Bloomberg News

Jewelry Exporter in $328 Million Retail Drive: Corporate India

January 13, 2013

Rajesh Exports Ltd. (RJEX), India’s largest gold jewelry exporter, is spending 18 billion rupees ($328 million) on retail expansion locally to sustain growth and counter declining demand in the U.S. and Europe.

The company will enter the three southern Indian states of Kerala, Tamil Nadu and Andhra Pradesh after almost doubling the number of outlets in its home province of Karnataka to 150 by March, Chairman Rajesh Mehta said in an interview, without giving a timeline for his investment plan. The exporter aims to boost the share of revenue from domestic sales to 50 percent in four years from 5 percent, he said.

Bangalore-based Rajesh Exports, which counts Goldman Sachs Group Inc. among its investors, is seeking to tap a market undeterred by a 12-year rally in prices of the yellow metal as festivals and weddings traditionally fuel purchases considered auspicious in India. The most recent World Gold Council data show consumer demand in the world’s biggest bullion importer climbed 9 percent in the quarter to Sept. 30 even as global use declined 11 percent.

“In India, it is a compulsion to buy gold more than anything else,” said Kishore Narne, head of commodities and currency at Motilal Oswal Commodity Broker Pvt. Ltd. “I am not seeing any significant cut down in jewelry demand.”

Profit Outlook

Profit growth at Rajesh Exports may slow to 30 percent to 35 percent in the 12 months to March 31 after an average growth of 72 percent in the previous three financial years, while sales may increase 25 percent, amid weak overseas sales, according to Mehta. Net income last year was 4.12 billion rupees ($75 million) and revenue was 256.5 billion rupees.

“That is an appreciable growth and most of this will come from the retail segment,” Mehta said.

Shares of the company gained 11 percent in 2012, trailing a 26 percent advance in the benchmark BSE Ltd. Sensitive Index. (SENSEX) The stock fell 2 percent, extending this year’s loss to 7.4 percent, to 128.45 rupees as of 9:43 a.m. in Mumbai, according to data compiled by Bloomberg. The shares started trading in 1995.

With the planned expansion, Rajesh Exports’ outlets under the brand of Shubh Jewellers will compete against Tanishq stores run by Titan Industries Ltd. (TTAN), India’s largest maker of branded jewelry by market value, and Gitanjali Gems Ltd. (GITG), the owner of Nakshatra, Gili and D’Damas brands.

Plain, Studded

The jewelry market in India is valued at $16 billion to $18 billion, according to Firstcall India Equity Advisors Pvt., while New Delhi-based consultants AM Mindpower Solutions estimate sales of gold ornaments may reach $41.3 billion in three to four years.

Southern India accounts for 45 percent of the total jewelry business in the country and is poised to be the fastest growing market, according to Firstcall. While Tamil Nadu and Kerala are known for plain gold jewelry, Andhra Pradesh and Karnataka have emerged as markets for studded ornaments.

Jewelry purchases in the U.S. fell 6.8 percent to 68.2 tons in the first nine months of 2012 from a year earlier, while in Europe, excluding CIS countries, demand slipped 11 percent, according to data provided by the World Gold Council.

A decline in gold prices may increase jewelry sales in India, said Motilal Oswal’s Narne. Rates in India climbed 13 percent in 2012, exceeding a 7 percent gain overseas, as a weaker rupee added to the imported cost of the yellow metal. Gold in Mumbai has dropped 5.1 percent from a record 32,464 rupees per 10 grams touched on Nov. 26.

“There are a lot of people sitting on the sidelines waiting for a price correction,” Narne said. “If a company is involved in consumer jewelry business, they might get their share of upswing towards the end of the year” as the festival and wedding season picks up.

Not Just Yet

The export market can’t be written off just yet as an economic recovery in the U.S. could spur a rebound, Vipul Shah, chairman of the Gems & Jewellery Exports Promotion Council, said by phone from Mumbai, predicting growth of as much as 20 percent in the year ending March 31.

“The U.S. economy is recovering, which we can see from the positive economic data coming out from the country these days,” he said. A revised report by the U.S. Department of Commerce showed that the world’s biggest economy expanded 3.1 percent in the third quarter, exceeding the highest projection in a Bloomberg survey.

India shipped $16.52 billion rupees worth of gold jewelry in the year ended March 31, according to the trade body.

Own Refinery

Rajesh Exports, which established its manufacturing facility in Bangalore in 1990, procures raw gold from various parts of the world and refines the metal in its own factory in the northern state of Uttarakhand with an annual capacity of 400 tons. It has wholesale distribution networks in cities including New York, Chicago, Toronto, Zurich and Sydney.

“The company purchases gold directly from the mines and sells it directly to the customer,” said Nagaraju Airruva, an analyst at Firstcall in Mumbai. “So they provide at a competitive rate.” He maintains a buy rating on the stock with a target price of 147 rupees a shares.

The cost of materials consumed in the year ended March 31, 2012 stood at 250 billion rupees, almost 98 percent of the revenue from operations, according to figures on the company’s website, squeezing margins after expenses and tax. The so-called EBITDA margin for the company in the year was 0.07 percent, compared with 9.5 percent at the jewelry retailer Titan.

Gold jewelry exports from India climbed 23 percent to $13.2 billion rupees in the eight months through November, according to the Gems & Jewellery Export Promotion Council data.

Import Duty

Imports of the metal widened India’s current-account deficit to a record $22.3 billion in the quarter to Sept. 30, prompting policy makers to consider higher duties for a second time in a year. The government last doubled taxes on bars and coins in March to 4 percent.

“We may be left with no choice but to make it a little more expensive to import gold,” Finance Minister Palaniappan Chidambaram said on Jan. 2.

Inbound shipments may have dropped to an estimated 750 tons in 2012, from a record 969 tons the previous year, Bachhraj Bamalwa, chairman of the All India Gems & Jewellery Trade Federation said the same day. The imports accounted for 80 percent of the deficit in the broadest measure of trade, a central official said in November. The shortfall has weakened the rupee against the dollar.

Chidambaram may raise the import duty to 6 percent, Bamalwa said. That may still fail to deter Indian consumers, Mehta said.

“Buying pattern of gold in India is not dictated by the price,” Mehta said. “There may be a lull for some time but demand will rebound within a few days.”

To contact the reporters on this story: Swansy Afonso in Mumbai at safonso2@bloomberg.net; Malavika Sharma in New Delhi at msharma52@bloomberg.net

To contact the editors responsible for this story: James Poole at jpoole4@bloomberg.net; Grant Clark at gclark@bloomberg.net


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