Gold import norms put Titan in a fix

Titan Industries, one of the fastest growing jewellery retailer from the Tata Group stable, sees change in its financial and business model following the curbs on gold imports by the Reserve Bank of India.

“We will have to see where to borrow, how to borrow and what instruments to use. All this is still in the early stage and we are trying to figure out what to do,” Bhaskar Bhat, MD of Titan, said.

The RBI has made it mandatory for companies to import gold only by paying full cash.

This would no longer give leeway to jewellers to take gold on lease and utilise the lower cost of funding. They would also not be able to hedge against fluctuation in gold prices.

Titan’s expansion plans may also get impacted going ahead as debt levels will go up.

“Expansion plans are driven by two things – an opportunity for greater sales and the return on investment. Now that cost has gone up so if I can reach my revenue target in the same number of stores then we can evaluate doing that also,” said Bhat.

Following the development, brokerages CLSA, Morgan Stanley and Religare have downgraded the stock.

Several others are on a wait-and-watch mode to see how the business model of the company would change before they re-rate the stock.

Morgan Stanley expects earnings to shrink going ahead, “Based on our estimates, these policy changes will likely crimp earnings by 13-14% for fiscal 2015,” its note on the company said.

A JP Morgan report said, “Additionally increased capital requirements to fund gold purchases would weigh on returns for the jewellery division, which could likely come down from estimated 90% in the last fiscal to 45% in the current.”

Since the cost of business would rise, its likely that price increases would be passed onto the consumers going ahead, says Abneesh Roy of Edelweiss Securities.

Apart from price increases, it is likely that the company will look at fully utilising its licence for direct gold imports.

“This would lead to estimated 1% VAT-related savings. The company is hopeful it would be able to renew the licence beyond the current approved limit of 10 tonne (nearly half of its full year requirement), “ the JP Morgan report said.