Titan to save Rs 50-60 cr in interest costs from FY15

RBI allows it to hedge gold, currency futures on international exchanges; move to boost margins by 100 bps

The Reserve Bank of India (RBI) has allowed Titan to hedge its gold inventory and currency futures on international exchanges. Currently, importing gold into India is an expensive proposition due to the high import duties, but internationally gold prices have been easing. Now, Titan will be able to hedge its gold inventory against international price fluctuations. RBI has also allowed Titan to hedge its currency exposure as well internationally.

Titan funds its gold purchases internationally through debt and faces the risk of currency fluctuations and changes in gold prices. Now, it will be able to hedge its currency exposure internationally. Gold futures are trading at a discount in India due to the shortage of gold, but internationally, gold futures are trading at a premium. According to HDFC Securities, forward premium of six-eight per cent on USD-INR currency futures and marginal premium on gold futures on COMEX (international futures) will enable Titan to reduce its net interest cost on debt taken to fund gold purchases. Titan's management has conveyed that its effective interest cost will now be 3.5-4 per cent from April against the 10 per cent hedging costs currently. Titan is expected to save Rs 50-60 crore in interest costs annually because of this measure.

Despite this, risks remain as the company will have to fund gold purchases through debt, which would be to the tune of Rs 1,000-1,200 crore. Given Titan has paid high duties to import gold, it is sitting on gold inventory that is 15 per cent more expensive. The company would be hit by inventory losses if import duties are lowered. PhillipCapital believes sale of gold coins could recommence (after discontinuation in July) and would form 15 per cent of jewellery sales from FY15. “The incremental margins of 140 basis points for the jewellery division from international hedging will aid the low margin category of gold coins the most.”

While these measures will aid Titan’s margins, analysts believe that a pick-up in demand is more crucial for a sustained improvement in the company's performance. While some analysts believe the company will grow earnings by 24 per cent in FY15 and FY16 on improved operating leverage and pick-up in sentiment, others remain negative on the company.