Jewellery stocks jump on ease in gold import norms

For the gem and jewellery sector, the new government has brought glad tidings. The much-awaited easing of gold import norms by the RBI, even though partial, saw stocks in the sector rally sharply on Thursday. Titan gained 6.5 per cent while PC Jeweller, TBZ and Thangamayil Jewellery shot up almost 20 per cent.

Besides raising the import duty to 10 per cent from 4 per cent, two big curbs were introduced last year to contain rising gold imports which were playing havoc with the current account deficit (CAD).

One, the central bank had prohibited credit of any kind for import of gold for domestic consumption. So, the so-called gold-on-lease model was no longer available to jewellers; they had to pay the entire amount upfront to buy gold.

Under the gold-on-lease model, jewellers enjoyed a credit period within which they could settle payments for the gold purchased based on the rate at which it was sold to end-users. This helped them hold low inventory and save on interest cost. But with the upfront payment rule, jewellers had to resort to more short-term borrowings for working capital, incur interest expenses and bear inventory risks/hedging costs. This change in business model dented their margins.

Next, the RBI, through the 20:80 scheme, linked gold imports by authorised agencies and banks to the quantum of exports. It mandated nominated banks and agencies to ensure that at least 20 per cent of the gold they imported gets exported. Fresh imports were permitted only after the 20 per cent was actually exported.

These measures led to a tight squeeze on gold supply, raised domestic price premiums and badly impacted the gems and jewellery sector. It also led to a sharp rise in smuggling of the yellow metal. Consumer demand for gold slipped. Jewellers were thus caught in a pincer.

With the CAD now tamed and in response to the repeated pleas from the sector, the RBI has made a couple of concessions. While the 20:80 scheme continues, the central bank has now allowed more players (star trading houses and premier trading houses) to import gold under the scheme. Under last year’s curbs, only nominated banks and agencies were allowed to import the metal. But this easing comes with conditions attached.

The trading houses should have imported gold prior to the introduction of the 20:80 scheme. This means that only erstwhile players, and no new entrants, can again start importing gold. That said, more choice will now be available to domestic jewellers to source gold.

Next and importantly, nominated banks have been allowed to give gold metal loans to domestic jewellery manufacturers from the eligible domestic import quota of 80 per cent. This means that the gold-on-lease has been reinstated. The catch here is that only nominated banks (and no other gold importers) can offer these loans to jewellers. Also, the banks can lend only to the extent of loans outstanding on their books as on March 2013.

Effectively, the RBI even while allowing more gold importers to enter the fray has imposed restrictions that the gold-on-lease model can be offered only by nominated banks and that too only up to limits which they used to lend earlier. Jewellers who seek gold on loan will have to approach these banks.

The calibrated easing of the curbs suggests that the RBI is adopting a cautious approach and doesn’t want to be caught on the wrong foot.

While the return of the gold-on-lease model will benefit almost all jewellers, those such as PC Jeweller with an export component in their business, stand to benefit more.