Import duty hike likely to weigh on stocks of gold jewellery retailers

Analysts were bullish on Titan before, but may downgrade target price

The hike in import duty on gold is designed to dampen import demand. The basic duty hike to 12.5 per cent from 7.5 per cent also has a load of 3 per cent goods and services tax (GST). This hike is designed to ease pressure on the country’s trade account and the rupee.

Gold is the second biggest item on the import list and accounted for $46 billion in financial year 2021-22 (FY22), up from $34.6 billion in FY21. Volumes rose to at least 842 tonnes, according to latest official data between April 2021 and February 2022, versus 642 tonnes in FY21 (April 2020-March 2021). In May, an estimated 98 tonnes were imported, up from 27 tonnes in April, and a 9x jump year-on-year (YoY) over 11.5 tonnes in May 2021.

The lion’s share of imports was by jewellers, who accounted for $39 billion of jewellery exports in FY22. Excise duties on gold exports have also been hiked. Jewellers have appealed to the government to reconsider this, after having lobbied unsuccessfully for a cut in basic import duty to 4 per cent in the FY23 Budget. The differential between international prices may be enough to incentivise smuggling, according to jewellers. International prices have declined due to the strong US dollar — there’s an inverse relationship, since prices are dollar-denominated.

This move may hurt jewellers. They will have to pass on the price hikes, both domestically and with exports. This may reduce domestic demand and the competitiveness of exports. Smuggling could lead to diversion of demand.

There wasn’t much impact on the share prices for Titan, Kalyan Jewellers, and PC Jewellers immediately after the government’s announcement and analysts have ‘buy’ recommendations on the sector. This follows on a flat Q4, when gold prices swung a lot. The wedding season (May) was said to have been strong. But Titan saw a decline in share price in June. Analysts had target prices for Titan in the Rs 2,500-2,900 range before the duty hike. This represents a considerable upside from the current price, but there could be target downgrades.

It is hard to assess the impact on non-banking financial companies (NBFCs) in the gold loan market. There is a delicate balance here. The demand for loans against gold generally occurs when household finances are stretched, and this is when the economy is not doing so well. The last three years have pushed up loan demand with high unemployment and rising inflation. However, if the distress levels are high, there are defaults and then the lender has to auction the gold. If there are many auctions, NBFC margins will be hit.

Most analysts feel with a recovering economy, the growth rates of gold loan demand may taper this fiscal. Rates on offer may be hiked, given the Reserve Bank of India’s (RBI’s) new monetary stance. There are also seasonal factors, with wedding seasons leading to higher redemptions. However, June has reportedly been strong in terms of loan demand. There’s aggressive competition in the segment, which means more NPAs. There’s been considerable price volatility for Muthoot Finance and Manappuram Finance in the last month, with both gaining after the hike.