Gold price drop could spur jewellery maker profit in India

New Delhi-India (Dec 9)  While a strengthening dollar and an economic slump in China are battering stocks of jewellers from Tiffany & Co to Chow Tai Fook Jewellery, one company in India is predicting a demand pick-up after gold slid to a five-year low last week.

Rajesh Exports, India's biggest exporter of gold jewellery, is betting the decline in prices of the yellow metal will lure buyers both in its overseas markets and in the South Asian country, the world's second-biggest, helping boost revenue to a record, Chairman Rajesh Mehta said in an interview. Shares have surged almost fivefold this year, fuelled by its July purchase of Swiss refiner Valcambi that boosted its capacity sixfold.

"We are looking at a good order book," Mehta said. "This demand will continue for another three to four months. Prices have been on the downward side this whole year and because of that, the volumes will be good."

Expectations of an imminent increase in interest rates in the US have boosted the dollar and reduced the appeal of gold as an investment, delivering the third annual drop in prices. In signs consumers are buying more, data from the World Gold Council showed physical purchases globally jumped 8 percent to 1,121 metric tons in the third quarter, the highest in two years.

Mehta, 51, says his consolidated order book may grow almost 16 per cent to 280 billion rupees ($US4.2 billion) by the end of the financial year in March, from 242 billion rupees now, mainly due to major markets such as the Middle East, the US and the Far East.

Shares of the Bengaluru-based company rose 1.9 per cent to 684.15 rupees in Mumbai on Wednesday. They surged to a record 729 rupees on December 1 and the stock is the best performer this year on India's BSE500 Index and among the top 10 gainers on the Russell Emerging Markets Index.

In contrast, shares of Chow Tai Fook, the world's largest publicly traded jewelry chain have slumped 49 percent this year, Tiffany has dropped 29 per cent and that of Cie Financiere Richemont fallen 19 percent. Locally, shares of Titan Co. Ltd. have slid 5.7 percent and that of Tribhovandas Bhimji Zaveri Ltd. slumped 40 per cent.

Not all investors are bullish about the prospects of gold jewellery retailers in India as demand for bullion as an investment is shrinking with declining prices.

"Given the crazy run-up" in Rajesh Exports' stocks in the past three to six months, investors should be cautious, said Gaurang Shah, vice president at Geojit BNP Paribas Financial Services in Mumbai.  "You can trade but investments should be limited in this stock."

Valcambi will play a crucial role in the growth of Rajesh Exports and will contribute to 75 per cent of its revenue this year, Mehta said.

Rajesh Exports bought the Swiss refiner from owners including Newmont Mining for $US400 million. Valcambi processed and sold an average of 945 tons of gold and 325 tons of silver annually during the last three financial years. The acquisition takes the company's total refining capacity to 2,400 tons per year from 400 tons earlier. Rajesh Exports also owns 80 retail jewellery stores in the southern Indian state of Karnataka.

"I am seeing a surge in buying of gold and diamond-based jewellery as Indians always have a liking for them," said Suniil Pachisia, vice president at Pratibhuti Viniyog Ltd. in Mumbai. "Currently demand for jewellery is high as the Indian wedding season is on."

The gold council forecasts global demand this year at 4,200 to 4,300 tons from 4,217 tons last year, while India's consumption is estimated between 850-950 tons from 811 tons in 2014.

Post the Valcambi buy, Rajesh Exports is also looking at further acquisitions as it seeks to cement its role as a major player in the global bullion industry.

The Valcambi acquisition would yield better results in the coming quarters as benefits of synergies of both the companies kick in and set a new world order in gold business, brokerage Firstcall India Equity Research said in a report on November 16, initiating a 'buy' call on the stock.