its
ability to sustain its interest coverage above 2.5x for the two years ended FY12 (year end
March) despite increasing working capital requirements. Operating EBITDA/gross interest
expense was 3.5x in FY12 and 3.4x in FY11 due to stable EBITDA margins of around 5% in
FY11 and FY12. This, along with revenue growth (FY12: INR1,699m, FY11: INR1,245m) on
the back of higher diamond prices and 9% volume growth, led to a significant improvement in
operating profits (INR85m; INR67m). However, its size of operations is still small
Om Anand Exports (IND A4) is a partnership firm, involved in the export of cut and polished
diamonds. It reported revenue of INR573.5m in FY11 (FY10: INR451.2m), operating EBITDA of
INR25.8m (INR13.9m) and interest coverage (operating EBITDA/gross interest expense) of
1.6x (0.95x). The company is faced with a moderate-to-weak liquidity position, characterised by
its almost full utilisation of working-capital limits in FY12. The company has large working-
capital requirements due to high debtor and inventory days.
MK (IND A4) is a partnership concern, and manufactures and exports diamond-studded gold
jewellery. The companys revenue increased to INR472.5m in FY11 from INR379.62m in FY09.
MK had volatile EBITDA margins of 3% to 6% over FY08-FY11 due to its exposure to volatility
in gold and diamond prices. Its liquidity position is moderate. However, cash flow from
operations is expected to remain negative due to high working-capital requirements.
Jodhani Exports (IND A4) is a partnership firm, involved in the export of cut and polished
diamonds reported revenue of INR1,015.8m in FY11 (FY10: INR846.2m), operating EBITDA of
INR151.7m (INR47.7m) and interest coverage (operating EBITDA/gross interest expense) of
3.9x (3.7x). Its liquidity is stretched as a result of the high working-capital needs arising from a
long credit period offered to clients and the inherently high inventory levels.
MM Group Entities (IND BB-/Stable): India Ratings took a consolidated view of the MM
group while assigning the ratings, given the strong operational linkages among the companies
in the group in terms of the same line of business (manufacturers, wholesalers and retailers of
jewellery), common founders and the fungibility of funds. Mohan Gems & Jewels Private
Limited (MGJ) and Delhi Diamonds Private Limited (DDPL) are rated at 'IND BB-' while M.M.
Jewellers (MMJ) is rated at IND B+'.
The group's liquidity position is stretched as reflected by its fully utilised working capital limits in
FY12, due to its high working capital requirements to maintain a large of inventory of gold.
However, the latter also provides a cushion against financial distress. MMJ's ratings are further
constrained by the partnership nature of the organisation. Provisional results for FY12 (financial
year ending March) indicate consolidated revenue of INR10,028.74m (FY11: INR5,044.22m),
EBITDA margins of 3.74% (FY11: 1.76%), net financial leverage of 4.18x (FY11: 9.6x) and net
interest coverage of 2.29x (FY11: 1.78x).
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Outlook 2013: Indian Gems & Jewellery
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Annex 1: Gold Demand Trends




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Outlook 2013: Indian Gems & Jewellery
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Annex 2: US Consumer Confidence Index and Personal Savings







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Outlook 2013: Indian Gems & Jewellery
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Annex 3: Exports of Gems & Jewellery


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