Is it the tripping point for the Indian jewellery makers in India? And why is Gitanjali Gems leading the pack of jewellers affected by the gold crisis in India? Has the sheer size of the Group led to lack of proper control or is it the case of ‘fingers into too many pies’? Maybe, over ambitious plans went wrong? Too many questions, but not all of them have answers.
At the moment a probe continues into dealings in shares of Gitanjali Gems, quite a number of foreign and domestic institutional investors have increased their exposure to the jewellery maker. A point to be noted here is that the increase in the shareholding of foreign institutional investors (FIIs) and Domestic Institutional Investors (DIIs) during April-June quarter coincided with a more than 50 per cent plunge in the share price of Gitanjali Gems.
As per the latest data available with the stock exchanges the Life Insurance Corporation (LIC) biggest institutional investor in the stock market, held almost 4.36 per cent stake in Gitanjali Gems during the Jan-Mar quarter, which has now risen to 4.89 per cent as of June 30. On the whole, domestic institutional investors' holding in the jewellery firm went up to 5.77 per cent from 4.45 per cent during the period.
But what is surprising is that the beaten-down Gitanjali Gems shares fail to deter LIC and others from raising their stake. In spite of the 65-percent fall in the share price of Gitanjali Gems in the April-June quarter, institutional investors had chosen to increase their holdings in the stock. The Stock Exchange data revealed that LIC purchased around 4.84 lakh shares of Gitanjali Gems during the April-June quarter and increased its holding to 44.99 lakh shares (4.89% stake) compared to 40.15 lakh shares (4.36%) in the quarter ended March 2013.Besides, FIIs raised their stake in the company from 19.98 to 21.65 per cent at the end of June quarter, in the preceding three months.
Last week SEBI, the market regulator and the bourses had suspended trading activities of 26 entities, including Gitanjali Gems promoter Mehul Choksi and firms linked to Prime Broking. This was as a part of a probe into suspected market manipulations while dealing in Gitanjali Gems shares. They had decided to suspend 'unique client codes' of 26 entities from trading for a period of six months till the probe is over.
Gitanjali Gems' stock dived by about 53 per cent in the last quarter and since the start of July, the company's stock further slipped by 58 per cent. It is currently trading at around Rs 90 levels on the BSE.
Blame it on the Government... But then the Government of India did what it had to do taking steps to bring down gold imports in the country. Gold, incidentally, is the second biggest import item after crude oil by India. The country is the world's biggest buyer of bullion and rising gold imports contribute to higher current account deficit. So, to safeguard the country’s economy and progress, such steps are inevitable; and the Government of India took the right steps.
A few days ago, in a bid to tighten gold imports in the face of a widening CAD, the Reserve Bank of India (RBI) set stringent conditions for importers. It has linked inward shipments to future exports, which will make it costlier. Through a notification, the RBI ordered that banks and authorized agencies will have to ensure that at least 20 per cent of imported gold is made available for exports. Also, the importers will be required to keep 20 per cent of the consignment with customs bonded warehouses. The restriction comes at a time when gold imports plus oil, are putting pressure on the current account deficit, which reached a record high of 4.8 per cent in the financial year 2012-13.
The RBI said in its notification that "It shall be incumbent on all nominated banks/nominated agencies to ensure that at least one fifth of every lot of import of gold (in any form/purity including import of gold coins) is exclusively made available for the purpose of export. Further, they shall make available gold in any form for domestic use only to entities engaged in jewellery business/ bullion dealers supplying gold to jeweller”. The RBI also said banks and other authorised entities will be permitted to undertake fresh imports of gold only after the exports have taken place to the extent of at least 75 per cent of gold remaining in the customs bonded warehouse.
This RBI notifications had traders and jewellers claiming that the restriction is likely to make gold costlier in the coming days, but exporters however hailed the RBI move saying that gold availability for exports will increase. Vipul Shah, Chairman ,Gems and Jewellery Export Promotion Council welcomed the ratio of 80:20 and said that as 80 per cent of imported gold would be available for domestic use, 20 per cent of it would be exported, which will boost exports and foreign revenue.
But, as the government has made it mandatory to export 20 per cent of imported gold, will the exporter be under pressure to export at any given price and if there is any export loss, will the exporter turn to domestic sales to recover the loss is left to be seen.
The stock price of Gitanjali Gems Ltd has now been battered down to its lowest in 29 months. The scrip has hit its lower trading limit for 11 straight trading sessions to its lowest since February 2011. The stock has shed 67.3% since the beginning of 2013.The shares of Gitanjali have plunged the most among listed jewellery companies. Other companies like Tara Jewels Ltd, PC Jeweller Ltd and Tribhovandas Bhimji Zaveri Ltd also slumped 48.7%, 43% and 20.3%, respectively.
In the month of May, RBI said the precious metal could only be imported without restriction by exporters of gold jewellery and In June, it said gold importers will require pay cash upfront without getting any credit period for purchases. This regulation affected Gitanjali’s gold jewellery business which is about 30% of total sales. These changes in policy led to non-availability of gold as well as change in working capital and funding requirement for the jewellery business on the whole.
Gold imports in June plunged by more than 80% to around 31 tonnes from 162 tonnes in May cramping the market to a great extent. Besides, the funding constraints were also because of the sharp spike in borrowing costs for gold jewellery makers. And for all listed jewellery companies it was a major problem and these issues also reflect in the stock price.
Earlier jewellery companies like Gitanjali Gems were availing loans from overseas banks at rates of 2% or below, but because of the Indian Government’s gold import restrictions, most jewellery companies were not able to get loans at cheap rates. This drove Gitanjali to raise money from the public by offering a fixed deposit scheme for one to three years with a minimum amount of Rs.25,000 with attractive interest rates.
According to Gitanjali, the company has also changed its product mix and has started focusing more on the diamond jewellery business. Besides, as it already had a vast network of retail and distribution of stores in these markets, it will deliver results for their diamond jewellery. But, market analysts however say that in 2013, diamond contributed 38% to the firm’s total revenue and the remaining 62% came from the jewellery business and half of the jewellery business is gold jewellery.
About 34% of the firm’s promoter holding of 60% of total equity is apparently pledged. Though, by March end foreign institutional investors held 19.98% in Gitanjali, dealers however say that some of it could have been sold recently; and that foreign institutional investors may be selling heavily because of the change in business plan. Will this affect the Company’s fundamentals adversely is something to wait and see.
All said and done, with almost all the jewellery makers’ shares sliding down, Gitanjali Gems seems to be in the doldrums, at least till today. When the share price of one of the world’s largest integrated jewellery sector players with diamond business as its core has tanked over 90% in one month, one wonders what went wrong. Is it the unseen force that brought about this situation for the jewellery makers on the whole?
Of course, Mehul Choksi, CMD stoically maintains that he estimates the company’s overall margins to move up this financial year. While admitting that there is a decline in their gold business with 25-30% of contribution from this segment in overall turnover of the company, the remaining 70-75% which is the core DNA is gradually improving. He said that the share of gold business was just 5% in overall profit and the loss from this segment will be absorbed from the diamond sector which is a high margin business. According to him, the company will focus on core competency of diamond jewellery.
Choksi claimed that the company’s debt-equity ratio had stayed at 1:1 in last few years. And for the next five years growth plan, they may raise capital to fund growth plans. Profit in gold company’s jewellery was just 5% and hence the business growth would be expected to come from diamond jewellery which has better margins and improving the cvompany’s profitability on overall basis.
While Gitanjali Gems seems to be going downhill, the company officials insist it is an industry problem and not Gitanjali specific, which is fair enough. Gitanjali’s officials are confident too of the company’s revival as its fundamentals are supposedly strong. The company is now looking at strengthening its diamond jewellery portfolio to offset the pressures in the gold business. Only recently the company launched its 100th store in Gurgaon, near New Delhi. And plans are afoot to add 50-60 new stores in the next 18 months.
Aruna Gaitonde, Rough&Polished, Mumbai
