Closure of deposit scheme to hit Titan's other income

Analysts expect FY15 pre-tax profit to fall 4-5%, as treasury income will decline on scrapping scheme

Having announced the winding down of its golden harvest scheme, Titan could witness some volatility in the coming quarters. While its sales could spike, the withdrawal of customer advances to the tune of Rs 1,400 crore would hurt its treasury income. If the entire amount translates into jewellery sales, it would account for 15 per cent of Titan’s estimated FY15 sales.

Under the scheme, customers pay 11 monthly instalments to get a discount equivalent to one month's contribution on purchase of jewellery.

Titan has given customers the option of either a cash refund, where it would give its additional contribution in cash depending on the duration of the deposits. If a customer has contributed for six months, Titan will contribute 15 days of the monthly contribution in cash. If the deposit is redeemed against a jewellery purchase, then the customer can avail up to 75 per cent of the monthly contribution.

Credit Suisse expects the next few months to be volatile for the firm, because other income would decline if deposits are redeemed. However, if customers redeem deposits through purchases there could be a spike in sales.

Titan has held most of the customer advances on its books as cash and earned 10 per cent on it. It has passed on nine per cent as discount to customers at the end of the accumulation period. With the company returning these advances, its interest income is set to decline. JM Financial says: “The absence of such  customer advances would lower Titan's treasury profit (4-5 per cent impact on FY15 profit before tax) and possibly a more difficult customer-acquisition process, given that this was an attractive route to do so.”

There is no risk to incremental risk to working capital  in FY15, claim  analysts, as the move to wind down the scheme would be offset by the resumption of gold-on-lease for imports. However, the company will need to start a similar scheme soon.

While Titan is expected to introduce a modified scheme, Credit Suisse believes the company could face issues in the coming quarters if a new scheme is not introduced soon enough. According to the new Companies Act, if a company takes advances with a commitment to sell a product one year later, the money will be treated as deposit. Titan will have to rework its programme with a duration that is less than 365 days.