Stable gold prices to boost demand volume: Gitanjali Gems

Gold prices in India have sky-rocketed ever since March this year. At Rs 30,500 plus, Indian gold is one of the most expensive. As expected, demand for the precious metal has fallen because of this.

Despite falling demand, Gitanjali Gems posted strong results for the first quarter of FY13. In an interview to CNBC-TV18, President Abhishek Gupta says that this was due to the expansion plans of the company. “For Gitanjali, the thing we did is right in last two quarters is the expansion of stores in tier II and tier III towns. We adopted the model of expanding through franchises, we introduced new categories in gold and semi precious stones and we expanded our international business in Japan, China and Far East. So the combination of all this gave us this kind of growth,” he explained. However, volume growth was lower than expected due to the high prices. But, Gupta says demand will pick up once gold price stable. “We are expecting gold prices to stabilise at Rs 30,000-31,000 per kg and this will increase the demand in volumes in next six month,” he said. Below is an edited transcript of his interview with Latha Venkatesh and Ekta Batra. Q: We get the sense from the World Gold Council and from rivals like Titan that demand has actually lowered. Did you see any tapering of demand? A: For us the demand side of the industry is categorized into four parts. First is the commodity side, which is more of the investment buyers, second is the wholesalers, third is the mom and pop stores and fourth is branded jewllers like us. For Gitanjali, the thing we did is right in last two quarters is the expansion of stores in tier II and tier III towns. We adopted the model of expanding through franchises, we introduced new categories in gold and semi precious stones and we expanded our international business in Japan, China and Far East. So the combination of all this gave us this kind of growth. Our like to like stores, which are two or three years old, have a stable growth in the likes of the other parts of the industry, but the incremental demand came from the new stores that we added in this last two quarters. Q: What is your volume growth in the quarter gone by and what do you expect for FY13? A: The total jewellery sales in Q1 were up by 36% and the volume in this was up roughly about 22%. As I said, the volume was due to incremental stores that we opened in last six months. Q: Your margins have been under some bit of pressure. From where did this pressure come from, largely interest cost? A: It was a combination of interest cost and commodity prices. Being a manufacturing company, we have to continue the sales part of the business. Margins are under pressure for majority of the players, including us. The products that we manufactured in this last quarter were more of gold sales. Q: Gold is sitting at over Rs 30,000 per kg at this point in time. How will this impact demand in the upcoming festival season, and are you looking at diversifying in order to substitute sales? A: For us the demand is picking up now. The festivals coming up are Diwali, Christmas and Valentine in India as well as in international markets. So the consumers who deferred their buying decisions in last six months will continue buying now. We are expecting gold prices to stabilise at Rs 30,000-31,000 per kg and this will increase the demand in volumes in next six month. _PAGEBREAK_ Q: I am still not able to understand how is it that you are able to import higher demand growth when that’s not the industry trend? A: We have introduced new collections of gold jewellery for all our brands - Nakshatra, Gili, Asmi, D'Damas. Secondly, we have introduced new categories in semi precious and precious stones. We have ruby collections, we have emerald collections that we have introduced last year. Thirdly, a lot of our product brands are converting into retail stores. So a combination of incremental sales and incremental categories have given this kind of growth to us. Q: Just give us a sense of your international expansion plans and what the demand is looking like there? A: With the dollar at today’s level, we are expanding in the international side. Japan is offering us great amount of margins and as well as incremental sales. So in mature markets like Japan and USA, we would rather go with inorganic way of acquiring companies and acquiring stakes. In markets like Middle East, we have opportunity to expand our own stores. Middle East has a lot of demand for Indian made jewellery and Indian branded jewellery, and that’s what we are catering to at the moment. We have opened our first store in Singapore and we are now looking to expand in China. Internationally we are expecting to grow in US, Japan, China, and Middle East, which along with India caters to 80% of the demand of global jewellery. Q: You have a decent growth in other income, Rs 135 crore compared to just about Rs 29 crore in the March quarter and Rs 23 crore in the year ago quarter. How come? A: Other income comprises of the dollar gain, the forex gain that we received, and it is compensated against the finance cost. So the other income component is largely because of the forex gain that we have. Q: It cannot be repeated, can it? A: I doubt. Q: So will you be able to do Rs 150 crore every quarter? A: As per the new accounting standards, we have to give the bifurcation of forex gain and forex loss separately, and the other income and the finance cost has both the components. Going forward, it will remain separate; the other income will consist of any forex gain that we have due to our international business and the finance cost will comprise of the forex loss that we have due to the imports that we do. Earlier we used to give net of numbers, but going forward we’ll have to give them separately. So you will see the net margins will be in a similar range because the accounting methods would have changed. Q: I understand that your finance cost increased 141% YoY basis. What do you expect in terms of interest cost going forward? Secondly, where does DB Corp’s stake stand at after the issue of fully convertible debentures worth around Rs 39 crore? A: Finance cost increase was largely due to the forex loss that we had. Also, the interest cost in India has increased, so that’s the total component of finance cost. Our debt equity is 1:1 and we would remain at that level going forward as well. To answer your second question on DB Corp, that’s to increase the advertisement component of the company. We issued debentures to Dainik Bhaskar, so that’s for the advertisement expansion for the company. Q: Did you make a forex loss or a forex gain? A: Forex gain is part of other income, forex loss is part of finance cost. Q: Net-net can you say what it would have been? A: Net would be gain of around Rs 20 crore.