India’s Gold Merchants Fight to Regain Their Glitter
Ever since the Indian government announced an import duty hike from 2% to 4% and an excise duty of 1% for unbranded jewelers on March 16, small gold traders have been upset. “The whole market is so confused,” says Mehul Choksi, chairman and managing director of Mumbai-based Gitanjali Gems, whose stock is down 13% from pre-budget announcement levels. Players like Gitanjali Gems say they will not be affected by the excise duty because they are branded players. The import duty is also expected to have only a negligible impact.
India’s gold market is highly fragmented and is dominated by thousands of small retailers and goldsmiths. The imposition of excise tax on these unbranded players will cut into their already razor-thin margins. And the accompanying paper work will only make life harder for them.
Meanwhile Gitanjali Gems—which did not shut any of its stores in the last few weeks—continues to be bullish on its growth prospects. Revenues at the gold and diamond jewelery maker have been on a tear, doubling from $1 billon in 2009 to $2.1 billion in 2011. Profits have risen from $30 million to $80 million in the same period. Revenues for the first nine months of fiscal 2012 ended Dec. 31 have hit $1.8 billion (as opposed to $1.6 billion the year before) and profits $72 million (as opposed to $58 million the year before). “We want to touch $6 billion in revenues by 2015-16,” says Choksi. “We want to put our shops in the best parts of the world.”
Gitanjali already derives 60% of its income from overseas operations. It has 111 stores in the U.S and one in Dubai. It’s picked up a slew of Italian brands in 2011 for $20 million; acquired a Japanese diamond company in March and is looking to acquire a 50-to-100 store chain in China shortly. As for India, it’s rapidly expanding into tier 3 and tier 4 towns.
The company, which was first featured in FORBES ASIA in 2008, has gone from one diamond processing plant to three in-house facilities in that period. Jewelry manufacturing units have also risen from two to seven and the number of stores has grown from 1,250 to 3,500 now. Moreover, Gitanjali owns top diamond brands like Asmi, Nakshatra and Gili, which are growing at the rate of 50% to 100%.
Meanwhile, its acquisition of Texas’ Samuels Jewelers in 2007, which was hit hard by the global slowdown in 2009, has just been turned around. “We suffered for two years in America but now we are doing well,” says Choksi.
But all this growth hasn’t come without hiccups. Last year the income tax department conducted a raid at Gitanjali’s Mumbai office for one and a half days alleging under-reporting of financials. Choksi claims it was routine. As for the upheaval in the gold sector, he feels it’s a temporary phenomenon which will die down.
India is the world’s largest gold consumer–followed by China–consuming 933 tons of gold in calendar 2011 representing a third of global demand. But consumption has dropped 7% in 2011 because of high and volatile prices. And now the import duty hike from 2% to 4% adds yet another wrinkle. This comes on the heels of a previous import duty hike in January when it went from a fixed rate of $6 for every 10 grams to 2% of the value.
But what’s really hit the unorganized jewelry industry is the proposed 1% excise duty on unbranded jewelry. Traders are also protesting another proposal to deduct tax at source for gold purchases in cash above $390,000. While the government wants to curb the flow of black money into the system, traders feel these measures will dampen demand and make it more onerous to run a business.
Meanwhile, gold imports are already down markedly for March–from an estimated 50 tons to about 20 tons. And for the entire first quarter gold imports are down 55%.
Source: Anuradha Raghunathan (Forbes)