Jewellery Stocks To Glitter More

The recent announcement of a reduction in Basic Customs Duty rates on gold, silver and platinum will certainly bode well for those in the organised jewellery business. Companies that have significant hedging of gold will benefit the most. Also, the demand for gold is bound to increase, thus creating an overall positive effect on the stocks of gold companies. Vaishnavi Chauhan takes a closer look at the emerging scenario 

The most notable event recently was the Union Budget 2024. Among various important announcements regarding employment, infrastructure and tax rates, a key highlight for investors was the revised Basic Customs Duty (BCD) rates on gold, silver and platinum. Finance Minister Nirmala Sitharaman announced significant cuts in import duties for gold and silver bars, which will benefit gems and jewellery companies with unhedged gold. The import duty on gold and silver has been reduced to 6 per cent from the previous 15 per cent. Similarly, the import duty on platinum has been lowered to 6.4 per cent from 15.4 per cent. 

These rate cuts are effective immediately. Some companies set to benefit significantly from the budget announcement include Tata Group-backed jewellery giant Titan Company and Senco Gold. The price of gold is expected to decrease, while the demand is likely to rise. For investors, the holding period for physical gold has been reduced to 24 months from the previous 36 months. If physical gold is sold within 24 months, the gains will be taxed according to the investor’s income tax slab, which remains unchanged. 

So, as investors, it is quite likely that you would like to know more about BCD and its impact on the gems and jewellery business. BCD is a tax imposed by the government on goods imported into the country. It is a key part of the customs duty structure. The BCD is usually calculated as a percentage of the value of the imported goods. For example, if the BCD on a product is 10 per cent and the value of the imported goods is ₹100, the customs duty would be ₹10. The BCD duty charged differs from item to item and the government has the right to exempt or reduce any item from being taxed the BCD. 

Impact of BCD

First of all, a reduced BCD directly lowers the cost of imported commodities. This happens because the tax levied on the product is lower, making it cheaper for importers. This decrease in cost is often passed on to consumers, leading to lower prices of the final products. For example, if the BCD on raw materials used in manufacturing is reduced, the cost of the finished product will likely decrease as well. Second, a lower BCD increases competition. Imported goods become more competitive compared to those produced domestically. 

This competition benefits consumers by offering a wider range of choices and potentially lower prices. Overall, for consumers, reduced BCD is generally positive. The impact of reduced BCD on commodity prices depends on several factors. These include how sensitive the demand for a commodity is to price changes, the capacity of domestic production to meet demand, global market conditions for the commodity, and other taxes and duties that apply to the imported goods. 

Top 10 Jewellery Stocks According To Market Capitalization 

Impact on Stocks 

Here is how the revised BCD will impact the jewellery stocks in the Indian markets i.e. the effects of budget announcements on bullion and silver for gems and jewellery companies: 

1. Reduction in BCD and AIDC Rates -

The reduction in BCD and Agriculture Infrastructure and Development Cess (AIDC) rates will lead to a decrease in gold prices. AIDC is a component of the overall customs duty. Adding 5 per cent AIDC, which remains unchanged, the total import duty on gold and silver is reduced from 15 per cent to 11 per cent. This price correction may help boost demand, especially the pent-up demand from the first quarter of the fiscal year.

2. Impact on Jewellery Companies -

Jewellery companies that do not hedge their gold prices will see the most significant impact on their profit margins. Further, companies with higher gold metal loans will also be affected, but to a lesser extent.

3. Benefit to Organised and Hedged Players -

Organised and hedged jewellery companies stand to benefit from a reduction in smuggled gold. The decrease in customs duty reduces the price difference between legally imported and smuggled gold, making smuggling less profitable.

4. Impact on Franchisees -

Franchisees of organised jewellers may be affected differently based on their level of hedging. Those who hedge their gold prices will experience less impact than those who do not.

5. Making Charges -

The reduction in BCD and AIDC may also affect the making charges for jewellery, but the specific impact will depend on various factors, including the cost structure of each company.

6. Gold as a Long-Term Asset -

Gold held for more than 24 months will now be classified as a long-term asset. This change is significant for investors and jewellery companies alike. 

Positive Outlook for Organised Jewellery Companies 

The reduction in BCD and AIDC is a positive move for the organised jewellery companies with a larger hedged portfolio. Companies like Titan Company and Senco Gold, which have significant hedging, are expected to benefit the most. The budget announcement is likely to lead to a substantial increase in jewellery consumption. That is because when it comes to gold, people tend to either invest directly in physical gold or indirectly via stocks of gold companies. This trend will also positively impact gold stocks listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). 

Gold Price Correction and Benefits 

The correction in the price of gold will certainly have tangible benefits, such as:

1. Essential Correction in Gold Prices -

The recent reduction in gold prices was much needed. Without this correction, it was becoming increasingly difficult for retailers to invest in gold. High gold prices were a significant barrier for small and medium-sized retailers who rely on gold as an investment and a product for their customers.

2. Impact on Farmers -

Farmers, who often invest in gold after harvesting their crops, will benefit from the price reduction. The harvesting season is approaching soon after the rainy season, and lower gold prices will make it more affordable for them to buy gold. Investing in gold is a traditional practice among farmers as a way to secure their earnings and savings.

3. Wedding Season Boost -

India is well-known for its wedding seasons, particularly towards the end of each year. This period sees a peak in gold purchases as gold jewellery is an integral part of Indian weddings. Preparations for weddings, including the purchase of gold, begin months in advance. The reduction in gold prices has provided a sense of relief to families planning weddings, making it more affordable for them to buy the necessary gold jewellery 

The recent price correction in gold has been a welcome change, providing relief and encouragement to various groups who rely on gold for investment, savings and cultural practices. The reduction in customs duty on gold and silver is viewed as a beneficial move for the organised jewellery sector. It encourages higher consumption and offers a competitive edge to companies with well-managed hedging strategies. These combined sentiments are poised to boost the stocks listed on the exchanges.