Bangalore: Even as other asset classes depreciate, the value of gold continues to increase. International prices are close to $1,000 (Rs40,100) an ounce (28.35gm), levels that have not been breached since 1981. India is the largest consumer of gold and imports around 850 tonnes of the metal every year. The high prices have hurt jewellers, even as imports halved.
The nation’s largest jewellery maker and exporter, Rajesh Exports Ltd, says that while its domestic sales have been hit, this has been offset by exports, which account for 88% of its revenues. Its chairman and managing director Rajesh Mehta wants his company to focus on branded diamond jewellery even as he contemplates a buy-back to shore up the company’s stock, which has fallen 47.93% to Rs75.70 since 10 January. Mehta spoke to Mint about these and other plans he has for Rajesh Exports. Edited excerpts:
What has been the impact of increasing gold prices on demand?
With prices shooting up, there is a drop in buying of gold because of the suddenness of the movement. It has shocked customers. Gold prices have gone up not due to high demand, but because of other economic factors, including weakness of the dollar, rising price of oil and speculation. Sales have definitely been impacted. In the last 90 days or so, India has imported less than 100 tonnes of gold whereas in the past, it used to import more than 200 tonnes in three months. The decrease in demand has affected gold retailers across the country.
All that glitters: Rajesh Mehta says his company’s domestic sales are just 12% of its business
How seriously has Rajesh Exports been impacted?
For us, retailing is not a major chunk of business at least this year and probably for the next year (too). Our main business is manufacturing and exports. Our domestic sales are just 12% (of our business). We had earlier projected sales of Rs8,000 crore and net profit of Rs200 crore for the current fiscal and we will surpass it easily. We are doing good business in West Asia. High oil prices have meant that the region is more than making up for whatever we have lost in India.
You buy about 75 tonnes of gold a year. Where do you see prices heading?
(It) depends a lot on international factors, specially if the US economy settles down. In the medium term, I see gold prices going down to $700-750 per ounce, which I feel is a normal level. If the dollar is not able to hold ground, then, of course, the prices may go anywhere.
In the past, Rajesh Exports has spoken about backward integration, including owning mines...
We do have plans, but nothing has been finalized yet. Rajesh Exports currently gets gold from Australia and South Africa. We may own mines, but we will not get into mining or prospecting. We are looking more at a strategic relationship or partnership to buy a mine.
You entered diamond retailing just three months ago and launched nine brands at one go. Aren’t you late? There are several strong brands in this area already.
We launched these brands after studying the diamond buying behaviour of customers. Yes, we took two-three years to design and launch these brands. But all the nine brands have their own significance. Like Solitaire: it’s a single diamond design. The diamond can vary from 25 cents to 2 carats. The I-Teen brand is aimed at teenagers and young-at-heart women. Similarly, each of the nine brands have been positioned differently.
We expect the diamond business to contribute 2-3% to our overall revenues this year.
What are the key engines for growth?
We have recognized three growth areas.
(The first is) private label branded exports, which will drive our (profit) margins. Our bulk business is primarily in Asian markets, though we do cater to the US and Europe, too. When Asians buy gold, it’s a volume game, but profit margins remain low. When it comes to private labels, profit margins are much higher. Customers in the US and Europe generally buy lower carat gold, usually 14 or 18 carats. It is design that is the key differentiator. We are selling through leading retail outlets and jewellery stores there. In bulk business, the gross margin is 3-4%. In private labels, it goes up to 20-22%. Private labels will contribute about Rs300 crore to our sales this year.
Diamond jewellery will be our second growth engine. The nine brands we have launched will be also sold to international customers. We intend to supply to two leading diamond retailers in each country and have targeted 100 countries. We will also aggressively retail these in the domestic market. Jewellery sales in India is still a relationship-based business. To cater to this market, we have launched Shubh stores, which will be manned by associates, that is, traditional jewellers who have tied up with us. To date, there are six such associates. We will launch 100 Shubh stores in the next 12 months to take on the unorganized market and stand- alone jewellers.
We will also have upmarket jewellery outlets called Laabh. These are our own branded stores in high streets. We are targeting slightly upmarket clients with this chain. We have 30 stores now, following the acquisition of Oyzterbay’s stores. We will have small-format stores at malls. We have not yet decided a name for these outlets. We will take about six-seven months to launch them.
How do you plan to fund all this?
We have estimated that we will need Rs450 crore for the next two years...we have already pumped Rs100 crore into this plan. The rest will come from internal accruals. We do not need fresh capital as of now. I am quite sure that for the next five years, the company will not make any equity dilution; 62% stake in the company is with the promoters.
Do you have any plans to diversify into other businesses?
We have substantial property in different parts of the country, which we plan to develop. We may spin off this (real estate) business into a separate subsidiary. We have about 100 acres of land around Bangalore alone.
Rajesh Exports’ stock is trading close to a 52-week low...
Our stock prices may be low, but that is due to liquidity and because of the (recent bonus issue). We are thinking of a share buy-back and may take a decision on that soon.