Abhishek Gupta, president, Gitanjali Gems, says gold companies face immediate working capital pressures due to recent RBI guidelines, which prohibit jewellers to buy gold on credit.
The recent guidelines announced by the Reserve Bank of India, which prohibit jewellers from buying gold on credit, will have an adverse impact on revenue, Gitanjali Gems said on Tuesday.
The stock was locked in the 20 percent lower circuit for the second straight session, and it has shed 40 percent in two days.
The government as well as the country’s central bank have taken several steps in recent days to curb gold demand in a bid to control the high current account deficit (CAD). The government increased gold import duty to 8 percent and the RBI issued guidelines, according to which jewellers can't use credit to buy gold. All gold will have to be purchased by paying cash upfront.
Abhishek Gupta, the President of Gitanjali Gems told CNBC-TV18 that gold companies face immediate working capital pressures due to these measures.
The new RBI guidelines and change in category mix will impact companies' sales, he said.
Gold jewellery contributes 25-30 percent of Gitanjali Gems' revenue and it is sitting on USD 150 million worth gold inventory, he added.
The company is now looking at strengthening its diamond jewellery portfolio to offset the pressures in the gold business.
Below is the verbatim transcript of Abhishek Gupta's interview on CNBC-TV18
Q: The stock has collapsed about 40 percent in the last two days, any reasons behind the sudden knock that we have seen in the stock?
A: Our overall gold sales kitty is almost 25-30 percent of the topline and with the new guidelines from RBI, the sales will be compromised. Our investors are reacting to the immediate terms. Nearly 75 percent of our business is diversified into diamond jewellery, which is on track with the coming future. So, there is a compromising impact on the plain gold jewellery sell that we did earlier and is also looking into the stock market.
Q: How much has the demand dipped because gold imports may halve in July-September quarter?
A: There is no gold available for domestic consumption. There are very few banks which are selling gold and hardly any physical gold is available, a fraction of what it used to be a couple of months back.
Q: What will be the impact on the financials of the company because of the recent curb in gold imports? In FY14, what are you factoring in terms of damage both to profitability as well as to the topline?
A: There will be more damage on the topline than profitability. We have nearly 25-30 percent of our sales coming from plain gold, which will be close to one-third in FY14. Plain gold was a low margin business so not much of an impact on the bottomline but the topline, which has a compounded annual growth rate (CAGR) of nearly 35 percent in last three-four years will be 15 percent in terms of growth.
Q: What about the working capital pressures that you may have to face now that credit availability will also be shut?
A: It is one of the challenges because there is a shuffle in working capital that we are managing. In next three-four months it will settle but there is an immediate stretch on working capital for our previous gold loans and now we are buying it upfront. So, there is a shift in working capital that we are going through.
Q: For FY14, what will be the change in the financial model of the company because the tweak that the Reserve Bank of India (RBI) has done in terms of these new norms? How would you change your financial model, what would be the pressures on the balance sheet as we head into FY14?
A: There will be less gold available on credit. The creditors will come down and we will have to stretch over debt and other borrowings to do the business in other formats. So the two portions on the balance sheet, the creditors and loan will be reshuffled.
Q: How much will that impact your interest cost, have you made any ballpark calculations?
A: We have not made any ballpark calculations as of now but in next couple of weeks we will come out with more precise calculations.
Q: Between last quarter and this one, the foreign institutional investors (FIIs) holding in your stock has gone up to about 20 percent versus 15.8 percent. Can you give us any indication of where this has come from in terms of who are these FIIs who have increased their purchases? Do you fear any large scale redemptions?
A: I am not sure about those names because we do not track the holder’s space but there will be investor base which will shuffle in one-two months, but we are strong company to come out in two-three months time. We will be on track in terms of overall projections working capital as well as sales and profitability.
Q: In the last two days, have you seen any major pullout?
A: No, not to my knowledge.
Q: What would be the inventory loss currently? What kind of inventory are you sitting on and what is the loss that you are expecting?
A: We have USD 800 million worth of inventory from March 2013 and nearly USD 150 million is plain gold jewellery.
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