Shanti Gold International Ltd: Inventory Policy Change Drives Profit Figure Shifts

Shanti Gold International Ltd's Board of Directors has approved a significant change in its inventory valuation accounting policy. The company will transition from the First-In-First-Out (FIFO) method to the Weighted Average Cost (WAC) method. This change is effective retroactively from April 1, 2024, and will be formally applied in financial reporting from the fiscal year 2025-26 onwards.

Financial Impact of the Policy Shift

This policy shift has immediate financial reporting implications. For the fiscal year 2024-25, profit before tax (PBT) under the new WAC method would have been ₹7,109.33 lakh, representing a decrease of ₹173 lakh compared to the ₹7,283.09 lakh reported under FIFO. However, the first quarter of fiscal year 2025-26 shows a markedly different trend. PBT for Q1 FY25-26 reached ₹4,589.65 lakh using WAC, a significant increase of ₹1297 lakh over the ₹3,291.65 lakh reported under FIFO for the same period.

Company Operations and Rationale

Shanti Gold International, which primarily manufactures and trades gold and silver jewellery and deals in precious stones, stated that this change aims to offer a more accurate financial picture and align with common industry accounting practices for cost averaging.

Reporting and Investor Implications

Inventory valuation methods critically impact the cost of goods sold and profit margins. The WAC method is generally considered to smooth out profit volatility compared to FIFO, as it averages the cost of all inventory items. Shareholders should anticipate changes in how future financial statements report inventory value. Comparability with prior financial years, reported under FIFO, will require careful adjustment. While intended to improve reporting, the accounting shift may present temporary analytical challenges for investors as they assess the full implications.

Industry Landscape

The Indian jewellery sector includes major players like Titan Company Ltd, Kalyan Jewellers India Ltd, and PC Jeweller Ltd. However, specific public disclosures on their inventory valuation methods are not always readily available, making direct comparisons difficult without detailed review of their annual reports. Shanti Gold's adoption of WAC may align its reporting with more prevalent industry cost-averaging practices.

What to Track Next

Investors will closely monitor subsequent financial filings for a detailed understanding of the impact and full adoption of the WAC method. Observing analyst discussions during investor calls and any further company clarifications on the rationale and benefits of WAC will also be important. Tracking inventory levels and cost of goods sold trends in upcoming quarterly results will provide further insight into the ongoing effects of this accounting change.