P N Gadgil, Muthoot Finance, Kalyan Jewellers Stocks Plunge - Know What’s Behind the Sell-off

Shares of companies which manufacture gold jewellery and finance gold loans came under pressure on May 15 following the Directorate General of Foreign Trade’s (DGFT) decision to impose a 100-kilogram cap on duty-free gold imports under the Advance Authorisation scheme.

The latest import cap has created a "double policy shock" which led to selling across major stocks like P N Gadgil Jewellers, Muthoot Finance, PC Jeweller, Kalyan Jewellers, and Thangamayil Jewellery. Shares of PN Gadgil witnessed significant selling as they closed lower by 10 per cent at Rs 573.9 apiece on the NSE. Shares of Muthoot Finance finished the session at Rs 3,311.40 apiece, down by 6.22 per cent.

Other stocks within the sector, such as Kalyan Jewellers, PC Jeweller and Thangamayil Jewellery, finished the session lower by 2.20 per cent, 1.76 per cent and 0.62 per cent, respectively. On the other hand, Senco Gold and industry heavyweight Titan managed to stave off the selloffs, while Titan shares finished the session at Rs 4,169.10 apiece, up by 0.82 per cent; shares of Senco Gold closed the session at Rs 334.70 apiece, down by 0.25 per cent.

Double Whammy For Gold-Related Stocks

The turbulence seen in jewellery stocks came as D-street factored in the new policies imposed by the Centre. On May 13, the Ministry of Finance changed the industry's cost structure by raising the effective gold import duty from 6 per cent to 15 per cent. This development was closely followed by the Directorate General of Foreign Trade (DGFT) imposing a 100 kg import cap per license under the Advance Authorisation scheme on May 14.

For shares of companies in the gold jewellery sector like P N Gadgil, Kalyan Jewellers, and Thangamayil, these rapid changes are expected to cause an immediate escalation in working capital requirements. For these companies, gold is the primary raw material, and a nine per cent jump in import duty forces these retailers to either hike prices and risk a drop in consumer demand or absorb the costs themselves and face a significant contraction in profit margins.

On the other hand, the 100 kg import cap specifically targets the plumbing of the gold bullion trade. The import cap seeks to prevent the diversion of duty-free gold into the domestic market. Notably, this import restriction is likely to create a liquidity crunch for mid-sized players who rely on high-volume turnover.

Additionally, gold loan providers are also likely to see a shift in loan-to-value ratios and a potential cooling of new credit growth. Vijay Kuppa, CEO, InCred Money, told Outlook Money that the reason behind the decline seen in gold-loan NBFC stocks is likely due to a knee-jerk reaction to falling gold prices.

“Gold loan NBFCs trending lower on the bourses today appear to be a knee-jerk reaction to falling gold prices. When gold prices fall, gold loan NBFCs experience reduced collateral value, leading to higher LTV (loan-to-value) ratios,” Kuppa said.

The broad-based fall in stock prices across these firms indicates a market-wide fear amid changing policy norms as India aims to curb non-essential foreign exchange outflows and preserve reserves for critical imports like crude oil and fertilisers, narrowing the current account deficit and stabilising the rupee amidst global economic uncertainty.

Despite the heavy selling pressure, Titan managed to close the day in the green, largely due to Titan’s inventory management and its "gold on lease" model. Unlike smaller regional players, which may struggle with the immediate cash flow needed for replenishment under the new 15 per cent import duty regime, Titan’s scale allows it to realise immediate gains on its current stock of gold.

“Inventory gains can lead to substantial one-time profit boosts. While inventory gains can provide a competitive edge in scenarios like imposition of import caps and import duties, it would result in a slower pace of growth for an industry already grappling with demand woes consequent to the movements in gold prices and increased volatility over the course of the past year or two,” Kuppa said.

Kuppa added that the two policy reforms are expected to act as a headwind for the gold jewellery industry in the near term. However, he added that organised players are expected to perform better.

“The measures present a near-term negative for the industry and will pressure retail operating margins further. Organised players are likely to perform relatively better given better inventory management practices,” Kuppa said.

Kuppa also highlighted that companies within the sector are likely to bank on jewellery recycling amid the likely price rise.

“Medium-sized jewellery outlets might see the most consolidation and closures given declining footfalls, amidst continuously high expenses incurred in running jewellery stores. Across the board, jewellers will continue to bank on customers exchanging old jewellery to make new pieces to drive profits, given that companies make a significant portion of their profits from making charges and inventory management,” Kuppa said.