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Watchlist #5- Jewellery Stocks

  • 6 days ago
  • 3 min read
With Watchlist we pen down our broader thoughts on an idea that looks interesting and is worth keeping in one’s watchlist. This week’s idea is the broader Jewellery Space.

Gold has been in a tear in last one year. And the biggest beneficiary of upmove in Gold price has been the gold financiers wherein borrowers now have much higher borrowing capacity for the same quantity of gold plus the overall slowdown in other avenues of borrowing like microfinance and unsecured personal loans has also resulted in higher demand for gold finance.


The demand is so strong that even the biggest lenders like Muthoot is growing at 40-50%.


On the other hand we have Jewellery stocks wherein though the higher gold prices has impacted volumes, the overall value growth has been fairly resilient and has been improving in last quarter as buyers who earlier postponed their purchases in expectations of lower gold prices are now coming back as gold prices continue to move higher; sentiment has shifted from fear of gold price correction to now FOMO of gold price further increasing.


However, despite a resilient growth and recent improvement, Jewellery stocks have been major under performers in last year or so. Market here is worried about volume growth plus the possible impact if gold prices correct.


But consumer’s purchase decision for jewellery is always driven by a certain value of jewellery that they want to buy and not a certain volume of jewellery; and thus, at higher prices volumes are bound to correct and vice versa.


The 2nd risk that market is concerned about is inventory losses due to correction in gold prices. Though this is a risk, but it is more of transient risk wherein you have one quarter of losses (most of which is already hedged) and then things go back to normal.


The risk of gold price correction is much more real for Gold finance stocks wherein if price corrects, not only there is a risk of credit losses as reduced security value might not be able to cover the value of outstanding; plus, the overall demand for gold loans will also take a big hit. So, the impact would be dual and much more sustaining.


But for Gold financers, market is not concerned at all. It is willing to give peak valuation multiples at possibly peak growth while undertaking impending large credit & demand risk if gold prices correct materially.


And this divergence in how market is valuing Gold Financers and Jewellery stocks for the same risk is what makes jewellery stocks worth keeping in one’s watchlist. Some of the smaller players like Senco and P N Gadgil are now available at low 20s multiples.


Further, the leader Titan has made a new high recently after ~2-years indicating a possible shift in market’s perception here.


So, in summary, we have a situation wherein growth for Jewellery stocks has been fairly resilient and is now improving; while market continues to be overly concerned around risk of gold price correction which is in stark contrast with how it is valuing the same risk for Gold Financiers.

That’s all for this one; we’ll be back with a new idea next week. Meanwhile readers can access some of our more detailed research and resources here;


Disclosures:
Surge Capital is a trade/brand name used by Ankush Agrawal (Individual SEBI Registered Research Analyst INH000008941) to provide equity research services in the Indian Equity Markets.

“Registration granted by SEBI, Enlistment with RAASB and certification from NISM in no way guarantee performance of the Research Analyst or provide any assurance of returns to investors”

“Investments in securities market are subject to market risks. Read all the related documents carefully before investing.”

“The securities quoted are for illustration only and are not recommendatory”

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