The hike in custom duty on gold imports may impact overall jewellery demand and hit the profitability of companies if the demand tapers. According to analysts, sentiment towards jewellery stocks will turn negative immediately due to a knee-jerk reaction.
Most jewellery companies have started registering better financial performance in the last two months after a depressing beginning this fiscal. The December quarter for jewellery companies is expected to be much better on the back of a pick up in demand during the festival season.
However, with the sudden hike in import duty there is lot of uncertainty on demand. There is wide perception that an increase of Rs 60 per grams will not impact the demand.
CJ George, Managing Director, Geojit BNP Paribas Financial Services, said more than the duty hike, the policy stand of the Government to discourage gold imports through the duty hike is more worrying.
May lead to smuggling
“With a lot of hard work, we have managed to do away with gold smuggling. With higher duty structure, this phenomenon will reoccur and lead to unwarranted illegal activity,” he said.
Gold prices in India have bucked the global trend and remained firm. This was due to the rupee deprecation against the dollar. In fact, the recent volatility in gold prices has put off customers in India during the major part of this fiscal.
Hit by high prices and lower demand, jewellers have offered discounts and turned innovative with light weight jewellery and gold plated ornaments. The World Gold Council offered seven per cent discount on gold coins between October 16 and December 31 to celebrate the festival of Dussehra and Diwali.
The sudden hike in customs duty comes at a time when customers are getting used to the prevailing gold prices. This will only hurt demand, said an analyst.
'Chasing too likely'
Contrary to general perception, Rajesh Mehta, Chairman, Rajesh Exports, feels that the Government will not succeed in taming high gold demand by increasing the import duty.
“Increase in gold prices will only attract more people. With the steady rise in prices, they will not think twice before putting their hard earned money in jewellery,” he said.
Gold demand in India increased nine per cent in the September quarter to 223 tonnes (205 tonnes) largely due to seven per cent rise in jewellers demand to 136 tonnes. In value terms, overall demand was up 27 per cent to Rs 65,373 crore, according to the World Gold Council data.