Gitanjali Gems Plunges as Gold Curbs Reduce Demand: Mumbai Mover

Gitanjali Gems Ltd., India’s biggest gold and diamond jeweler by revenue, tumbled on concern that demand will fall after the government restricted imports and as bullion traded near the lowest price since September 2010.

The shares slumped by the 20 percent daily limit for the second day in Mumbai to 320.75 rupees, the lowest level since August. Shares of Titan Industries Ltd., Tribhovandas Bhimji Zaveri Ltd., Rajesh Exports Ltd. and Shree Ganesh Jewellery House Ltd. erased losses as the benchmark S&P BSE Sensex index rebounded from the lowest level in 10 weeks.

Morgan Stanley lowered its forecasts for gold, joining Goldman Sachs Group Inc. and UBS AG in paring estimates on prospects that the U.S. Federal Reserve will scale back monetary stimulus as the economy recovers. Spot gold has fallen 23 percent in 2013 after rallying for 12 years, while prices in Mumbai have declined 14 percent.

“The retailers have traditionally followed a practice of holding a lot of inventory and they benefited when the gold prices were rising,” said Nitin Mathur, an analyst at Espirito Santo Securities in Mumbai. ‘Prices have corrected so much in the international markets, and the risk is now coming to them as the gold in their inventory is worth less than what they bought it for.’’

Bear Market

Gold tumbled to $1,269.46 last week, the cheapest since Sept. 16, 2010, after entering a bear market in April as investors lost faith in the metal as a store of value. The precious metal was at $1,285.83 at 2:37 p.m. in Mumbai.

India raised the import duty on gold to 8 percent this month, a fourfold increase from January last year, and the central bank curbed overseas purchases on a consignment basis and limited imports for local consumption against cash only.

Finance Minister Palaniappan Chidambaram on June 13 appealed to Indians to “resist the temptation to buy gold” for a year, saying reduced imports may help tackle a record current-account deficit of $32.6 billion in the last quarter of 2012 and the weakness in the rupee.

The central bank’s curbs on import financing has meant that the company needs to take on additional short-term loans to fund purchases, said Ravi Ramalingam, vice president for investor relations at Gitanjali. “We need to first pay off the existing credit for the gold in our inventory and only after that will we be able” to buy additional gold, he said.

Suspending Sales

Shares probably fell as investors may also be concerned that the company will not be able to sustain sales growth, he said. Gitanjal’s inventories were worth 43.5 billion rupees and gold was about 18 percent of it, he said.

Jewelers and bullion dealers will be asked to suspend sales of coins and bars to retail investors to support government efforts to narrow the current-account deficit, the All India Gems & Jewellery Trade Federation said yesterday. The curbs may reduce demand by about 20 percent, said Haresh Soni, chairman of the trade body said.

“In the current scenario some changes in the product mix with a reduction in the gold jewelry segment are inevitable,” Mehul Choksi, Gitanjali’s chairman said in an e-mailed statement today. “The company has plans to introduce more value added gold jewelry rather than selling it as coins.”

Gold jewelry and coin sales accounted for as much as 30 percent of Gitanjali’s sales, Choksi said. The company will focus more on selling diamond jewelery, he said.

“Working capital requirement and cost of capital will shoot up significantly and will suppress return ratios as well” for jewelers, said Paras Bothra, vice president of equity research at Ashika Stock Broking Ltd.

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