Investors are cautioned that this discussion contains forward-looking
statements that involve risks and uncertainties including, but not limited to, risks
inherent in the Companys growth strategy, acquisition plans, dependence on certain
businesses, dependence on availability of qualified and trained manpower and other
factors. The following discussion with the Companys financial statements included
herein and the notes thereto:
INDIAN MACROECONOMIC OUTLOOK
Indias economic growth in FY23 has been principally led by
private consumption and capital formation. It has helped generate employment as seen in
the declining urban unemployment rate and in the faster net registration in Employee
Provident Fund. Still, private capex soon needs to take up the leadership role to put job
creation on a fast track. Recovery of MSMEs is proceeding apace, as is evident in the
amounts of Goods and Services Tax (GST) they pay, while the Emergency Credit Linked
Guarantee Scheme (ECGLS) is easing their debt servicing concerns. The Mahatma Gandhi
National Rural Employment Guarantee Scheme (MGNREGS) has been directly providing jobs in
rural areas and indirectly creating opportunities for rural households to diversify their
sources of income generation. Schemes like PM-Kisan and PM Garib Kalyan Yojana have helped
in ensuring food security in the country, and their impact was also endorsed by the United
Nations Development Programme (UNDP). The results of the National Family Health Survey
(NFHS) also show improvement in rural welfare indicators from FY16 to FY20, covering
aspects like gender, fertility rate, household amenities, and women empowerment.
Global growth has been projected to decline in 2023 and is expected to
remain generally subdued in the following years as well. The slowing demand will likely
push down global commodity prices and improve Indias CAD in FY24. However, a
downside risk to the Current Account Balance stems from a swift recovery driven mainly by
domestic demand and, to a lesser extent, by exports. The CAD needs to be closely monitored
as the growth momentum of the current year spills over into the next. Growth is expected
to be brisk in FY24 as a vigorous credit disbursal, and capital investment cycle is
expected to unfold in India with the strengthening of the balance sheets of the corporate
and banking sectors. Further support to economic growth will come from the expansion of
public digital platforms and path-breaking measures such as PM GatiShakti, the National
Logistics Policy, and the Production-Linked Incentive schemes to boost manufacturing
output.
Indias growth continues to be resilient despite some signs of
moderation in growth. Although significant challenges remain in the global environment,
India was one of the fastest growing economies in the world. The overall growth remains
robust and is estimated to be 6.9 percent for the full year with real GDP growing 7.7
percent year-on-year during the first three quarters of fiscal year 2022/23. There were
some signs of moderation in the second half of FY 22/23. Growth was underpinned by strong
investment activity bolstered by the governments capex push and buoyant private
consumption, particularly among higher income earners. Inflation remained high, averaging
around 6.7 percent in FY22/23 but the current-account deficit narrowed in Q3 on the back
of strong growth in service exports and easing global commodity prices.
In the second half of 2022, there was a respite for governments and
households. Commodity prices peaked and then declined. In the near term, the acute
pressure was relieved, although prices of some commodities (e.g., crude oil) remain well
above their pre-pandemic levels. For countries dependent on imports, priced and payable in
dollars, a global slowdown led by the United States (US) offers a triple relief. Commodity
prices decline, and US interest rates peak, as does the US dollar. Capital and current
account imbalances abate. As 2023 rolled in, China opened up rather swiftly, reversing its
Zero-Covid policy. An unexpectedly warm winter that has spared households from a
debilitating increase in fuel prices that would have dented their disposable income
significantly has stirred hopes that the Eurozone economies would narrowly avoid a
recession. As the headline inflation rate declines in the US, policy rates are set to rise
more slowly. In anticipation, bond yields have come down, and there are faint hopes of the
US avoiding a recession altogether, barring any unexpected financial system stress. Lower
chances of a downturn in advanced economies and resumption of economic activity bring with
them hopes for some developing economies that are export-dependent and concerns for those
who are heavily import-dependent for essential commodities. In anticipation of
higher-than-earlier forecasted demand, crude oil prices have begun to climb, as have the
prices of industrial metals. Wage negotiations are leading to upward revisions on either
side of the Atlantic. Meaningful interest rate reductions in the US and the Eurozone may
not materialise as quickly as one would have hoped. The year promises to be far from
predictable and may hold surprises for countries and households.
For India, 2022 was special. It marked the 75th year of Indias
Independence. India became the worlds fifth largest economy, measured in current
dollars. Come March, the nominal GDP of India will be around US$ 3.5 trillion. In real
terms, the economy is expected to grow at 7 per cent for the year ending March 2023. This
follows an 8.7 per cent growth in the previous financial year. The rise in consumer prices
has slowed considerably. The annual rate of inflation is below 6 per cent. Wholesale
prices are rising at a rate below 5 per cent. The export of goods and services in the
first nine months of the financial year (April – December) is up 16 per cent compared
to the same period in 2023-22. Although the high oil price this year compared to last
inflated Indias import bill and caused the merchandise trade deficit to balloon,
concerns over the current account deficit and its financing have ebbed as the year rolled
on. Foreign exchange reserve levels are comfortable and external debt is low.
India had a good monsoon, and reservoir levels are higher than last
year and the 10-year average. The fundamentals of the Indian economy are sound as it
enters its Amrit Kaal, the 25-year journey towards its centenary as a modern, independent
nation. Policies pursued carefully and consciously have ensured that the recovery is
robust and sustainable.
INDUSTRY STRUCTRE AND DEVELOPMENTS
Gold is a clear complement to stocks, bonds and broad-based portfolios.
A store of wealth and, a hedge against systemic risk, currency depreciation and inflation,
gold has historically improved portfolios risk-adjusted returns, delivered positive
returns, and provided liquidity to meet liabilities in times of market stress.
Gold benefits from diverse sources of demand: as an investment, a
reserve asset, jewellery, and a technology component. It is highly liquid, no ones
liability, carries no credit risk, and is scarce, historically preserving its value over
time.
Global Scenario Demand
Colossal central bank purchases, aided by vigorous retail investor
buying and slower ETF outflows, lifted annual demand to an 11-year high. Annual gold
demand (excluding OTC) jumped 18% to 4,741 tonnes (t), almost on a par with 2011 – a
time of exceptional investment demand. The strong full-year total was aided by record Q4
demand of 1,337t. Jewellery consumption softened a fraction in 2022, down by 3% at 2,086t.
Much of the weakness came through in the fourth quarter as the gold price surged.
Investment demand (excluding OTC) reached 1,107t (+10%) in 2022. Demand for gold bars and
coins grew 2% to 1,217t, while holdings of gold ETFs fell by a smaller amount than in 2023
(-110t vs. -189t), which further contributed to total investment growth. Quarterly
fluctuations in OTC demand largely netted out over the year. A second consecutive quarter
of huge central bank demand (417t) took annual buying in the sector to a record high of
1,136t, the majority of which was unreported. Demand for gold in technology saw a sharp Q4
drop, resulting in a full-year decline of 7%. Deteriorating global economic conditions
hampered demand for consumer electronics. Total annual gold supply increased by 2% in
2022, to 4,755t. Mine production inched up to a four-year high of 3,612t.
Supply
Annual mine production increased 1% y-o-y although remains below the
record high seen in 2018. 2022 saw the global hedgebook almost unchanged over the year
ending at 167t. Full year recycled gold supply increased by 1% but remains 30% below the
all-time high seen in 2012, despite a record annual average gold price in 2022. Total
supply increased by 2% y-o-y in 2022, halting two years of successive declines. Full year
mine production of 3,612t was the highest since 2018 as the mining industry remained
largely free of COVID interruptions and output in China posted a full year without safety
stoppages in Shandong province. Regional gains and losses in recycling – due to base
effects and local currency gold price moves – largely netted out over the year: 2022
recycled gold supply was essentially flat, up less than 1% at 1,144t. The global hedgebook
was also almost unchanged over the year, although it is possible that some end-of-year
hedging occurred in Q4, which will only be picked up as quarterly results are released in
February.
Indian Scenario
Gold is used to protect and enhance wealth over the long-term and it
operates as a means of exchange, because it has global recognition and is no ones
liability. Gold is also in demand as jewellery, valued by consumers across the world. And
it is a key component in electronics. These diverse sources of demand differentiate gold
from other investment assets. They also give it a particular resilience: the potential to
deliver solid returns in good times and in bad.
Gold was one of the best performing major assets of 2022 driven by a
combination of: high risk low interest rates positive price momentum especially during
late spring and summer.
Indian gold demand remained robust compared with longer-term
pre-pandemic levels. Despite a fairly soft start to the year, Indian consumer demand
recovered and only just fell shy of the strong levels of demand seen during 2023.
Continued recovery from COVID-19 boosted yearly comparisons, although the sharp local
price rally choked off demand in the closing weeks of December.
A 2% decline in 2022 gold jewellery demand in India belies a strong
absolute annual total. At 600t, demand was in line with the annual average over the
10-year period preceding COVID, despite high/rising local gold prices being a key headwind
at times during the year. Q4 demand fell 17% y-o-y, but this apparent large decline is set
against Q421s record high level; quarterly demand of 220t was the
fourth-highest quarter in our series back to 2000. Q4 demand was exceptionally strong
during the festive period in the first half of the quarter. Discussions with the trade
revealed that sales during this period were around 20% higher y-o-y, indicative of very
strong sentiment, particularly when we consider that last years festival demand was
robust. Jewellery demand also received a boost from wedding purchases during the quarter.
However, momentum was derailed as gold prices surged in November and December 2022. Demand
came to a virtual standstill after mid-December, with customers preferring gold-for-gold
exchange; anecdotal evidence suggests such exchange volumes almost doubled during the
quarter. And higher prices encouraged higher recycling volumes. Annual bar and coin demand
in India was 7% lower at 174t. The yearly drop was due to a 28% y-o-y decline in Q4,
albeit that demand was a healthy 56t during the quarter, levels failed to match the
extremely strong performance of Q4 2023. Bar and coin demand was healthy at the start of
the fourth quarter during the Dussehra and Dhanteras festivals. However, the onset of the
wedding season saw attention turn towards gold jewellery – particularly as retailers
preferred to promote higher-margin products – and investment demand took a back seat.
Many investors also preferred to sit out after missing the swift jump in the gold price in
November. Discussions with the trade revealed that buying was concentrated on lower-ticket
items (e.g. 20g and below), which suggests a focus on gifting demand.
India was another stand-out recycling market during the quarter,
with sharp increases in recycling supply. The South Asian region – where India is by
far the biggest market – saw recycling supply up nearly 40% y-o-y and about 60%
q-o-q. This surge in volume is explained mainly by the increase in the average
rupee-denominated gold price, which was up 3% q-o-q and ended December near the highs of
the year and 10% above the Q4 low. This had two effects: first, it suppressed jewellery
demand at a normally soft period of the year and second, it substantially reduced the
amount of old jewellery that was exchanged for new, thus increasing the amount of outright
sales of old jewellery.
Company Overview
Shirpur Gold Refinery Limited, a part of the Essel group, has the
largest installed capacity in India of refining gold and silver from the raw gold (Dore)
stage to 99.99% purity. The technical capabilities include achieving fineness of up to
999.9 parts per thousand for gold and silver, casting the refined bullion into bars of
various denominations, minting of coins and manufacturing of Jewellery in various designs.
The State of Companys Affairs/ Developments
The company continues to maintain its commitment to the highest level
of production efficiency and excellence in quality. As such at the company has always kept
abreast of the ever-changing technologies and processes.
Gold industry in India has always been greatly impacted by the
government regulations and controls. Changes implemented by the regulatory authorities has
been challenging for the industry and so for the company. The company is well compliant
with all directions, changes and regulations implied by the government on gold industry
from time to time.
STRENGTHS, OPPORTUNITIES, THREATS, RISKS & CONCERNS:
A) Strengths
(i) Product Range
Currently, The Company has kept on hold its manufacturing operations at
Shirpur, Dist Dhule since February,2022.
(ii) Product Quality
The company compares its quality standards with the best in the world.
The products positioned are comparable with the highest levels certified and accepted
internationally. The production processes and controls along with stringent quality
control systems has ensured a Zero-defect record over the term.
(iii) Laboratory
The Companys laboratory is a NABL Accredited Lab (National
Accreditation Board for Testing & Calibration Laboratories) Government of India for
ISO / IEC 17025; 2005 in the discipline of chemical analysis and the scope covers testing
of Gold and Silver by Fire Assay, Chemical and Instrument Assay. NABL Accreditation
provides formal recognition to Companys lab, thus providing a ready means for users
to find reliable testing and calibration services in order to meet their requirements.
(iv) Responsible Sourcing of Raw Material
The company follows acceptable standards of due diligence and
responsible sourcing of raw materials. The company ensures adequate compliance following
all international regulations covering anti money laundering and terrorist financing. The
management is fully committed to establish and maintain strict adherence to international
compliance standard for sourcing of raw material. Companys aim is to continually
maintain and update its compliance policies with respect to procurement of dore, supply
chain management and trading.
(v) Economy of Scales
The production processes established by the Company and continuous
monitoring of the same ensures that the Company is in position to reduce the production
time with economies of scale and cost reduction through modular structure.
(vi) Distribution network
Your Company has further strengthened the existing strong distribution
network created over years. The necessary steps have been initiated to increase
penetration in all the gold consuming centres. The Dubai subsidiary of the company has
already created a strong customer base in the international market by having strong and
solid channel partners in main hubs of UAE and Hongkong.
(vii) Financial Strengths
The Company is financially sound and has been able to take the
advantage in operations.
(viii) Strong operational, technical and management team
Standard Operational Procedures (SOPs) are implemented and policies are
put in place by the management to ensure that the work force is adequately monitored and
efficiency levels maintained. New trends and practices in the refining areas are evaluated
and implemented under the able guidance of technical experts of the Company having on its
panel.
B) Opportunities
The Government has permitted 100% FDI in the sector under the automatic
route, wherein the foreign investor or the Indian company do not require any prior
approval from the Reserve Bank or the Government of India.
A lacklustre 2022 for ETF and OTC demand is likely to set the stage for
a year of growth in investment. Golds stable performance in 2022, despite strong
headwinds from rising rates and a strong dollar for most of the year, has reignited
investor interest. As investors have settled the likely peak level of interest rates, rate
hikes will pose less of a problem. In addition, continued weakness in the US dollar,
growing recession risks, a continued high bond-equity correlation and elevated
geopolitical risk form the backbone of a positive tactical case for gold in 2023 The
outlook for technology demand in 2023 remains poor as sanctions on China and faltering
consumer demand continue to weigh on the electronics sector. In addition, the recession
risks materialising in Europe and the US will further curtail demand in discretionary
goods spending. However, inventory adjustments are projected to continue across the
industry and this may provide some support for demand towards the end of the year. Based
on its potential for growth and value addition, the Government of India declared gems and
jewellery sector as a focus area for export promotion. The Government has undertaken
various measures recently to promote investment and upgrade technology and skills to
promote ‘Brand India in the international market.
C) Threats
Gold provides an alternative means for criminals to store or move their
assets as regulators implement stronger anti-money laundering and counter terrorist
financing measures to protect the formal financial sector from abuse. Due to the
IMFs revised global GDP prediction, reducing inflation, the halt in interest rate
hikes, the weakening dollar, and Chinas reopening, the global commodities market is
anticipated to exhibit a mixed trend in 2023 and the global economy is currently
experiencing a slowdown. This is likely to have a mixed effect on the commodities market.
D) Risks & Concerns:
(i) Market Risks
The Company is largely dependents on domestic customers. The Company
continues to work towards diversifying its customer mix and to focus on building
relationships with customers spread geographically.
(ii) Regulatory Risks
The Company is exposed to regulatory uncertainties facing the gems and
Jewellery industry in India. Any changes in the duty, rules and regulations, Import and
Export policies or requirements by the Government of India may require the Company to
revise business strategies which may impact its financial position adversely. The Company
in order to reduce loss of revenue and market share due to any changes in the policies of
the Government of India, has diversified sales mix, product range, and raw material mix.
However, the management cannot totally eliminate the risks involved in such volatile
trades.
(iii) Operational Risks
The Company adopts a sustainable production platform. Continuous
availability of gold dore and scrap is critical for the production plans of the company.
The company has tied up with global miners for continuous supply of gold dore. The Company
is also in process of entering into off-take agreements with miners for supply of gold
Dore. The Company is also procuring SR bars and scrap materials from local markets.
However, the management cannot totally eliminate the risks involved in such volatile
trades.
(iv) Commodity Price Risks
The prices of Gold and Silver are largely governed by movements at
major precious metal exchanges of London, New York, Tokyo and others. The local precious
metal prices are an algorithm of these movements on ‘spot basis and Indian
currency Rates. Prices may fluctuate widely for all products affecting demands in the
market. The Company has adopted adequate hedging mechanisms to effectively counter the
risk that arises during operations. However, the management cannot totally eliminate the
risks involved in such volatile trades.
(v) Currency Risk
This exposes the Company to metal and foreign exchange risks. The
Company has established a dealing room and placed hedging policies and procedures for
mitigating the risks in gold prices and foreign exchange transactions. However, the
management cannot totally eliminate the risks involved in such volatile trades.
(vi) Competition Risk
Significant additional competition in the gold trade may result in
reduced off-take and thereby negatively affect the Companys revenues and
profitability. The Company may also face competition arising from new technology/
automation leading to new products acceptable to customers. For maintaining or increasing
the market share, Company has taken initiatives of effective marketing, ability to improve
processes, introducing new products & technology.
(vii) Internal Control Systems
The company follows a standard operating procedure in all its
operations, documentation and trades which is best as per industry standards. The
management ensure all the activities and operations are well informed to the concerned and
risk management policies are followed in all its endeavors.
(viii) Attrition Risk
The Company has a strong management and technical team to oversee the
operations and growth of its business. The Companys ability to sustain its growth
largely depends, on its ability to attract, train, motivate and retain high skilled
employees. An increase in the rate of attrition of experienced employees, would adversely
affect the Company business. In view of above, to curtail attrition of high potential
employees, the Company always strives to create conducive work environment, platform for
innovation & creativity, creation of learning & growth opportunity and sense of
belongingness. As a part of its retention strategy the Company is putting its endeavor to
identify & ring fence of "High Potential Employees".
SEGMENTAL PERFORMANCE
The Company is in the business of refining, manufacturing and marketing
of precious metal which is considered as the only reportable segment.
OUTLOOK
Indias gold demand will witness a sharp upswing to top 800 tonnes
in 2023. The Government has permitted 100% FDI under the automatic route in this sector.
The Government has reduced custom duty on cut and polished diamond and coloured gemstones
from 7.5% to 5% and NIL. India has 10 special economic zones (SEZ) for gems &
jewellery. These zones have more than 500 manufacturing units, which contribute 30% to the
countrys total exports.
The revised SEZ Act is also expected to boost gems and jewellery
exports. India has signed an FTA with UAE which will further boost exports and is expected
to reach the target of US$ 52 billion. India has signed Economic Cooperation and Trade
Agreement (ECTA) with Australia.
Looking ahead in 2023, Indian bar and coin demand currently faces
headwinds from the strong domestic gold price and rising equity market, while lower
inflation could diminish golds role as an inflation hedge. However, a revival in
rural demand may provide support to bar and coin demand in the coming year. Investment is
expected to rise in 2023. Gold ETF and OTC demand – depressed during 2022 –
looks set to take the baton held by last years strong retail bar and coin demand.
Retail investment will likely be lower in Western markets, albeit still healthy, as
inflation fears fade, but should be robust in Asia on higher growth. However, elevated
recession and geopolitical risks will likely sustain interest in gold and present upside
potential as the year progresses Central bank buying is unlikely to match 2022 levels.
Lower total reserves may constrain the capacity to add to existing allocations. But lagged
reporting by some central banks means that we need to apply a high degree of uncertainty
to our expectations, predominantly to the upside Jewellery demand to improve further on a
resilient 2022, but caution that strong base effects in Chinese demand could be undermined
if a more severe global slowdown drags down demand elsewhere. Chinas re-opening,
with its pent-up and growth-driven demand for jewellery, will inject welcome momentum,
although recurrent COVID spikes are a potential headwind. A sluggish start to the year for
Indian demand could persist if local prices remain elevated Total supply is expected to
rise modestly again in 2023 as expansion at existing operations provides a production
uplift. Recycling is expected to fall but upside risks cant be ruled out as
inflation falls in Western markets and the spectre of recession-driven distress selling
rears its head.
SUBSIDIARY PERFORMANCE
Shirpur Gold DMCC, Dubai (100% subsidiary) is actively engaged in the
precious metals trading business and tapping opportunities in countries like Middle East,
Africa, Indian sub-_Continent, South East and Central Asia, The Americas, Turkey and the
former CIS countries. The central location of Dubai and a time zone that facilitates
trading with all global markets provides an ideal base from which to develop a major
precious metals business. The business is focused on Wholesale physical bullion trading,
incorporating sales of the full range of the companys physical gold and silver
products, including value added investment bars and coins. Sourcing of both primary and
secondary supplies of gold and silver.
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