Record Gold Fee Spurs Gitanjali’s Diamond Push: Corporate India

Gitanjali Gems Ltd., India’s largest jewelry retailer by revenue, is focusing on diamonds as near-record premiums for gold push up costs for a metal that accounts for about 30 percent of its sales.

Import curbs in the world’s biggest gold user may force jewelers such as Gitanjali and Rajesh Exports Ltd. to pay a record $200 per ounce over the London price from next month to obtain supplies, according to the All India Gems & Jewellery Trade Federation. The premium is currently $120-$130 an ounce.

“We’re not depending on gold anymore,” Mehul Choksi, the chairman of Gitanjali, said in a Nov. 25 phone interview from Mumbai, less than two weeks after the company said its fiscal second-quarter profit plunged 95 percent from the year before. “We’re looking at diamond and stone jewelry where the gold content is much less.”

The gold premium in India, which relies on inward shipments for supplies, has climbed from just $2 an ounce following three increases in import taxes on the metal this year to pare the nation’s trade deficit. Mumbai-based Gitanjali joins Titan Industries Ltd., India’s largest maker of branded jewelry by market value, and Tara Jewels Ltd. in seeking to expand sales of higher-margin diamond ornaments.

Profit margins for diamond jewelry are as much as two times greater than for gold, according to Vivek Veda, an analyst at Espirito Santo Investment Bank.

Gold for immediate delivery in London traded at $1,241.95 an ounce as of 5:05 p.m. in London yesterday, down about 25 percent this year. Futures on the Multi Commodity Exchange of India Ltd. rose 0.3 percent to 30,260 rupees per 10 grams.

Store Closures

Prices of so-called top-quality gems have fallen 4.6 percent this year, according to the RapNet Diamond Index, which calculates the average weekly price of the 25, best-quality 1-carat diamonds. A carat is a fifth of a gram.

Companies must pass on some of the gold premium to customers, Rajesh Mehta, Bangalore-based chairman of Rajesh Exports Ltd., India’s largest manufacturer and exporter of gold jewelry, said by phone yesterday.

“We have to pay whatever higher premiums they quote if we want supplies,” said Mehta. “There’s no way out.”

Mumbai-based Tara Jewels said on Nov. 25 that it will close some of its less profitable gold-led stores and increase its focus on the higher-margin diamond and studded jewelry businesses to adapt to the current regulatory environment.

Gitanjali shares have slumped 90 percent this year and closed at 52.55 rupees in Mumbai yesterday. Rajesh Exports has slid 35 percent to 90.05 rupees. Titan is down 21 percent to 224.5 rupees. The S&P BSE Sensex Index is up 5.1 percent this year.

Gold Smuggling

The gems federation in a letter to India’s finance minister on Nov. 22 asked for a cut in the import duty to 5 percent from 10 percent and an easing of financing norms. Gold shortages are stoking smuggling, it said.

In one example of a smuggling case, a maintenance crew found 24 gold bars worth more than $1 million hidden in the bathroom of a Jet Airways Ltd. plane at Kolkata airport, the Times of India said on Nov. 20.

Customs officials at airports in the southern state of Kerala have seized 90 kilograms (198 pounds) to 100 kilograms of gold in the past eight months, according to a Press Trust of India report.

The incidents illustrate how smugglers are stepping in to supply gold to India’s 1.2 billion population. The nation accounted for 20 percent of global demand in 2012, according to the World Gold Council. Indians use the metal for uses ranging from wedding jewelry to a hedge against elevated inflation.

Election Impact

Inward shipments of bullion fanned a record current-account deficit of $87.8 billion in the year ended March 31. The government projects a gap of about $60 billion in fiscal year 2013-2014.

For now, it’s difficult to say if the government will ease import restrictions soon, said Espirito Santo’s Veda. Officials face pressure to loosen the curbs to court support ahead of the Indian general election due by May 2014, even as they are focused on paring the trade imbalance, he said.

“There is a supply crunch and if the restrictions stay in place it will be very difficult for the industry,” Bachhraj Bamalwa, a director at the All India Gems & Jewellery Trade Federation, said by phone on Nov. 25. “Only people who are willing to pay the high premiums will get supply.”