Regulatory headwinds a drag on Titan Industries

Fear of deceleration in jewellery sales an overhang for stock

Over the past three months, shares of Titan Industries have fallen 12.5 per cent on fears that the regulatory environment would not be conducive for gold jewellery sales. The company's shares have underperformed the Sensex over the past year for similar reasons. A yawning current account deficit has forced the government to take steps to deter consumption of bullion and jewellery. Analysts say the sales momentum seen during the festive season did not sustain in January 2013. The fear of deceleration in jewellery sales has been a big overhang for the stock.

Apart from this, the market has been expecting the Prevention of Money Laundering Bill, 2011 (PMLB), to include jewellery, bullion and precious gems. However, Morgan Stanley believes otherwise. In a report, it says: "Based on our discussions with various industry participants it is likely that the Prevention of Money Laundering Bill, 2011 (PMLB), will be restricted to bullion and precious gems - if true, this removes a large overhang on the stock."

However, the long-term visibility on the company's business model remains cloudy, with the government taking steps to moderate gold demand in the country. It is for this reason that the stock has not outperformed the benchmark, though the consensus rating on the stock is overweight. Channel checks by analysts suggest the fears are not baseless. The growth in sales of studded jewellery and watches continues to be sluggish.

The jewellery division in the third quarter reported a 27 per cent year-on-year growth in sales and a 12 per cent growth in grammage. However, most of this was at the wholesale level as franchisees stocked for the festive season. Sales growth at the retail level was lower at 19 per cent. The division's earnings before interest and taxes moved up a mere 20 basis points, says JP Morgan, with the benefits of rollback of excise duty. Analysts also believe jewellery sales over the past six quarters have been driven by a sharp increase in gold prices. Demand for gold jewellery could moderate if prices remain stable.

Although the stock is now trading at five per cent above its five-year average price/earnings, analysts are still not convinced if all the risks have been mitigated.