Investors have been preferring gold instead of stocks of jewellery companies. While investors have got bullish on the yellow metal, with Gold ETFs hitting a record inflow of ₹3,751 crore January, the recent rout in the market has not spared stocks linked to gold. Many of them being mid- and small-cap stocks, the bears have been harsh on them.
From the respective all-time highs, major listed companies have lost between 18 per cent and 58 per cent (refer table). Titan Company saw the least decline, whereas Senco Gold was the top loser as its stock price more than halved. Kalyan Jewellers, Thangamayil Jewellery and P N Gadgil Jewellers have fallen heavily by 39 per cent, 35 per cent and 34 per cent respectively.
While the broad market sell-off did have a bearing, the sell-off appears justified given the hefty valuations at which they were trading at peaks.
Expensive buy
As the stock price of the jewellery stocks was on the rise, valuations hit through the roof last year. The trailing price-earnings (PE) multiple of companies, at their respective peaks, were between 52 and 123. Kalyan Jewellers, Senco Gold and Titan Company were the most expensive with a PE ratio above 100 at their respective peak. Given the profit growth (refer table), the valuations were stretched.
While these stocks rode on the broader bull trend in the market, a key factor that added momentum to the rally was the duty cut for gold imports. In the July 2024 Budget, the first full Budget for the fiscal post the General Elections, the import duty was cut to 6 per cent from 15 per cent.
Gold price in the domestic market dropped sharply (nearly 7 per cent in a matter of one week) post-duty reduction. This happened as we approached the festival/wedding season and the drop in price was seen as an icing on the cake, as jewellers expected a boost in the topline.
The potential inventory loss due to sudden decline in gold price did not have a bearing on the price, at least in the following months post the duty cut as sales was expected to go up and compensate. So, the net impact of duty cut was seen as positive for the jewellery companies. This led to an extension of the price rally in jewellery stock, further lifting the valuations to exorbitant levels.
But losses have been carried over to the latest quarter as companies took time to churn the inventory that they stacked up at higher costs before July. Thus, margins have been under pressure. This at a time when sentiment on small-caps has turned negative, had added to the pressure. PN Gadgil, though, managed to improve margins with better inventory management.
The valuation being very expensive already and the margin compression in a low margin-high competition industry like jewellery is a recipe for a downtrend. Moreover, seasonality helped with higher sales even though gold prices sharply recovered in the last two quarters. However, this may not be the case, going ahead.
Price risk
The impact of the duty cut is a one-off event, and the companies have come past it. So, going forward, there is scope to improve their margins in the coming quarters. However, there is a considerable challenge – increasing gold prices.
There seems to be no stopping the rally in the yellow metal prices. The price of gold futures in the domestic market as well as in the price of spot gold in the international market has appreciated nearly 12 per cent each so far in 2025.
In the absence of major festivals in the near future, the demand could take a hit as buyers might opt to postpone their purchases, especially with a sharp rise in gold prices.
Moreover, the industry being fiercely competitive in nature, some companies might resort to discounts to improve topline and maintain market share at the cost of profitability. Therefore, the outlook for jewellery stock is a bit cloudy.
Even from a valuation perspective, major companies do not appear cheap even after the correction.