P N Gadgil Jewellers Ltd

Hedging is a common practice among organized jewelers, especially in India, where gold price volatility significantly impacts profit margins. Most large, organized players like PNG Jewellers, Kalyan Jewellers, and Tanishq use hedging strategies to manage gold price risks and protect their margins. Here’s why it’s widespread in the organized jewelry sector:

Why Hedging is Common:

1. Gold Price Volatility: Gold is the primary raw material for jewellery production, and its price is influenced by global economic conditions, inflation, currency fluctuations, and demand-supply dynamics. To avoid margin erosion, jewelers hedge against price volatility using forward contracts, options, and other derivatives .
2. Inventory Management: Organized jewelers often hold large inventories of gold, so any major fluctuation in prices can affect the value of that inventory. Hedging helps lock in the cost of gold at pre-determined prices, protecting against unfavourable price movements .
3. Stable Profit Margins: For businesses like PNG Jewellers that operate on relatively thin margins, stable input costs are crucial. Hedging helps stabilise costs, ensuring that the company can maintain consistent pricing for its products and avoid passing on sudden price increases to customers .
4. Competitive Advantage: Hedging gives organized jewelers a competitive edge over unorganized players, who may not have the financial sophistication to adopt such strategies. This allows organized players to offer more consistent pricing and better manage their costs .

Common Hedging Instruments:

• Gold Forward Contracts: Jewelers often enter into forward contracts to purchase gold at a fixed price for future delivery, thus locking in costs.
• Futures and Options: These are more sophisticated instruments that allow jewelers to hedge against adverse price movements, offering flexibility in managing gold procurement.

Risks of Hedging:

While hedging is crucial for risk management, it does carry potential downsides. Over-hedging or poor timing in the use of derivative instruments can lead to financial losses, especially in scenarios where gold prices fall. This can hurt profitability and lead to mark-to-market losses, impacting profit after tax (PAT) and return ratios.

Overall, hedging is an essential risk management tool for organized jewelers, providing them with the ability to manage input cost volatility while offering price stability to their customers. So volatility in gold price will effect majority of organised players in same manner depending upon how much of their portfolio is hedged