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“Consumer sentiment is still low, so people are not spending or postponing discretionary purchases. Growth is difficult to come by,” Managing Director Bhaskar Bhat told Business Standard.
The company had seen an unprecedented surge in sales in the first quarter, with revenue climbing 40 per cent, largely from the jewellery business that saw higher volumes due to a dip in gold prices. The July–September period was relatively dull, registering a growth of merely 1.4 per cent in sales, coinciding with a drop in consumer spending on discretionary items.
“The third quarter is not going to be good. It will be extremely muted. In the first quarter, we had estimated that consumers had advanced their purchases for the rest of the year and that seems to be still holding,” says Chief Financial Officer S Subramaniam.
The company had run a series of discounts in the Diwali period, especially on its diamond range of jewellery, unusual in the season but helping its sales of higher-value items climb. The third quarter has not seen as many discounts. “Besides, it’s the wedding season, when it’s the purchase of gold jewellery that is more preferred,” says Subramaniam.
The wedding season also sees huge demand for gold coins, but Titan has halted the sale of these at its Tanishq stores, in line with the government’s efforts to stop import of gold. “Normally, the sale of gold coins in this season would account for 10-15 per cent of the segment’s sales, as Dhanteras and Diwali see a lot of buying,” says Subramaniam. “Even wedding sales seem a little muted. There are more wedding dates from last year but it has still been very sober.” In all, the company gets about 80 per cent of its revenue from the jewellery segment and about 15 per cent from its watches and accessories segment, the two main divisions.
Debt levels
Apart from the drop in demand,, the continuing regulatory hurdles add to the burden. The company says it has sourced its gold requirement for this financial year but its debt level continues to rise, with the Reserve Bank (RBI) mandate of upfront cash payments for gold still on.
“The issue we’re facing is the high premiums because of the artificial scarcity through the import curbs. Our cost of buying gold has gone up substantially and while all jewellers are passing it on to the consumer, the question is how effectively we can do so,” says Subramaniam. The government has also increased import duties on gold to an all-time high of 10 per cent.
The company expects to end the financial year with a net-debt balance sheet. “I don't see us being net-debt by the end of this third quarter. However, in the next quarter, we will certainly be net debt because some old payments are coming up and some bills need to be taken care of,” he adds.
It has also sought permission from RBI to hedge gold outside the country on international exchanges such as COMEX or the London Metal Exchange but has not received approval. It currently has permission to hedge up to five tonnes of gold at the Multi Commodity Exchange but that amount is not adequate, as Titan works with an inventory of about nine tonnes.
The company has an edge over competitors by virtue of a direct import licence it can use for all its requirement but RBI has ordered that any entity importing gold must export a fifth of that export quantity as well. Titan does not have any export business but the company has embarked on a series of measures to explore options, expected to take a few more quarters to begin. It does not ruling out any possibility at this time, including an entry into a new market outside the country.
“We’re considering it but we’re not working on anything now. There is a big market outside India but we have always believed that the margins there were low,” says Subramaniam. “Perhaps we can try to find a way to work around it. After all, it is incremental business, so I would not mind if the margin numbers come down by a few points.”
Retail plans
Despite the hurdles the company is currently working with, its retail expansion plans are going ahead as planned.
Bhat says he expects capital expenditure to stay at Rs 200 crore in 2014-15 and about Rs 60 crore is expected to be set aside for expansion of its retail footprint. With plans to open a little over a 100 stores in the fourth quarter of this financial year, Bhat says Titan could add about 250 stores in the next year.
The company works with a mix of own stores and franchisee-operated ones, and the bulk of these new ones are likely to continue to be through franchisees.
Bhat also says product launches are not likely to be delayed. The company recently launched a new line of fragrances under the brand ‘Skinn’ and a line of helmets under ‘Fastrack’. It is expected to launch a Swiss brand of watches, ‘Favre Leuba’, in the middle of 2014-15.
To alleviate the effects of the drop in discretionary demand and the tough regulatory environment, the company is also re-looking at its business model, to review the overall cost structure across all heads.
“Measures are being taken to ensure overheads are cut whereever it is unnecessary,” its CFO says.
“For instance, on the manufacturing side we were facing the increasing costs from Chinese imports of cases. So, we’re now setting up a stainless steel plant in Coimbatore that will reduce our import costs significantly when it is up and running by the third quarter of next year.”
