Despite the steep fall in gold prices and the resultant fall in realisations, retail jewellers are likely to sustain the ongoing demand recovery into the next fiscal with a 30-35 per cent spike in demand.

There was strong demand recovery in the third quarter of 2020-21 due to the festive season, pent-up wedding demand, and a 10 per cent correction in gold prices during festival period from its peak in last August, said India Ratings in a report on Thursday, revising the sectoral outlook to stable from stable-to-negative.

With economic activities reaching pre-pandemic levels, the agency expects the momentum to continue into 2021-22, backed by a softening of gold prices.

The agency expects the jewellery demand to grow 30-35 per cent in 2021-22 over 2020-21, primarily because of a low base and rising demand. But the overall sectoral demand will be only be 5-10 per cent above 2019-20 as the recovery in 2021-22 will be V-shaped.

During the first three quarters of 2020-21, the overall operating margins of the top jewellers put together expanded to 7.7 per cent against 5.9 per cent in 2019-20 because of improved realisation, and a reduction in selling and promotional expenses, among others.

Though price realisation gains may not continue in 2020-22, lower operating leverage and improved efficiencies in terms of lower marking expenses and lower rentals are likely to support margins, which is expected to be 25-50 bps above 2019-20 levels.

Most companies have deferred new showroom launches to 2022-23 and are consolidating their less profitable showrooms. The sector is likely to deleverage in 2021-22, backed by a revival in demand and no significant showroom launches.

On the upward revision in the sectoral outlook to stable for 2021-22, it said, although there have been no rating upgrades in 2020-21 till date, about 11 per cent of the ratings have been put on a positive outlook in view of a sharper-than-anticipated recovery, adequate liquidity buffers and margins supported by high realisations. There were no downgrades of any big players in 2020-21.