Analysis: Policy impact on Titan Industries may be temporary

Jewellery companies like Titan are nimble and hugely focused on margins

Titan Industries has taken a hit on account of the central bank tightening gold import norms. The stock has fallen by nearly 30 per cent in nine trading sessions since the policy was first announced from a high of Rs 302 to a 52-week low of Rs 202.3 on Wednesday.

Analysts have downgraded the stock saying the Reserve Bank of India’s recent policy would lead to lower margins and reduction in its return on capital employed. Its net profit is expected to fall by 13-14 per cent on account of the policy change.

RBI, in its latest policy of curbing imports, has allowed gold imports only with 100 per cent cash margin. Titan used to get a 180-day credit period for its gold purchase which it brought down to 90 days over the last one month. This policy would now mean that Titan would have to make upfront payments to purchase gold.

This move will naturally affect its cash flows and would require the company to raise funds for raw material procurement. The company’s entire business model stands to change based on this one policy change.

However, over the years, irrespective of where the gold market moved or the volatility in rupee, Titan’s operating margin as well as those of other jewellers was not impacted. The impact of higher prices and seasonality would have been on the turnover but never on the operating margins. This reflects the company’s and the industry’s strong focus on maintaining profitability. Thus, even if interest costs may increase, jewellers like Titan are likely to pass on the impact of interest costs rather than absorbing it.

In the case of Titan, the company has another option, which it has used earlier - of outsourcing or purchasing finished goods. This way it can pass on the burden of purchase to the manufacturer.

The impact of government’s policy of curbing gold imports is unlikely to hit the ultimate consumer, but at least for the time being it has hit the jewellers. But given the agility and nimbleness of the sector, the shortcomings are likely be short-lived.
In the end the consumer will end up paying more for jewellery. However, a slowdown in consumption, which is what the government wanted when introducing these curbs, may not come about.