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Jewellery Hallmarking – Under-appreciated facets

Consensus understands and appreciates jewellery hallmarking (JH) as a tailwind for industry formalisation. In our view, the impact is far higher.

We believe that JH may likely lead to:

(1) further industry consolidation (apart from formalisation),

(2) likely traceability of raw material (gold) leading to potentially higher imports through formal route,

(3) material business disruption for informal players in converting their inventory to hallmarked standards (necessity to melt and recreate ornaments),

(4) opportunity for design-oriented brands to realise higher brand premium (versus commodity++ / unbundled pricing mostly, as of now),

(5) higher industry-wide efforts to drive premiumisation (higher share of studded),

(6) consumers may choose to convert ‘old jewellery’ to hallmark-compliant ornament in FY21-23E, potentially driving consensus earnings upgrades in Titan and Kalyan Jewellers.

<15% of the jewellers are registered:

We expect accelerated consolidation in the jewellery industry given the increasing regulatory requirements. According to World Gold Council, India has around ~400,000 jewellers, out of which only ~40,000 have been BIS certified. Experts believe that several jewellers have multiple business streams and sale of jewellery may not be the core business. Secondly, industry experts reckon that only ~30% of the gold jewellery in India is hallmarked.

>15% increase in product cost for the informal players.

Unorganised segment continues to be dominant in the jewellery market (c.70% share) as it offers lower product price (some of it is optical though) than the organised segment. Hallmarking implementation is expected to create a level playing field for all the players:

* Payment of custom duty. India imports bulk of its gold requirements, which attract custom duty of ~10% (reduced from 12.5% recently). Given the requirement to have input-output traceability (through hallmarking), we believe this may potentially lead to higher procurement costs for informal segment.

* GST compliance. We believe implementation of hallmarking may potentially lead to better GST compliance in the medium term. As per industry experts, the practice followed by some informal players of “selling without bill” may be difficult in the future.

* Product quality. We believe the unorganised segment may potentially have to increase the making charges to make sale of hallmarked jewellery viable. Historically some informal players may have utilised the arbitrage between selling lower cartage jewellery and lower making charges.

ST impact – on inventory.

We believe the unorganized players which may be holding non-hallmarked jewellery will have to upgrade it to meet hallmarking requirements (91.6% purity mostly).

Industry trends:

* Increased importance of brands and designs. Given higher regulatory compliance, jewellers will eventually be able to earn just from making charges (apart from unhedged metal exposures, if any). As plain gold jewellery has an inherent limit on the amount of making charge, complex and intricate designs will increasingly gain importance. Some of these trends can be empirically seen in the south market, which has higher share of organised players. We believe jewellers in south India have laid more importance on offering better designs to improve their brand equity and ability to charge higher making charges.

* Increased efforts to drive premiumisation (studded). Parity in the jewellery industry will drive industry-wide premiumisation efforts, in which studded will play a key role. Studded jewellery offers significantly higher gross margins over plain gold jewellery. However, increasing studded share requires higher (1) marketing investments – organised players typically advertise only their studded range and (2) better sales staff – selling studded required more consumer persuasion and more technical knowledge.

Hallmarking infrastructure. India currently has 945 A&H (Assaying & Hallmarking) centres, of which 490 centres have been added in the last five years. Per our understanding, these A&H centres have an estimated capacity to hallmark 140mn jewellery pieces (assuming 500/day and 300 working days).

Timelines and current update. After facing multiple extensions, hallmarking has been introduced from June 16, 2021, in 256 districts (out of 742 districts in the country) which have A&H centres. However, no penalties are imposed till August2021. Also, jewelers with annual turnover of Rs4mn have been exempted from the mandatory hallmarking.

Potential LT impact – no need to go to branded jeweler given increased trust on a local jeweler? One can argue that given the increased transparency and trust in the system post hallmarking, will the affinity towards the local jeweler increase? As stated above, we believe that going forward the importance of design and branding will only increase if price arbitrage reduces due to hallmarking. Large organized players can leverage their scale to provide better and more intricate designs to customers. Besides, the organized players also have the required capacity to invest in wide product range, which is a limitation for the local jeweler.

Other key points:

* Cost of hallmarking. Hallmarking charges for the jewellery are – Rs.35 + GST per piece for gold jewellery and Rs.25 + GST per piece for silver jewellery irrespective of the weight of the jewellery.

* Fees of registration. A jeweller who wants to sell hallmarked jewellery, has to first obtain a registration from BIS. The entire process is online and the fees for registration (for five years) is based on annual turnover – Rs7,500/15,000/40,000/80,000 for turnover of less than Rs50mn/between Rs50mn and 250mn/between Rs250mn and Rs1bn/above Rs1bn. There is a provision to get the registration at a corporate level also.

Verification by BIS.

BIS will periodically visit the jewellery shop and randomly draws sample of hallmarked article and gets it tested at its own referral assay labs at Chennai, Sahibabad and Kolkata to ascertain the purity of the precious metal content in the sample. In case of failure of sample, action will be taken on both the jeweller and the A&H centre. BIS will also carry out periodic surveillance audit of the A&H centre to ascertain its continuation with the specified requirements.

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