Mumbai: Fitch today said it expects the Indian gems and jewellery industry to continue witnessing muted demand in 2012, with volume growth of below four percent for the overall segment.
The low volume growth may possibly be attributed to a reduction in discretionary spending both in the export and domestic markets, Fitch said in a release issued here.
However, a lean cost structure adopted by companies in the sector and limited further downside of macroeconomic factors impacting jewellery demand are likely to limit further deterioration in operating margins that was experienced in 2009, it added.
Exports, which constitute around 85 percent of the sales of organised companies in this sector, are likely to remain flat in volume terms, it pointed out.
The Indian households’ jewellery purchases depend largely upon discretionary spending power, which is affected by a reduction in the savings rate driven by high consumer price inflation and muted wage growth.
Additionally, the emergence of alternate investment options such as gold exchange traded funds, gold coins and bullion may structurally reduce demand for gold jewellery as an investment option.
Thus, business risk facing this sector is likely to increase and may be reflected by a higher volatility of revenue and margins, in line with the business cycle.
Fitch also expects operating margins to remain stable in the short to medium term as the companies have been able to contain a significant reduction in margins through cost control measures.