Why are jewelry stocks underperforming despite gold's price surge?
What's the story
Jewelry stocks in India have been unable to match the meteoric rise in gold prices, which have surged over 70% in a year. Eight of the top 10 gems and jewelry companies by market capitalization are struggling on Dalal Street. The biggest loser is PC Jeweller, whose shares have plummeted by a whopping 44% in a year. Senco Gold follows closely with a decline of 43.5%.
Performance
Other jewelry companies also witness significant stock declines
Apart from PC Jeweller and Senco Gold, other major players in the jewelry sector have also witnessed a sharp decline in their stocks. Kalyan Jewelers's shares have fallen by 35%, while Sky Gold & Diamonds's shares have dropped by 38%. New entrants such as PN Gadgil, Bluestone Jewellery, and Motisons Jewelers have seen their stock prices decline by 15%, 1%, and 45%, respectively, over the past year.
Analysis
Analysts highlight key factors for underperformance
Analysts have pointed out three main reasons for the divergence between gold prices and jewelry stocks. Pravesh Gour, Senior Technical Analyst at Swastika Investmart, said rising gold prices increase raw material costs and working capital requirements, thus putting pressure on margins. He added that higher gold prices often hurt affordability and slow down consumer demand as they are an input cost for jewelers, not a direct profit driver.
Market challenges
Weak volume growth and lower liquidity impact stocks
Gour also pointed to weak volume growth as another key factor for the underperformance of jewelry stocks. He said when gold becomes expensive, buyers either delay purchases or opt for lighter jewelry, leading to lower sales volumes and reduced operating leverage. This is especially true during wedding and festive seasons where price sensitivity is high. Additionally, rising interest costs and tighter liquidity conditions have affected jewelers with higher debt and inventory funding needs.
Market dynamics
Consumer behavior affects jewelry demand
Commenting on the impact of gold prices on jewelry demand, Sonali Shah Sheth, Founder and Creative Director at Sohnaa, said that record-high gold prices are certainly influencing buyer behavior. However, she added that the impact is nuanced rather than uniform. "There is a clear wait-and-watch sentiment among some consumers who expect prices to soften while others believe prices may rise further," Sheth observed.
Currency impact
Rupee weakness complicates gold buying
A Mumbai-based dealer told Reuters that the weakening rupee is making gold even more expensive for Indian buyers. This has made it difficult for jewelers to decide when and how much to stock up.