Retail jewellers facing elongated working capital cycle amid lockdown: Ind-Ra
May 12, 2020
Mumbai (Maharashtra) [India], May 12 : Most retail jewellery players either have sufficient liquidity available or are backed by strong bank funding or outstanding free cash which will enable them to manage liquidity in the short term, India Ratings and Research (Ind-Ra) said on Tuesday.
In an assessment of the impact of COVID-19 pandemic, Ind-Ra said the demand shock and consequent lockdown will lead to a 25 per cent decline in overall jewellery sector revenues in FY21.
For FY22, Ind-Ra expects a recovery in revenues as well as profitability supported by higher gold prices, continued consumer interest in gold jewellery for traditional reasons and gold being an attractive investment destination.
Ind-Ra expects that the average profitability margin of its A-minus and above-rated portfolio will be negatively impacted in the range of 25 to 50 basis points in FY21 but will remain comfortable at four to six per cent.
At end-FY20, the sector's inventory cycle is expected to have optically stretched due to higher inventory holding cost and inability to sell accumulated stock due to the lockdown.
Ind-Ra said the inventory holdings will be consolidated during FY21 in volume terms and expects the inventory cycle to remain elongated at 105 days in FY21 (FY20: 84 days, FY19: 75 days) on account of an increase in gold prices and estimated decline in revenues.
The working capital cycle will be partially supported by five to ten days of extension to creditor days. Any jewellery capex is heavy on inventory and light on fixed assets.
Thus, the working capital cycle for players with high capex plans is expected to have elongated due to incremental inventory being placed at new showrooms that may not pick-up sales immediately.
Besides, lack of labour availability and supply chain disruptions may not be an immediate challenge but it may delay recovery further and affect the preparedness for the peak season, said Ind-Ra.
