Titan: Jewellers to gain from improved return ratios, growth prospects

While Titan stands to benefit, smaller players could gain more from move to ease gold norms

The Reserve Bank of India (RBI)'s move to ease curbs on gold imports on Thursday resulted in share prices of Titan, Tribhovandas Bhimji Zaveri (TBZ), PC Jeweller (PCJ) and other jewellery players surging 7-20 per cent. RBI allowed gold on lease scheme and star/premier trading houses to import gold under the 80:20 norm.

Titan though never had an issue in sourcing gold even in the toughest times and was able to largely offset higher costs via international hedging.

However, given the costs involved in international hedging vis-à-vis gold on lease option, Titan's funding costs could fall 100-150 basis points on an annual basis post the RBI move, say analysts. Peers such as TBZ and PCJ also stand to benefit, as their working capital requirements as well as interest costs will come down. Sourcing costs for the players will fall. The immediate gain is the premium on gold (versus global prices) in domestic market is down $60 to $20 per ounce.

Abneesh Roy, associate director - institutional equities - research, Edelweiss Securities, says, “Around seven per cent of the industry, especially Titan, PCJ, TBZ, used the gold on lease model (before the ban) and RBI’s recent relaxation will help players sharply reduce debt (Titan's current gross debt at Rs 800 crore), thereby boosting RoCE (return on capital employed) and working capital cycle.”

For Titan, these moves will reduce its capital employed and lower debt, which in turn will lead to higher return ratios. Analysts estimate about Rs 1,100 crore of cash flow will be freed up post these relaxations. Notably, unlike peers such as TBZ, Titan had not delayed any of its expansion plans. It plans to add 300 stores across its businesses this financial year.

Analysts remain positive on Titan. Though the stock is at about 33 times FY15 estimated earnings, trades at a premium to its one-year forward average price/earnings multiple of 29 times, investors can enter the stock at dips.

Adhidev Chattopadhyay, analyst, HDFC Securities, says Titan's RoCE could expand to about 40-42 per cent levels versus about 35 per cent in FY14. For the smaller players, analysts expect their stocks to re-rate further. Analysts also expect customs duty on gold imports to be reduced in the forthcoming Budget. Gold prices have already fallen by Rs 1,100 per 10 grams in the initial trades on Thursday, and the outlook is benign given global economic recovery and a firm rupee.