Thangamayil Jewellery Ltd Management Discussions.

INDUSTRY STRUCTURE AND DEVELOPMENTS

Indias gems and Jewellery sector is one of the largest sector in the world contributing 29 per cent to the global Jewellery consumption. The market size of the sector is about US$ 75 billion as of 2018 and is estimated to reach US$ 100 billion by 2025. The sector is home to more than 300,000 gems and Jewellery players, contributes about 7 per cent to Indias Gross Domestic Product (GDP) and employs over 4.64 million employees.

The Indian economy was expected to grow at just 5 per cent this year, as per the first GDP estimates released by the government. It is essential in such times that the government should provide instant relief by lowering the duties and taxes, apart from taking necessary actions to target new export markets to analyze and control the risk and tackle unexpected situations like the virus outbreak. Supply chain will remain unsettled for at least a year, as in Gems & Jewellery trade over 90% of the raw material is imported and imports are again on a complete standstill. The industry will feel its effects for at least a year.

There is a massive slowdown in the entire market due to Coronavirus, and it has affected the sales of gold drastically. People have been asked to stay indoors, which has led to the closure of retail shops as there are no buyers of gold anymore. At the same time, all offline sales are expected to be down by 80%. The only way to increase sales is to reach online trades. Owing to the economic crisis that this Coronavirus will unleash, the Gems & Jewellery industry will be on a complete halt for at least six months.

Buying Gems & Jewellery will be the last on the priority list for anyone for the next least six months. The industry is sure to have lost over 75-80 % sales this month as individuals are purchasing only essential products and tend to keep cash on them as there is no clarity on how long this crisis will prevail. There is a constant fear that the situation may worsen. This time range may still increase owing to the effect on the GDP of the country, which is already not in a perfect place. Besides, many employees will have to be sent on unpaid leaves for months as there will be minimal or no work for the employees. It will leave an effect on many households, and the buying capacity of every home will thereby decrease drastically. In such circumstances, no one will be opting to invest in Gems or Jewellery.

Indias average gold demand is around 850 tones owing to its affinity to gold and social and economic context, and the countrys gold demand was anticipated to be approximately pf 700-800 tonnes in 2020, as per the WGC. The Dhanteras and Diwali festivals were the only hopes, but the unpredictability along with higher costs has impacted the demand. With the shutting down of many malls and postponing or scaling down of marriages have also left an impact on the demand. Indias Gems & Jewellery sales are set to drop to the lowest in a quarter of a century, and when we get through with the lockdown, it is a long fight ahead. The trade body, along with the Gem & Jewellery Export Promotion Council is discovering ways to help several small workers employed in the industry who earn daily/weekly wages.

The industry is looking for an expansion for loan repayments and a decrease in import tax on gold to 4% from present 12.5% to help Jewellers. The above statistics and analysis depict that the Gems & Jewellery Industry are in the doldrums. These are times when significant industries will face a sharp blow which will thereby affect the countrys economy. We all need to stand strong and prepare ourselves for the impact that this virus will leave on our lives and businesses.

MARKET SIZE

Indias gems and jewellery sector is one of the largest in the world contributing 29 per cent to the global jewellery consumption. The sector is home to more than 300,000 gems and jewellery players. Its market size will grow by US$ 103.06 billion during 20192023.

Indias demand for gold reached 760.4 tonnes in 2018 and 496.11 tonnes during first nine months of 2019. Indias gems and jewellery exports stood at US$ 25.11 billion in FY20P (till Jan 2020, Provisional). During the same period, exports of cut and polished diamonds stood at US$ 16.32 billion, thereby contributing about 73.42 per cent of the total gems and jewellery exports in value terms. Exports of gold coins and medallions stood at US$ 814.33 million and silver jewellery exports stood at US$ 1.22 billion in FY20P (till Jan 2020). India is one of the largest exporters of gems and jewellery and the industry is considered to play a vital role in the Indian economy as it contributes a major chunk to the total foreign reserves of the country.

INVESTMENTS/DEVELOPMENTS

The Gems and Jewellery sector is witnessing changes in consumer preferences due to adoption of western lifestyle. Consumers are demanding new designs and varieties in jewellery, and branded jewellers are able to fulfil their changing demands better than the local unorganised players. Moreover, increase in per capita income has led to an increase in sales of jewellery, as jewellery is a status symbol in India.

The cumulative Foreign Direct Investment (FDI) inflows in diamond and gold ornaments in the period April 2000 - December 2019 were US$ 1.17 billion, according to Department for Promotion of Industry and InternalTrade (DPIIT).

GOVERNMENT INITIATIVES

1 The Government of India made hallmarking mandatory for Gold Jewellery and Artefacts. A period of one year is provided for implementation i.e. till January 2021.

1 As per Union Budget 2019-20, the GST rate has been reduced from 18 per cent to 5 per cent (*5 per cent without Input Tax Credit (ITC)) for services by way of job work in relation to gems and jewellery, leather goods, textiles etc.

1 The Bureau of Indian Standards (BIS) has revised the standard on gold hallmarking in India from January 2018. The gold jewellery hallmark will now carry a BIS mark, purity in carat and fitness as well as the units identification and the jewellers identification mark. The move is aimed at ensuring a quality check on gold jewellery.

1 The Gems and Jewellery Export Promotion Council (GJEPC) signed a Memorandum of Understanding (MoU) with Maharashtra Industrial Development Corporation (MIDC) to build Indias largest jewellery park in at Ghansoli in Navi- Mumbai on a 25 acres land with about more than 5000 jewellery units of various sizes ranging from 500-10,000 square feet. The overall investment of Rs 13,500 crore (US$ 2.09 billion).

1 Gold Monetisation Scheme enables individuals, trusts and mutual funds to deposit gold with banks and earn interest on the same in return.

ROADAHEAD

In the coming years, growth in Gems and Jewellery sector would be largely contributed by the development of large retailers/brands. Established brands are guiding the organised market and are opening opportunities to grow. Increasing penetration of organised players provides variety in terms of products and designs. Online sales are expected to account for 1-2 per cent of the fine jewellery segment by 2021-22. Also, the relaxation of restrictions of gold import is likely to provide a fillip to the industry. The improvement in availability along with the reintroduction of low-cost gold metal loans and likely stabilisation of gold prices at lower levels is expected to drive volume growth for jewellers over short to medium term. The demand for jewellery is expected to be significantly supported by the recent positive developments in the industry.

RISKS AND CONCERNS

It is essential to correctly assess the risk in each segment so that the risk is mitigated before it becomes a possible threat. General risk segments are statutory compliances, economy, financials, Government policies, market related, operational, products and technology etc.,

The management has a rapid review of likely risk areas with the objective to define a framework for identification, evaluation and mitigating the risk in the decision making process and to encourage proactive management and not reactive management. From the perspective of the company the risks are of the following nature:

(a) Strategic risk: Those risks associated with operating in a particular industry and includes risks arising from demand changes, changes in customers preference , taste and industry changes. These risks pose threats or opportunities which materially affect the ability of the organization to survive.

(b) Compliance risk: Those risks associated with the need to comply with Government Laws and regulations.They also apply to the need to act in a manner which stakeholders and customers expect.

(c) Operational risk: Those associated with the companys operational and administrative procedures which inter alia include accounting controls, regulations, recruitment, IT systems, board composition, contractual risks and exposures, organizational risks and exposures.

(d) Financial risk: Those associated with financial structure of the company, its transactions and the financial system in place.

(e) Environmental risk: Those associated with release of polluting materials, environmental performance/ compliance limits, business opportunities and breach of regulations.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has in place adequate system of internal control. It has documented procedures covering all financial and operating functions. These controls have been designed to provide a reasonable assurance with regard to maintaining of proper accounting controls, monitoring of operations, protecting assets from unauthorized use or losses, compliances with regulations and for ensuring reliability of financial reporting. The Company has continued its efforts to align all its processes and controls with global best practices in these areas as well.

Some significant features of the internal control systems are:

v Documenting Major Business Process including financial reporting, Computer Controlling, Security Checks and Top Committee level Plans

v A comprehensive information security policy and continuous upgrades to IT system

v Audit Committee of the Board of Directors, comprising independent directors, which is functional since October 2007, regularly reviews the audit plans, significant audit findings, adequacy of internal controls, compliance with Accounting Standards, as well as, reasons for changes in accounting policies and practices, if any.

v A well established multi-disciplinary Internal Audit team, which reviews and reports to management and the Audit Committee about the compliance with internal controls and the efficiency and effectiveness of operations and the key process risks

v Monthly meeting of the top management committee to review operations and plans in key business areas v Corporate policies on accounting and major processes.

v Well-defined processes for formulating and reviewing annual and long term business plans. v Preparation and monitoring of annual budgets for all trading activities.

v Having introduced and continually upgraded, improved and fine tuned state of the art Enterprise Resource Planning (ERP) since August 2008, supplier Relations Management and Customer Relations Management, to connect its different locations, dealers and vendors.

ANTI-FRAUD PROGRAMME.

The Board takes responsibility for the total process of risk management in the organization. The Audit Committee reviews reports covering operational, financial and other business risk areas. Taking into Consideration the high risk associated with this business, the organization and management have taken necessary measures towards achieving an environment free of fraud. This is also facilitated by internal audit. The business risks are managed through cross functional involvement and intense communication across businesses. Results of the risk assessment and residual risks are presented to the senior management.

INFORMATION TECHNOLOGY

Thangamayil Jewellery Limited has a jewellery retail based information technology savvy department deploying the best retail solutions in the market to enhance, develop, support and maintain our retail business activity across all our showrooms

Thangamayil has developed an information technology team to test and maintain our own solutions across the showrooms. As a base platform for our ERP we used SAP Business One solution across the showrooms. End to end application to meet the requirements of Jewellery retail business needs, right from purchase of ornament to sale of it, customer management and inventory handling.

Thangamayil jewellery E-commerce is a first of its kind in online jewellery retail segment with an in-store experience of selling 22kt gold ornaments, silver articles, diamond and platinum jewels. The in-store experience to a customer is to view more variety ornaments on every online visit (not a confined catalog) with the store price. The ornaments are real photographed pictures with exact product details and real time priced based on the market rate of gold and silver.

HUMAN RESOURCES & INDUSTRIAL RELATIONS

The Companys Human Resources philosophy is to establish and build a strong performance and competency driven culture with greater sense of accountability and responsibility. The Company has taken pragmatic steps for strengthening organizational competency through involvement and development of employees as well as installing effective systems for improving the productivity, equality and accountability at functional levels.

With the changing and turbulent business scenario, the Companys basic focus is to upgrade the skill and knowledge level of the existing human assets to the required level by providing appropriate leadership at all levels motivating them to face the hard facts of business, inculcating the attitude for speed of action and taking responsibilities.

In order to keep the employees skill, knowledge and business facilities updated, ongoing in house and external training is provided to the employees at all levels. The effort to rationalize and streamline the work force is a continuous process. The industrial relations scenario remained harmonious throughout the year.

Note: Forward looking statements embedded in the Management Discussion and Analysis above is based on certain assumptions and expectations of future events. The Company cannot guarantee that these assumptions and expectations are accurate or will be realized. The Companys actual results, performance or achievements could thus differ materially from those projected in any such forward looking statements. The Company assumes no responsibility to publicly amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or events.

SWOT ANALYSIS

Strengths

1 Renowned brand across in southern and western regions of Tamil Nadu.

1 Adequate manufacturing facilities across the jewellery hub for strengthening of design 1 Cost competitive logistics and synergy optimisation

1 Capable to venture into new markets and exploit various opportunities with the help of strong experienced management team

1 Having huge customer base to explore new markets across the state 1 Customized service gives a unique identity to the company distinct from other players 1 Use of synergy optimization at various functional verticals gives a huge advantage 1 Advanced Technology strength to support business operations and expansion

Weaknesses

? Operating in a stiff competitive environment with uncertain profit margins.

? Unpredicted Gold price movements and its impact on margin of the product.

? Low margin products required huge investment

C Limited area of operation is the bottleneck to exploit untapped markets.

? Frequent change in customer taste and preference for jewellery designs.

? Mixture of organized and un-organized sector in Jewellery Industry affects profit margins drastically Opportunities

? Sustained performance over the last few years in Madurai and surrounding areas for replication of the model in other Tier II/III cities inTamil Nadu having similar customer profile.

? Growing preference for online platform

? Rural spending development

? Customers preference in choosing hallmarked products over products made by un-organized manufacturers.

? Concentrating in one sector makes the company mature in the industry and gain efficiency in operations.

? Scaling of economy resultant out of Brand/ Advertisement & Publicity / Procurement of Gold, Product Mix, designs, etc.

? Increasing disposable income in Tier II and III locations as well as growing consciousness of branded jewellery in these locations which is shifting demand toward organized players.

Threats

? Presence of Small and un-organized industry players affects a sustained growth in the industry.

? Depending on bank finance and customer advances

? Existing competitors

? Penetration of large corporates jewellery traders cutting down margins.

? Macro-economic factors such as Rupee fluctuations, enactment of new laws such as GST, KYC norms and global demand recession affects the industry growth in general.

? Acute shortage of skilled labour increases the production cost significantly.

? Highly fluctuating gold price movement acts as a damper

? Increasing duties and cess following GST implementation.