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Demand momentum for jewelry continued in 1QCY21, lockdowns temporarily dampen outlook

We analyzed the World Gold Council’s (WGC) quarterly demand trends for 1QCY21. The key takeaways are:

Lower gold prices led to strong consumer demand, but impacts ETFs

* Despite a sharp jump in consumer demand, global gold demand was down 23% YoY and flat sequentially at 815.7t mainly due to outflows from gold Exchange Traded Funds (ETFs). Softening gold prices was the key reason for both trends.

* Global jewelry demand was up 52.4% YoY to 477.4t in 1QCY21, led by India (up 38.8% YoY) and China (up 211.8% YoY). These two countries together constitute 55-60% of global demand.

* Global demand for bars and coins also saw a significant jump YoY (up 33.8%), but was lower QoQ (down 23.2%).

Consumer demand in India sees robust growth in 1QCY21

* Total consumer demand for gold in India, which includes jewelry, bars, and coins, witnessed a 37.4% YoY growth in 1QCY21 to 140t. On a QoQ basis, demand was down 24.8%.

* Demand for jewelry remained robust in India, with volumes up 38.3% YoY to 102.5t in 1QCY21. Demand was boosted by: a) easing of lockdown restrictions, b) lower gold prices, magnified by lowering of customs duty, and c) wedding demand.

* Demand for gold bars and coins continued to witness a surge during 1QCY21. With the bottoming out of gold prices, consumers advanced purchases in the form of gold bars and coins. Demand for bars and coins rose 33.8% YoY to 37.5t in 1QCY21. TTAN, as part of its 4QFY21 result commentary, indicated that gold coin and bar sales were disproportionately higher in the quarter.

Bullion imports see a sharp surge

* Net bullion imports, which constitute 85-90% of India’s gold supplies, saw a sharp (262%) surge in 1QCY21. Although growth is on a soft base of 1QCY20, it is at the highest level since 2QCY13. This indicates the extent of pent up demand.

* This sharp growth was due to robust consumer demand and stocking up ahead of upcoming festivals (including Akshaya Tritiya in May’21).

* The management of TTAN indicated in its post 4QFY21 result call last week that buying ahead of the wedding season continued up to mid-Apr’21 on the back of a correction in gold prices.

* Total gold supply grew 205.9% YoY to 316.9t in 1QCY21, after growing just 11.6% to 190.2t in 4QCY20.

Conclusion

* To summarize, three trends are increasingly discernible:

* There was a sharp YoY increase in jewelry demand in India in 1QCY20, as well as the rest of the world, especially China, due to an improving economic scenario, fall in gold prices, and festivities.

* There was a major drop in demand for gold as an investment, especially via ETFs, as a fall in gold prices and higher interest rates led to investors switching to other asset classes.

* There was a sharp increase in net bullion imports in India due to robust consumer demand and stocking ahead of festivals.

View on TTAN and outlook

* With the ongoing second COVID wave and lockdowns, the prospects for India in 2QCY21 (1QFY22) are less certain. All players are being affected by the lockdowns in several Indian states.

* TTAN indicated in its 4QFY21 earnings call that 50% of its stores are closed due to the lockdown and even the remaining ones are expected to be impacted sooner or later.

* Jewelry players are better equipped in CY21 to deal with the disruption due to the lockdowns, with omnichannel strategies and higher usage of technology, which may offset the impact to some extent.

* Once stores reopen, demand will rebound sharply as seen earlier, especially given the low gold prices (15% lower from its Aug’20 peak of INR55,900/10gm) and pent-up wedding demand. In our recent interaction with the India head of WGC, he indicated that higher gold prices were the key reason for lower demand in the past two years, and a respite (even after a small spurt in Apr’21) is likely to lead to strong demand once stores reopen.

* TTAN stands to gain market share from both unorganized as well as smaller organized players as consumers shift to trusted brands. The travails of smaller players during the pandemic would further accelerate this shift. With less than 10% market share in the Indian jewelry market, TTAN has a long runway ahead.

* Even when there was a 62% decline in net sales for TTAN in 1QFY21 due to a complete lockdown, it more than recouped those losses and ended FY21 with a 3% growth. The extent of impact on margin will not be as severe as last year, where it was affected by ineffective hedges, one-off bullion sales, a lower share of studded sales, and a higher proportion of gold coin sales.

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