GST another growth enabler for Titan

A lower-than-expected tax rate leads to a 17% spike in the stock price

Jewellery makers like Titan Company (Titan), PC Jeweller and Tribhovandas Bhimji Zaveri (TBZ) were among the biggest gainers in trade on Monday as the 3 per cent tax rate on gold and gold jewellery under the goods and services tax (GST) was lower than expectations of 4 per cent and close to the prevailing rate of 2.5 per cent. In addition, these companies can also avail of input tax credit (not available in the pre-GST regime), which means the total savings on the rate front is a good 150 basis points for these companies. Most of these players are likely to pass on these benefits to the end consumers to improve their volume growth. 

Another enabler to these companies’ market share improvement is the fact that as the tax and compliance-related costs increase for the unorganised jewellery makers, the shift of consumers in favour of the organised players could accelerate going forward. All these factors will ring in better growth for the organised jewellery sector which surged anywhere between 5 and 18 per cent in Monday’s session to factor in the positives from the GST. 

A key concern, though, is regarding the tax on making the gold jewellery from plain gold. This metric will be 18 per cent under the GST as against 2-3 per cent earlier. While there could be some price hikes by these companies, it may not impact sales in the jewellery segment much, given that demand has been steady despite earlier increases. 

“Unorganised players are cheaper on making charges, and the 18 per cent tax on this component makes the tax-compliant unorganised players more value for money than the organised players,” says Rohit Chordia, an analyst at Kotak Institutional Equities. For unorganised players, though, it remains to be seen whether they will be able to offset the higher compliance costs efficiently.

Overall, the GST is a mixed bag for Titan and other organised jewellery makers. Titan though had capitalised on demonetisation to increase market share and drive up the pace of new customer acquisition as was reflected in its strong show in the latest March quarter. The company’s focus on innovation and wedding jewellery segment is expected to strengthen its growth prospects. At current levels, Titan trades at 45 times FY18 estimated earnings which is higher than its historical average of about 30 times. However, this may not come down if the company continues to perform well.

Management is confident of delivering a good growth in this financial year as well and is also investing in newer growth opportunities presented in the wearables segment and the online sales channel. They aim to maintain margins at current levels going forward. Given the high valuations, investors can await some correction to enter the stock.