In India, Gold-Related Shares Melt Down

June 28, 2013 Leave a comment

Jun 27, 2013

In India, Gold-Related Shares Melt Down

By Ashutosh Joshi

Gold-related Indian companies have seen their shares hammered this week, as global gold prices hit a three-year low and the Indian government’s efforts to restrict gold imports hit bottom lines.

Shares of jewelers such as Tribhovandas Bhimji Zaveri Ltd 534369.BY +0.54%PC JewellerLtd. 534809.BY +1.96%, and Gitanjali Gems Ltd. 532715.BY -9.99% have fallen by as much as 40% this week as overseas funds, especially, have dumped holdings. Investors fear that recent efforts by the Indian government to curb gold imports will hurt the jewelers’ profit margins.Meanwhile, stocks of lenders such Muthoot Finance Ltd. 533398.BY +3.30% andManappuram Finance Ltd. 531213.BY +3.77% have fallen 10%-18%, due to fears that falling gold prices will make it difficult for them to maintain margins on loans made against gold collateral and will cut revenue from auctions of physical gold.

“I am negative on gold retailers. The government’s reforms have put these companies’ business model at risk,” says Mitesh Shah, an analyst with Mumbai brokerage Inventure Growth & Securities Ltd. 533506.BY -3.85%

Gold prices slid to $1,223.80 a troy ounce on Thursday. International gold prices have fallen 25% this year, while prices in India have dropped 15% as the rupee has slid to a record low against the U.S. dollar. The rupee has fallen 11% against the dollar since the beginning of May.

Gold’s decline has accelerated in recent weeks amid indications by the U.S. Federal Reserve that it might soon begin to roll back its massive bond-buying program. The Fed’s loose monetary policy in recent years had helped drive prices toward $1,900 an ounce, as investors sought gold as a hedge against inflation.

India’s central bank has tried a number of measures to limit gold imports, which are blamed for worsening the country’s current-account deficit.  India is the world’s biggest gold consumer.

Since May, the Reserve Bank of India has restricted banks and trading agencies from importing gold on deferred payment, effectively requiring gold dealers to pay cash in advance for imports.

Mr. Shah said retailers will now have to raise fresh funds to buy gold, increasing their costs.

Retailers such as Tribhovandas Bhimji Zaveri and PC Jeweller get a chunk of their profits from converting gold into jewelry. Large retailers normally maintain an inventory of gold and benefit from rising prices. But the recent decline has eroded the value of gold held by these companies.

“It’s a double whammy for gold retailers,” said Paras Bothra, a vice president of equity research at Kolkata-based Ashika Stock Broking Ltd.

He said companies will now have to raise fresh working capital which could cut 10%-15% from their bottom line in the fiscal year that ends March 2014.

Mr. Bothra says the current slide in global equities markets may also have prompted investors to sell shares in these companies.

Mumbai-based Gitanjali Gems has been the biggest loser. It has lost 48.1% this week to trade at 262.75 rupees ($4.3)–taking off $374.2 million from its market capitalization of $777.4 million last week.

Filed under Macro Trends

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